Global stock markets have been whitewashed over the past month, Dow Jones fell to its lowest level in 6 years this week, and gold has charged to a record high $1,007 as investors seek to preserve capital.
Granted that Obama’s administration has been hard at work – a $787 billion economic stimulus was signed into law Tuesday and a $75 billion foreclosure prevention plan was unveiled to aid distressed homeowners and revive the housing market. However, there is little confidence that these measures will be effective.
It didn’t help the fragile investment community that Treasury Secretary Tim Geithner’s much anticipated bank bailout plan fell flat on its face due to its lack of details. So far, notable “contributions” from Geithner has been to test Obama’s damage control ability with his tax evasion and currency manipulation remarks about China.
Geithner has another mammoth task on his platter sitting on the committee to reform the automakers. The endless black hole coming from General Motors and Chrysler is troubling. Both companies had the audacity to ask for $21.6 billion in addition to the $17.4 billion in government assistance already doled out.
But we are getting ahead of ourselves. Let’s just focus on the details of the bad bank concept. While waiting anxiously for Geithner’s grand financial plan, calls for nationalization of banks has gained such a strong following that it is virtually guaranteed (despite Obama’s insistence to the contrary) that shareholders will be wiped out while bondholders are eventually paid pennies on the dollar.
Then, we have Allen Stanford’s $8 billion Ponzi scheme which rubbed salt into the wounds of rattled investors. Clearly, devious elements in financial institutions have not been fully weeded out. When you see a rat in the kitchen, surely, there will be many others lurking.
Who else has been running Ponzi schemes, good old Madoff has shown that it is perfectly possible to keep investors happy with no investments for 13 years, except robbing Peter to pay Paul. And if this financial crisis has not erupted, I believe his investors may just enjoy another uninterrupted 13 years of solid returns.
The numbers for other major economies are not inspiring either, and I meant it as an understatement. Japan’s economy contracted at its quickest pace in 35 years and G7 finance ministers warned the global slump will drag on through 2009. Europe’s services and manufacturing also shrank at record pace while Eastern Europe, once among the world’s fastest growing region, is staring at a severe economic shakeout.
Not surprisingly, gold is the flavor of the month – it is the best asset class besides cash. Its run-up from $771 last month to breach a major resistance at $930 and then closing over $1000 this week is clear evidence that many investors are turning into gold bugs.
Since January, if you have invested in gold and reduced your portfolio’s exposure to stocks and bonds, you will have clawed back substantial losses and maybe breakeven. In the short term, I am not sure if the uptrend will fizzle out, as the momentum over the last couple of days has been so powerful, and any readjustments from profit taking is normal.
In the long term, the fundamentals could not be better for gold. Many nations are diluting their currencies in bailout, easing of credit crunch, and economic stimulus to avoid further deterioration in their domestic markets. Inflation will certainly come back with a bang, thanks to all these newly minted paper money.
With no bottom in sight for the global stock markets, except for Shanghai benchmark, and deflation looming, (someone please prepare the helicopter, the time for Ben Bernanke to take to the sky and start dropping money has come), it is safer to conserve cash.
Alternatively, if you are sitting on too much cash and not being in a hurry to invest in stocks or being a gold bug, I will suggest you tackle debts aggressively, especially credit card debts. Assuming a standard 24% interest rates on credit card debts, eliminating this debt is equivalent to achieving a 24% return per annum on your cashflow.
In a deflation, prices fall across the board (a boon for consumers), but those who are debt laden will suffer tremendously. The same $1000 debt is now being paid with increasingly valuable cash. Hence, debts are onerous in a deflation.
However, you don’t have to give up your credit cards altogether. They offer superior protection against dishonest or faulty transactions, especially when you are a fanatic online shopper. There are also attractive rebates and rewards available. Here are some tips to help you to eradicate irresponsible credit card habits.
1. Limit usage to your credit card. The only way to extricate yourself from a hole is to stop digging deeper.
2. Pay debts off from smallest to biggest. This snowball method is advocated by Dave Ramsey (check out The Total Money Makeover Workbook for useful financial worksheets) where you throw all your bullets at the smallest debts and build up the momentum. Clearing one or two quick debts keeps you motivated rather than whittling down a huge debt which you are not able to make headway in the short term.
3. Increase your credit card minimum payments, if you are not able to make the full payment. To ensure you are able to cough out the requisite amount, create a monthly budget to keep your expenses in check.
4. Make one-time payments when you receive extra money. You should direct lottery winnings or earnings from overtime/part time work directly to your credit card debts. Every penny adds up and you don’t have to worry about fighting temptations to spend the idle money in your bank account.
If you want to be debt-free, it is necessary to make sacrifices for a period of time and scrape every penny to repay outstanding debts.
Once you paid off your credit card debts, consider living on a cash basis and building up an emergency fund to sustain at least five or six months of expenses. It will definitely come in handy if we go into a Depression and more layoffs ensue.