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YOUR TIME IS UP

The world has been left reeling from the global financial crisis, particularly in the USA. Their housing market has collapsed, unemployment has risen and the confidence of the citizens in their government has been shattered. A crisis can’t last forever though, and the news stations are reporting that the US economy is recovering.

The American public is widely aware of biased reporting, so these claims should be taken with a grain of salt. Recent Pew Research surveys have shown that 63% of Americans believe that news stories are inaccurate, with 60% claiming they are politically biased. A staggering 74% of the public are now aware that the media is heavily influenced by powerful people and organisations, creating a huge level of distrust in the American media’s reported stories.

Considering these facts, it is not surprising that the media is failing to report and ignoring the opinions of most of the leading international economists. While they may have differing opinions on a wide variety of subjects, there is one thing that they all agree on – the USA will plunge into an even greater depression, meaning its time as a global superpower is over.

EXPERT CONSENSUS

Gerald Celente is probably the world’s most highly respected trend forecaster, for which a number of media firms and notable personalities approach first when they need accurate predictions. They say even Nostradamus would have a hard time keeping up with him. His record speaks for itself, accurately predicting the 1987 stock market crash, the fall of the Soviet Union, the Dot.com bust, Gold Bull Market and 2001 US Recession.

Celente has remained on the pulse with world events and predicted the recent Real Estate bubble, panic of 08 and tax revolt. But his predictions amidst the global financial crisis don’t stop there, as Celente predicts “the Collapse of ’09″ to occur later this year as well as the coming “Great Depression”, which will dwarf the 1930′s version. Celente also believes the mayhem will flow worldwide, leading to “an economic collapse, the likes of which the world has never seen before”.

Respected economist & author, William Engdahl, also agrees that the US will suffer worse than it did back in the 1930′s. He has predicted “10 years of hell” for the US population, and has been quoted as saying that the decline can not be reversed, even if Jesus Christ was the president of the USA.

Engdahl has also launched scathing criticism upon both the former and current US Administration and in particular the actions taken to ‘repair’ the economy. He claims that everything they have done has just made the situation worse, and that Obama has maybe another few months before he becomes the most hated man in America, just like what happened to his predecessor George Bush.

ZOMBIES ON THE LOOSE

PhD economist Marc Faber has taken steps to describe the events which the US can expect to see during the coming years. He has said “I am 100 percent sure that the U.S. will go into hyperinflation”, but described it as a financial profit inflation rather than a Weimar Republic type price inflation.

Faber has warned that in this situation, zombie financial institutions turn nominally profitable in a collapsing economy, for which the public will mistake for economic recovery. After they invest their remaining wealth, the profit bubble will burst and almost all of the public’s remaining money will be gone.

The zombie tag has also been used by one of the world’s great investors, George Soros. He is also of the opinion that the US economy is in for a “lasting slowdown”, as well as the high inflation that Marc Faber expects. Soros is not a fan of the economic stimulus packages, for which he has warned that rescuing US banks could turn them into “zombies” that draw the lifeblood of the economy and prolong the slowdown.

The US administration has been copping it from all angles, even their local institutions. The head of the Dallas Federal Reserve bank has been drawing attention to the big hole in unfunded pension and health-care liabilities caused by incompetent politicians. Last years federal commitments have added an extra US$55,000 for each household to cover, bringing the total to over US$500,000 per household. The government now has a mortgage-sized obligation on each household, except unlike a real mortgage, there is no house as security and it is backed up by nothing.

LIKE A GAME OF MONOPOLY

Damning figures like these have contributed to the notion that the USA will follow in the footsteps of Iceland and soon file for bankruptcy. Iceland got themselves into a mess by lending copious amounts of money worldwide, which the borrowers now lack the capacity to return. There have been rumblings that Switzerland is also heading down the bankruptcy road, due to similar lending splurges to eastern European nations now plagued by currency devaluations.

