Posts Tagged ‘Depression’
Let’s take a look at the facts: Housing prices are rising at a clip of 10-15% per year, tuition costs are rising by an average of 10% each fall, and energy costs – well, the average rise in prices depends on the week you happen to be looking at, but double-digit increases have been the norm for the past few years. And now, the really depressing fact: Average wage increases have hovered between a measly 3 and 4 percent for the past three years. Now what, you ask, does any of this have to do with car financing?
Hey, as simple as can be stated, it boils down to numbers. Interest rates: These are the hidden little killers that can destroy retirement plans and lifestyles over the course of a lifetime. Car financing is the second most important credit-related decision you will ever make, the first being the mortgage on your home. So, just as an example, let’s say that you make $30,000 per year and are looking to finance a $25,000 car over five years. The difference between attaining approved car financing at 6% interest and 16% interest equals $130 per month if you take the loan out over 5 years! And here’s the clincher – a 3% annual increase in salary will net you an extra $900 per year (and that’s before taxes), while saving $130 per month on your car financing puts nearly $1600 more dollars in your pocket. (And hey, that’s after taxes!) Even a few percentage points difference on your car financing can actually equal or exceed the raise you got from work this year!
I had no idea those tiny numbers could add up to so much money! What is my best option for getting an approved car finance plan – with the lowest interest rates?
In the end, your credit rating, and the interest rates it commands, can make or break you over the course of your life. Car financing is not rocket science, but you really have to be careful with the numbers – or you can end up paying thousands of dollars more than you have to. Your best approved car finance option is probably going to be obtained through a bank or credit union. The great things about getting your car financing through a bank is that you tend to get the best rates, personalized service, and you don’t have to worry about some pushy car salesman trying to shove useless add-ons down your throat every five minutes! However, banks and credit unions have higher car-financing standards, so you need decent credit to consider this as an option.
But wait a minute – the banks always take forever to process a loan, and the salesperson at the dealership can get me approved in minutes!
This is very true. But there is a price for that convenience, isn’t there? The dealer almost always offers you a higher rate on car financing – and be prepared for them to try and sell you every single add-on you never wanted in the hour it takes them to fill out the paperwork! That approved car finance arranged through the dealership may save you a week over financing through a bank – but just a few percentage points difference in interest rates can easily cost you $1,000 more each year for the entire length of your loan. So in the end…how much is that week worth to you?
All right…the dealer can be a bad option for car financing – but what about those online places that can approve me in minutes?
In all honesty, the Internet can be a great place to secure approved car finance. With the ability to hop around and shop the different sites, you can definitely get some decent interest rates, sometimes comparable to those offered by a bank – plus you can get approved in minutes, and be driving your new car in a day or so. So what’s the catch? Well, the Internet has more than its fair share of scammers just looking to get your social security number and other vital information. If that car financing information ends up in the wrong hands…well, you can do the math! Plus, the ‘Net can be terribly impersonal at times – but it is still a viable option for approved car finance at competitive interest rates.
Impulsive and poorly made car financing options can literally cost you the price of an entire new car over the course of your life. Approved car finance is available through a number of outlets, and each has its own benefits and disadvantages. However, if you want to be able to afford actually driving your new car someplace other than home and work for the next few years, you may want to avoid the inflated car financing, AND those useless add-ons, offered by dealerships.
Introduction
A venture financing can be structured using one or more of several types of securities ranging from straight debt-to-debt with equity features (e.g., convertible debt or debt with warrants) to common stock. Each type of security offers certain advantages and disadvantages to both the entrepreneur and the investor. The characteristcs of your situation and current market forces will impact the type and mix of security package that is right for you.
Types of Securities
- Senior debt: Which is usually for long-term financing for high-risk companies or special situations such as bridge financing. Bridge financing is designed as temporary financing in cases where the company has obtained a commitment for financing at a future date, which funds will be used to retire the debt. It is used in construction, acquisitions, anticipation of a public sale of securities, etc.
- Subordinated debt: Which is subordinated to financing from other financial institutions, and is usually convertible to common stock or accompanied by warrants to purchase common stock. Senior lenders consider subordinated debt as equity. This increases the amount of funds that can be borrowed, thus allowing greater leverage.
- Preferred stock: Which is usually convertible to common stock. The venture’s cash flow is helped because no fixed loan or interest payments need to be made unless the preferred stock is redeemable or dividends are mandatory. Preferred stock improves the company’s debt to equity ratio. The disadvantage is that dividends are not tax deductible.
- Common stock: Which is usually the most expensive in terms of the percent of ownership given to the venture capitalist. However, sale of common stock may be the only feasible alternative if cash flow and collateral limits the amount of debt the company can carry.
While each of these securities has unique characteristics, they can be grouped into two categories: debt or equity. In structuring a venture financing, the primary question is whether the financing should be in the form of debt or equity.
Disadvantages of Debt to a Company
From a company’s viewpoint, there are two potential disadvantages to debt.
- An excessive amount of debt can strain a company’s credit standing, thereby reducing its flexibility in meeting future long-term financing requirements on a favorable basis. It can also negatively affect a company’s ability to obtain short-term credit. Of course, the form of debt the venture financing takes makes a difference. For example, subordinated debt will have less impact on borrowing capacity than senior debt.
- The venture capitalist has the option of calling his loan if the company is in default of the loan agreement. This remedy, which is not available to him under other financing agreements, puts him in a better position to influence the company’s affairs when it is in default.
Advantages of Debt to a Venture Capitalist
From the venture capitalist’s viewpoint, there are three principal advantages to debt.
