The crisis and your cash

Global recession, doom and gloom, wadda wadda. It all gets a bit samey after a while. Yes there is a crisis on, yes it is the biggest financial news for fifty years, yes it does tend to drag on a bit. However as boring as it may be now is an opportune time to get yourself financially fit so when the market comes back up again you will be ready to take advantage. So what can you do?

• Use a budget planner
• Get a savings account
• Invest in real things

There may be scope for change in the way the financial system works given the crisis but at the end of the day real change is unlikely and even though this is a massive crash it is part of a cycle that has been going on for years. This is not likely to change and what is most probable is that the financial system will stay much the way it is and continue to work the way it does. So it becomes imperative to understand what your money does.

Planning a budget enables you to know exactly what you can afford, a savings account is a way for you to trap value for later. A savings account may not pay the best interest but it is a hedge against inflation and pays better than money under the mattress. Savings accounts also allow you to harness the power of compound interest. Real things, are in a nutshell, real things so rather than put all the spare value you can scrape together into a paper based instrument (which caused this crisis) rather buy something real, like gold or diamonds. Real things last forever and are much less dependent on market vagaries.

Less credit coming round

The global economy is in crisis.

This is one of the largest market crashes ever, and even here in sunny South Africa we are not totally immune to the effects of the global credit crunch.

The whole problem was started by the risky lending practises of the western world's major financial institutions.

These self same institutions now lie in tatters, ripped apart by their own weight of debt. So what does this really have to do with South Africa? Well, we had the foresight to introduce the National Credit Act already in 2007.

This act essentially tightened up the rules for lending way before the proverbial fan hitting began. This has allowed us to lessen our exposure to the risky lending vortice that is pulling the rest of the world into its gaping mire.

The act essentially sets out rules for what lenders need to do in order to not give credit recklessly. Reckless lending is what led the US mortgage market to collapse.

You could get a so called 'liar loan' whereby you could say that you earn whatever you felt like, safe in the knowledge that the bank would not actually verify this.

This caused people to frequently and vastly overstate their income to get a bigger badder mortgage.

So when the market turned and house prices no longer just kept on going up and up, the debt to income ratios flipped and the crash came on.

After the National Credit Act was instituted here the onus was put on the lending institution to perform its due diligence and not lend to people more than they could afford to carry.

The banks were essentially made liable for defaulting debts.

This basically led to a slow down in how much credit was available as the lenders were no longer as slap happy in dishing out the cash. According to new data released this week by the Reserve Bank credit extension slowed down in February to 11.05% compared to 11.85% in January.

However this still means that credit extension is growing.

We are still lending in South Africa.

In other parts of the world lending has come to a stand still, banks don't even want to lend to each other, they are still getting Minsky moment shivers and shudders.

Whole countries went bankrupt.

We don't have this problem here in South Africa.

The sun is still shining, the economy may be cooling, but in general we are fairly decoupled from the crisis gripping the rest of the world.

So if you still want to get some debt you can find a personal loan or compare credit cards with Justmoney, South Africa's online guide to money.

Don't forget to register with us if you wanna get our complete look at what's going on.

Emergency rate cut?

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Emergency rate cut?

Statistics SA released some scary, well, statistics yesterday.

These are the figures that relate to our GDP. GDP or Gross Domestic Product is the total of all goods and services produced by a country over a specific period.

The period in question is the last quarter of last year, Q4 2008.

The figure has fallen into the negatives. Negative 1.8%.

When an economist talks about 'negative growth' what they really mean is that our economy is contracting, not growing.

This use of the word growth is due to the mindset that without growth we fail.

There are other economic threads of thought that would point to the obvious, that we can't keep growing as the earth is a finite resource.

However non growth economics are anathema to classical schools of economic thought.

This is why the misnomer 'negative growth' kicks in, and with too much emphasis on growth we run the risk of uneconomic growth.

However, the system as it stands is one whereby negative growth is a big bad wolf that has come to eat us all up.

With our GDP contracting by 1.8% at the end of last year we are not in a recession.