England and possibly even Germany may face the same face for their excessive lending. There are even those who claim the USA is already bankrupt, albeit unofficially. Just like Iceland, it is impossible for the US to make the interest payments on their debt, let alone repay the principal. US debt has now blown out to US$65 trillion, which is more than the GDP of the entire world.

But what does bankruptcy mean for a nation? Basically, it means that they can not pay back their external debts and have defaulted on their loans. Their currency will become worthless, leading to a problem with paying for imports, and they will need to seek assistance in the form of further loans to rectify their balance of payment issues.

Other countries may be willing to loan a bankrupt country money, but the most common source of assistance comes from the International Monetary Fund (IMF). IMF loans are definitely not free. In addition to charging interest on funds, the IMF also has the power to stipulate policies and measures for the country to implement, effectively ensuring they fall under the control of the IMF.

Continued at USA’s time as a superpower is over – Part 2

LEOPARD CHANGES IT SPOTS

The global financial crisis has forced many Australians to rethink their spending habits. Some have been forced to do so as a necessity to survive, while others have decided to play it safe due to factors such as job insecurity and uncertainty regarding survival during retirement.

Nobody seems to be talking about the wonderful benefits of the global financial crisis. Before it came, life seemed great. But in reality, we had adopted many irresponsible and unsustainable lifestyle habits, which left uninhibited would have caused far more pain in the future.

The spending habit changes ushered in with the global financial crisis could themselves be economy savers. Many Australians were seeing their household debt spiral out of control, as they attempted to satisfy every one of their desires in this consumer driven economy. But now their eyes have been opened up and they can see the errors of their ways, cutting down on their brash spending sprees.

CUT UP THOSE CARDS

The Reserve Bank of Australia has recently released figures confirming the changes in the Australian publics spending habits. They have been monitoring credit card usage, with the latest data showing a reduction in the use of credit cards and an increased eagerness from the public to pay them off.

Purchases made on credit cards fell by 1.1% in July in comparison to the previous month. Additionally, repayments increased by 2.8% over the same period. Cash advances on credit cards also fell by 5.6% in July, and dropped 13.2% lower over the past twelve months. The last year also saw the average credit card balance contracting at the highest rate on record.

DOWNGRADING

When it comes to essential items, plain or generic brands have become the popular choices instead of luxury and labelled items. Common sense has returned, with Australians starting to realise that fancy packaging or the appearance of a certain name on the item does not make it a better purchase.

Perfumes are a classic example of the previous crazed spending habits. If Australians were given two bottles of perfume that smelled exactly the same, they would buy the Chanel bottle for $100 rather than a $10 no-name brand. The global financial crisis has thankfully changed this type of thinking. The ‘fashion’ industry operates much the same as in the perfume example, with brand names dominating the market. Now, fancy retail outlets are experiencing a drop in sales as customers return to stores such as Target and Kmart.

Supermarkets have seen this change first hand, with an increase in sales for generic brands. Black and Gold baked beans are preferred to Heinz, and Lux and Dove soaps are just not necessary anymore. Service industries have also seen customers turn to ‘generic’ providers. The rip-off merchants such as those ‘classy’ hairdressers charging $80 for a haircut are now suffering, with the plain old $20 barber doing the job just as well.

In what might seem to be a negative aspect of the downgrading habit, Australians are also giving less money to charity. But this might not be so bad, since charity has become an industry in itself, run by executives who demand such high wages that maybe less than 1% of all donations make it to the intended recipients. Hopefully these leeches will now be sacked and replaced by people working for reasonable wages, allowing more money to make it into the hands of the poor.

THAT’S RIDICULOUS

Before the global financial crisis, there were many Australians who spent their money on items and services that can only be deemed ridiculous. Who really needs to get their cat taken for a walk or buy a cappuccino for their dog? It’s the height of stupidity and these idiots were a major cause of the global financial crisis with their crazy spending habits

Australians are also waking up to the stupidity of other services and items that have been commonly used and purchased for many years. Fuelled by laziness, dog walkers and clothes ironers have been given the flick, and people are now doing the jobs themselves. Carpet cleaners and dry cleaners are also seeing a drop in business as people realise that they don’t need these services as often as they think.

