It’s the Economy Stupid

For just about seven years now, we’ve been waiting for the economy to improve. I have a question for the middle class; do you see an improvement? Is your pay keeping up with inflation? Are you paying more for borrowed money, and getting less for the money you save?

I have been following economics in general for 30 years and in particular the period since the last crash. Now, it seems to me that not only is the economy not getting better, it’s at best flat, or getting worse.

The middle class has been paying a heavy price since that time. For example, the interest rate that you on your savings is minuscule, while interest rates on your credit cards and auto loans are sky-high.

Other areas of concern are the small increases in pay, or even being able to find a job at a decent wage, or any job at all in some cases.

Also, it is very difficult right now to get a mortgage unless you have at least 20% for a down payment plus closing costs. Although mortgage rates are currently fairly low, they are not at their all-time low. But even at the current rates banks are putting real estate buyers through rigorous credit testing because of the climate that was created by them, whereas people who bought homes during the peak years back in 2007, found it easier to walk away from their mortgage because they were paying more for their homes than they were worth.

Although home prices have rebounded somewhat, it is expected that another downturn will occur at some point in the near future. This will make it more difficult for the banks and the borrowers alike. From the banks perspective, more people will be walking away from their homes leaving the banks high and dry, which in turn will make it even more difficult for borrowers to get a loan.

This will not only affect mortgages, but may put a strain on credit card holders as well, and again will force the Federal Reserve to keep rates low, which will keep mortgage rates low and interest on your savings low.

How the Federal Reserve controls bank rates is a subject for another article. Anyone who is old enough to get a loan or have money in a savings account should know exactly how the Federal Reserve works. It’s only fair to warn you that the Federal Reserve is not part of our federal government but a privately owned bank or consortium of bankers.

Although this is not an in-depth article on the economy there should be enough information to get you thinking about what’s really going on in the economy and how it affects you directly and indirectly.



Review of Economy Shows Slow Growth

A review of the overall economy is revealing that the growth of the economy overall is not so swift. This is in direct contracts with many reports that have been coming out stating that the economy is indeed recovering from the doldrums of what many consider the last U.S. recession. However, with the recent findings in the, the growth that many think is happening rapidly may be happening much slower than expected.

Continued High Unemployment

It seems that with every positive jobs report that comes out there are two that are negative. While the numbers fluctuate as expected, the overall news remains bad. In fact, according to the Nation Labor Department, the jobless rate is holding steady at over 9%, which is anything but an indication of a strong or booming economy.

Rough Real Estate Market

Another indication of a tough and slow recovering economy according to the ISM review is the continued problems for the real estate market. While mortgage rates are at all time lows, which is good news, the rate at which people are losing their homes is more than enough to counteract that good.

According to RealtyTrac Inc, there are more and more banks allowing short sales to go through than ever before. These short sales are banks actually accepting less than a property is worth so they can clear the properties off their books. So, while some are getting great deals on homes, the willingness of banks to lose money is just another example of a weak economy.

Rising Gold Prices

Gold has reached all time highs as far as prices go. While still not at all time highs when adjusted for inflation, the fact that gold is as high as it is shows that many investors are flocking to the precious metal as a safe haven and that doesn’t not typically bode well for the dollar or the economy.

Recent National Debt Downgrade

The recent downgrade by S&P of America’s debt from triple A to double A Plus is the most obvious sign that the American economy is struggling. This news did follow with the Chairman of the Federal Reserve, Ben Bernanke, stating that he would keep interest rates low for the next year or more. However, any further downgrades by S&P or any other credit rating organization could prove disastrous for America’s economy.

What it all Means for You

A slow moving and slow to recover economy affects everyone; including you. While the findings of this latest review may not have shocked everyone, everyone still has to be wary as their financial futures depend on the state of the economy and how they react to it.



Global Financial Crisis

The financial distress of the last two decades has revived interest on the question of the stability of the financial system. On the one hand, the “pessimist” view, associated primarily with Minsky argues that not only that the financial system is prone to such crises (“financial fragility” in Minsky’s terms) but also that such crises are inherent on the capitalist system (“systemic fragility”). On the other hand, the monetarists see the financial system as stable and efficient where crises not only are rare but also are the fault of the government rather than the financial system as such. For many others, however, financial crises may be largely attributable to the financial system but they are also neither inescapable nor inherent in a capitalist economy.

Therefore, the issues we have to examine here are how common are such crises from a purely historical perspective; to what extent we can identify a common pattern between all crises which would suggest an endogenous process that leads to crises; a theoretical framework which explains both the process and the frequency of such crises and finally examine the extent to which these financial system characteristics that make it prone to crises are inherent on the capitalist system.

The first question, i.e. the frequency of financial crises partly depends on our definition of crisis. A financial crisis has been defined by Goldsmith as “a sharp, brief, ultra-cyclical deterioration of all or most of a group of financial indicators – short-term interest rates, asset (stock, real estate, land) prices, commercial insolvencies and failures of financial institutions”. The question here is of what intensity and/or intersectoral spread should a financial disturbance be in order to be considered a crisis.

