Today with globalisation, Australians are enjoying a standard of living which is the envy of many nations in the world. The boom in commodities prices has brought our country’s GDP to the level of those major developed countries in Europe. Many of us are also looking forward towards our ‘golden years” when we retire. Our wise investments and careful financial planning are just waiting for us to cash out so we can reap the fruits of our labour. Life couldn’t be better and all the problems in the world seem so far away. Until a few months ago, this was the idyllic vision that most Australians have in their mind. The full impact of what is happening in the US didn’t hit us until we started to see the consequences of the subprime leading crisis on the major economies of the world. Little by little, we are now beginning to feel the ripples of the fallout. Our prudential financial planning for our retirement now seems helpless against the onslaught of bad news that is hitting the news daily.
For those who had planned their retirement around properties investments are finding themselves not insulated from the current credit crisis as well. Property has traditionally being seen as the most stable and fail safe model of investment. The phrase “You can never go wrong with bricks and mortars” is nothing more than a fallacy now. With globalisation, property developers have funded their projects with Real Estate Investment Trust’s (REIT) funds. These funds are in turn obtained from the world’s financial market. With the credit crisis now, many property firms are now finding their sources of funds being cut off leading them to become insolvent. Apart from this, rising cost of funding due to the credit squeeze has resulted in declining demands pushing down the value of homes. To make matter worse, the demise of corporations like ACR, Fincorp and Westpoint demonstrated how easy it is for spruikers to raise money from thousands of unsuspecting victims. The complacency of the Australian Securities and Investments Commission (ASIC) is not helping investors to feel confident in further investment in the Australian real estate market.
Many Australians also use financial planning to amass a portfolio of investments for their retirement purpose. Of course being a welfare state, the State will provide for our pension if we choose not to do anything for our retirement. But most of us are hard working and living near the poverty line doesn’t seem to appeal to most of us as retiring comfortably. Even our Deputy Prime Minister, Ms Gillard, find it hard to survive on the current state pension scheme. This is why many of us choose to self fund our retirement through the superannuation funds so that we will not have to compromise on our standard of living. Unfortunately current events in the world financial markets are also affecting the returns on superannuation funds. Because of the credit squeeze, this has resulted in value of shares dropping by as much as 30 percent since the beginning of the year. As share prices drops, the value of a superannuation funds also drops as the funds are nothing more than just a basket of diversified financial instruments.
The current credit crunch is the result of the world’s financial market being clogged up by risky and questionable assets which many of the financial institutions are stuck with. To remove these toxic assets from the financial market, the US Federal Reserve have seek to buy them up with the enactment of the Emergency Economic Stabilization Act of 2008 or more famously known as the $700 billion Bail Out Plan. Beside from the adverse effects that these toxic assets have on our property value, share prices and the returns of our superannuation funds, monies earmarked for community development have also been depleted as in the case of Wingecarribee Shire council. Long regarded as prime value investments, money market instruments are popular because they represented a good balance between yield and stability as compared to shares and bonds. Even with the bailout plan, lawyers acting for the local councils which had made investments in these mortgage backed securities are doubtful that they will be compensated by the US’s bailout plan.
Globalisation has brought a new world order which had benefits us in terms of trade and development. But with increased interaction between all the trading nations of the world, there is also an increased dependency with each other. This had the effect of intensifying risks into areas which were previously impervious to external influences. The traditional models of investment are proving to be outdated as the current credit crisis has shown us. For example, the value of a company stock used to be determined by the yield of its dividend. Today this is no longer the case. With technological advances, shares prices are being determined in ways we had never imagined. With increasing competitions and decreasing margins brought about by globalisation, market traders are seeking alternative avenues for increasing their revenue. One of these ways is to take advantage of inherent market inefficiencies. With the use of complex computer programs and statistical arbitrage, market traders are making billions daily just by trading based on price differentials of two or more complementary assets. It doesn’t matter how small these differential are or which way the market is moving. Their systems virtually eliminated their risk level. With the kind of volume which these market trader deals in, it is not surprising that they can create “market sentiments”.
For many of us, we can only dream about systems like these as the development of these sorts of systems requires heavy capital investments costing millions of dollars. In addition, these systems also require heavy maintenances. On the other hand, a former London city stockbroker, Rajeev Shah, illustrated that using a customised algorithmic program called the ArbAlarm, based on the system developed by the investment bank Morgan Stanley during the 1980s, the same mathematical principles is applicable in the Sport Arbitrage world. (To gain more insight, read: “Sports Arbitrage–How to place riskless bets & create Tax free investments”). For many of us, this is as close as we can get to having a taste of how hedge funds made their monies using complex algorithmic systems. The current credit crunch for many of us is proving to be a rude awakening experience. For those soon to retire, diminishing values of the retirement nest is causing endless sleepless nights as we worry about our options. Perhaps, we should seriously consider and study what other options that we have to secure our retirement that is impartial to influences from the global financial market regardless of how unorthodox the option maybe.