For a recession you need to consecutive quarters when the economy contracts. The third quarter of 2008 grew at 0.2% this is pretty close to no growth but technically does not put us in a recession.

The business news outlets all carried comment about the new figures with some even speculating that The Guv, Tito Mboweni, will call an emergency rate cut.

But bear in mind that rate cuts do take some time to filter their effects into the economy itself. A rate cut now is going to have an effect in a few months time, they are not a quick fix and more of a guide for where a central banker wants the economy to go.

Here are some of the comments from the papers.

Fin24 was in the surprise rate cut camp, but also qualified the chance of this happening on the inflation data due in at 11:30 Wednesday 25 February (today).

If inflation has not responded to the previous rate cuts (and the change in how it is worked out) then there may be more weight to the possibility of an emergency rate cut.

iAfrica interviewed a bunch of economists to get their take on the situation, with most figuring on an early rate cut coming.

The Times reckons that we are already in recession and their quoted economist says this is due to the stats for last year needing to be revised, and that there was already a contraction in quarter three.

The thing is, these are notional versions of reality and when the difference is only 0.2% that may be right, but can never be entirely accurate as it is not what it is itself, and merely a model thereof.

According to Bua News if our economy is shown to have contracted in the first quarter of 2009 then we will be in a recession.

Right now there is a lot of uncertainty and the best thing you can do is keep up with your budget planning and keep your savings in a safe place. There is more turmoil to come and it won't be pretty.

South Africa and the crisis

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South Africa and the crisis

The global financial crisis is now a fact of life. Its effects are widespread and getting larger everyday.

People are being retrenched all over the world and this is even starting to happen here.

The South African government, according to BUA News, has pledged R 10 billion over the next three years in order to save South African jobs during the financial crisis.

The details of this initiative were released last Thursday.

Apparently support will be given to sectors like clothing, textiles, footwear, mining, auto and capital equipment, which are already showing signs of a decline.

There will also be money available to other sectors that are under pressure including engineering, electronics and building materials.

Companies that get the bail out will have to sign reciprocity agreements committing to what they will do in order to restructure and survive. These programmes are also designed to tie in with the Expanded Public Works programme.

The goals of this initiative are to 'minimize job losses and economic shock, ensure that all activities are aimed at strengthening the capacity of the economy, and that there [are] high levels of investment in public sector infrastructure'.

This emphasis on lessening economic shock is an interesting one although possibly not related to Naomi Klein's 'The Shock Doctrine'.

The Shock Doctrine explains the concept of disaster capitalism where through the use of economic shock therapy, during the ensuing economic chaos (aka during a financial meltdown), key public industries are bought up and privatised, releasing profits for the new owners that were built up by taxpayers, who of course, see none of it.

It seems that the government has become wise to this, or possibly not. There is a very interesting chapter on South Africa after the fall of Apartheid (that was our last major shock). Very interesting stuff as reviewed in the New York Times by Joseph Stiglitz.

The Mail and Guardian reported that South Africans had formulated their own response and were frantically buying up gold.

Gold tends to retain its value rather well over time, and while it will not bring speculative returns it will hold value in the face of crashing markets, which right now is what you want, your assets to hold their value.

In Europe there are calls for much stricter regulation of the financial markets to prevent these sorts of excesses taking place again according to a Business Day article.

Fin24 came in with a look at the effects of the crisis on real people and the finding that due to fear of losing our jobs, we South Africans are losing our work/life balance as we graft harder fearing retrenchment.

If you are feeling the stress why not work your budget out frequently, then you will know exactly how you are doing financially and what the stakes really are.

House prices normalising

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House prices normalising

The news is new, that is what it does.

Some stories have legs and keep going some come back again and again. With the state of the world financial system at the moment the bad news just never seems to go away.

Then again as the saying goes bad news is good news. There is a pleasure, a schadenfreude, to be had in viewing other people's difficulties, but then again what if it happens to you?

The world economy is set for a possible 0% growth this year according to Business Report. This projection was made by the head of the International Monetary Fund, and is a further reduction from the previous IMF estimate of 0.5%.