The art industry has suffered greatly. After all, what purpose does an expensive painting or statue serve? Keeping on the subject of purpose, people go to restaurants to get fed. These ‘fine dining’ money thieve restaurants that serve up a spoonful of mashed potatoes, add some fancy sauce and charge $50 are being deserted like the plague they are. Fast food purchases are also reducing, as people prefer to stay at home and get a low cost, decent sized meal.

THE DREAM IS OVER

The illusion of the Great Australian Dream is thankfully fading. Australians are waking up to the fact that we don’t all need a large house with a gigantic plasma TV and home entertainment system, along with a brand new car in the garage.

New car sales are falling as people realise that a second hand car at a quarter of the price is sufficient to get from A to B. They no longer see the need to impress their friends with a fancy automobile. Home furnishing sales are also dropping. The need for designer couches and high priced electronics is no longer existent for most people, who instead settle for standard furnishings or a normal size TV.

The travel industry is seeing a change in habits too, but not necessarily a drop in business. More purchases are being made online, with local travel being preferred to exotic destinations. Australian travel is not only preferred for its lower costs, but many people want to keep their dollars in Australia to help the local economy.

We can only hope that the spending habit changes currently being seen will be continued to be implemented far into the future. Spending based on necessity rather than desires is far more sustainable for both individuals and the country at large, and will help to maintain our excellent standard of living for many years to come.

SPENDING CUTS

The global financial crisis has put a dent into most people’s lifestyles, both in Australia and overseas. The effects have been far reaching and it is interesting to note that it has affected all income groups, regardless of whether they are from the upper or lower rungs of society.

Although spending has been reduced, the bare essentials such as rent/housing payments, food, clothing and utility payments have not seen too much of a cutback. After all, people still need to survive and there is a good reason why these are known as the bare essentials.

The only utility bill that could be reduced is the telephone expenses, but with most people on a phone plan, this is something they won’t be able to lower for some time yet. Similarly, rent and housing payments can not be lowered quickly either.

The only reduction in food would be a change in eating out habits, with expensive restaurant meals or fast food purchases being put on hold for some time. Supermarket purchases are largely the same, although some families have switched to generic brands rather than the big names. Labelled clothing is off the radar for a while, as consumers make do with cheaper clothing brands.

Overwhelmingly, the largest spending change we are seeing is in the area of non-essential items, otherwise known as luxuries. The ‘rich club’ were previously gigantic spenders on these lifestyle luxuries, and their change in spending habits has not gone unnoticed by the luxury item manufacturers.

SHARING IS CARING

Not wanting to depart with their glamorous lifestyles, the ‘formerly rich club’ have devised new ways to live the high life without hurting the bank balance as much. One of the latest tactics involves sharing the usage of particular items, where a consortium of individuals each contributes to the purchase and shares the time they can use it.

While the formerly rich may like to take the credit for such a brilliant idea, the real credit should go to the product sales departments, such as those at Rodriquez Cantieri Navali SpA, who are one of the world’s largest boat manufacturers. They recently sold a 41 metre luxury yacht called the Ocean Emerald under a fractional ownership scheme with great success.

With a price tag of 15 million Euros (25.6 million AUD), the Ocean Emerald was previously a luxury item limited to the super wealthy. With many senior executives and managers missing out on their yearly bonuses and pay rises, the luxury yacht market was suffering. An innovation was needed to break them out of their slump.

Under a fractional ownership arrangement, a two million Euro cost for a five week timeshare is far more affordable. Besides, who uses a yacht all year round? Robert Hersov, the vice-president of Yacht Plus, the developer and manager of the timeshare project, was certainly aware of this based on his experience using the same concept to sell corporate jets.

Similar to corporate jets, the yachts often sit idle for a large portion of the year. For this reason the timeshare arrangement makes better financial sense and has naturally been a very easy concept to sell. It has also brought a number of new entrants into the yacht market, as many people have now been given access to items they could never previously afford.