In any case, it appears that though major crises leading to the (near) collapse of the financial system are quite rare (the only one being 1929 in the US), more moderate ones are frequent enough to allow the argument that the financial system does suffer from a certain degree of fragility. In the post-war period, after an almost complete absence of crises until the mid 60’s, the financial system has been at strain on many occasions including the 1966 credit crunch, the 1969-70 and 1974-75 crises, the 3rd world debt problem of the early 80’s and the stock market crash of 1987.

Again a casual observation of financial crises will find a wide variety of different causes and forms as each crisis seems to have occurred in response to a unique set of accidents and unfortunate coincidences. But quoting Kindleberger “for historians each event is unique. Economics, however, maintains that certain forces in society and nature behave in repetitive ways”. Indeed, it is not difficult to distinguish a rough pattern which has been graphically presented by Minsky : crises tend to occur at the peak of the business cycle following a period of “euphoria.”

This has probably been initiated by some exogenous shock to the macroeconomic system (“displacement”) which results in new profit opportunities. The boom is fuelled by an expansion of bank credit as new banks are formed, new financial instruments are introduced and personal credit outside the banks increases. During that period there is extensive “overtrading”, a not very clear concept which generally refers to speculation for a price rise, or an overestimation of prospective returns due to euphoria. This stage is also often referred to as a “mania” emphasising its irrationality and “bubble” predicting the collapse.

Eventually, some insiders decide to take their profits and sell out and the increase in prices begins to moderate. A period of “distress” may then occur until speculators realise that the market can only go downwards. The crisis may be precipitated by some specific signal such as a bank or firm failure or a revelation of a swindle; the later are quite frequent in such circumstances as people try to escape the imminent collapse. The rush out of the real or long term assets (“revulsion” in Minsky’s terms) lowers the prices of these real assets which were the object of the speculation and may develop into a panic. The panic continues until either the price falls so low that people are tempted to keep their illiquid assets or a lender of last resort intervenes and /or manages to convince the market that money will be made available in sufficient volume to meet the demand for cash.

Minsky, unlike many others who otherwise accept much of his model, believes that this process will always result to a crisis. Minsky classifies the demand for credit to “hedge finance” when cash receipts are expected to exceed the cash payments by a significant margin, to speculative finance” when, over some periods, expected earnings are less than payments and to “Ponzi finance” when the payable interest in the firm’s commitments exceeds its net income cash receipts; thus a Ponzi unit has to increase its debt to be able to meet its commitments. Once the Ponzi finance situation becomes general, a crisis is inevitable. Others, however, believe that there are ways to prevent Ponzi finance from becoming too widespread.

This model described above implies that crises are in part endogenous and in part outcomes of exogenous disturbances. Whether this conclusion supports the “financial fragility” view depends on the weights given to the disturbance and the endogenous part of the process. If the shocks necessary to set off this process are of exceptional size and rare then obviously the financial system can be thought as stable. Indeed it has been suggested that the recent crises have in fact showed the resilience of the financial system against huge adverse shocks. If instead the speculative forces are triggered by even relatively small shocks we can then blame the financial system even if the shock were exogenous.

This is both an empirical and theoretical issue. Empirically the euphoria-distress-revulsion process seems to conform with the experience of many crises such as the 1929 stock market crash, though many others have not gone through the whole process. Theoretically, we have to explain the assertions of the above model, namely for the existence of speculation and other “irrational” behaviour as implied by “manias” and “overtrading”.

Friedman rejects the notion of destabilising speculation completely as a destabilising speculator who bought when the price was rising and sold when it was falling, would be buying high and selling low so that he would be losing money and fail to survive. The answer may be that we can distinguish in two groups of people: the “insiders” who are rational and possess a lot of information and the “outsiders” who may not be “fully” rational and/or not possess adequate information. In such a world, the insiders have incentives to speculate and gain at the expense of the outsiders. We may also distinguish in the 2 phases of the bubble, a first “rational” one based on “fundamentals” and a second where agents’ behaviour is best described by ‘mob psychology’. Other possibilities are that agents may choose a wrong model of the economy or fail to anticipate the quantitative rather than the qualitative reaction to a certain stimulus, especially if there are time lags.

The question, however, is whether outsiders learn by experience though it can be argued that in rapidly changing complex financial markets such learning may not be very effective. Still “euphoria” arguments may be a little naive when applied, for example, to contemporary bankers who have access to a wealth of sophisticated advice. Indeed a criticism of the Minsky model is that though it might have been true of some earlier time, it is no longer so as big unions, big banks, big government and speedier communications have improved the stability and efficiency of the system. Hansen similarly argues that since the mid 19th century the main outlets of finance were the industrialists rather than the traders and merchants reducing the instability of credit. As we shall see later on, especially after the recent deregulations such arguments are questionable.

