The Coming Economic Tsunami
I was having dinner with a good friend the other night and she mentioned that her 401K was taking a hit. This is the second time she’s mentioned it. I’m sure others have observed the same thing with their 401k’s.
I was talking to yet another friend (who I consider to be a semi-expert on finance) and he told me that the U.S. economy is headed for very bad times. He re-directed me to this blog (global economic analysis) which I’d encourage everyone to read because no matter where you are, this coming tsunami is going to have an impact on you.
The U.S. is the world’s economic engine. If it goes down, a whole lot of other countries are going to go down with it. Already, according to the blog above, shipping movements are down in China. What does this mean? it means that the slowing economy in America is hitting the Chinese manufacturing sector.
But wait..
There’s more bad news according to the blog:
Lehman Brothers is going down…
Bank of America is going down (quote here:”More than half the Charlotte, North Carolina-based bank’s $13.4 billion in loans to builders are considered troubled”)
Citibank is in trouble….
Oy.
These are some of the world’s largest banks.
Is it time to put your money under your bed?
**And what’s up with the CMA “adjusting” Crown Berger’s share price? The NSE is a fraud and I’m surprised people haven’t realized it yet. The only people making money are the brokers and the investment banks who are charging you a mint and a leg to execute orders that take them 3 days to input!
**If you bought a house within the last 5 years in either Europe or America, you need to watch this video. Housing prices are slated to drop by 40% in the next year (wiping out any equity you thought you had).
PS: You have to listen to this guy Roubini. He predicted this years ago and everyone called him crazy. However, when his predictions started coming true, everyone decided to start listening to him.
How does it affect the African economies ?
Actually its been known for the past year that financials were in the bear. Washington mutual has been in bear markets for so long I stopped monitoring, but I concur that Lehman Brothers just got into this mix and it looks ugly. So did Fannie and Freddie Mac. I dont know about BoA but I do know that Wells Fargo is actually doing pretty well. I dont think there’s a need to put your money under the mattress, upto $ 100,000 is insured by the FDIC so even if your bank goes under, your money is still safe. For people with over $100,000, yeah they have to start thinking.
I think its a great time for new investors, if the housing prices go down by 40%, i’m assured of getting a nice home at throw away prices
So while it might be an economic tsunami for some, for others its an economic blessing.
Frederic,
African economies that are dependent on Western loans will be affected by the credit squeeze. Loans for roads, ports, infrastracture will be harder to come by, and if they are available will have higher intrest rates.
I would imagine AID is going to be cut, to offset spending in Western countries.
Also, countries that depend on diaspora money, will see a drop in remittances, as the Africans in the diaspora are affected by the economy.
Nerimae, getting a mortgage is going to be harder. I would imagine banks might even reduce the amount of loans given for a particular area, i.e. California. Also, hope your employer does not depend on loans , as they will be harder to come by. Also, hope your employer does not have customers who run into trouble.
Working Stiff:
That is a good summary of how this global financial crisis will affect Africa. Thank you for that.
I’ve been trying to listen to stations like CNBC this past week and while I don’t profess to be totally familiar with this world of “high” finance, I think I’ve boiled this crisis down to one main problem and that problem is this straaaange concept of leverage.
What do I mean? the banking rule that allows places like Lehman and Merrill to lend 100 or 200 times leverage, meaning, if a bank like Lehman only has 100 million in cash, the rule allows them to lend an “extra” 100 million, which they don’t really have. How on earth does this make sense?
I’ve been saying for years that the problem with these bankers is that they think they’re rocket scientists when they are clearly not. I mean, who would come up with this concept that says you can lend substantially more than you don’t have?
So, now, these banks that lent way more than they had are actually operating in the absolute red. The assumption was that people would continue to pay off these loans over the course of 30 years, but since the mortgage crisis, people aren’t paying them off and if you’ve lent 100 times more than what you had, how on earth will you ever recover?
The government is now just printing money, but how long can they keep doing this? Are they going to print money and bail out every bank?
read the link to the blog I posted above if you want to gain a better understanding of what’s going on.
These investment bankers have basically been doing things that at their core, defy basic common sense.
KE,
Now Lehamn and Merrill are out, who ever thought ML would end up this way?
there must be other bad things coming
Yes it will be tougher to get loans, but what i’m banking on is foreclosures and REO’s, as the economy continues to go down, foreclosures will rise, banks dont want to hold onto all those properties so as long as you have good credit and a steady source of income, they will have to give you a loan.
