Monday, May 25, 2009

Global Financial Crisis

Global Financial Crisis – How Then Shall We Live?

We are living in a new world now. Ever since the US dollar has depeg from the gold standard in Nixon days in the early 1970s, the US Fed has been at liberty to print money – creating new USD without any need to have gold as reserves. Since then the global money supply has expanded tremendously resulting in global economic growth for most years. We are living in a highly leveraged world not just in terms of borrowings, but much more so in terms of excess fiat money supply not backed up by gold or actual goods. It’s a dream world.

Now the dream is over. Asset bubbles (properties, stocks, money, credit) are bursting globally at the same time! This crisis was triggered by the subprime residential loans in the US. But that is only a small part of the overall problem that we have – too much loans/debt in the system especially in the western world. Take away the debt, and you can wipe off a huge chunk of the economy – maybe send them back to the early 1990s or 1980s level. The stock prices in US are already indicating that the past 12 years of profit growth are illusory – unsustainable. You can now buy Citigroup at less than USD5.00 bucks. Do you recall when was the last time Citigroup was trading at that price?

What’s the solution? We need to reduce the overall debt levels in the western countries. But how do you do that? The banks need to shrink their loans books i.e. become smaller. Just before the crash, financial sectors’ profit was 46% of the corporate profits in the US. It has become a huge monster sector hunting after profits to feed the lust of the CEOs, traders, fund managers etc, with the tacit support of incompetent regulators and corrupt governments [yes we are talking about developed countries here – in many ways they are worse than Malaysia !] Their overspending/greed have now created huge problems for the rest of the world. Eastern Europe countries are at the brink of collapse. Germany’s Merkel has refused to help them. This time they will be worse hit than the Asian countries in 1997 as then the crisis was only confined to a few countries in East Asia. Now it is a global recession.

I think many people are still dreaming when they hope for recovery at end 2009. This is the worse crisis since Great Depression/World War 2. We got to wake up to the new reality. It’s time to worry about return of your capital then return on your capital.

How then shall we live?
Spend below your income – you must get rid of any consumption type debts like credit cards, personal loans for weddings etc. And if you are planning to buy a house, it may be a good idea to KIV until 2010 – if you still have your job, then only proceed to get a loan. Don’t change car unless your job is very secure.

Don’t be greedy and buy all those financial products out there that promises you extra returns if you hold them to maturity etc. Extra returns mean extra risk. No free lunch.

Cut any ‘fat’ in your monthly spending. For example – do you really need Astro? ; do you really need to use the aircon every night? Learn how to eat at home/cook instead of eating out regularly. Shop wisely. Other tips:-
  • Use a debit card instead of credit card – you can control how much to spend. E.g. AmBank NextG debit card etc.
  • Try to use public transport. If you must buy a car, you can always buy a 2nd hand car.
  • Stay together with good friends; and cook in.
  • Budget – tithe, saving + investment.
  • Insurance – just get a basic life/medical e.g. Sihat.

This is a good time to learn how to manage your financial affairs properly. Learn how to invest [which will take years]. Read and read. Take some local courses that cost less than RM500. Sign up for free seminars/talks organized by people like Securities Commission, non-profits like GCF etc. Learn how to invest in places like Singapore and US where the stocks have been battered very badly. Go for the safest/biggest companies. Don’t speculate or go for the small mid caps which may go bust if the recession last longer than their cash reserves.

Biblical Principles

  • Matt 6:33 – Seek ye first the kingdom of God and all these things will be added unto you…
  • Malachi 3:8-10 - “…bring all the tithes into the storehouse.. and try Me now in this,” says the Lord,” if I will not open for you the windows of heaven and pour out for you such blessing that there will not be room enough to receive it.”

In the bible we are exhorted to put God first, and not worry about what to eat etc. God promises to provide for our needs if we seek Him first. Are we faithful enough for that? Can we spare time for the work of the Kingdom or are we spending too much time at work & trying to earn more to retire early? Are we giving regularly to those in need be it orphanages, and support missionaries/church workers etc.?

When will the economy turnaround?
Some estimates that US GDP will shrink by 10%, and Singapore’s GDP will shrink by 15%! Malaysia – at best flat, worst maybe -5% or so. How long more? Only God will know the answer. We can analyse all the figures in the world, so did millions of smart people out there. Only so few have got it right – including Prof.Roubini of RGE Monitor/NYU, and Paulson & Co (a global hedge fund that made billions betting against the banks in the US.). What do these people have to say? Roubini thinks that the total losses in the financial system in US alone is USD3.6 trillion ! So far recapitalization by the US government is less than USD1 trillion. So what? That means the US government is still hoping that there will be no more losses. Look at AIG – they have to put in another USD 40 billion on 2nd March 2009. They should just hire Prof. Roubini to be the adviser to Obama.

Conclusion : there are some very smart Americans who got this right, unfortunately they are not the ones running the country ! (Ditto for Malaysia, perhaps only Singapore has the best in the national service).

So don’t expect this pain to end anytime soon. If it does, we are all very lucky. Historically a housing burst always lead to a banking meltdown. And the average duration is 5 years from peak to trough. So this housing decline started in 2006 in the US. Expect the house price to stabilize around 2011. In the meantime, go and spend more time with your family – enjoy life.

Save and invest wisely. Buyers beware / caveat emptor.

"This article does not constitute investment advise. No reproduction of the article in any form is permitted without prior permission from the author."

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