Perspectives - Personal Finance Blog

: Linda says:

As the French say- “The more things change, the more they remain the same.” Saving money has been out of fashion for years. Why bother when even for major purchases like housing, you could get a loan often with minimal deposit. But the rules have drastically changed, which is a problem for those with an existing mortgage and an enormous profit opportunity for those without one.

All the economic gloom and doom is likely to result in a major fall in property prices in many countries. The simple fact that most financial institutions now require a sizable deposit, favors savers, over those who do not control their spending. Only people who can save a deposit and qualify for a loan, are going to be able to take advantage of the new circumstances. Property profits are going to be dependent on the ability to save.

The precise timing of property price falls is going to vary, but housing affordability, which has been woeful in many countries, is about to markedly improve. To save money to take advantage of this situation, is going to take a period of time. But the residential property market is looking at a prolonged downturn, so time is should be available for anyone who wants to profit from this situation.

When there are changed trends and circumstances, acting quickly rather persisting with outdated ideas is important. Saving money will be the hot new trend, recognise it now and be ahead of people who still believe that last year’s strategies will work.

Linda says:

The average central banker is usually the last person to admit to the obvious- namely inflation is going out of control. Which is strange since the wanton printing of money, is the prime contributor to the aforementioned inflation. And most ordinary people are prohibited from printing their own or likely to be jailed for successful efforts. But it certainly is the province of central banks.

While Western countries certainly have their problems, the degree of inflation is considerably worse in Asian economies. Figures for some of these countries include about 8%in both China and India with a horrendous level of 25% in Vietnam. Vietnam is trying to stop imports of gold, which are in great demand by a populace witnessing a major fall in their paper currency purchasing power.

While perhaps seized upon by all forms of speculators, inflation destroys the purchasing power of average wages and the savings of average householders. It is generally bad for stocks and business, since it cuts the profitability of companies and therefore stocks.

The major way of controlling inflation is to raise interest rates, so even if it is not happening everywhere yet, the likely “cure” is going to inflict pain when it comes. If you can reduce debts- do it now, before higher rates hit.

Some central bankers are still of the belief that the financial system is too fragile to inflict the pain of higher rates. But that pain will still be necessary at some point, if inflation is to be brought under control.

Linda says:

The time is here to look beyond the beyond the downfall and woes of big speculative players, and apply the same lessons to our own lives and our own finances. Whilst the high flyers are getting the headlines, it is in our own lives that we can make the biggest difference.

While we can’t control the price of oil or the big events in world affairs, the power that each of us has is to take control and see ourselves as chief financial officers of our own small enterprise. Apart from the benefit to our own “balance sheet”, it is the best way to avoid feeling overwhelmed by negative news and sensational headlines.

There have always been better and worse times in the world of money and finance, like in the natural seasons. The idea that we had entered a period of economic sunshine, with growth in asset prices, and speculation replacing old fashioned economic sense has been shown to be false. Unrealistic expectations are always a source of disappointment and heartache.

The Wall Street bankers have caused a world wide mess with excessive debt, and massive bonus levels, that have encouraged a Las Vegas attitude to risk. Unfortunately, much of the money taken to the casino has belonged to ordinary investors and pension funds. Easy money and excess debt is, however, not just a problem for the hedge fund operators.

The other side of the coin is that a season of harder times allows us an opportunity for personal growth, and also an opportunity to build better for the future. If you are weighed down by debt, look at ways to reduce it. If you are in the habit of spending on impulse on purchases that you don’t really need, this is a habit that you need to alter. Sound principles apply equally to the world of money as they do to the rest of our lives. It
was simply a myth that the old rules had altered.

Linda says:

Or any of the other big mining companies with known huge resources in the ground and major cashflow. You may not realize it, but that is who you are now competing with to get money you may need for your business, or to fund a real estate purchase or other investment. Like food and oil, the cost of money is going up be it in your mortgage, overdraft or credit card.

What the sub prime crisis has done is make credit harder to obtain and more expensive.
The big mining companies and other large financial institutions, in days gone by, could obtain money that they needed cheaply overseas. But these cheap money supplies are no longer available, so they are now borrowing money from Australia’s big banks.

Which is good news if you are cash rich, and find a term deposit preferable to venturing back into the stock market. But don’t depend on a quick change in conditions, or being able to get credit again easily in the near future.

We have passed from a season of easy credit and relatively low interest rates to a time of much tighter money. Even in parts of the world such as the United States where official interest rates have fallen, mortgage rates have not moved and banks are far less willing to lend.

As we have warned multiple times before, now is the season to cut back your debts, and be aware that having your own savings will place you in a good position to weather uncertain times.

