The NEXT Global Financial Crisis

[lexusgs]

I am a bit of a news freak. I tend to check out BBC/CNN etc. Last weeks doom and gloom G20 summit surrounding the Eurozone crisis along with major upcoming problems with the so called PIIGS(Portugal,Italy,Ireland,Greece and Spain) leaves me slightly depressed. You guys here seem to pretty smart when discussing financial issue. Where do you see all this ending? To me speculators must be earning piles of cash with markets so volatile. Much of it down to the wild MEDIA HYPE.

[Guest fountainhall]

I haven't the faintest idea how or when this will all end! All I do know is that whenever there is a financial crisis, it is often portrayed by some of the media pack as if the world will end tomorrow. And the world just keeps chugging along! Remember Black Monday? The dot-com bubble bursting? The pan Asian economic crisis? Somehow, the world got through them.

 

Another favourite sound-byte in recent months has been China's hard-landing. Well, from what I have read over the last few days, that seems less likely now (although how much value one can put on official Chinese statistics is questionable). But then, as the owner of over 3 trillion dollars of US treasuries, plus goodness knows how much in other currencies, I assume (stress "assume"!) it can somehow spend its way out of trouble if necessary.

 

Yet, China's economy is hugely dependant on exports. It does seem that the horrible mess in certain European Community countries must result in yet more austerity and more trouble for big banks, amongst others. And until US banks start lending again, the US itself seems doomed to remain mired in recession. So China's route out of the current mess seems to be to loosen the reins again and get its own consumers spending - in a big way.

 

Interestingly, earlier this year there was a tax-payer revolt in Hong Kong - the tiny special economic region of China whose 7 million souls sit on a pile of around US$85 billion in its own foreign exchange reserves. When the annual budget was announced and yet more cash had been added to those reserves, the population questioned the need for such a "rainy day" hoard. As a result, every Hong Kong permanent resident is in the process of getting a cheque for around US$770! And this in a place where not only is the maximum rate of income tax just 15%, but a large percentage of the population pays no tax a all!

 

In the light of my very amateur analysis, my 'bet' is that China will emerge from the present series of crises pretty well equipped to stride forward faster than other economies. So I have been converting cash into the Chinese currency. As a Hong Kong permanent resident, I can do that. The interest rates are lousy, but I believe the chances of a currency gain in the medium to long term are extremely good. Those wanting some Chinese exposure in their portfolio can purchase shares in those Chinese companies listed in New York, Singapore and Hong Kong, or in US/European/Australian multi-nationals with good business in China - e.g. Coca Cola and some of the luxury goods brands.

[Rogie]

Where do you see all this ending?

Like Fountainhall, I have no idea either. Sorry, I wish I was one of the smart guys as far as financial awareness is concerned, but I'm a bit of a dumbo. It obviously helps to speak from experience, if you have it, so for example Fountainhall has lived in Hong Kong so he knows a lot about what makes China tick. If you don't have any direct experience or a reliable friend or business colleague to talk it over with, I guess you are reliant to some extent on the media, and if a feeding frenzy could be hyped, they'd do it! Apart from 3 or 4 British companies, I don't have any investments in shares any longer. I got stung following the dot.com bubble and haven't invested in unit trusts or investment trusts since, even though I have occasionally been tempted to do so in the emerging markets arena, sometimes referred to as BRIC's (Brazil, Russia, India and China).

 

. . .every Hong Kong permanent resident is in the process of getting a cheque for around US$770! And this in a place where not only is the maximum rate of income tax just 15%, but a large percentage of the population pays no tax a all!

What a contrast with Greece! British TV aired an interesting programme earlier this week and i didn't know whether to laugh or cry. A reporter pretended to be a Greek financial adviser and approached 3 British individuals with tempting proposals. Number one was a beautician/hairdresser in her mid-50's who was advised that in Greece her occupation would be regarded as hazardous and she could retire on 90% of her salary straightaway - she accepted. Number two was a bus-driver who accepted similar retirement terms, based again on the Greek system, well before he would have been eligible in Britan. Number 3 was a doctor earning about GBP 200,000 a year privately and a much smaller amount working for the National Health Service. He was told that in Greece he could wangle it so he 'took home' an extra GBP 1,000 a week. How so? Easy, he just virtually eliminated his tax bill by under-reporting his salary. So when a patient comes to pay his bill the lion's share is paid in cash. It's the black economy given quasi-respectability. All the Brits expressed incredulity that any country in Europe could function in that way, let alone a country within the supposed safety of the Eurozone.

 

Those wanting some Chinese exposure in their portfolio can purchase shares in those Chinese companies listed in New York, Singapore and Hong Kong, or in US/European/Australian multi-nationals with good business in China - e.g. Coca Cola and some of the luxury goods brands.

That seems a good idea for anyone with a medium to high risk approach, but probably shares are almost always in that category, I don't know whether you could ever call a particular share 'low risk'.

[Guest thaiworthy]

Where do you see all this ending?

Is there an ending? Gee, I hope not!

 

I don't have any investments in shares any longer. I got stung following the dot.com bubble . . .

That's exactly what happened to me, too. I took out what was left and invested in a 10-yr fixed rate annuity earning 6%. You can't find those these days, but in retrospect I am sure I did the right thing, especially considering that if I had kept those funds by 2008, it would surely have all evaporated. It has taken me about 6 years of that 10 to recoup what I lost and I have vowed never to allow any ingenue financial advisor to steer me in that direction ever again.