The monetarists further object to this theory because they argue that we should distinguish between “real” or “true” crises which were caused by changes in money supply and “pseudo-crises” which were not. For example, Friedman has argued that the 1929-32 crisis was largely due to a fall in the money supply. There is little reason, however, why the supply of money is more than an element in financial flows and stocks and indeed Friedman’s explanation of the Great Depression has been challenged.

Minsky has further argued that the fragility of the financial system relative to disturbances and speculator behavior depends on three factors: the mix of hedge, speculative and Ponzi finance in the economy, the levels of liquid asset holdings (what he calls “cash kickers” and Margins of Safety) and the way used to finance Investments of long gestation. He further argues that inherently and inevitably the capitalist system will result in the worst combination of the above as far as financial stability is concerned. Minsky bases such conclusions on what he calls a “Wall street economy” paradigm as contrasted to the essentially barter economy of the neoclassical paradigm. Minsky in fact traces his views on Keynes who also expressed his concern for an increasingly speculative and unstable financial system governed by animal spirits.

In an initially robust financial system, he claims, agents will overestimate the stability and success of the system and will increase their indebtedness (an “euphoric economy”), so that speculative finance will become the norm. Similarly overconfidence will make agents reduce their Cash Kickers although such margins are crucial for speculative finance units. These mean that the economy and the financial system become very sensitive to variations in interest rates. Finally, investment projects which have a long gestation period can be financed either sequentially or by prior financing. For similar reasons agents generally chose the risky way of financing projects sequentially which not only further increase the interest sensitivity of the financial sector but increases the volatility of interest rates themselves as they imply an inelastic demand for finance given sunk costs plus possible effects in the real economy through falls in Aggregate Demand. This, however, does not sound a very robust argument as one would expect that as Wallich argued, once the system becomes fragile, the agents will get scared and reverse the trend towards speculative finance.

Moreover, the Stiglitz paradox argues that destabilising speculation is an inherent characteristic of the system. A financial system is an information infrastructure and as any infrastructure being a public good poses problems in being paid by the price system. Hence “noise” is needed to remunerate active financial markets.

Here we could also mention that many of the disturbances which cause financial crises, may in fact, be endogenously caused by the capitalist system. Nevertheless, this argument cannot be stretched too far and on the other hand one could attribute the apparent greater instability of the financial system the last 2 decades to the hardships of the real economy (oil price shocks, stagflation). In this later case the financial system emerges as particularly resilient , certainly more so than the real economy. Indeed, many people such as Kindleberger, believe that financial disturbances are neither inherent in the system nor is it inevitable that they will develop into crises. Most concentrate on the issues of appropriate monetary policy, regulation structure and lender of last resort facilities.

Monetarists obviously support that a monetary rule is adhered though others, including Minsky, fear the consequences of high volatility of interest rates. The lender of last resort facility has generally proved to be quite effective in preventing financial collapse throughout the post-war period. The problem, however, is that it creates a moral hazard problem as agents are encouraged to be more risky. This problem may increase in significance in the future as the importance of the commercial banks relative to other financial institutions declines and for most of these institutions the moral hazard costs are considered to be much higher and lender of last resort protection is not generally widely available to them. Also in our increasingly globalised financial system, there is none really able and willing to play the role of the international lender of last resort; the collapse of 1929-32 is often partly attributed to a similar lack of lender of last resort as Britain was unable to play this role anymore and the US were unwilling.

The widespread deregulations of the last two decades have also attracted attention regarding their effect on financial stability. On the one hand, it is argued that the subsequent rationalisation not only increased efficiency, the quality and the variety of financial services but helped stability as well by for example allowing a better allocation of risk towards those who can bear it more easily. Others, however, point to the increased difficulties for conducting monetary policy, the increase in indebtedness, the increase in credit risk as business finance shifted towards securities and the greater freedom in speculative behaviour.

Furthermore, as Kaufman feared, completely liberated markets will increase instability by allowing crises to quickly spreading to other sectors and countries. In many respects, the Savings & Loans debacle is typical of the problems of deregulation: Though most people would agree that deregulation was long overdue, its timing (coincided with a crisis in the S&L industry which encouraged speculative behaviour) and the easing of “safety-and-soundness” regulation proved catastrophic. Indeed there is a significant group of economists who while support deregulation, strongly recommend the imposition of restricted safety and soundness regulations to increase the stability of the system.

If through either of the above instruments, crises can relatively easily be prevented or stopped then it is clear that they are much less dangerous and less important. Indeed, since one could include such government actions as part of the actual financial system, then one could conclude that the system endogenously prevents crises from occurring.

Concluding, I believe that the financial market has in fact shown remarkable resilience and adaptability in the face of the condition of the real economies, the shocks experienced and the rapid deregulation. The issue of financial instability is and should be a concern but probably the best policy towards that objective is to have a healthy and stable “real” economy. How to achieve this is indeed another question.

It may be useful to summarize the argument. A system of financial regulation was crafted out of the financial turmoil of the 1930s. It had two defining characteristics, the restriction of competition and government protection. This institutional structure was created in conformity with the concrete conditions at the time (low debt, high liquidity, low inflation, and low interest rates). It was successful in the postwar period in the United States in part because of that conformity. The high profit rates in the early postwar period also helped to create a situation in which no financial crises occurred.