What do you guys think about investing in the stock market, I know the past couple of days have been crazy but considering the Feds have bailed out AIG, rather they own about 70% stake of the company as collateral, I am thinking AIG is a buy. So is Merrill Lynch or Morgan Stanley when they hit about $10 a share, which looks likely to happen if things continue the same way. I know this is presumably the best time to enter the stock market, but what if you get in and the market tanks 450 points like it did yesterday? Warren Buffet advised people to buy a Vanguard Index fund instead of putting money into a 401k, if only there was a way to call the bottom then get in. I think BoA is going to be the next victim, they took up more than they can chew. I guess Washington Mutual doesnt matter, coz even though they have declared it junk, there are no talks of bail outs or takeovers, I wonder if they will just close doors.
Nerimae,
yes, im sure banks have alot of physical assets on their books such as foreclosed homes and all.
but i wonder- if u buy into rthe forclosed homes, will u do it for investment proprty purposes or for your personal home ?
as for AIG, I’m not sure if it’s a good buy, since the fed is gonna replace all their management.
The way I understand it, AIG still has very attractive and great buisinessess and assets, HOWEVER, it got into a bind becoz it had insured ll those guys who were involved in the sub prime loans in one way or another as either a lender or investor.
I think that’s why it needed this money as a bridge loan to pay or keep up with it’s current liabilities, immediately. It’s like you loosing your job immediately and you have bills that are due soon, yet you may own 5 cars , 2 houses, 2 franchises, but you cannot liquidate these assets fast enuff to help you meet your current obligations.
I’m sure there were firms that were just salivating and coveting on AIG’s assets such as it’s life insurance business, It’s Comercial ASircrfaft leasing business-did u know that AIG was the biggest plane owner in the world ?
Yes all those you fly, from KQ to BA..Most likely AIG owns them.
but it is a perilous times for the financial industry
Nerimae, to you now, what’s ur take ?
Nerimae:
Investing in the stock market? Heck, money market funds are going down!! That was supposed to be a safety net for people’s money.
Put your money in a pickle jar and hide the jar in the basement.
KE,
Beleiev it or not,thereare good opportunities right now, you have to think like a hedge fund, thatmakes money in good and bad times.
Heck, Warren Buffet is already buying with his pick up of constellation energy at a deep deep bargain.
Mzeiya,
I plan on buying a foreclosure or Reo or just a house as prices continue to fall for my personal use. Where I live, a bedroom currently goes for $800 to $1200. If you chalk up 20 % of a $120,000 3 bedroom house, you can end up paying the same in mortgage and when times get hard you can always rent out one of the bedrooms. However way you slice it, its the best time to look into buying a house than renting. This will be my first home, if the real estate market keeps going down, I wouldnt rule out buying investment properties but I think it wise to walk before I run.
Wealth creation really is a state of mind. If you put aside your emotions and just thought rationally, you would be crazy not to get into the stock market right now. As a new investor, prices are down 40%, in some cases like Fannie & Freddie Mac, they are down more than 80 %, why wouldnt you want a discount? Why wait till the market goes back up to start buying? Take AIG, its selling at around $4 a share, this is an international company being backed by the government which everyone knows will eventually go back up, why wouldnt you want a piece of it? The reason I think its a buy is once the govt gets involved, there is pretty much no chance of it going down. The govt knows this and so do investors thats why they pulled it from public trading, you can longer buy AIG shares, there goes a missed opportunity.
KE, there is a wise man that said that when investing, watch what everyone is doing then do the exact opposite. Right now tthere’s a sell off but eventually the market will go back up, it may take months or years but it will go back up. Putting money in a pickle jar only guarantees your money being eaten away by inflation and plus what if someone steals it? I have been watching the markets for a while and have decided to go ahead and open a Vanguard account. If I put in $1000 between now and the end of the year and the market goes down 20%, I will have only lost $200. On the other hand, if it surges I’ll be a happy camper. I think after the elections, there will be a sell off especially if McCain gets in then hopefully after that things will calm down but I dont think there will be any gains for months to come. So basically what I plan on doing is hoarding stocks while they are cheap and wait it out till the market turns around.
Nerimae,
The markets with the highest rates of foreclosed homes are california, florida ,ohio and michigan.