PLUNGE IN WEALTH

Over the last year, the value of the all of the world’s millionaire’s assets has collectively plunged in value. It is estimated that they have each lost on average 20% of their wealth since the global financial crisis, with some faring far worse than others.

One of the rich club who has suffered tremendously has been our own Kerry Packer. Late last year it was reported he had lost around two thirds of his inherited wealth as shares markets tumbled, with the situation expected to get worse as his other investments struggled.

Packer was forced to liquidate his lifestyle. First to go was his luxury yacht; then he negotiated to put back the purchase of his private yet. A backyard pool and leisure facility for his property was next to be put on the backburner, followed by the impending sale of one of his British properties.

2009 has brought Packer some relief. His wealth improved slightly as his business losses were covered by a 50% gain in the share price of the Crown gaming group, his major investment. But he also gained a slight mental benefit, as he regained his position as the wealthiest Australian after falling to third in 2008.

In 2008, Packer was listed by Forbes as the third wealthiest Australian, with an estimated fortune of US$5.3 billion. Even though Forbes estimated his wealth fell to just $US3.1 billion in their 2009 list of Australia’s 40 richest people, the late share rally has meant that Packer has been propelled into top place.

The previous two wealthier Australians, Andrew Forrest and Frank Lowy saw massive amounts slashed from their fortunes, with spiralling share prices responsible for Forrest losing 75% of his wealth in just one year. In fact, 37 of the 40 wealthiest saw their fortunes tumble when the global financial crisis hit.

NOT ALL IS LOST

The head of hedge fund group CQS, Michael Hintze, Macarthur Coal founder Ken Talbot and property tycoon Maurice Alter were the three Australians to see an increase in personal wealth from the 2008 to 2009 Forbes rich list. Although two of these only appeared richer after information about their total wealth changed.

Even considering the staggering losses of wealth experienced by the richest Australians, the increase in fortune of just one out of the top 40 shows that is possible to make money in this financial climate, providing the correct investment decisions are made.

One of the great examples of someone who can make incredible investment decisions is the world’s richest man, Warren Buffett. He has done it consistently over the years and through all types of market conditions. The global financial crisis was not a problem for him either, as he successfully made a pocketful of cash.

Buffett reached an agreement with Goldman Sachs Group at the peak of the credit crunch to provide the Goldman Sachs Group with immediate financial relief, and Buffett the option to purchase their shares at US$115 at any time over the next four years. Based on last months share price, if Buffett were to exercise the deal now, he would have made a cool US$2 billion dollar profit.

While the rich club can’t all be as investment savvy as Warren Buffett, there is no reason for them to sulk at their reduction in personal fortunes and cut in lifestyles. After all, these guys are still billionaires, or at least multi-multi millionaires. That’s more money than the rest of us would see in our entire lifetimes.

SWEDEN DOES THE UNTHINKABLE

Last week we saw an incredible event when Riksbank, the Central Bank of Sweden, cut the deposit rate to -0.25%. Usually unheard of and rarely utilised by central banks, a negative interest rate effectively charges savers money on their deposits in the bank.

Sweden is amidst its worst recession since the 1940’s, and it’s no surprise that drastic measures have been used in an attempt to revitalise the economy. The executive board of Riksbank has decided the country needs a more expansionary monetary policy; hence the decision to drop the deposit rates into negative territory.

A fall was also seen on lending rates, with these falling below 1% to just 0.75%. The rates are expected to remain constant until late next year, allowing plenty of time for the intended results to take effect. Official rates now sit at their lowest levels since interest rates were recorded, which was way back in 1907.

The economic downturn has hit Sweden hard. Exports are in important part of the Swedish economy and with the global financial crisis impacting their export market, export levels have dropped considerably. Automotive manufacturer Volvo is just one of the affected companies, scrambling to cut costs and slash job numbers.

To counter this, Riksbank has offered Sweden’s banks 100 billion kronors (AUD $16.2 billion) at fixed rates, in an attempt to reverse the economic situation. What this essentially means is that the banks are free to lend as much money as they want, but shouldn’t put any of that back into the central bank as deposits.

