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The R word

As sub-prime loan problems rock the banking world and send shuddering vibrations through global stock markets, I have a word of advice – relax!
Unless you’re going to lose your house or your job in banking because interest rate rises have made life too hard, then it would be wise to take a dispassionate view of what’s happening in both the economic and investment worlds.
Splashing the cash
The investment world, being primarily determined by stock markets, are in the grip of volatility as the bears and short-sellers now have a market where they can really get some big results.
For nearly four years, those who tried to make money out of falling share prices and preaching the end of the bull run lost money as share prices went onward and upward. The power of the global economy driven by the likes of China and India kept profits swelling in top international companies and cheap money – low interest rates – made money-making as easy as falling off a log.
Who’s to blame?
The ‘you know what’ hit the fan when a stupidly regulated mortgage market in the US ignored the foolishness of things such as NINJA loans. These were mortgages to people with no income, no jobs and no assets!
They were also put on low interest rate loans, which reset at much higher interest rates in a few years time. These people are the home owners who are walking away from their homes and their loans, they are the victims of the sub-prime problem. The people at the core of the problem were stupid financial institutions, which are now paying a big price, along with their shareholders.
Tighten the purse strings
So, how does a normal person cope with the sub-prime fall out? Let’s profile people and come up with ideas.
If you have a loan that is getting more expensive, then try and refinance. Nothing ventured nothing gained and if a bank does not want to do a deal, try a mortgage broker.
If you can’t get a cheaper loan, do a budget and analyse all of your spending. Try to cut your spending by 10%. If you’re a family, get everyone together and tell them there will be a short period of belt-tightening while interest rates remain high.
This will be a great and enduring lesson for young people about how you cope with financial problems. No ostrich stuff, but a mature tackling of a problem!
By the way, don’t rule out second jobs to cope with this period of high interest rates. The job market is tight as a drum and finding weekend work would not be hard.
Life in the fast lane
If you aren’t happy with your portfolio of shares at the moment, don’t stress out unless you have bought bad shares!
It’s time like these when you should ask yourself this question: “Are my shares in good companies?” If you’re not an expert on shares, think about becoming a fan of top 20 companies that pay good dividends and sign up for these strong brands for the long-term.
Nothing ventured, nothing gained
A mate of mine writes a stock picking column for a newspaper and had to make about 460 buy, sell, hold recommendations and this year he lost a small amount, while the overall market went up some 12%. There’s a lot to say about not being an active buyer and seller when you have other things to do with your life.
Show me the money
For chickens who don’t like shares, especially right now, cash rates of interest on bank deposits around 7.5% look attractive. I reckon some people will park their money until mid-year in these safe harbours and then venture back into the stock market in the new financial year.
In terms of the real economy, I reckon the Oz economy slows down a tad but will still grow at a good clip to avoid a recession, despite the increased chances that the US could have to pull out the R-word soon.
Stemming the rise
Australia is less US-linked with the likes of China providing us with a lot of demand. There will be a knock on effect from a weakened US, but it should not hurt us like it used to a decade or so ago.
That means there won’t be interest rate relief in the short-term. The banks raising ahead of the Reserve Bank could mean the Big Bank gives us a break from more rises in February, but I would not bank on it! (Excuse the pun.)
I believe we could only cop one more interest rate rise, but some economists tip two more.
Hedge your bets

These are tricky times where investors should remember that they are long-term investors, just like superannuation contributors. There will be some bad results after four great years, but as long as you are in great companies and you don’t have all of your eggs in one basket, then you should have a bright economic future. 

Published on: Thursday, January 17, 2008

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