In Washington DC, while the debate about the $700 bailout plan rages on, Federal Reserve Chairman Ben Bernanke warned that, unemployment in the US are rising and consumer spending have been sluggish despite easing oil prices. To compound the situation, August data shows that housing prices have been dropping at record level fueling worries that foreclosure rates will spike further.
The Head of Congressional Budget Office, Peter Orszag, also warned that unless Congress acts quickly, the US economy would face possible chaos with equaling severity to that of the Great Depression.
Congress has been unwilling to give its endorsement to the bailout plan in its original form due to the huge price tag attached to the plan. Another reason was the lack of oversight controls over the execution of the plan. The House Democratic Speaker Nancy Pelosi also said that Congress will not just hand over a “$700 billion blank cheque” without any safeguard. The anger felt by Congress is understandable as while the crisis is getting worse; CEOs of failing banks have been receiving “Golden parachute” payments to the tune of millions of dollars. To many, this amounted to rewarding them for failures. In fact, so great is the contention that the FBI is now investigating the two mortgage giants Fannie Mae, Freddie Mac, as well as Lehman and AIG for possibility of fraud.
Meanwhile the US dollar slide further when investors shifted their focus to bonds as unease about the bailout plan increases. Even Warren Buffett $5 billion investment into the Goldman Sach Group Inc failed to calm investors nerves. France, Spain, and Germany are also not spared the effects of the fallout from the US as surveys show investors’ confidence at an all time low. Talks of an European recession are now matters of concern with the Europeans markets. Meanwhile according to the South China Morning Post in Hong Kong, the Chinese government has already instructed all its banks to curtail their inter-bank leading to US banks with immediate effect to prevent any further losses. This is China first attempt in trying to defend its financial position from the fallout after its mainland banks have reported losses due to exposure to the financial crisis in the US.
The Chinese and the Europeans were not the only ones who are showing concerns about the situation in Washington DC. Australian Prime Minister, Kevin Rudd, at the United Nation meeting said that the world’s economy required the bailout plan to be put into effect quickly. He reiterated that the plan is a “good and strong” measure required to stabilise and to avoid a recession in the market. Speaking to reporters after his meeting with the World Bank President, Robert Zoelick, He called on members of the US Congress to work together to enact the plan as the world’s financial markets are under considerable stress.
The Australian Stock market in response to the situation in Washington, took a dive earlier this week as doubts whether the bailout plan will work affected investors confidence. The exceptions to the plunge in shares prices were those in the Oil and Gold sectors which gained ground amidst falling investors’ confidence. In addition, the International Monetary Fund forecasted that the Australian economy growth will slowed to 2.7% in 2008 down from 4.3% in 2007 whose growth had been fueled by raising commodity prices.
Analysts have warned that the situation is bound to get worse as the financial market starts to adjust itself to an equilibrium position. The process of deleveraging, that is the unwinding of bad debts, will cause additional downward spiral on an already distressed market. As bad as Australians wants to avoid the fallout from the crisis, the nightmare is not going to go away. As banks like the NAB write down their losses, multinational companies like Ford, Qantas, and Mitsubishi are retrenching workers to cut down overheads.
Many of us are questioning how did we ended up in a crisis of this magnitude. Some say it was the housing bubble burst, some say predatory leading practices was the cause while others said the credit default swaps market resulted in all this mess. The truth is that while we all hated to admit it, Greed played a major role in all the drivers for the credit crunch crisis. Everyone wants to get rich and as quickly as possible. Unfortunately there is no such thing as getting rich quickly. The truly wealthy like Warren Buffett and George Soros got to where they are now because they followed a definitive plan when it comes to investing their capital. Five years ago, Warren Buffett exited the credit default swaps market when everyone else was diving in neck deep. Today, everyone is talking about Warren Buffett “Time Bomb” going off already.
The reality is that if we want to be successful, we have to follow their footsteps in terms of mindset. George Soros, when it comes to investing, always hedges his bets in the currencies market. This way, no matter what direction the market turns, he is still able to reap a profit. In short, he practices what we call “riskless investment“. This form of investing capitalise on what we term as “Statistical Arbitrage”. (To gain more insight, read “Sports Arbitrage-How to place riskless bets & create Tax free investments“). Pioneered by Morgan Stanley Investment Bank during the 1980s, today statistical arbitrage have advanced to incorporate computers into everyday trading using softwares like the ArbAlarm to execute high frequency trading. With this technological development, trading situation takes mere seconds to execute. In addition to dealing with unorthodox investment vehicles, the successful investors also do not let go of control in respect of matters like capital gain tax. This path of thinking allows them to profit further without running afoul of the law. In fact, according to the Australian Tax Ruling (TR2004/D17), capital gains from this form of investment are not subjected to tax.
As the Governments of the developed countries meets and discuss at the United Nation about the financial crisis that the global economy is facing now, many of us here at Main Street level, will have to start to rethink about our future and with whom we can leave it all too. While financial planners recommend us to invest in shares, we can see the stock market extremely volatile and having the ability to wipe out our “dreams” within days. The property market also leaves very little room for us to maneuver in the current economic climate. Whatever and however we decide, it will be us who will reap the fruits of our labour or bear the pain of our losses.
Tags: Australian Times