Perspectives - Personal Finance Blog

Linda says:

Credit Crunch is developing into a global stock market rout which will affect more than just the market players.

We predicted on 19th november 2007 that world stock markets were looking dicey - and we were correct! Developments in America mean that money is likely to get tighter around the world and recession beckons. To quote Professor Roubini from New York University, “ This will be a much worse recession than the ones in 1990-91 and 2001.” The performance of global stock markets is summarized in the word CRASH!

There are ongoing problems emanating from the US, that are going to affect ordinary mortgaged householders and investors far away. Globalisation has a nasty side effect, in that as economies are more interrelated, problems spread easily from one to the other.

Whilst the massive losses at Citigroup and Merrill Lynch have been exposed, further problems lurk below the surface with the companies that insured many of the mortgage –backed securities.

These are organizations that normally do not rate much of a mention, but in the current climate are likely to be the next source of problems and headlines. The share prices of two of the largest such companies, Ambac Financial and MBIA have fallen markedly in recent times and a smaller insurer, ACA Capital is on the brink of insolvency. Panic that very major problems are developing is behind the tumultuous headlines.

The insurance that various financial institutions relied on to guarantee their bonds and securities is now questionable, with downgrades of these insurers expected. If this occurs, further write downs, and less money available for lending will be the consequence. This will put a further strain on many banks,with more headline losses.

Legendary investor Warren Buffet’s company, Berkshire Hathaway has set up a new bond insurance business in December and could do very well. His is a new business and therefore has no questionable loans hiding in the closet.

But the problems of his competitors, are likely to raise interest rates on loans, far away from Wall Street.

And what was fear last week, is now turning into panic.

Linda says:

How to lose absolutely astronomical amounts of money.

Most of us have at some stage in our lives lent money to a friend or work colleague with a hard luck story. I remember learning the lesson as a student that there were some people, who felt no priority in repaying money they had borrowed. As I noted the borrower to be spending on other items, but making no attempt to repay the debt to me, relations became quite unpleasant. But I learnt one of life’s basic lessons- namely be extremely careful whom you lend money to.

Old fashioned banking where money was lent to persons who had a deposit, and prospects of repaying the loan, appears to have been totally disregarded in the parallel universe called sub prime lending. The old fashioned “deposit” eliminated those who had compulsive spending problems, gambling, overly extravagant lifestyles or simply in sufficient income to service the loan. It was a useful test that even if you had a good income, could you manage your spending?

In the sub prime universe, commonsense appears to have flown out the window as bankers and brokers, paid themselves huge salaries and bonuses for making highly suspect loans, and then on selling these as AAA grade securities. Now, no amount of financial engineering can hide the smell of the rotten original loans. Prestigious firms have basically conned everyone, destroyed billions of capital and are now on their knees, to governments and central banks, to bail them out of an appalling mess.

In old fashioned banking, the first rule was not to lose money. Sure, money was lent to businesses and homebuyers, who eventually, could not keep up their repayments. But, at the time the original loan was made, the belief was that the loan could be serviced. A lot of these sub prime loans were totally rotten from their inception. The money was lent to people. who had no hope of being able to make the payments. It was lent by individuals and organizations, who were looking to shift the risk elsewhere, pocket their money, and did not care what happened down the track.

As the colossal losses that have materialized have shown, some of the involved parties have not been able to escape the real world consequences of their actions. Unfortunately, much of the collateral damage is going to affect ordinary people, who never profited from the financial games played in the parallel universe.

Linda says:

Financial fashions will radically alter in 2008.

My financial forecast for 2008 is a return to the virtues of simplicity.

No more convoluted financial models, which require an advanced degree in mathematics to have any hope of understanding.

No more investing in the blind faith, that name institutions in glossy premises are not going to lose you a truckload of money.

Out of fashion are any styles completely, of dodgy mortgage related securities that have some sort of down gradable rating on them.

Extremely fashionable will be some form of legal action, aimed at sellers of the dodgy mortgage related securities.

That last season’s hot number called private equity buyout will be replaced by the far less glamorous style of actually running a business in a viable, long term manner.

Second hand yachts and Ferraris are likely to be in ready supply and at good prices.

The fashion colour of 2008 is likely to lashings of bright RED, especially in terms of red ink in the balance sheets of some banks and brokerages.

Equally red may be some faces of CEOs, especially entering court.

Owning a condominium, in an empty building in Florida, will definitely not be admitted to by any fashionista.

Buying any asset to “flip”, especially real estate, will be seen as a total style disaster.

Dining “in” is going to be the look of the season, rather than dining “out”.

Throwing the credit cards on the barbecue, is another new fashion trend that is likely to be a hit.

Very well dressed will be the politicians on TV, calling for legislation to do something about whichever financial problem is in the headlines.

Excessive debt levels will equate to excessively high heels- likely to contribute to a wobble and probably a nasty fall.

Unfortunately, the camouflage, military look is also likely to a growing trend in numerous locations across the world, which are not usually known for setting fashion trends.

Linda says:

Food prices are an upcoming political issue.

Inflation and the rise in the price of food and fuel is becoming a mainstream media issue. In the United States the cost of heating oil has soared. As oil approaches a hundred dollars per barrel, more and more land is being planted with corn for ethanol production. This is land, which would otherwise be planted with grains, for human or livestock consumption.

Products such as wheat and soybeans are at record prices and the rising affluence of large populations in China and India is straining the demand, and price, of a large range of foodstuffs. Wheat has risen in price by 90% in twelve months. Whether it is the price of pasta in Italy or bread in Germany, price rises are a hot topic. A new inflationary cycle is beginning which could lead to demands for higher wages, to offset the rising cost of living.

Most affected are poorer people for whom foodstuffs represent a higher proportion of their expenditure - thus the risk of social unrest and upheaval is correlated to rises in food prices. Apart from the rises in price of food staples themselves, the rise in oil prices is increasing the costs of transportation to markets.

Droughts, pollution and loss of land to industrialization, (especially in China), are all playing their part in why the loaves at your local bakery are going up steeply in price.