- There is a greater likelihood that the venture capitalist will get his principal back and, at least, a small return. Many of the companies in the average venture capitalist’s portfolio are referred to as "the living dead." Needless to say, their performance has turned out to be disappointing. In some cases, these companies are able to repay principal with interest but have limited appeal to potential acquirers or the public. As a result, a venture capitalist with an investment in such a company’s common stock may be unable to recover his investment within a reasonable period, if at all.
- As previously discussed, under certain circumstances the venture capitalist is in a better position to influence the company’s affairs.
- The venture capitalist has a senior claim. However, it should be emphasized that the meaningfulness of a senior claim depends on the marketability of a company’s assets and the amount of equity it has to cushion its creditors’ position. For example, in the case of a start-Lip situation with little or no equity, a senior claim means little or nothing.
Percentage Ownership Needed
While the difference may not be great, depending on the particular circumstances of the company, a debt position involves less risk than an equity position for the venture capitalist. Accordingly, a company should not have to relinquish as much ownership when a financing is in the form of debt. However, this advantage must be weighed against the disadvantages of debt.
No matter how the venture financing is structured, it must be priced so that it is attractive to the venture capitalist. There is no clear-cut answer as to how much ownership a company will have to relinquish to make a financing attractive. Broadly speaking, the greater the potential return perceived by the venture capitalist, the less ownership he will demand. In other words, if a company has a patented product which a venture capitalist thinks is revolutionary and highly marketable, he will undoubtedly settle for less ownership than he would in the case of 4 company with a relatively less attractive product. Thus, his ultimate position will be a business judgment based on his potential return.
Before you enter negotiations with the venture capitalist, you should determine what your company is worth and how much of your company you want to sell. The following procedure can be used to get a rough idea of how much ownership you will have to give up to make the financing attractive.
- Estimate the risk associated with the venture financing. If the investment is very risky, the venture capitalist may be looking for a return as high as 15 times his investment over five years. Conversely, if a relatively low degree of risk is involved, the venture capitalist may be satisfied with doubling or tripling his investment over five years.
- Make a reasonable estimate of the price/earnings ratio applicable to comparable publicly held companies. The market value of the company can then be projected by multiplying forecasted annual earnings by the estimated price/earnings ratio for comparable companies.
- Divide the estimate of the total dollar return the venture capitalist wants by the projected market value of the company. This yields the percentage ownership the venture capitalist will need, as oil the future date, to realize his desired return. It is important to note that any equity financing required during the interim period must be considered in making these calculations.
Case Study
Suppose XYZ Company, Inc., a start-up, needs $500,000. The company’s product appears to have excellent potential. However, because the product is new and unproven, an investment in the company would be extremely risky. Accordingly, it is reasonable to estimate that a venture capitalist would want a potential return of at least ten times his total investment in five years. Management estimates that the company should be able to "go public" at 20 times earnings in five years. Projected after-tax earnings for the fifth year is $1,250,000. Additional long-term financing of $500,000 will be needed at the beginning of the third year.
Scenario I
In the calculations below it is assumed that the venture capitalist who provides the initial financing ($500,000) also provides the subsequent financing ($500,000), and that he wants a return equal to ten times both. However, it should be noted that if the company made satisfactory progress during the first two years, it would be reasonable to assume that the venture capitalist would be satisfied with a lower return on the subsequent financing since it would involve less risk.
Estimate of Total Dollar Return Required Total Investment $ 1,000,000 Estimate of Return Required X 10
$10,000,000
V. Projected Market Value in Fifth Year VI. VII. Projected Earnings $1,250,000 VIII. Estimate of P/E Ratio x 20
$25,000,000
Percentage Ownership Needed in Fifth Year Estimate of Total Dollar Return quired $10,000,000 Projected Market Value of Company in Fifth Year 25,000,000
40% Scenario II
In this set of calculations it is assumed that a second investor provides the subsequent financing ($500,000). The calculations show that the venture capitalist who provides the initial financing ($500,000) would need 20% ownership as of the fifth Year to realize the return he wants. However, since the ownership to be given up for the subsequent financing will reduce his ownership position, he will want more than 20% ownership initially. For example, if it is assumed that 15% ownership will have to be given up for the subsequent financing, the venture capitalist who provides the initial financing would need 23% ownership initially to end up with 20% ownership in the fifth year.
Assume the same facts as Case I, except a second investor provides the subsequent financing for 15% ownership.
Estimate of Total Dollar Return Required Total Investment $ 500,000 Estimate of Return Required X 10
$5,000,000
Projected Market Value in Fifth Year Projected Earnings $1,250,000 Estimate of P/E Ratio x 20
$25,000,000
Percentage Ownership Needed in Fifth Year Estimate of Total Dollar Return required $5,000,000 Projected Market Value of Company in Fifth Year 25,000,000
20%
Thus, it appears that the investment ($500,000) may be attractive to an interested venture capitalist if the principals of XYZ Company, Inc. are willing to give up approximately 23% ownership.
Conclusion
It must be emphasized that the above procedure is highly subjective. And, you should remember that what really matters is how the venture capitalist views the relative attractiveness of a company. Typically, venture capitalists are satisfied with a minority interest. Although a venture capitalist may demand a majority interest, generally they are not interested in operating control. Some of them like to tie the amount of ownership they ultimately get to the performance of the company. For example, a venture capitalist who wants a majority interest initially may give the principals the opportunity to earn part of it back. Such an arrangement can be used to compromise on pricing when there is a significant disagreement between the principals and the venture capitalist.
To entrepreneurs unfamiliar with venture capital, it may appear that the venture capitalist is seeking an extraordinary high return on his investment. However, it is important to understand that, even under the best of circumstances, only a minority of the companies in which the venture capitalists invests will be successful. He is well aware of this, and must make a sufficient return of his successful investments to come out with an acceptable return overall.