The world economy was expected to be turned around by next year after the banks had cleared up their balance sheets and got some of their bad debt off their books.

Business Report also told us that the housing market here in South Africa was sliding into recession. While this will have an effect on home owners what we need to remember is that those astronomical house valuations are all very well and good on paper, but that they are not actually connected to the value of the real house.

Getting the capital out of your house investment is the big issue, and don't forget until you pay your house off, or manage to sell it, it belongs to the bank and is a liability not an asset.

So while the housing market 'crashes' sit back and do those DIY jobs that you have been meaning to get around to.

The value of your house, the real actual value of your house, based on the actual physical house itself is going nowhere.

The book value of your house is the one that is correcting.

So rather fix your house up, and wait for the possibility of actually getting the real value out by selling your property.

As the Business Report article put it 'Two years ago, the property market was overheated. Sellers were demanding what they thought was a reasonable price and getting it. What we have now is a return to normality'.

This return to normality is the process where by the speculative bubble is deflated so that book value and actual value are related to each other rather than seeming to be entirely separate species as they have been last few years.

Business Day noted that demand for new houses has fallen. There has been a lot of speculative building based on the expectation that the market would continue to rise.

This is often a fatal flaw and the American sub prime meltdown was caused by this type of thinking.

However subsidised low cost housing has retained its value. This shows us that the higher priced houses are the ones that have been inflated beyond their real values, while a real physical house is still the same physical house. It just needs its book value to be inline with that real value.

You can check with our bond specialists if you would like to get a home loan. Just make sure that you don't over pay for a house as prices are still coming down.

Global and local

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Global and local

The financial crisis is a doozie, a whopper, the big kahuna of all financial crises.

Ever since the speculative Tulip Mania bubble of 1637, to the Great Depression, to now with the global Financial Crisis, the markets have been fuelled by greed filled speculation that inflates prices way above their value.

When this bubble is burst it is often preceded by a Minsky moment.

A Minsky moment is when the market collapses, often rather sharply, after 'a long period of prosperity and increasing values of investments, which has encouraged increasing amounts of speculation using borrowed money'.

This is the basis of the sub prime meltdown.

Too much greed, too much reliance on markets continuing to rise, too little attention to history.

Speculative bubbles crash when they over extend themselves.

The National Credit Act of 2007 in South Africa was a major factor in helping to cool down our credit market, and at just the right time.

The Act prevents lenders from lending 'recklessly', this means that they can't just lend to you with out doing their due diligence and being reasonably sure that you can pay back any credit that you are extended.

It means that we never got the problems caused by 'liar loans' as they have in the States. A liar loan is a document whereby some one applying for credit was able to effectively make up their financial situation, because there were no checks carried out on it.

The NCA prohibition on reckless lending, means that if they don't do a proper check on you, then they extend you credit, and they should not have, because you could not reasonably be expected to repay it, then that becomes the lenders problem.

The fact that lenders may now be held accountable for their actions, has lead them to calm down and not just chuck credit at anyone and everyone.

This is a major reason why the financial crisis, though it is here, is not as bad as in many other parts of the world.

There have been some seriously expensive responses to the financial crisis by the major economies.

Business Report looked at who is behind the meltdown. The article is in depth and looks at the various reasons that have created the crash, including more behind the scenes type analysis particularly pointing to the problem of global imbalances and the knock on effects that these cause.

The response has often been to chuck money at it, effectively printing your way out of the problem. The thing is that increasing your money supply has all sorts of effects, like hyperinflation, just ask Gideon Gono.

Yesterday, as reported in The Times Obama, signed the stimulus package, now we wait and see if it has the desired effect or it just causes further problems down the line.

Crisis continues, capital revalues itself

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Crisis continues, capital revalues itself

The global financial crisis has been hitting hard for months now.

There is fear, serious fear that it is the end of capitalism as we know it.

Well it may not be such a bad idea to constrain the worst excesses of capital.

The South African National Credit Act was a big help in allowing us here in SA to so far weather the crisis much easier that many other, and more developed, countries.

