Despite constant interventions in the financial market by the US Federal Reserve Board, the credit crisis is getting worse by the day and already investors are questioning how effective will the bailout plan be. Beginning with the bailouts of Bear Stearns in March to Fannie Mae and Freddie Mac and the latest for AIG, none of the corrective measures seem to have any effect in arresting the chaos which had ensue in the financial markets. The latest move led by US Treasury Secretary, Henry Paulson, led to the enactment of the Emergency Economic Stabilization Act of 2008. The $700 billion rescue plan calls for the US Treasury to buy up the “toxic assets” of ailing banks which were initially the root cause of the credit crisis. When the Federal Reserve Board refuses to extend any financial assistance to the Lehman Brothers, the demise of the century old investment bank had led to a cascading effect which had so far resulted in the current situation. What the Lehman Brothers failure had shown is that size is no longer a safety net for failure in the financial world.
In response to the global credit crisis, Australian banks had move swiftly to provide details of their limited exposure to the US mortgage investments hoping to alleviate fears of a financial meltdown locally as what had happened in the European Union currently. Lawmakers in Australia were also quick to add that the current problems in the US were due to lack of regulations unlike Australia which has existing regulations in place. However the latest development in Germany which resulted in the German Government bailing out Hypo Real Estate AG, Germany second largest property lender, for €50 billion seeks to show that this line of thinking might not hold true. The German’s Bundesbank is known for its conservative and prudent management of its financial institutions and yet this has not insulated Germany from the fallout of the credit crisis. Furthermore, globalization has not resulted in diversification of risks rather it has intensified risks and permeating even to areas which are supposing to be immune.
Shares prices in the Australian Stock Exchange (ASX) have been falling by as much as a third since the end of last year led on by the banking sector. The commodities sector is not immune to the declining prices as well. Blue chips mining shares like BHP Billiton Ltd has seen their value eroded despite the imposition of short selling of shares by the ASX. It goes to follow that if the current condition persists, Australian would be facing harsher times ahead. The Australian economy, in terms of its ability to remain insulated from the fallout, is on borrowed time.
The global contagion is already testing the supposedly bond that exist in the European Union (EU) as Finance ministers from member countries broke ranks in their bids to protect their own banks. The magnitude and speed of fallout had caught many of the European nations unaware that instead of a concerted effort to stem the effects of the crisis have ultimately resulted in disarray unilateral actions of EU member countries. The Irish Government on 30th September, in its bid to starve off a meltdown of its financial system, had sought to guarantee the debts and deposits of its six largest banks. The move was decried by its neighbors and Brussels fearing a flight of deposits from the domestic banks the neighboring countries to Ireland. What the recent events had shown is that despite the ideal goal of unity that the EU has tried to embodied, no nations can be immune from the current financial crisis. Australia will not be the first exception to the rule.
The globalisation of the world’s economies has brought tremendous gains in terms of trade and finance. The development of instant communications, international trade and development of the capital markets has contributed to what is termed as the New World Order where the economies of the world are intertwined together. Businesses now are able to raise funds on the global capital market with ease. However it has brought disastrous repercussions as well. Globalisation has also sought to magnified risks in areas which are seemingly totally unrelated to the global economy. What traditionally used to be considered safe and worthwhile investments has now changed subjected to external factors thousands of miles away. The current credit crisis the global economy is facing is an example of a US domestic crisis spilling over to Europe now. Money market instruments before were considered a prime investment as they carried a well balanced mix between yield and stability. Due to the emergences of the toxic assets, investors are now shying away from investing in any of these types of instruments as no one knows the actual risks that are tied to these investments anymore.
Rapid advancements in technologies have totally changed the ways shares prices are determined. The intrinsic value of shares used to be determined by amount of dividend that share would yield thus reflecting shareholders values. Today the profitability of shares investments are derives from inherent market inefficiencies. The world’s major stock markets today are largely automated. In the London Stock Exchange for example, System like TradElect are programmed with algorithmic trading patterns designed to execute stock trades in 10 milliseconds while simultaneously processing 3000 stock orders per second. The computer systems are able to act to information about market conditions even before any human traders are aware of the changing market conditions.
It is through this manner which hedge funds have the ability to determine the price of a stock, by sheer volume trading. Use together with Statistical arbitrage which isolate assets mispricings, Algorithmic trading is powerful tool which had generated billions of dollars in profits for the hedge funds. This is the main reason why hedge funds are the top performing funds in the financial markets. However the high cost of development and maintenances of these sort of systems means that only those large firms with the funds are able to acquire sophisticated systems like this for their Trading desk operations. But a former London city stockbroker, Rajeev Shah, highlighted that the same quantitative analysis methodology could be applied to the world of Sport Arbitrage. Using softwares like the ArbAlarm developed using algorithmic blueprints; traders are able to isolate price differentials also in a matter of mere seconds. The only difference between the Sport Arbitrage market and the financial markets is the volume of trading that is being done. The Sport Arbitrage market smaller size makes it a more accessible market to the smaller investor. (To learn more, read “Sports Arbitrage–How to place riskless bets & create Tax free investments”).
As the returns on superannuation funds are declining, many are finding themselves unable to make ends meet. This in turn has force thousands to go on the aged pension. Even Julia Gillard ,the Deputy Prime Minister, has admitted that she couldn’t survive on the age pension, a fact that many are indeed living near the poverty line, there is currently no other alternative beside this. Unless one starts to consider alternative means to build up a retirement fund, with the recession looming around the horizon, retirement can prove to a hardship for many Australians in the near future.