A Recession-Proof Business Is the Security Your Future Needs
It’s no secret that the economy is in trouble. Professionals debate daily as to whether we are in a financial recession, or whether we are just headed in that direction. All of a sudden, we feel insecure about our jobs, our savings, and even our retirements. With so many businesses failing, it’s hard to imagine that starting a business of your own would be a good idea. The fact is, there has never been a better time to start your own recession proof business at home.
How Can A Business Be Recession Proof?
One characteristic of a recession-proof business is that it provides a product or service that will not go out of demand. Certainly, plenty of people are having to make sacrifices on how much they spend not only on the “extras”, but also on the necessities. Finances for many of us have taught us to set up priorities on how we use our money. That means giving up unnecessary purchases but not the things we need in order to survive. If you provide a necessary product or service, you will have a recession-proof business.
It also depends on your target group for which you provide you product or service. Not everyone is in the market for the same things at the same time. Everyone’s finances aren’t affected in the same way and by having the right target group, you can recession-proof your business.
Some Advantages to Having a Home-Based Recession-Proof Business
Flexibility is always one of the most attractive features to any home-based business. For parents of young children, this could mean not having to pay for child care while getting to spend more time with your children. If a student has classes and needs to work around them, a home-based business will let them work around their own schedule without worrying about someone else’s priorities. Whatever you need to find time for, a home-based business will give you the freedom to spend your time where you need to spend it. A home-based recession-proof business will not only provide flexibility of your time, but will also provide you with financial security.
Another advantage to having a home-based recession-proof business is that you will never have to pay for the gas to drive back and forth to the office again. Many people commute long distances for their jobs and over the last couple of years, this has gotten to be a financial burden for many. When you work at home, there’s no fuel used, no wear and tear on a vehicle, and you don’t even have to go out to eat lunch!
Of course, one of the biggest advantages you will have from starting your own home-based recession proof business is not having a boss to answer to. You don’t have to worry when the economy worsens that you will go into the office one morning to have your boss tell you that he is “letting you go”. A recession-proof business is one that will give you the security to make your own decisions and to benefit from your efforts.
Nobody wants to face a recession. It is because people fear of losing their jobs, stock market crashes, people go bankruptcy and so much more can happen. However, this is something nobody can avoid it and must learn how to face it. So what actually is considering as an economic recession?
In most country, it is normally defined as a technical recession when there are 2 consecutive of negative growth in terms of their GDP. Such situation will causes a lot of panic as the entire economy slows down. There are always sign of such event before it even gets started. Consumers spending will drops, employment rate in the country decline and industrial manufacturing production drop and there will be more volatility in the stock market.
Historically, an economic recession will normally last for a period of about 1 to 2 years as cited by a lot of expert.
Why Can’t the Government Stop Recession?
Recession period causes a lot of stress to the people and most people will the finger to the government. However, it is important to know that recession is deflationary in nature and if the government tries to rescue the economy, they would have to pump in a lot of money to improve liquidity. Such move will cause an after effect of increase inflation which will possibly lead to stagflation. That is why most government is always very cautious in this move whether to increase liquidity to the economy and reduce increase rate.
How Economic Recession Normally Get Started?
It is a fact that the rich will always get riches while the poor gets poorer. When the rich sees an opportunity, they will know how to speculate the market as though it is a great way to make money. After a while, the rest of the population will follows and started to make some quick money. The combination effect of all the poor and middle income people make the entire market so huge and nobody will ever think of supply and demand. Economic bubbles will soon explode and it will be fierce and fast. However, the rich would be smart enough to exit way before such bubbles occur. So it is the majority of the population who will suffer and the governments are force to step in to clean up the mess.
Phases Of An Economic Recession
There are always few phases an economic recession has to go through, that is the period of slowdown, recession, recovery and than expansion again. Usually the period of recovery and expansion will last much longer than the period of slowdown and recession. Most people like to chase after money during the period of expansion, when the market is very hot and this is a sure loose strategy. Most people will never learn that they should position their investing during recession period where everything is at their cheapest.
How to Rescue a Recession
Lowering interest rates is the most common measures the government will take to help stimulate the economy. As mention earlier, the government will be very cautious in such move as this will cause inflation which will further dampen the spending from the consumer. It will normally implement over a period of times when situation forces them to do so. There are however times when the bubbles are so big that such recession lasted for a prolong period of times like the one happens on thirties. This will make the whole economies to go into depression which is the worst things that can happen.
Conclusion
So, please bear in mind that making money from the stock market is very possible but do not just chase after the market. You need to study the situation very carefully and the strategy of buying low selling high will always work. You need to have a long term vision and do not speculate. If you know the cycle of accumulating your cash during good times, start buying in during recession, hold and sell at good times and accumulating cash again …etc You will soon be the next wealthy man like those gurus. Remember, we will only face such cycles a few times over our lifetime and you must take opportunities of it.
It’s only been a few weeks since Congress signed off on Treasury Secretary Henry Paulson’s big $700 billion bailout plan—the Troubled Asset Relief Program (TARP). What exactly do we have to show for it? Nobody knows. What’s more, we now face a complex financial logjam that’s every bit as messy as the original fiasco. And the situation is all the more hazardous because Paulson keeps waffling.
As you recall, the original plan was to buy $700 billion in toxic securities—spoilage from defaulted home mortgages that kicked off the financial meltdown. Simply put, taxpayers would buy $700 billion worth of assets nobody else would touch, ostensibly to get frozen credit markets back in motion. But the toxic-loan plan never got off the ground. It couldn’t move far or fast enough to bring the immediate relief Paulson promised.