I think cali would be a good spot to get deals, however, would you want to live in a neighborhood with no neighbors ?
I know people will swoop in once the gvt bail out goes thru. It might be a repeat of the 80’s s&l crisis when guys would set up funds and buy apartment complexes in bulk for as little as 19k a unit and later offload it into a REIT and guess what, a new member of the forbes list was born.
There’s money to be made in good and bad markets, as you’ve said, take the emotion out and try and think rationally. I say “try” coz I know it’s hard at times, but doable.
Try is def the word. I watched the markets today with a mixture of horror and hapinness, its kinda scary but at the same time the discounts are as if you are a kid in a candy shop. Just before I open a retirement account, the market dips almost 800 points. To put this in context, if you have a 401k or any other investment, and you had atleast 50k invested, you lost almost $5,000 in one day!!!!!!! Damn, pole to everyone out there but it looks like it’s about to get worse. At the moment, whether they bail out or not, money is going to be lost coz of ripple effect.
About buying a house with no neighbors, I do not have fear within me, I can comfortably go in & out of the hood so living in a suburban neighborhood with no neighbors will be a walk in the park. My bottom line is capitalizing on this market so that what I pay every month is cut down by half or more, anything else is a non issue. And besides, those houses will eventually get tenants. I think we as Africans need to get over what if’s, watch CNBC and these jungus are asking themselves how can I make money from this. There is no what if this or that goes wrong, just do it.
The US Stock market has officially crashed. On Monday the Dow traded under 10,000 basis points and I wa sthinking Damn. Two days later, the Dow is trading in the 8,000 range. These are scary times especially for people already invested in the stock market. Your first reaction would be to get out of the market but you actually lose more by getting out. This is how, unless you are over 59 and a half years old, if you cash out your 401k or IRA, you will be charged a 10% fee just to pull your money out. On top of that, the IRS will tax that money as gained income, do the math. Option number two is just leave the money in there, this is also not wise coz essentially when the market comes back you will not have capitalized on the sale going on. Your best option is to Dollar cost average. This basically means you should keep contributing to whichever investment vehicle you have, ignore whats going on in the stock market and keep buying shares. The idea is to buy as many shares at the current cheap prices so that when the market turns around you can actually profit. On this point I should point out that you should only invest money that you will not need in the 5 to 10 years ahead, and it should also be money that you can afford to lose. To make money, you have to lose money, its that whole higher risk higher return maxim.
I said before that Warren Buffet advised people to invest in an index fund, specifically the Vanguard fund that tracks the S&P 500 Index. Most people dont know that they have to pay fees to their mutual fund managers which cuts into your profits, with an a fund that tracks an Index, those fees are virtually eliminated and Vanguard has the lowest fees ( a Vanguard rep should compensate me for all this free publicity, better yet gimme a job). Anyways look at your mutual fund prospectus, you might be interested to know that even in these hard times when you are losing vast amounts of money, you are essentially paying a mutual fund manager to lose that money for you. For comparison purposes, the Dow was at its all time high last year today @ 14,000 points, we are now @ 8,000 points. Alot of money has been lost but alot of money will be made just for us to break even, then after that more money will be made for us to go past 14,000. I am very Bullish on the US market regardless if it collapsed today coz the rest of the world is now entering a recession as a result of the crisis that started in the US. Europe and Asian indexes are considerably down that tells me that there will definitely be a huge bounce, but the market has to go thru the washer. Jim Cramer predicted this mess last year, and he says that it will take about 5 years for us to get back to prosperity. Translation, stock up on food and essentials and even though I dont think you should pull out all your money from the bank, have a couple of Dollars on hand just in case the day comes when the ATM will refuse to withdraw money for you. And finally I hope Obama is serious about picking Warren Buffet as his Secretary of Treasury, or rather that Buffet will accept the position, coz then I would be 10 times as Bullish on the US economy. If you are in your 20’s or even 30’s, open a Vanguard S&P 500 account, you will thank me 20 years later. It costs $3000 to open one, if you dont have this amount, ask them about an Individual investor account, costs $1000 and ofcourse remember to Dollar cost average, preferably make contributions on a weekly basis eg if you plan on investing $200 a month, ask them to invest $50 a week for you to capitalize on any losses. This is my part in building Kenya, hopefully I have made investing clearer coz most times we dont have someone to explain in simple terms how to create wealth.