Eventually, however, those conditions changed: debt increased, liquidity declined, profits fell, and inflation and interest rates increased. The worsening financial conditions in the later postwar period contributed directly to the reemergence of financial crises. The old institutional structure, rather than leading to stability and profitability for financial institutions, resulted in instability and financial difficulties in the context of these new conditions. Banks and thrifts found themselves in a difficult situation intensified by the tight monetary policy beginning in the early 1980s. Financial crises increased, as did failures of thrifts and commercial banks. Eventually the banks and thrifts searched for riskier, potentially more profitable, but ultimately more speculative areas of lending.

Bibliography: 

1.      Friedman, Milton and Anna J. Schwartz (1963), A Monetary History of the United States 1867- 1960, Princeton: Princeton University Press

2.      Gersovitz Mark, and Joseph E. Stiglitz. “The Pure Theory of Country Risk.” European Economic Review, 30 (June 1986), 481-513

3.      Goldsmith, R. W. (1987), Premodern Financial Systems: A Comparative Study, Cambridge: Cambridge University Press

4.      Kaufmann, Hugo. Germany’s International Monetary Policy and the European Monetary System. New York: Brooklyn College Press, 1985

5.      Kindleberger, Charles P. and Jean-Pierre Laffargue, eds. (1982), Financial Crises: Theory, History and Policy, New York: Cambridge University Press

6.      Minskiy, Hyman P. – ” A Theory of Systemic Fragility.” In Financial Crises: Institutions and Markets in a Fragile Environment , eds. Edward I. Altman and Arnold W. Sametz, pp. 138-52. New York: John Wiley & Sons, 1977b.

7.      Wallich, Henry C., et al. World Money and National Policies. New York: Group of Thirty, 1983

8.      Wolfson, Martin H., “The Causes of Financial Instability,” Journal of Post Keynesian Economics 12 ( Spring 1990): 333-55.

9. Study-aids.co.uk – http://www.study-aids.co.uk (2009)



Rebuilding Your Finances After an Economic Crisis

Did the recent economic crisis shake you out of your comfort zone and leave you nearly bankrupt? If so, you are one of the many individuals who experienced difficulty during the crisis. You should not feel ashamed of this though because there are also a number of other people who share this same sentiment with you. Of course, the crisis really took everyone by surprise which is why there are a number of people who are trying to rebuild their lives after the calamity. But what happens after the storm? Should you just start all over again and hope that this time, you are ready for another crisis?

When it comes to rebuilding your life after a financial crisis, there are some steps that you need to make. Although it is unfair, you will have to rebuild your life from scratch, if that is what you were left with.

Budgeting- Assess what things in your life are necessary and what things you can let go. You can do this by keeping track of your expenses in a small journal. This will alert you on what you normally spend on.

Debt Repayment- You should not ignore your current debt as they will only keep growing. Not to mention, the debt you leave unattended will have a negative impact on your credit score. You might not be aware of it but when it’s time for you to get a loan later on, you will have a hard time getting approved for it because of your low credit score

Emergency Savings- If you are able to save and budget your money after the economic crisis, you will have to prepare yourself for some emergencies. For this, it is important that you set aside some money from every paycheck you earn. Who knows, this might be where you can get money the next time a crisis strikes.

The above mentioned are the things you need to consider when you are rebuilding your life from scratch. When you successfully do these, you will be able to protect yourself once another economic crisis takes place. Once it does, you will be prepared to face its wrath.



Financial Planning in Today’s Global Economic Climate

A lot has been said about the sad state of the United States’ economy, but aside from government bailing out companies, what has the American public been doing to help soften and or cushion the after – effects of the global economic crisis? Well probably nothing much, because the American public has suffered the most in the past year or so. The American public is now looking for ways to get back to the status quo, and this is the time where excellent financial planning is needed the most. This applies not only to businesses but also with individuals as well. And this should not only be the concern of the government to formulate a financial plan for the economy but it is also a concern of every citizen.

Contrary to most beliefs,it is not as easy as it sounds. The brightest and smartest minds in Wall Street did not see the economy free – falling, how much more the average Joe. Although there are a lot of references in the internet about financial planning, and anyone could probably go to a forum dedicated to financial planning and ask advice from the so – called “experts” on those forums, the truth is utilizing the services of professional financial planner is still the way to go, provided that the planner can be trusted and would also have a proven track record.

So what does it matter if you make a financial plan of your own? How would you be sure that the person in charge of the financial planning process is trustworthy? These are just some of the frequently asked questions that individuals could think of when faced with hiring a professional to take care of the financial planning aspect of their lives. If you are well aware of your finances then you could probably tackle planning your finances for the future, but if you are like a large portion of the population who are having a hard time dealing with numbers and finances, a professional financial is the answer to all your financial planning worries. And even though professional financial planners might be a bit expensive, the outside perspective that they provide can be also be helpful in future financial decisions that you might undertake. Financial planning in today’s economic climate is obviously very important, being able to know where and how your hard earned money is being used, and also getting something or profiting out of the transactions made with your money can steadily help the economy pick itself up from the near-tragedy that has been the global financial crisis.