Instead, Treasury announced it had devised a new plan aimed at thawing out the frozen credit markets. The new plan: Put money directly into big banks by enacting a little-known clause in Sec. 113, (e )(1) of the TARP legislation, which economists are calling the “Stock Injection Alternative.”
Paulson promised that stock injection effectively served to “rescue” the banks, but instead of owning shaky assets, the government—the taxpayers—would become preferred shareholders of the banks themselves. That means the taxpayer would be promised a return (since preferred shares pay interest), and those owning common shares would take the first hits. Thus, taxpayers would be more protected and less likely to lose money.
Amid this back-and-forth maneuvering, people started whispering that perhaps Paulson didn’t really know what to do. First he’d claimed that buying toxic mortgage-based investments from troubled banks, particularly those whose failure might undermine the domestic or global financial systems, was the only conceivable solution to bank failures. And he tenaciously opposed any congressional suggestions that could modify his plan.
Then after the first $350 billion had been released, he unexpectedly switched gears into what some believed was too broad and too vague a direction.
Paulson had already spent $85 billion to bail out insurance giant, AIG. But even after a congressional hearing and scandalous admission about the company’s lavish corporate resort boondoggle, AIG still had the audacity to come back to the money trough and lap up another $40 billion.
If there is anyone in the Treasury keeping track of where all these dollars are going, they aren’t letting on. In fact, the money banks have received has done little to thaw out credit for U.S. businesses or consumers. Banks appear to be more willing to lend to each other, judging by a drop in the LIBOR rate. But the no-strings nature of the bailout has led some to use the money in ways Congress may not have intended. For example, PNC Bank, headquartered in Pittsburgh, PA, used part of its allotted cash to acquire Centurion branches in its market area.
Credit cars and auto loans next in line
In a further drift away from Congressional intent, Paulson announced he wanted to extend the bailout program to non-bank credit markets like those holding credit card receivables, auto loans and student loans. American Express has, with a sprinkle of Treasury pixie dust, been deemed a bank, thus qualified to feed at the trough with the others. Companies like GMAC, the lending arm of General Motors, and other carmakers’ lending units, are standing in line as well.
In the original bailout plan Paulson asked for overarching Czar-like authority to move money around, without being subject to review by any court or administrative agency. His initial “just trust me” proposal didn’t fly. Congress assured the public that any plan they approved would have built-in oversight.
But by early November, not only had the White House failed to nominate a special inspector general to head up oversight efforts, Congress had yet to appoint any members to a five-person congressional oversight panel. In fact, a comprehensive plan seems non-existent.
A lot of money had been blowing out the door, but no one had bothered to consult with Congress about any of the details. Finally lawmakers stepped up to the plate.
On November 18, Paulson faced harsh questioning by members of the House Financial Services Committee where he shared the table with Fed Chairman Ben Bernanke. In addition to sharp criticism of mishandling matters, pointed questions reminded everyone that some TARP money was to have helped homeowners faced with foreclosure, an idea strongly supported by FDIC Chairman Sheila Bair.
Paulson argued that TARP was meant to stabilize financial markets and the flow of credit, not serve as a panacea for all our economic difficulties. And, he brushed aside questions about future plans by saying he had no intentions of doling out the second half of the $700 billion program — let the Obama administration deal with it, he said.
A secret $2 trillion deal
Back in mid-October, the Federal Deposit Insurance Corporation announced a new $2 trillion three-year program—the Temporary Liquidity Guarantee Program. The program was meant to strengthen confidence and encourage liquidity in the banking system. This guarantee is in addition to the $250 billion preferred stock purchase plan we already mentioned.
Perhaps you might be curious about the details surrounding that $2 trillion deal, a little transparency perhaps? Well, never mind. Federal Reserve Chairman Ben S. Bernanke said the central bank would not disclose any details of these loans of taxpayer funds because doing so would “stigmatize banks needing the money.”
The American taxpayers deserve a coherent explanation about what has happened with all the money spent so far, like who’s getting what, how much and why. They were promised oversight and transparency, but Bernanke’s statement it’s yet another example of a whole country being left in the dark with no real answers.
Now more than ever Americans need confidence that their government is making smart decisions as they sort through this financial fiasco. The best way to instill confidence is for Congress to do what it said it would do: ensure strict oversight of the bailout process. They would do well to start at the beginning by keeping a closer eye on Paulson, a man who seems hell-bent on making up the rules as he goes along.
Perhaps the entire bailout fiasco was summed up best during the congressional hearings when Gary Ackerman (R-NY) looked Paulson in the eye and said, “You seem to be flying a $700 billion plane by the seat of your pants. It seems to be the second-largest bait-and-switch scheme that history has ever seen, second only to the reasons given to us to vote for the invasion of Iraq.”
This is far from being the final chapter of the story. You can find updates at our website: www.financialspeculation.com.
Global recession is now a given. Australia is also headed for at least a mild recession.
The key issue is the depth and duration of the slump.
At the moment, leading indicators for global and Australian growth are still in free fall.
The AMP’s Dr Shane Oliver says much of this bad news has already been factored into share markets, but as the news remains bleak shares are still under pressure.
————–
Lehman Brothers’ collapse in September and the resulting panic it set off in global money markets, and more broadly in confidence, has caused immense damage to the global economic outlook.
In particular, it would seem that the efforts by the US Government to convince Congress to pass the bank rescue program last month by arguing it is a Main Street problem as well as a Wall Street problem has convinced investors and the wider global population of the seriousness of the situation.
This has led to a sharp deterioration in economic data recently.
Recession is now a given in key advanced economies – Japan and Europe have already had two consecutive negative quarters and it is only a matter of time before it is “officially” declared in the US as well.
Recession is also probable in Australia.
And the emerging world will be running far enough below potential to qualify as a recession as well (even though growth will still be positive).
