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Weekly Market Update:
14th May 2010
Quick Summary:
Video Update
In addition to the text below, I have also recorded a short video. To view, simply press play on the video player below.
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Please note that to view the video you will need the latest Adobe flash player. If you don't have it you can download it for free from:
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European Zone Crisis Averted... For Now
You've probably heard the news that richer Euro countries and the IMF have found a lazy 500b euros to bail out struggling European Union countries that have immediate and crippling debt repayment problems.
In case you're wondering what all the fuss is about, consider this: if dodgy US home loans sent shockwaves around the world and caused major financial houses to fold, imagine what would happen to financiers around the globe if several major countries went bankrupt? Assuming you could borrow, it would be at much higher interest rates.
If you're wondering how Greece etc. got into such a poor financial position in the first place, the answer is simple: they spent more than they earned (from taxes and revenue), and funded the difference with debt (issuing bonds).
This is common enough, but a crisis unfolds for countries that cannot produce enough output to pay both the ever-increasing interest AND the principal on the debt. So, for the first time in a long time, investors holding sovereign Western government bonds (many of which are banks and other countries) faced the prospect of not being repaid.
Those unable to repay had to come cap in hand and ask richer European countries like France and Germany to lend them the money to repay their immediate loans. Once upon a time this wouldn't have been considered, but with a central European currency, it's harder to turn your back on a desperate Euro Union cousin.
How would you feel if you had a family member that consistently squandered their cash while you worked hard to save, only to turn up on your door and ask for a handout to avoid going broke? Now you can see why the idea of bailing out the free-willed Greeks is unpopular among the less haughty Germans.
While all seems okay at the moment, you can't swap billions of dodgy bonds for cash without serious longer term consequences. In the very least, Greece, Portugal, Spain, Ireland etc. are in for an extended period of lower living standards on the back of diminished economic growth and higher unemployment. Try telling someone they need to have a frugal retirement after paying a lifetime of taxes and see how many turn out for an angry demonstration!
But the truth is an unsustainable standard of living got them to this position (i.e.. spending more than they earned), and until this basic problem is tackled and fixed, the financial hole being dug will only get bigger and bigger.
The word for 2010 is 'austerity', and when applied to finances this means being sober, stern and strict with your spending and outlook. Our grandparents, coming out of the Great Depression, knew what being austere meant, but those aged under 40 have little clue because they've been able to get whatever they wanted on credit and worry about the consequences later. Or so they thought.
The lesson to learn here is simple: it doesn't matter if you are a country, a business, a household or an investor - you can't spend more than you earn indefinitely. Sooner or later a reckoning will come, and when it does, if you can't repay your debts you'll go broke.
Is the situation in Greece also a timely wake up call for the way you manage your money? What do you need to change to ensure you spend less than you earn? Perhaps it's time to reconsider holding underperforming assets heading into a less certain economic climate.
Do you have an opinion on this topic? If so, share it by making a post on the forum boards at this link:
Federal Budget - Impact For Property Investors
The Federal Budget didn't contain much to alarm or anger property investors. In fact, the forecast outlook is positive as far as jobs and incomes, and lower personal taxes are good for sustained house price increases.
The biggest threat remains increasing interest rates. At a budget briefing organised by the NAB, they forecast that interest rates will continue rising throughout 2010.
Our expectation is that the growth in house prices will slow to around 5% for the remainder of 2010, while at the same time rents will increase sharply as less people buy and more people rent on the back of higher interest rates.