Global Financing – Hard and Soft Currency

Global financing and exchange rates are major topics when considering a venturing business abroad. In the proceeding I will explain in detail what hard and soft currencies are. I will then go into detail explaining the reasoning for the fluctuating currencies. Finally I will explain hard and soft currencies importance in managing risks.

Hard currency

Hard currency is usually from a highly industrialized country that is widely accepted around the world as a form of payment for goods and services. A hard currency is expected to remain relatively stable through a short period of time, and to be highly liquid in the forex market. Another criterion for a hard currency is that the currency must come from a politically and economically stable country. The U.S. dollar and the British pound are good examples of hard currencies (Investopedia,2008). Hard currency basically means that the currency is strong. The terms strong and weak, rising and falling, strengthening and weakening are relative terms in the world of foreign exchange (sometimes referred to as “forex”). Rising and falling, strengthening and weakening all indicate a relative change in position from a previous level. When the dollar is “strengthening,” its value is rising in relation to one or more other currencies. A strong dollar will buy more units of a foreign currency than previously. One result of a stronger dollar is that the prices of foreign goods and services drop for U.S. consumers. This may allow Americans to take the long-postponed vacation to another country, or buy a foreign car that used to be too expensive. U.S. consumers’ benefit from a strong dollar, but U.S. exporters is hurt. A strong dollar means that it takes more of a foreign currency to buy U.S. dollars. U.S. goods and services become more expensive for foreign consumers who, as a result, tend to buy fewer U.S. products. Because it takes more of a foreign currency to purchase strong dollars, products priced in dollars are more expensive when sold overseas (chicagofed,2008).

Soft currency

Soft currency is another name for “weak currency”. The values of soft currencies fluctuate often, and other countries do not want to hold these currencies due to political or economic uncertainty within the country with the soft currency. Currencies from most developing countries are considered to be soft currencies. Often, governments from these developing countries will set unrealistically high exchange rates, pegging their currency to a currency such as the U.S. dollar (invest words,2008). Soft currency breaks down to the currency being very weak, an example of this would be the Mexican peso. A weak dollar also hurts some people and benefits others. When the value of the dollar falls or weakens in relation to another currency, prices of goods and services from that country rise for U.S. consumers. It takes more dollars to purchase the same amount of foreign currency to buy goods and services. That means U.S. consumers and U.S. companies that import products have reduced purchasing power. At the same time, a weak dollar means prices for U.S. products fall in foreign markets, benefiting U.S. exporters and foreign consumers. With a weak dollar, it takes fewer units of foreign currency to buy the right amount of dollars to purchase U.S. goods. As a result, consumers in other countries can buy U.S. products with less money.

Fluctuating currencies

Many things can contribute to the fluctuation of currency. A few are as follows for strong and weak currency:

Factors Contributing to a Strong Currency

Higher interest rates in home country than abroad

Lower rates of inflation

A domestic trade surplus relative to other countries

A large, consistent government deficit crowding out domestic borrowing

Political or military unrest in other countries

A strong domestic financial market

Strong domestic economy/weaker foreign economies

No record of default on government debt

Sound monetary policy aimed at price stability.

Factors Contributing to a Weak Currency

Lower interest rates in home country than abroad

Higher rates of inflation

A domestic trade deficit relative to other countries

A consistent government surplus

Relative political/military stability in other countries

A collapsing domestic financial market

Weak domestic economy/stronger foreign economies

Frequent or recent default on government debt

Monetary policy that frequently changes objectives

Importance on managing risk

When venturing abroad there are many risk factors that must be addressed, and keeping these factors in check is crucial to a companies success. Economic risk can be broadly summarized as a series of macroeconomic events that might impair the enjoyment of expected earnings of any investment. Some analysts further segment economic risk into financial factors (those factors leading to inconvertibility of currencies, such as foreign indebtedness or current account deficits and so forth) and economic factors (factors such as government finances, inflation, and other economic factors that may lead to higher and sudden taxation or desperate government imposed restrictions on foreign investors’ or creditors’ rights). Altagroup,2008. The decisions of businesses to invest in another country can have a significant effect on their domestic economy. In the case of the U.S., the desire of foreign investors to hold dollar-denominated assets helped finance the U.S. government’s large budget deficit and supplied funds to private credit markets. According to the laws of supply and demand, an increased supply of funds – in this case funds provided by other countries – tends to lower the price of those funds. The price of funds is the interest rate. The increase in the supply of funds extended by foreign investors helped finance the budget deficit and helped keep interest rates below what they would have been without foreign capital. A strong currency can have both a positive and a negative impact on a nation’s economy. The same holds true for a weak currency. Currencies that are too strong or too weak not only affect individual economies, but tend to distort international trade and economic and political decisions worldwide.