Right now, leading indicators of economic growth are still pointing down and provide no indication of when the slump will end and of how deep it will be. (See the next chart.)
Not a normal post war slump
The current situation is very different to that going into past post war recessions for several reasons.
Normal post war recessions were part of a cycle which saw inflationary pressures build during an economic upturn, interest rates rise, demand slow and inventories rise resulting in a downturn which is ultimately turned around via lower interest rates and after de-stocking has run its course.
The current cycle has some elements of this and it was made worse by the huge surge in oil and commodity prices into mid year which saw interest rates increased or maintained at higher levels than should have been the case.
But two considerations make this global slump potentially more serious and hence add to the level of uncertainty.
Firstly, we are faced with significant systemic risk as the flow of credit has been radically impaired by a severe loss of confidence on the back of the subprime mortgage crisis and subsequent banking problems.
The resultant pressure to reduce gearing (whether in hedge funds, real estate investment trusts or indebted households) has meant that the current slump has many of the signs of a debt-deflation cycle described by economist Irving Fisher in relation to the Great Depression.
In a debt deflation spiral: distressed selling of assets leads to wealth destruction, which leads to falling spending which leads to rising unemployment and then more distressed selling of assets (including houses) and more falls in asset prices, etc.
The UK & US are already in a form of this.
On top of this most countries are weakening at the same time. For example, back in the early 1990s, the US had a recession in 1990 and then recovered but Japan and Europe did not really succumb till 1992.
So the synchronisation in the economic downturns in the US, Japan and Europe is now making the global downturn a lot worse. As a result, weighted average growth in the world’s advanced countries is now expected to contract for the first time in the post war period. See the next chart.
While the emerging world is coming from a higher growth base than was the case going into the early 1980s and early 1990s downturns, momentum here is also fading rapidly.
As a result, there is greater than normal uncertainty regarding the economic outlook. Our base case would see the global recession last to around mid 2009.
But given deleveraging and the uncertainties it sets off, a longer and deeper recession stretching into 2010 is possible.
Rapid government policy – to stabilise money markets along with fiscal stimulus and lower interest rates – should head off the deep recession scenario (or a 1930s depression).
Australia is currently better placed than many countries.
Our financial system is less impaired, it has more scope for policy easing, growth in its trading partners will likely remain above that in the advanced world and the fall in the $A will provide a boost to domestic production.
But even in Australia the risks are high given our high levels of household debt and house prices relative to income and Australia’s high reliance on foreign capital.
Our leading indicator for Australia now points to growth slowing to 0.5% over the next six months and it’s rapidly falling to the levels associated with the early 1990s recession.
This along with the still deteriorating global outlook, plunging confidence and negative wealth effects indicates Australia will at least have a mild recession at some point in the next year.
During the last two recessions in Australia, unemployment rose by 5 percentage points and inflation fell by an average 5 percentage points.
Inflation will fall sharply as lower commodity prices and the slump in the economy feed through.
Unemployment is likely to rise to between 7 to 9%.
What to watch
Given the uncertainty regarding the outlook, and specifically the lack of certainty between whether the world is facing a mild or deep recession, we are monitoring a range of signposts.
To gain confidence in our base case view that global growth will start to stabilise around the middle of next year and improve thereafter we are looking for:
• A rapid further decline in short term interest rates relative to long term rates.
• More global rate cuts and more fiscal stimulus quickly.
• A slowing rate of decline in US house prices.
• US consumer spending to slow but not collapse.
• A stabilisation in consumer confidence in key countries.
• A modest pick-up in corporate defaults.
• An easing in bank lending standards.
• A further improvement in money markets.
• A fall in private sector borrowing rates.
• An improvement in broad money supply measures relative to the monetary base, indicating monetary easing is getting traction.
• A stabilisation in global trade indicators.
• A stabilisation/improvement in China’s growth.
• Weekly auction clearance rates are also worth watching in Australia.
While there has been some improvement in some of these signposts it is not enough to provide confidence yet.
Implications
The bleak and uncertain economic outlook has several implications for investors:
Firstly short term cash rates are likely to fall a lot further. Japan and the US are in a race to zero.
In Australia, the Reserve Bank is likely to cut by another 0.75% to 1% next month and the cash rate will probably ultimately bottom out below 3% next year.
Just as shares led on the way down they will lead on the way up.
Having now had 50% plus falls shares are already factoring in a recession. But while they are great value from a long term perspective the uncertainty about the outlook and the continuing flow of bleak news means it’s too early to say the bear market is over.
Commodity prices and currencies like the $A lag the economic cycle and so it’s hard to see them moving higher until there is more confidence that global growth is back on track.
In the meantime, more weakness in commodity prices and resource stocks is likely.
Unlisted assets – including housing and commercial property – are now more vulnerable than financial assets which have already been hit hard.
Conclusion
While the next year is likely to be pretty tough, all is not lost. Australia’s long term growth prospects remain bright given our exposure to China which will resume its rapid industrialisation process after the current pause and our financial system is in far better shape than in many other countries.
And in the short term it should be borne in mind that a lot of stimulus is being pumped into the household sector, with lots more to come.
A middle income Australian family with a $250,000 mortgage, two kids and two cars will be seeing their finances bolstered considerably.
their mortgage interest bill will have fallen by about $375 a month (and will fall a lot further) since August, their monthly petrol bill will have fallen by about $95 since July and, if they qualify, they will get a one off $1000 per child payment next month.
Of course, the uncertainty caused by rising unemployment will mean a big chunk of this will be saved, but it will certainly help avoid a big collapse in spending and more importantly at some point later next year will help drive a recovery.