Linda says:

Warren Buffett, in an interview on CNBC has commented that ‘my general feeling is that the recession will be longer and deeper than most people think.’ Is the world’s wealthiest man and a legendary investor right?

Certainly he has age and massive experience on his side and an extremely successful record. Markets are looking a lot better than in mid March, and many are saying that the sub prime crisis is about to improve. Others, are far more cautious such as Mr Buffett and George Soros, another billionaire, also in his seventies and a former hedge fund operator.

Certainly, stock markets appear to be recovering, as the real economies of many nations appear to be slowing with falling consumer confidence and rising unemployment in several countries. No stabilization has been achieved in the US housing market with more foreclosures, falling house prices and no bottom yet in sight. And inflation, quiet for so long is becoming a worsening problem. (See our recent article - “Australia’s Inflation Rate Rises to 4.2%”‘ )

Falls in real estate prices are also now being experienced in the UK, Spain and Ireland with some other countries likely to follow. With the price of most people’s main asset still falling or likely to fall, the rise in the stock market may be premature.

If business activity and retail sales fall, the profits of many companies will also be affected and this will cause share prices to fall as a result. Therefore the outlook is still uncertain and the legendary Warren Buffett may be correct in his recession call.

Linda says:

Recession may be hitting the United States but the IMF (International Monetary Fund) is still forecasting that Australia’s growth rate will be 3%. Forecasts are always a variable and probability thing- just ask the weather bureau. This pronouncement has appeared at the same time as another wonderful, pronouncement from the Washington based IMF – that the total losses from the global credit crunch may well total $ 1 trillion dollars. The World’s Banks are supposed to be responsible for half of that loss at $500 Billion dollars.

The statistics coming out of these official sources now defy comprehension, and mean simply that there is a huge mess. And the mess is so big that officials are no longer bothering, to reassure the average person, that it is not going to affect them. The forecasts for other countries around the world are not as rosy with words such as severe recession, US dollar crisis and probable stagflation abounding.

The IMF, in its crystal ball department, has also forecast that property prices in the UK and Ireland may fall by 30%. The UK Prime Minister, Mr Gordon Brown is calling for homeowners not to panic. Others are calling for the world’s central banks, to bail out the banks and stockbrokers with taxpayer’s funds i.e. YOUR AND MY MONEY.

Yes, it is possible that Australia will remain an island of prosperity in a sea of global woes! But if that is not to be, recession proof your finances, cut your debts and have a “lifeboat” of cash to tide you over no matter what happens around you. If times turn out better, you will simply have a nest egg to invest or spend as you choose.

Linda says:

Why are various financial markets still in a state of paralysis, or ongoing downturn?
Because in the world of investment banking and broking, no one trusts any one else (to be financially sound). Thus, with large quantities of doubtful loans on the books, each bank is hoarding cash, to survive whilst others may go under.

As for the ordinary people who trusted their banks, brokers and numerous other financial professionals to look after their money responsibly and not take excessive risks, the current financial meltdown has been a very nasty shock.

In the center of the crisis, in the United States, large neighborhoods are already filled with foreclosed homes and homeowners who are struggling to pay their mortgages.

The sub prime crisis is affecting both those who speculated and used their home as a giant ATM, and those who were far more cautious but still are surrounded with foreclosed homes and impacted by a nasty recession. Indulging in a blame game may be to the advantage of the politicians and regulators, but that is not going to help you.

What will make a difference to you and those who are close to you, is how you view the situation and what measures you can personally take to improve it! DON’T WAIT FOR OFFICIAL ACTION - it may or may not help you! Governments in the US and elsewhere are more concerned with the integrity of the banking system, (and state of various brokers and markets) rather than the woes of individuals.

TRUSTING OTHERS TO LOOK AFTER YOUR FINANCIAL WELFARE HAS NOT WORKED!
There has been too much greed, speculation and excessive risk taking. The individuals who you have thought were looking after your investments and your money, have been more interested in their bonuses and astronomical salaries, rather than the soundness of their lending practices. The investment bankers have behaved like Las Vegas high rollers, and the regulators have been busy looking the other way, at what has been going on.

Sure there will be prosecutions and court cases, which may make you feel better, but it will not bring your money back and pay your bills!

DO EVERY THING THAT YOU CAN DO, TO TAKE CONTROL OF YOUR OWN SITUATION AS FAST AS YOU CAN.

Linda says: YOU DO!

Easter is a religious festival but also a time for catching up with family members. As well as the usual topics of conversation there was a new topic mentioned- namely SAVING MONEY! And it was mentioned from an unusual source –namely my adult children who are in their early twenties. I have alluded to excess spending patterns before, but it has previously been as well received as my multiple other parental lectures on excessive drinking, too much partying etc, etc.

