The Money Managers | In the News

The whiplash back and forward of the share market over the last month is indicative of fear and uncertainty about its future direction. The deflating of the debt bubble has begun in the global economy and no one is quite sure who the winners or losers will be. We have seen the consequences of pumping too much easy money into the economy. The encouragement for businesses and consumers to borrow beyond anything that seemed possible a decade ago is now wrecking its havoc. When Robert Shiller coined the phrase ‘Irrational Exuberance” in 1997, he thought things were bad but they have only gotten worse.

We have reason to be nervous, the risk of a meltdown is too big for us to ignore and yet the concerted efforts to re-inflate have given some hope to many participants. The cause of the current problems has been too much borrowing to extend a business cycle beyond its use by date and the solution offered now is to attempt to extend it further. Individually what we need to do is to repay our debt and position ourselves to come out the other side of the recession stronger than we are now. We do this by reducing debt, cutting expenditure, diversifying and progressively rebalancing our portfolio with the money we have kept in quality bonds and fixed interest.

You can recover well from a down turn if you can retain 70 to 80% of your assets based on their valuation at the peak of the market. The question remains as to how the mistakes and mis-allocations of the last five to ten years will be corrected. Some portfolios that were not well constructed and have been over exposed to leverage may never recover. At the moment smart CEO’s are moving aggressively to reduce costs and debt in their businesses. Smart households would be well placed to do the same.

We should be running our home in such a way that we don’t over extend ourselves especially as there is a likelihood that there will be tough times and the possibility of redundancies in the near future. We need to pool our resources into short, medium and long term commitments. Building up a reserve of cash and immediately paying off any credit card debt is imperative. Putting off any discretionary expenditure until the future is more certain makes a lot of sense. Using the benefit of interest rate cuts to pay more off our mortgage and get ahead on our repayments is well worthwhile.

Despite the fact that retailers and the Government are going to be hoping that Christmas spending and the stimulus payments are enough to re-inflate the system if you are already in debt then don’t join the party. If that is the case, my hope would be that everyone else spends while my household uses the opportunity to get the house in order.

There are a lot of concerns about superannuation and the wisdom of adding more money at a time when market prices have dropped so much. Ironically, it is at a time that markets are booming that super funds are most at risk. Most of the risk has been taken out of the share market at least with the 40% falls in that part of the fund over the last year. The next twelve months are more likely to give the maximum financial opportunity to be buying assets at historically low valuations.

Not all super funds are as well positioned and as diversified as they should be so now is a good time to be analysing the structure and performance to ensure it is in line with market norms. Good independent advice that is not driven by a salesman promoting his own particular brand of superannuation can be invaluable at a time like this.

Negative gearing is another method of wealth creation that is under question now that the debt driven asset inflation model is coming into question. There will be the usual suspects whose businesses rely on them promoting property price rises that will predictably be saying now is the time to borrow even more money and buy into property before it booms. Don’t be fooled into believing that the interest rate cuts to head off a deep recession will translate into massive speculative gains in property. This time it might be like pushing on a piece of wet string.

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