When the phone is ringing every day and the bank is threatening to foreclose your home, because you are behind on payments, it is easy to believe that the banker is drooling over the possibility of foreclosing on your home. But you should know that the bank stands to lose a lot of money if they are forced to foreclose on your home. Read this article to learn the real truth about banks and foreclosures.
With what I have learned about banks and foreclosure over the last couple years, the information that I am about to share with you now, could have helped a few of my friends avoid losing their homes. Because I could not help them in their time of need, it is my hope that I could help you now, in your time of need.
I know that my initial suggestion that “banks do not want to foreclose on your home” may seem far-fetched to you now, but by the time you have read this article in full, you will recognize that you have more power over the bank than the bank would care to admit to you.
The Truth Is In The Numbers
Let us suppose for the sake of this story that you paid $100,000 for your home. And let us suppose that you put a full 20% down on that home five years ago. In this scenario, your bank loaned you $80,000 to help you purchase your home, and at best, you have probably paid $10,000 towards the principle of your home loan.
In the past year, you suddenly found your finances stretched for one reason or another. Perhaps you changed jobs, or your business contracted with the economy. Perhaps you had a financial emergency that required a lot of cash to solve, and now you find yourself struggling to catch up on the rest of your bills.
In the end, it really does not matter the reason for your current financial crisis. It will have little bearing on the outcome of this story.
This is where most people make a mistake in their understanding of the banks’ motives in threatening foreclosure. The bank is not threatening foreclosure because they want your house. The bank is threatening foreclosure, because they want to spur you to action, to fix your current financial crisis.
I know you are thinking that the bank will sell your home for its full retail value, but they won’t, because they cannot afford to hold onto your house for a long period of time. In order to sell a home for full retail price, the bank would need to commit to holding the home, perhaps for years, until that perfect buyer arrives to buy it.
If you force your bank to foreclose your home, your bank will put your house up for auction at a sheriff’s sale. PAY ATTENTION… this is important. When your bank puts your house up for auction, they will generally only get 35 to 40 cents on the dollar for your home.
The bank is currently out 70 cents on the dollar against the retail value of your home, but if forced to auction, the best the bank can expect to get out of your home is half what the bank has invested into your home!
In the scenario I have outlined here, you owe $70,000 on a $100,000 home. But if you force the bank to foreclose your home, the best the bank can hope to achieve is to get $35 to $40,000 for your home at auction. Do the math. If your bank forecloses your home, your bank will lose between $30 and $35,000, when they sell your home. Ouch!
This is the key information that you will use to stop the foreclosure of your home. As you can now recognize, your bank needs you to stay in your home, more than they desire to foreclose on your home.
Leverage
As should now be obvious, you as the homeowner have a lot of leverage over your bank. And if you play your cards just right, you will not have to lose your home.
If you find yourself behind on payments and you are looking for a way to save your home from foreclosure, you need to speak to a company like National Foreclosure Counseling Services (http://nfcscorp.com/). NFCS is a company, which can help you negotiate a repayment plan or loan modification on your behalf.
When NFCS contacts your bank on your behalf, your bank knows that you are interested in taking whatever steps are necessary to get back on the straight and narrow with them. When banks realize that you are serious about staying in your home, they have to weigh the options of negotiating a loan modification or losing an average of $30,000 when they foreclose your home.
If the bank has someone in a home that wants to stay in the home, then the bank stands a chance of retaining some of their profits on their original loan, if they are willing to renegotiate the terms of that loan. However, if the bank is forced to foreclose on the property, then chances are good that the bank will lose a lot of money.
Think about it. Your bank does not want to foreclose your home. It is in the best interests of your bank to keep you in your home, period.
National Foreclosure Counseling Services (http://nfcscorp.com/) has a proven track record (with documentation) of helping families such as yours renegotiate with their banks to help them to stay in their homes. In just the last 90 days, NFCS has helped 600 families renegotiate with their banks to avoid foreclosure.
The Most Important Step In This Process
You have the power to save your home from foreclosure, if you simply decide that you want to exercise your power of self-determination.
Who knows? You may have decided that you don’t want to try to hang on to your home for whatever reason. So long as you understand that a foreclosure will hurt your credit for at least ten years, perhaps preventing you from being able to buy another home, then by all means, it is your choice to accept foreclosure or not.
The current real estate crisis will not last forever, and housing prices will rebound eventually. Even if you see yourself upside-down in your home now, you may just find that if you hang on to your home another five or ten years, then housing prices will bounce back and you will survive the current real estate crisis without great financial loss.
But if you are like most people, you probably cannot bear the thought of losing your home and the equity you have so far built up in your home. If you desire to hang on to your home, then you alone must take that first step towards saving your home from foreclosure, then you should make it a point to get in touch with the folks at National Foreclosure Counseling Services, as shown below.
Author’s Note: This article was originally posted at: http://cash-advance-payday-loans.org/blog/banks-do-not-want-to-foreclose/2009/01/
A dictionary may define a recession as “A significant decline in general economic activity over a period of time” In my personal opinion some US Citizens have fall and come out of a recession in their personal economy a few times before it was ever declared by the government. The state of mind of the general population due to their personal situation could help generate a national recession. The best way to prevent a decline of the country’s economy is, I think, to help its citizens come out of their own personal recession.
When someone loses his job due to any circumstance, in a small way, affects others. The money he used to spend every weekend to take his family out to see a movie or the “extras” he used to spend in other things will be money lost by others in the form of revenue. It is only noticed by the rest of the society when a massive lost of jobs or a significant slow down of the general production of the country happens. If you have a job and things go smooth, if there is money to spend and your family has the basics to live, then you are not in a recession even if the rest of the country is falling a part. On the other hand, If the chain of events reaches the company in which you work and you have to start looking for a different way to provide for your family because the money that you make is not enough, be careful because the decline of your personal economy may take you to a personal recession, and guess what? It will be very unlikely that the government will come up with extra funds to help you get out of that hole if it only affects you.