Who would want to live in Iceland? As a fellow from there put it, we had a great country and they ruined it.

The nature of capitalism is that it decouples the nominal worth of stuff from the actual worth of stuff.

As value gets more abstracted from its actual physical value it becomes easier to manipulate and all sorts of dodgy schemes get hatched. While this surplus value creation is in full swing, the old fear and greed factors that run the markets kick in, and kick in heavily.

Folks get greedy and believe that the endless Bull Run is for real, or they get scared that they are missing out and that a zero sum game is forcing them to get the other guy before they get got themselves.

The reality is that the zero sum game does not really exist. There is never a perfect interchange that will lead to a zero sum outcome. It suits the suits to talk the talk using these loaded terms, it helps to vest interest.

The difficulty is that many people who believed that the housing market would go up forever, who believed the 'you just have to get on the property ladder, dahling' shpiel, who feared that if they did not buy this house right here right now, some one else would take it and turn them into a loser.

This kinda zero sum thinking helps the market to inflate itself way out of what its real value is. It sets up a kill or be killed kinda of thinking.

This out of kilter valuation must at some point correct itself.

That correction is now.

The South African housing market has been over-heating for years. Now its time to come back down to real values.

It could be worse.

In the US thousands have been made homeless by the packaging of mortgages together in order to spread risk, but too much notional value was created, and that value was dependent on the market rising and continuing to do so.

The NCA helped to cool down some of the reckless lending that was taking place here previous to its promulgation.

Not nearly as many people will be affected here as there. Our interest rates are turning and the housing market is cooling considerably. It is easy to see this as a bad thing, but the reality is that these corrections need to be enacted to stave off a worse crash further into the future.

As our housing market softens it will turn into a buyers market and there will be some great homeloan deals to be had. You may also be able to save money every month by renegotiating your mortgage and by consolidating your debt. If you are feeling the pinch, get yourself some debt counselling in order to protect your assets until the circle turns.

The Committee of Ten

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The Committee of Ten

The Committee of Ten that is they name they want to be known by.

Well who are they you ask.

Trevor Manuel addressed the first meeting of the committee, his opening remarks can be found here. The Committee of Ten is basically a grouping of the African finance ministers and central bank governors.

In his remarks at the meeting Uncle Trev noted that 'This Committee arises from a meeting of African Finance Ministers and Central Bank Governors convened in Tunis on 12 November 2008 by our 3 Pan-African institutions - the African Union, the African Development Bank and the UN Economic Commission for Africa'.

He then went further to define what it is that they do and in his words 'At a formal level, our remit is fairly simple - firstly, to take stock of the impact of the current economic recession on Africa; secondly, to explore such actions derived from the observations that would inform the African Heads of State and thirdly, to make a case for governance reform in the multilateral economic institutions for enhanced African participation. Essentially, we are charged with ensuring that the African voice in global economic affairs is amplified'.

This meeting was covered by the various news outlets and this is what they had to say about it. BUA News the Government news outlet noted that the meeting dealt with the severe liquidity problems and that even the domestic banking sector, which is relatively stable, was having difficulty in securing finance.

The Mail and Guardian came in with the headline 'Manuel: Africa to feel pain of crisis for years'. They reported that Uncle Trev had had said that there will be strain on the African region for at least five years due to the global crash.

The Committee of Ten meeting follows an African Development Bank meeting which set up two funds to help us out of the crisis. The funds are to be allocated on a first come first paid basis. The two funds would come to a total of 2.5 billion dollars part of which would be used for the purposes of temporary liquidity injections.

Business Day followed this story from the perspective of the African Development Bank and noted that they expected growth to slow from 5.1% to around 4.5% and that the funds were designed to prop up falling capital inflows as other countries withdrew their money to keep house at home.

The problem with the financial crisis is that it has altered the budgets that were drawn up pre-crisis. iAfrica has an article about the benefits of planning a budget and sticking to it. Justmoney says that if you keep on top of your budget, and have a decent savings account then when the crisis passes you will be in a better position than if you just get swept away with it, and don't keep track of where you are.