PUNISHING SAVERS

Negative interest rates are a slap in the face of savers. The global financial crisis was caused by lack of saving, which makes it odd that Riksbank has decided to further punish savers and remove any incentive for them to save instead of spend. The lack of incentive is a deliberate tactic, as they believe that consumer spending will stimulate an economic recovery.

This line of thinking is in stark contrast to the reality of the situation. It was overspending and escalating levels of consumer debt which was the cause of over-inflated prices for assets and commodities. The banks kept lending under the false assumption that asset prices would continue to rise, and when the prices went the other way, the global financial crisis was here.

It is clear that the problems behind the current economic situation in Sweden have been fundamentally misdiagnosed. Not only have the wrong group been punished with this move, but the borrowers and speculators that are the true cause of the crash have been rewarded with lower interest rates and the ability to further ruin the economy.

SWEDISH PIONEERS

The four minute mile was for so many years the unpenetratable barrier. But once it was crossed, a flood of other runners conquered the landmark time in quick succession. We may see a similar effect with the negative interest rate barrier. Sweden has crossed the line and other countries are considering following suit.

No other country seems to be more ready to take the step into negative interest territory than Japan. The recommendation has been floating around amongst Japan’s economists, as the country attempts to battle with an aging population and a potential decade long fight with deflation.

Other extreme ideas have been mooted, including the introduction of a tax on physical currency, as Japan faces the reality that an interest rate of 0% has been deemed too high by economists. They propose a drastic cut in rates in order to combat spiralling deflation, with economists calculating the necessary rate at -4%.

There has even been speculation the Federal Reserve in the US and the Bank of England could also introduce negative interest rates in their respective countries. Undoubtedly a number of other countries will mull over this proposition and potentially follow the lead of Sweden’s central bank. Although, they are more likely to wait to see what the immediate effects are upon the Swedish economy.

Even though this is the first time negative interest rates have been used as a remedy to repair an underperforming economy, it is not the first time they have been introduced. Switzerland also moved interest rates into the negatives during the financial panic of the late 80’s. People were worried about the financial stability of a number of currencies and rushed to the Swiss Franc, so they modified the rates to effectively charge a premium for the privilege of currency safety.

JUST WHAT IS THE POINT?

On the surface, negative interest rates appear like a ridiculous proposition. But if so many countries are considering the idea, there must be a purpose behind the reasoning. Well, the main function is to battle deflation. Lack of saving and increases in lending lead to higher spending levels. The spending creates an increase in demand and this naturally inflates prices, giving the governments the results they desire.

Unfortunately, the price inflation will only be temporary. Markets will always correct themselves naturally and when government intervention delays the natural market corrections, it only compounds the effect until it occurs at a later stage. As with most governments, the policies they implement are designed to shift the problems into the future and let someone else take the responsibility and blame when it occurs.

When you think deeply about the situation you realise that the same men who set the economic policies which led us all into this mess in the first place, have been given the job of getting us out. Policies like negative interest rates only compound the problems and highlight the reality that the top economists don’t have a clue what they are doing.

HEAVY CRITICISM

The move to lower interest rates into the negatives has drawn heavy criticism from a number of sources. Some say the decision is more to do with pleasing the political party donators and allowing their businesses to flourish; while others see it as an attempt to prop up property prices owned by the elite and give them enough time to sell their assets before a monumental collapse occurs.

Many Swedish residents have expressed outrage with the decision. They accuse Riksbank of practically forcing them to take on debt and are in dismay as their kronors become more worthless each day. In late October, 1 euro would buy 9.5 kronors. In the past 8 months, the rate has depreciated and now sits at over 11, representing a drop in buying power of around 11%.

Whatever the underlying reasons behind the decision are, Sweden faces an interesting road ahead. The international community eagerly awaits the economic outcome of the decision and only time will tell what the true effect on the economy will be. One thing is for certain – this is one of the true occasions when storing money under the mattress makes perfect sense.