You may come out of your personal recession but the experience you just went through may still affect others. After that very unpleasant experience you may just want to prevent it from happening again. You may just reduce your expenses in order to plan for the future. It means less money in the market and, if enough people think the same way, a slow down of sales for the local commerce. The circulation of the money means new jobs to keep up with the demand of products therefore we need people to be able to spend their money in a healthy way.
During a recession companies go out of business causing the lost of many jobs. The people that got laid off will get into a recession along with the rest of the society due to our economic structure by which some companies depend on others to survive. The government then may declare a recession and will start looking for ways to “save” the economy from slowing further down. The reduction of the interest for loans and other banking purposes by the Federal Reserve is a way to stimulate people to borrow and expend money. The generation of jobs with money that came out of our own taxes may help reactivate the economy. It will put the necessary money in circulation to increase the need of goods and services, which, at the same time, will generate more jobs and more money. The country could go back to have a health economy but, what about those individuals that did not get absorbed by the economic change. In other words, what about if the economy is in good health and I don’t have a job?
I think that if I do not have a job and a way to get money, then I am in a recession. There are significant affords by the government to reduce unemployment but other things may come in to effect in particular situations. Some companies may consider you too young or too old to hire you. Some others may require skills that you do not have for a particular position. You may not have the experience for the job they want to cover. It could happen that in the town in which you live all the jobs are taken and it could be difficult for you to move because, guess what you need to move? Yes, that is right! You need money. The advantage of our country is the social help programs implemented by the states and the federal government, which, thanks to the taxes paid by the working population, will help you if you get under the poverty level.
Due to different situations that were described above, some people may only want to think about their own situation before declaring a recession. Our society may be a victim of different economic phenomenon and the fear of the social analyst that is widely publicized may be contagious. I am not saying that you should not care about the general social situation, what I am trying to say is that we could contribute to make it worst if we suddenly change our habits. Make sure to keep going with your normal life before pushing everybody else towards an economic slowdown. In my case, there is a recession when my personal economy is suffering.
Luisrcg
The old saying “History doesn’t always repeat itself, but often rhymes”, is based more on fact than fiction. By studying the US Economic Recession History, you should better understand how current recessions may affect your financial life today.
I focus on recessions simply because they have a dramatic effect on 401k balances and investments in general. During the last recession, which was officially from March of 2001 through November 2001, the major market indexes plummeted. The Nasdaq Index declined over 70% from it’s high within a year surrounding the recession. This index still hasn’t recovered. It is still only half of where it once was.
Could you have avoided this downfall by studying the US Economic Recession History? Maybe, but maybe not. Let’s look at the problem. The National Bureau of Economic Research (NBER) is the official agency that determines when recessions begin and end in history. Since recessions have such a detrimental effect on our investments, wouldn’t it be nice if they would notify us when one is beginning? Yes it would, but they don’t. The Nasdaq Index lost over 43% from its high before the NBER determined we were in our last recession. It took them 9 months after the beginning of the recession to announce it had begun. Is this a fluke? Unfortunately not. The official notification of the beginning of the last 4 recessions came an average of 228 days after they had already begun. This is an 8 month delay.
The way numbers work, if you lose 50% of your portfolio, you must earn 100% just to break even. If you had $100,000 and lost 50% ($50,000), you are left with $50,000. You must double this (100%) in order to break even. This is why it seems to be twice as hard to regain money after losing it. It took the Dow Industrial Index and S&P 500 Index around 6 years to get back to even after the last recession.
Let’s pretend you’ve lost 43% of your portfolio and are determined NOT to lose any more. You sell your stock funds and put your account into the safety of the money market. Your account is now safe for the rest of the recession. Will knowing the US Economic Recession History help you determine when the recession is over? Once the recession is over, you definitely want to move back into stocks so that you don’t miss the next increase in the market. After all, you need to make almost 100% just to break even!
NBER announced the last recession was over on July 17, 2003. Unfortunately they announced it was over in November of 2001! Yes they didn’t determine the last recession was over until nearly 2 years later. Had you had your investments strapped down for the winter winds of recession, you could have missed the excellent recovery period that typically follow recessions. The end of the last 4 recessions were officially announced an average of 522 days (17 months) after they were over.
Studying the US Economic Recession History may be helpful for some, but I don’t find it very helpful in managing investment portfolios. I find that tracking Supply vs. Demand in the investment markets is a much better way to protect assets. When supply begins to outweigh demand, simply change the portfolio to a more conservative stance. This usually happens near the beginning of recessions and you have plenty of time to switch your portfolio to safety. The opposite occurs near the end of recessions. Demand shows back up and you begin to change the portfolio to one of moderate risk.
The upside to recessions is the fact that periods of expansion last about 5 times longer than recessionary periods. There were 10 Recessionary cycles since 1945. The recession side of these cycles lasted on average 10 months. The expansion side lasted on average 57 months. If you can protect your money during the 10 recessionary months you won’t have to spend a lot of the expansion months trying to get back to even. You can instead be exploring new highs for the portfolio.
A banker or bank is a financial institution whose primary activity is to act as a payment agent for customers and to borrow and lend money.