Conclusion

Hard currency is usually from a highly industrialized country that is widely accepted around the world as a form of payment for goods and services. A hard currency is expected to remain relatively stable through a short period of time, and to be highly liquid in the forex market. Soft currency is another name for “weak currency”. The values of soft currencies fluctuate often, and other countries do not want to hold these currencies due to political or economic uncertainty within the country with the soft currency. Many things can contribute to the fluctuation of currency; a few of these things are inflation, strong financial market, and political or military unrest. The decisions of businesses to invest in another country can have a significant effect on their domestic economy. In the case of the U.S., the desire of foreign investors to hold dollar-denominated assets helped finance the U.S. government’s large budget deficit and supplied funds to private credit markets.



A 2010 Financial Outlook – The 4th Quarter Report – What Economic Recovery?

Rolling head-long into the new decade, we are now only a few short weeks from entering into the forth quarter of 2010. The big question on the minds of millions: What is on the economic horizons? What is the financial outlook for the 4th quarter of 2010 and beyond? And, how will the economy effect you and your family? Let’s take a look at these questions and more in this, A 2010 Financial Outlook: The 4th Quarter Report.

We are currently living in perhaps the most dynamic times in the history of our planet. Let’s face it, our world is a mess. Physically, emotionally and financially.

Despite what governments around the globe would have us believe, the economy is not getting any better. Ever since the false, taxpayer funded, multi-trillion dollar bailout of 2008-2009 got underway, there has been no “Real” economic recovery. Facts are, we never really left the recession.

It’s time we all woke up and read the writing on the out-house walls. The sugar high we’ve experienced over the last 18 months is over. Much like the false recovery experienced in 1931 – 1932, we will soon revisit new lows in the stock market like never before seen, ultimately breaking through those as well.

There is no denying we are treading on dark and dangerous economic times. Many now believe we have entered into the next phase of the $50 trillion wealth transfer that some economists have been predicting for years.

Soon, the focus is sure to shift to fears of global sovereign debt collapse. Euro-land, Japan, the UK, and ultimately the U.S. will be unable to pay their debts. This is when we will find out if the powers-that-be attempt to end this Depression in the same manner they did in the 1930’s. The question remains. Who will become this generations Hitler? Who will take the role Germany played during those dark times?

It is apparent, businesses from all industries, and individuals alike, are now tip-toeing around on financial eggshells like back-stage ballerinas, waiting to see what the orchestra plays next.

Just in case you haven’t been paying attention, the stock market is currently poised on the edge of yet another downward spiral into the murky abyss of sub 10,000. As this is being written, the DOW has lost another 140 points. Next stop, 9,600? Who knows how low we may go from there.

On the “Home Front”, despite record breaking low mortgage rates, news this morning from The National Association of Realtors indicates existing home sales for the month of July fell 27.2%. Sales are now at the lowest level since the total existing-home sales series launched in 1999, and single family sales – accounting for the bulk of transactions – are at the lowest level since May of 1995.

No one can seem to qualify for a new home loan or banks just won’t give them up. It’s either that, or folks don’t dare spend what little money they do have squirreled away in fear of what may be around the next bend.

And what about all the new jobs our leaders so boldly promised just months back? According to President Obama just a few short months ago, we were well on our way up “the road to recovery”. Where is all that promised relief? Who sucked the breath out of the federal economic recovery plan this time? Or, was it simply full of hot air to begin with?

As if this weren’t enough, while the unemployment rate in the U.S. continues to teeter on the edge of double digits, the number of under-employed is now reaching levels never before seen. Record numbers of folks, all around the world, are working for far less money than ever before. Making ends meet is now as hard for many as teeing off with The Pope himself. Take a closer look at these unemployment numbers you’ll find, within some industries, unemployment figures are actually closer to 20%, or more. Scary stuff when you consider how many folks aren’t even counted.

Many are now forced to cash in their retirement accounts just so they can put food on the table and pay the electric bill. Personal bankruptcies are spiking and more personal credit accounts are going into default than at any other time in history.

So what does all of this mean? What does a simple carpenter, with a head full hope and a heart full of hate, do about it anyway?

Oh, and how about this little news flash? Now that the federal government is considering massive principle reductions – forgiveness – on underwater mortgages. Many can soon expect to experience an overnight write-off to their home an property value the likes of which you’ve never seen.

Think about. If your neighbor is underwater on their mortgage, now the government steps in, essentially re-appraising the value of their home and “re-valuing” it. Now, what do you think will happen to the value of your home? Yep, you guessed it, the value of your house just fell through the floor joists like a lead brick headed to the bottom of the deep-end.

If you think the Ground Zero Mosque, or even Obama Care, is a bust with the public, you may be surprised to find that a whopping 82% of those polled believe that “principal forgiveness” is a horrible idea, bordering on the edge of lunacy.

However, since there appears to be zero limit to the amount stupidity that we are witnessing from this administration, don’t write this possibility off. In fact, you should probably be surprised if they don’t do it.

