Wednesday, October 8, 2008

The Financial Crisis - more thoughts

Financial Crisis – thoughts on Oct 8th 2008

It’s worldwide. No matter where you live, you will be affected.

Ireland and Greece move in early and guarantee all bank deposits

Germany’s govt has to rescue its fourth largest bank.

Belgium and Iceland govts are bailing out their major banks.

Australia drops interest rates by 1% and stuns the market.

What next???

Maybe you are sitting calmly thinking that this crisis will not affect you?

I hope not.

This is a worldwide situation and in one way or another, nearly everyone will be affected:
Job losses, cutbacks, redundancies,
Pension plans dropping in value
Property prices plummeting
If you have investment property you may find you cannot let it easily if at all
Uncertainty in the banks – maybe a freeze on your hard-earned monies
Inflation – meaning that the value of your money is decreasing – NZ already at 5% at the moment and going up.

Why should we all suffer due to the greed and irresponsible lending of the banks worldwide?? It seems grossly unfair, but that is the situation we find ourselves in. Is it similar to the Great Depression of the 1930’s? In some ways yes and not in others. Well, here the banks are more centralised and can communicate with one another and can pump liquidity into the system. However, there is great distrust between the banks and in order to keep the system alive, they have to be able to lend to one another, especially in the short term markets.

Governments are buying up tons of bad debts that they cannot hope to ever recover – what is going to happen to all this money?

How much information has yet to come out? Probably a lot more. The European banking system is much more secretive than other parts of the world and so likely to produce some startling news as time goes on.

The US is still trying to be optimistic in the face of an upcoming election – yet once the dust settles and the new president is inaugurated – then the true situation will be revealed. There are still rose-tinted glasses on despite the heavy drops in stock markets worldwide. There is still manipulation of the gold price keeping it as low as possible – however, panic is setting in, and sooner or later, the price of gold will skyrocket.
What on earth can you do?

I do not mean to be a doom-monger – that is not my style – however, I do believe in protecting myself, my loved ones and in alerting the rest of the world to the current unfolding situation and giving ways of insuring yourself against the worst scenario.

Do not take on any debt.
If you already have a mortgage, try to get a better rate as interest rates start to fall. If you are on a fixed rate, make sure you check the date the fixed period ends and be ready to transfer onto a floating rate. This is likely to reduce your monthly payments.
If possible, pay off larger amounts so that you redeem the debt earlier.

Pay off your credit cards. Do not use them if you can possibly help it. If you have several cards, just keep one and get rid of the rest.

Keep 3-6 months cash on hand. Just in case your money is frozen for a period in the bank, at least you will have enough money to live on.

Stock up on dried goods, canned products and toiletries. Prices will continue to rise, and these goods will last – so at least you will have bought them at more reasonable prices.

Buy some gold or silver.
Do not keep it in the bank. All banks are scary at the moment. It is hard to know which one is going to be all right and which one will not be. Also, although governments are guaranteeing the monies (excluding NZ at the moment) – be prepared to have something that will insure your money should all else fail. Gold and silver are your insurance in case of systemic failure. Buy the one ounce coins in the gold.

Sit tight. Do not invest in property at this time.
Wait it out. These are turbulent times ahead – and although there are high-risk takers out there who will know how to invest and ride out the storms, for the average person, this is too risky and will have you up at night worrying about your finances. Do nothing. Wait.

Rent rather than buy.
If you do not own a property at the moment, do not buy. Rent and negotiate on the rental. There is an over-supply of rental properties out there at the moment and you should be able to get a good deal – maybe with some extras thrown in e.g. garden maintenance, cleaning etc.

If you are a very high risk taker and have spare cash, then you may want to invest in the stock markets as they are plummeting. However, this is not for the faint hearted and should only be considered if you have a large sum of spare cash. This is only an option once you have NO DEBT, own your own property, have at least 6 months cash on hand, have some gold and commodities. Then you might consider this option. It is vital to study the markets and to be on top of your investments on a day to day basis.

Remove the intermediaries
Wherever possible remove intermediaries between you and your money and assets. It’s very hard to know who is sound and who is not, so best for you to take control as much as you can. Then you will have no one to blame.

If you are near to your final pension and you can draw the money out at a small discount now, then consider this option very seriously. Stock markets worldwide are in for severe volatility for the foreseeable future. If you are able to get a lump sum out and you are near to retirement, this could be preferable to watching your investments fall and then receiving hardly anything for all your payments.
If you are not near to retirement e.g. 5 years plus away, then hold tight and wait it out.

Foreign currency
If you have spare cash and have already done the above points, then you may want to consider diversifying your risk into different currencies. This is something that you will have to watch on a daily basis, however, and you cannot leave it to your financial consultant or bank. Minute by minute the exchange rates change, and you need to be abreast of the changes.
Also it is important to know what your options are:
If you are exchanging cash, you will be charged a premium at the bank. For example, the general rate for the Yen to the NZD might be 0.63, but the bank will only give you 0.67 for your Yen.
However, if you have a foreign exchange account with your bank, you may find that they will give you a better rate even if you have to pay a 1% handling charge. For example let’s say they will give you 0.65 for your Yen.
So 800,000 Yen at 0.65 is NZD $12307 – plus their 1% commission of 8000 Yen at 0.65 is NZD$123.00 - so your total is NZD$12184.00
However, if you exchange your Yen at the Forex counter at the bank you will get 0.67 which amounts to NZD$11940.00

So, in knowing about this option, and checking it out fully, you would have gained $243.00.

Check out all your options with Forex – it can be a minefield, but it is worth taking the time to do this and you will make money. If you are unsure, you may want to consult an independent financial adviser who specialises in this field.

This is a risky option generally, and I reiterate – ONLY if you have no debt and have some spare cash.

If you would like some impartial advice about your finances during these volatile times, please contact me on

Barbara Goldsmith

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