Perspectives - Personal Finance Blog

Linda says:

Relief appears to be around the corner for oil prices, hopefully for oil dependent countries and poor motorists.The words “demand destruction” are being used to describe the phenomenon. The rationale for the fall appears to be that multiple countries are heading towards some form of economic slowdown with signs of trouble involving now Europe and Japan. And thus the private and commercial use of oil is falling.

In its normal cycle, demand will not start rising until the colder months of the Northern hemisphere. Apart from demand, prices are heavily impacted by changes in production and various types of geopolitical instability. Iran remains an uncertainty, Iraq is improved but not stable, and strife has impacted Georgia.

Georgia is home to current pipelines supplying Europe and the future home of several proposed pipelines. Russia’s government and it military are heavily funded by oil revenues. And, not surprisingly its military are now in parts of Georgia, reasserting Russia’s traditional influence in the area.

Whilst there are other issues such as missiles, and proposed NATO membership for Georgia involved in the conflict, the aim of many of the pipeline projects is to supply Europe with alternate energy sources to those under Russian control. Countries such as Russia and Iran are not favorably disposed to a fall in prices, and can be expected to try to influence the price back up.

While the economic situation would appear to favor a price fall, military actions or threats may be designed to counter this trend.

: 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:

You would have thought that demand for oil would have fallen with the way prices are heading higher and higher. Whilst there is evidence that demand is falling in the United States, in the form of a general economic slowdown, consumption is still rising rapidly in many other areas.

In China the cost of fuel is subsidized so there is less pressure from price rises. The oil rich countries of the Middle East have cheap oil as well, so traffic jams in Dubai are not going to be curtailed by a rising world price. The falling US dollar is also cushioning some countries from the full rise in the US dollar price.

The price is also being driven higher by speculation and the continual instability in the Middle East. The threat of some form of confrontation involving Iran does remain, certainly until Bush leaves office. Knowing what is really happening there, in the midst of bluff and counter bluff is impossible.

However, the current high prices will cause slowing of the world economy in oil importing countries. The governor of the European Central Bank, M Trichet, has admitted as much when he has cautioned that further turmoil of financial markets could occur. The rise in oil will also dampen many economies and worsen inflation problems. If inflation goes higher, interest rates are likely to follow.

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:

The result that Australian home loan approvals have slumped in February confirmed that Australia, will not be an island of stability in a sea of global real estate woes. The multiple interest rate rises and headlines of domestic and International turmoil, have convinced the average person that now is not the time to rush into a big home loan.

The Reserve bank wanted to cool the economy and it is getting what it wanted, a big slump in home loan approvals, down by 5.9% in February. About the only good news out of this is that the if the boys at the Reserve Bank are scaring away the new home buyers, existing mortgage holders are less likely to be hit with yet another interest rate rise!

Which is good news if you are happy to stay in the mortgage and home you are in currently. If you are over committed or have speculated in an investment property, this news means that it will now be much harder to sell your property.

When people rush madly to buy real estate, they are often scared that prices are only going up and out of their reach. If they are now scared of higher and higher interest rates and economic gloom, the mood of the market changes again.

The home loan slump in Australia also means that more people are worried that property prices could FALL here as they are doing in other countries.

P.S.

Are you changing your ideas about investing or buying property?

Several of my friends have got far more cautious in just the last few weeks. Is that what you are thinking too?

Register to give us a comment of what you are seeing happen in your town.

(I am writing this from South East Queensland, which has been one of Australia’s hottest areas for rising property prices in recent years - But now I’m seeing new “For Sale” signs popping up every day)

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: A drastic change is going to be long lasting.

By March it is quite obvious that the big debt party of the last couple of years is over and the year of the super hangover has begun!

The fashion impact of announcing astronomical losses is starting to bore to tears. This has been an overdone trend, which unfortunately is going to be trans seasonal and is having an increasingly, international flavor.

The revolutionary “in” look of the year will go to any financial institution that actually will manage to shock everyone by making money. (for the investors not the executives…..) This will be breathtaking and quite stunning.

A new class of culinary award, a variant of the Michelin star, should be awarded for the most creative accounts. Perhaps the super soufflé award for resembling a grand French culinary creation but collapsing on delicate probing or the heat of a proper audit. The super soufflé could be awarded with or without a smattering of rogue traders to add some spice to the concoction.

Accounting, normally the most staid and boring of professions, is likely to implicated in a number of superb super soufflés and transform itself into an exciting, long running series of courtroom dramas. Insolvency experts will be highly prized and a very “hot” item.

Being the CEO of certain financial institutions will be regarded as favorably as standing on street corners, scantily dressed and looking for customers. The latter business model is far more “transparent” and easily understandable, than some financial products sold by the CEOs concerned.

Inflation is back! The supposedly conquered scourge of the seventies is on everyone’s lips and evenly heavily fudged government statistics are admitting there is a problem. Only the Japanese government is running around with the proverbial white cane- unable to find any evidence of rising prices.

Complaints about rising prices of food and energy are highly fashionable. They have replaced the boasts of yesteryear of rising house prices as a favorite topic of conversation. Only if you are lucky enough to live somewhere like Dubai ( where the gas price is heavily subsidized), can you radiate the glow of rising national wealth, courtesy of the oil price.

Linda says:

Beware Asian Problems (in the upcoming year of the Rat)

The last week has not been good on Wall Street, but keep an eye out for problems in China. If you are an Australian investor (or have a superannuation fund do the investing for you), every day has been colored in red ink. Not good!!! For the total masochists, or those who are sleeping very poorly, there have been the European and American markets to look at in the middle of the night. The news from there has not been conducive to a good night’s rest!

How previously highly regarded corporations, such as Merrill Lynch and Citigroup, could lose such astounding sums is mind blowing. But while all the attention has been on Wall Street and the sub prime loan shambles, there is a market in our own time zone to keep a close eye on.

The most speculative market in the world is to the north of us, in Shanghai. Whilst foreigners are largely excluded from dabbling in it, the biggest gambling den in China is not in Macau but in the Shanghai Stock market. There are lots of crazy valuations here, for those nostalgic for the Nasdaq at the height of the dot-com boom.

The communist party bosses in Beijing are presiding over a large scale, frenzy of ridiculous prices with shares in some companies selling at 95% more in Shanghai, than shares in the identical company are selling for in Hong Kong. Even the famous Mr Alan Greenspan, has called Shanghai “a Bubble”.

Enthusiastic, ordinary Chinese are mortgaging their houses to participate in the easy, riches of the Shanghai market. The government is worried, and trying to slowly raise interest rates to control inflation and excesses. A 9% fall in Shanghai on February 27th, 2007, triggered losses around the world. This is a market known for rapid movements.

Since a quarter of China’s economy depends on exports to the US, the widely expected American slowdown may complicate the Chinese problems.

Problems in Shanghai are a question of when, rather than if, with direct implications for Australian resource stocks.