And get this! Word on the street, now there may be another lame brain idea in the works. Believe it or not, the next “innovative idea” coming straight down the pike from the Washington, “Bankrupt The U.S. As Quickly As Possible” playbook, could be across the board credit score increases.

What the? That’s right. Assume that your credit score is 600, which means you can not buy a house unless you make a 30% down payment. Well, with this new idea, your credit score could immediately be raised by 20%, giving you a score of 720. Now, you can run right out and buy that home with just 5-10% down, possibly less, no matter what it’s worth.

There’s not enough time in the day to go over all the problems associated with this cock-screwed idea. Even an old wood butcher can see the slippery slope this will lead to. Let’s just say, it would cause a massive drop in the value of the U.S. dollar overnight.

This crashing dollar, along with a complete loss of confidence in the U.S. economy globally, would, of course, cause real estate prices to plummet even more across the board. Subsequently, we would have a 20% increase in the value of gold and silver. That said, it now seems apparent, we’re headed there anyway.

So there you go. A 2010 Financial Outlook – The 4th Quarter Report in a nut shell, straight from the blurry eyes of an old, worn-out, wood butchering, Colorado carpenter.



The Future of Finance Jobs

In the not so long-gone past, many career advisers were advising young people seeking to start out a career to go into finance. The financial markets were doing well then, finance jobs were in plenty and MBA schools were bursting with young students seeking to build a career in finance. And the finance jobs were, of course, not limited to the financial markets. With a strong   economy ,  finance  graduates who couldn’t get jobs in the financial markets and investment banks could quite easily be absorbed into commerce and industry accounting jobs. Other would get middle office finance jobs in the public service, and going was good.

Then the bubble burst.

The  economy  went into recession mode, the financial markets shrunk and  finance  graduates who had taken up jobs with investment banks found themselves facing the axe, as the investment banks are the worst affected by turmoil in the financial markets. And as if on cue, companies, in a bid to cut costs, were also cutting on their head counts, thus also shaking the fortunes of the finance graduates who found commerce and industry accounting jobs in the private sector. In the midst of all this, it seems that the only secure finance graduates are those who took up middle office finance jobs in the public sector, but even this is not fear-proof for we do not know for sure what the full effects of the economic turmoil will be on civil service staffing.

So in the face of all this, what is the future of finance jobs?

It might seem counter-intuitive to say, but the future of finance jobs is still bright, in spite of the current turmoil in the financial markets. As it were, economists tell us that the current economic turmoil is largely short-term to medium term, which is to say that it won’t be with us forever. Which means that the people who chose to pursue a career in finance need not regret their choice, as better times are coming. But even before the better times arrive, the people with finance backgrounds who are currently getting laid off might not find themselves in the cold for too long.

As governments unveil the various economic stimulus plans, there will be need for people to manage the money as it goes into various sectors – which translates to some finance jobs. Of course the finance jobs created in this way will be for the best brains in finance.

And then there is the fact that all companies, like human beings, have a native survival instinct, which they are likely to find handy in these hard economic times. One survival strategies for companies in crises is to hire the experts who are likely to navigate them through the particular crises. And since the current crisis is financial, the companies are likely to find themselves hiring financial experts to help them address the economic crisis. Of course, the companies are not likely to be overtly looking for finance experts to help them address the financial crises. What we are likely to see is an increase in commerce and industry accounting jobs, but the accountants so hired are bound to be almost exclusively tasked with cost and revenue management tasks, geared towards helping their employers sail through the turbulent times successfully.

And finally the good times will surely come back again. If the history of the financial markets is anything to go by, we know that all bursts are always followed by booms.



Financial Stress – Should We Blame the Failing Economy?

Financial stress is at the top of the list of things which cause us most stress and anxiety in our lives. It is sad that we are not taught in early education how to recognise stress and how to deal with it effectively. By the time we are older, we have all the adult life stress but none of the tools to deal with it.

In fact there are many things our educational system does not teach us and stress management and financial management are two of the most important ones that are missing. Unfortunately, when we feel out of control of any situation, we are often stressed by it too, and personal finances fall into that category for many of us. Particularly in these days when the economy is fairly depressed and not as buoyant as it has been in the past.

Financial stress to a certain degree is almost inevitable, because however much money we earn, we always have decisions to make about it. If we earn too little, then we have excess stress about how to pay the bills. Money is tight so every financial decision is a large issue.

If we earn an adequate income, then we still stress about whether we will lose our employment or whether we will get the salary raise we are due. Family issues and purchases become possible but subject to stress-making decisions and arguments.

If we are wealthy, then we are concerned where to invest our millions or whether the stock market will crash and we will become penniless and lose our fortune. So financial stress in all these circumstances is a very common thing. Each of these situations is potentially subject to excess stress, but it is our ability to cope that determines whether we will suffer health problems due to the excessive stress we experience.

It just depends how we manage with life’s decisions as to how stress effects us. Our health is as individual as we are, and there is not one solution that will work for everyone. Stress arises from and is experienced in our mind. This is not to say that we imagine it. It is very real and sometimes has the most profound effect on our health and wellbeing. Sometimes even causing us to lose relationships or to become reclusive in nature.