But suddenly I discovered that the turmoil in the world financial markets had had an unexpected benefit, namely an onslaught of THRIFT! Children who had grown up in a world of easy credit, economic expansion and low unemployment levels were suddenly aware of storm clouds hitting the economy. Though they both had not been personally affected yet, a marked change in attitudes from Christmas less than three months previously was evident.

And they admitted that many of their friends were thinking similarly and deciding to cut back their spending and save some money. Saving for the proverbial “rainy day’ has long fallen out of fashion, while there has been a very prolonged period of economic sunshine!
Whilst asset values have been rising quickly, it has made far more sense to borrow to buy stocks or real estate.

Trying to grow your assets by cutting back spending and saving some of your income has seemed incredibly old fashioned. The runaway growth in asset prices HAS been the way to go. But borrowing money to buy assets that are actually falling in value is a sure fire way to end up in trouble. Until real estate markets, stock markets and others stabilize, holding cash, cutting your debts and saving money is the way to go!

And your actions and those of many millions of others will determine the direction of the world economy, more than the strategies of investment bankers, hedge funds, governments and central banks.

Linda says: Dicey days for the US dollar are ahead.

Politics and economics are always intertwined. President Bush will leave office in January 2009 leaving behind a country and an economy considerably weakened from that which he inherited. Others in the world are already seeing the opportunity to advance their own national interest, at the expense of the United States.

The fall of the US dollar is in part symptomatic of the fall in prestige and standing of the United States, and the confidence in its government managing both economic policy and foreign policy. The US dollar (like all other paper currencies) has no inherent value: its value depends on trust in the government in Washington to pay its debts and preserve the value of its currency.

The now open intention of the Federal Reserve is to drop interest rates to try to bail out mortgage holders and and now a major bank in the United States (and also support the stock market in the process.) The obvious casualty will be the American dollar, which will be good for American exporters or American manufacturers competing with imported goods. And it is bad news for the holders of American currency, both inside and outside the United States.

The financial crisis now hitting the American banking system resembles a margin call on the entire American way of doing business. The excessive American government spending and the reckless lending practices have created pressures, which have destroyed trust. This will not be easily restored.

Inflation is taxation by stealth, destroying the value of savings of ordinary citizens, who don’t appreciate the implications of government and central bank actions. The sophisticated brokers and traders will take action to preserve their wealth and purchasing power whilst the average citizen, who is not aware of the implications of government policies, will end up suffering the consequences.

ACCESS TO INDEPENDENT INFORMATION is your only way to protect yourself and those close to you. If you have any friends or neighbours who have experienced out of control inflation first hand – those who remember the seventies, talk to them. Even more so people from Mexico or Argentina, who have seen the complete financial devastation that can engulf the unprepared and destroy the financially unwary, are well educated in the problems that could arise.

I am not predicting problems of the level of Latin America, but smaller doses will still cause havoc for the uninformed and unprepared. The information is available for free to protect yourself and your family.

Linda says: Analysis followed by Action will beat worry or panic!!

With the financial headlines, constantly talking about crises- sub-prime, banking, mortgage bonds or recession, bailouts ,impending bankruptcies- it is easy enough to feel a bit gloomy. However, crises past have always provided great opportunities to profit, and this one is not going to be any different. The psychological trick is to see beyond the general pessimistic mood, to whatever opportunities may emerge. Visualize the silver lining, not the dark cloud.

To put it in very, simplified terms, there have been good or booming times in many industries and geographical locations. A lot of the boom has been fed by easy money and excessive risk taking. The risks being taken just got bigger and then BIGGER! The rules of the game have now altered, and are not going to change back until much of the excess risk has been resolved. The best strategy is to get yourself and your affairs into a position, where YOU are going to be a winner rather than a loser from the major changes taking place in the world.

What will happen, will happen whether you like it or not. All you can choose is how you try to handle the circumstances to your own advantage. A ruthless analysis of your own position is a priority. Imagine yourself as the CEO of your own enterprise- what assets do you have and what are your debts and outgoings? Is your income (namely your job or business) secure, or are you in an industry that is likely to be badly affected by any economic slowdown?

Are you retired and dependent on a pension or investment income? Are you currently cash rich or up to your eyeballs in debt? Excess levels of debt are the anchor dragging companies down and will drag you down. Now is not the time for procrastination and hoping for a miracle. Take a long hard look at your position! If there are measures that need to be taken, take them quickly. See the current difficulties in the world as a huge opportunity- to bring about changes in your business or your personal affairs, that would be much harder to implement in booming times.

If despite all your efforts, there does not appear any way of winning out of your particular circumstances, look at how you can limit your losses. Try to think laterally and seek advice if need be. No one has the ability to forecast the future accurately , so develop several plans to use, depending what particular circumstances develop. This is much easier than agonizing if you have picked the correct course of action.