 

A lot of people don't like annuities, and it depends on what you buy and why. You can take out as much as 10% per year (or more, sometimes) to fund your retirement or you can buy a lifetime immediate annuity that pays as much as $600 a month for every $100K invested. Of course the latter is not liquid, the principal is gone after you die. The former however sometimes also allows withdrawals based on need, such as nursing care and hospitalization. Also, annuities are protected from creditors.

 

I firmly believe we are headed for a double-dip recession. The only investment I believe in now is the belief that people are living longer. Somehow the mechanics of an annuity seems to reflect that. But I am not sure of anything anymore. This just seems to make sense to me now, especially in a world that is making less sense or cents, than it ever did before.

 

There are no easy answers for anyone at all . . . only easy guesses. The only view that is 20/20 is hindsight.

[Rogie]

The only view that is 20/20 is hindsight.

That's interesting! No, I'm not being facetious. . .

 

It's clearly not hindsight, but sometimes a person will sound a warning and be laughed at. Maybe years later his warning becomes no laughing matter. Of course if you take a thousand monkeys and they're shrieking a thousand different warnings, maybe 1:1000 will turn out years later to have been prescient, but that's just pure randomness. When you replace the monkeys with a human brain occasionally it too hits lucky, or maybe he is just ahead of his time.

 

Here is the conclusion reached by the author of the book described below:

 

. . . like a dying star, the gigantist global system would in the end fall in on itself, and the whole cycle of growth would begin all over again. But before it did so, "between the intellectual ice ages of great-power domination", the world would become "little and free once more".

( When I first read that earlier today it struck me as a the sort of thing a science fiction writer might write. I would imagine a similar theme must appear on many science fiction works, but the one it reminded me of was the famous short story by Isaac Asimov, written in 1941, Nightfall. http://en.wikipedia.org/wiki/Nightfall_(Asimov_short_story_and_novel) )

 

The above quote comes from an article in Britain's Guardian newspaper back in September headed This economic collapse is a 'crisis of bigness'

 

In 1957 Leopold Kohr wrote The Breakdown of Nations; the book . . .

 

laid out what at the time was a radical case: that small states, small nations and small economies are more peaceful, more prosperous and more creative than great powers or superstates.

 

Kohr's claim was that society's problems were not caused by particular forms of social or economic organisation, but by their size. Socialism, anarchism, capitalism, democracy, monarchy – all could work well on what he called "the human scale": a scale at which people could play a part in the systems that governed their lives. But once scaled up to the level of modern states, all systems became oppressors. Changing the system, or the ideology that it claimed inspiration from, would not prevent that oppression – as any number of revolutions have shown – because "the problem is not the thing that is big, but bigness itself".

He went on to say:

 

Drawing from history, Kohr demonstrated that when people have too much power, under any system or none, they abuse it. The task, therefore, was to limit the amount of power that any individual, organisation or government could get its hands on. The solution to the world's problems was not more unity but more division.

http://www.guardian.co.uk/commentisfree/2011/sep/25/crisis-bigness-leopold-kohr

[Guest thaiworthy]

This economic collapse is a 'crisis of bigness.'

This is especially true in the corporate world. My former boss, who left the job in which he had hired me, had this to say later about leaving local tv news (the small pond) to swim amongst the sharks in (the big pond), national tv news or namely, CNN.

 

In the news biz, time is your enemy until it becomes reported. After observing the internal workings of this huge news gathering machine, he quipped, "Bigness masks mediocrity."

[Guest]

I don't have any investments in shares any longer.

 

I believe shares are still a good investment, providing you adopt a valuation based approach & avoid anything on an excessive PE ratio. Employing a simple PE ratio limit will protect you from the worst excesses of most bubbles.

 

In many countries, the alternative of cash offers CERTAIN failure, as interest rates are frequently below the rate of inflation. So you lose a few percent each year.

[Guest snapshot]

All I do know is that whenever there is a financial crisis, it is often portrayed by some of the media pack as if the world will end tomorrow.

True... but with the exception of the GFC in its early stages. The media was eerily oblivious about it all, as if nothing was about to happen. I think that's why it was such a shock to so many people.

 

So I have been converting cash into the Chinese currency. As a Hong Kong permanent resident, I can do that. The interest rates are lousy...

Interesting decision. Good luck.

 

Many SMEs in China are currently facing serious funding issues... Won't go into the cause (long story short, it's due to the government tightening lending and the way lending works there) but basically, if they were highly leveraged before, they now can't get a large enough loan to maintain operating their capital. If (if!) you're willing to take a risk with your money, many of these companies are willing to pay obscene interest rates for loans. Though it's better if you can do it via the right local business connections that can minimise the risk for you.

 

I believe shares are still a good investment, providing you adopt a valuation based approach & avoid anything on an excessive PE ratio. Employing a simple PE ratio limit will protect you from the worst excesses of most bubbles.

 

In many countries, the alternative of cash offers CERTAIN failure, as interest rates are frequently below the rate of inflation. So you lose a few percent each year.

Totally agree... Unless you're extremely savvy, values based investment approach wins out.

[Guest fountainhall]

Many SMEs in China are currently facing serious funding issues.

The government lowered banks' reserve requirements a few days ago - presumably to ease this situation.