It is probably true to say that in these present times, I think it is more likely that our financial stress will be caused by our reaction to the depressed and ailing economy. With credit cards being used to pay for our day-to-day living and taking on more and more of our debt, it is these that are often the reason for our worry and stress.

However, financial stress is the same as any other type of stress when it comes to treatment and management. By knowing our enemy, we defeat him and this applies to health problems also. A reasonably good understanding of the way stress effects us and what can be done to lessen the impact on us, is essential if we are to overcome its effects and avoid serious health issues.

The internet is a fantastic resource for information and knowledge and there are many good courses, newsletters and ebooks available that do not have to cost very much and are sometimes completely free.



Financial and Operating Leverage in Uncertain Economies

Operating Leverage and Financial Leverage can be paramount for a company to survive an economic downturn. High Financial and Operating Leverage are undesirable for a firm at any point, but are much worse in a time when revenues are declining. Financial Leverage increases when firms take on more debt, increasing their Liabilities. Higher Financial leverage increases a firm’s risk because the firm has to pay back that debt, even if revenues have slowed or even stopped. Operating Leverage increases when a firm has larger amounts of Fixed Costs. Similarly to Financial Leverage, higher Operating Leverage increases the Breakeven Point for that company, which is troublesome especially in a slow economy.

In 2009, Chrysler, Ford and GM had high Financial and Operating Leverages and in that year, 2 were forced to file for chapter 11 bankruptcy. A brief snapshot of Ford and GM’s financials show their high Financial Leverage:

Ford:

2009

Assets

$203,000,000,000

Debt Ratio:

103.45%

Liabilities

$210,000,000,000

Equity

$ (6,520,000,000)

GM:

2009

Assets

$ 136,860,000,000

Debt Ratio:

78.84%

Liabilities

$ 107,900,000,000

Equity

$ 28,960,000,000

Ford had a Debt Ratio of over 103 percent the year the company filed for bankruptcy; GM had a Debt Ratio of over 78%. All three of these corporations had high operating leverage resulting from large fixed costs, partly from compensation of employees, including pensions and retirement plans. As the economy slowed from 2007 to 2009, The Big Three were in serious trouble as revenue streams dried drastically increasing their vulnerability. The companies began two realize that they would not have enough Working Capital to keep afloat and all three had to receive outside funding (Chrysler and GM from the bailout and Ford from a line of credit).

More than three years removed from the bailout of Chrysler and GM, have the Big Three learned from their mistakes? So far, it appears that both Ford and GM have lowered their risk and Financial Leverage.

Ford:

2011

Assets

$ 178,350,000,000

Debt Ratio:

91.55%

Liabilities

$ 163,280,000,000

Equity

$ 15,070,000,000

GM:

2011

Assets

$ 144,600,000,000

Debt Ratio:

73.04%

Liabilities

$ 105,610,000,000

Equity

$ 38,990,000,000

Both Ford and GM improved their Debt Ratio. Ford lowered their ratio close to twelve percent while GM lowered theirs more than 5 percent. This has decreased their financial vulnerability if another global anomaly happens to decrease demand within their industry and revenues suffer because of this.

Both Ford and GM have also made strides to decrease their Fixed Costs, which will make their Operating Leverage more desirable. Cost of Goods Sold for both companies has decreased since 2009. Ford’s ratio of Cost of Goods Sold to Revenue (COGS/Revenue) decreased from 85.72 % in 2009 to 79.20% in 2011. The same ratio for GM decreased from 107.45% in 2009 to 87.78% in 2011. Since it is unlikely that there has been any significant advances in machinery or technology that drastically reduce production cost on a per unit basis, it seems that both corporations have found a way to lower their fixed costs, bettering their Operating Leverage. It is unknown if Chrysler has fared better or worse, post-bailout, as it is a private corporation and their financials are not made public.

With economic uncertainty a challenge facing all businesses, it seems that Ford and GM have learned from mistakes they have made in the past. They have been able to reduce the risk in which they operate as well as change their operational model in order to better satisfy demand. Both Ford and GM have changed the types of cars that they produce, moving to more economical and fuel-efficient models that are in demand, increasing revenues in both companies. It should also be noted that the increase in units sold and revenue can be, at least partially, attributed to the fact that many consumers are less afraid of buying Chrysler, Ford and GM models because there is a smaller chance that their car will be orphaned; meaning that their car’s manufacturer will go out of business and the customer will not be able to get service or parts for their car.

No one can predict future. Revenue for The Big Three could skyrocket, plummet or fall somewhere in between the two in the next few years. Regardless of what happens, they have taken significant steps to assure that they will be protected from the mistakes that they have made in the past by decreasing their risk when they made efforts to lower their Liabilities and Fixed Costs to improve their Operating and Financial Leverage, as well as creating products that better satisfy the needs of potential customers. Hopefully, these business strategies will keep these American companies in business and American workers out of the welfare office.