The first modern bank was founded in Italy in Genoa in 1406, its name was Banco di San Giorgio .Many other financial activities were added over time. For example banks are important players in financial markets and offer financial services such as investment funds. In some countries such as Germany, banks are the primary owners of industrial corporations while in other countries such as the United States banks are prohibited from owning non-financial companies. In Japan, banks are usually the nexus of cross share holding entity known as zaibatsu. In France “Bancassurance” is highly present, as most banks offer insurance services (and now real estate services) to their clients. http://banks-banking.blogspot.com
Banks have influenced economies and politics for centuries. Historically, the primary purpose of a bank was to provide loans to trading companies. Banks provided funds to allow businesses to purchase inventory, and collected those funds back with interest when the goods were sold. For centuries, the banking industry only dealt with businesses, not consumers. Banking services have expanded to include services directed at individuals, and risk in these much smaller transactions are pooled. http://banks-banking.blogspot.com
Origin of the word
The name bank derives from the Italian word banco “desk/bench”, used during the Renaissance by Florentines bankers, who used to make their transactions above a desk covered by a green tablecloth. However, there are traces of banking activity even in ancient times. In fact, the word traces its origins back to the Ancient Roman Empire, where moneylenders would set up their stalls in the middle of enclosed courtyards called macella on a long bench called a bancu, from which the words banco and bank are derived. As a moneychanger, the merchant at the bancu did not so much invest money as merely convert the foreign currency into the only legal tender in Rome—that of the Imperial Mint.
Traditional banking activities
Banks act as payment agents by conducting checking or current accounts for customers, paying cheques drawn by customers on the bank, and collecting cheques deposited to customers’ current accounts. Banks also enable customer payments via other payment methods such as telegraphic transfer, EFTPOS, and ATM. http://banks-banking.blogspot.com
Banks borrow money by accepting funds deposited on current account, accepting term deposits and by issuing debt securities such as banknotes and bonds. Banks lend money by making advances to customers on current account, by making installment loans, and by investing in marketable debt securities and other forms of money lending.
Banks provide almost all payment services, and a bank account is considered indispensable by most businesses, individuals and governments. Non-banks that provide payment services such as remittance companies are not normally considered an adequate substitute for having a bank account. Banks borrow most funds from households and non-financial businesses, and lend most funds to households and non-financial businesses, but non-bank lenders provide a significant and in many cases adequate substitute for bank loans, and money market funds, cash management trusts and other non-bank financial institutions in many cases provide an adequate substitute to banks for lending savings to http://banks-banking.blogspot.com
Definition
Cathay Bank in Boston’s ChinatownThe definition of a bank varies from country to country.
Under English common law, a banker is defined as a person who carries on the business of banking, which is specified as:
conducting current accounts for his customers
paying cheques drawn on him, and
collecting cheques for his customers.
In most English common law jurisdictions there is a Bills of Exchange Act that codifies the law in relation to negotiable instruments, including cheques, and this Act contains a statutory definition of the term banker: banker includes a body of persons, whether incorporated or not, who carry on the business of banking’ (Section 2, Interpretation). Although this definition seems circular, it is actually functional, because it ensures that the legal basis for bank transactions such as cheques do not depend on how the bank is organised or regulated. The business of banking is in many English common law countries not defined by statute but by common law, the definition above. In other English common law jurisdictions there are statutory definitions of the business of banking or banking business. When looking at these definitions it is important to keep in mind that they are defining the business of banking for the purposes of the legislation, and not necessarily in general. In particular, most of the definitions are from legislation that has the purposes of entry regulating and supervising banks rather than regulating the actual business of banking. However, in many cases the statutory definition closely mirrors the common law one. Examples of statutory definitions: “banking business” means the business of receiving money on current or deposit account, paying and collecting cheques drawn by or paid in by customers, the making of advances to customers, and includes such other business as the Authority may prescribe for the purposes of this Act; (Banking Act (Singapore), Section 2, Interpretation).
“banking business” means the business of either or both of the following:
receiving from the general public money on current, deposit, savings or other similar account repayable on demand or within less than [3 months] … or with a period of call or notice of less than that period; paying or collecting cheques drawn by or paid in by customers
Since the advent of EFTPOS (Electronic Funds Transfer at Point Of Sale), direct credit, direct debit and internet banking, the cheque has lost its primacy in most banking systems as a payment instrument. This has lead legal theorists to suggest that the cheque based definition should be broadened to include financial institutions that conduct current accounts for customers and enable customers to pay and be paid by third parties, even if they do not pay and collect cheques.
Accounting for bank accounts
Bank statements are accounting records produced by banks under the various accounting standards of the world. Under GAAP and IFRES there are two kinds of accounts: debit and credit. Credit accounts are Revenue, Equity and Liabilities. Debit Accounts are Assets and Expenses. This means you credit credit accounts to increase their balances and you debit debit accounts to increase their balances. This also means you debit your savings account everytime you deposit money into it (and the account is normally in deficit) and you credit your credit card account everytime you spend money from it (and the account is normally in credit).
However, if you read your bank statement, it will say the opposite- that you have credited your account when you deposit money, and you debit when you withdraw it. If you have cash in your account you have a positive or credit balance and if you are overdrawn it will say you have a negative or a deficit balance. The reason for this is because the bank, and not you, has produced the bank statement. Your savings might be your assets, but it is the bank’s liability, so your savings account is a liability account which is a credit account and should have a positive credit balance. Your loans are your liabilities but the bank’s assets so they are debit accounts which should have a negative balance. Below where bank transactions, balances, credits and debits are discussed, they are done so from the viewpoint of the account holder which is traditionally what most people are used to seeing.
If you have cash in your account you have a positive or credit balance and if you are overdrawn it will say you have a negative or a deficit balance. The reason for this is because the bank, and not you, has produced the bank statement. Your savings might be your assets, but it is the bank’s liability, so your savings account is a liability account which is a credit account and should have a positive credit balance. Your loans are your liabilities but the bank’s assets so they are debit accounts which should have a negative balance. Below where bank transactions, balances, credits and debits are discussed, they are done so from the viewpoint of the account holder which is traditionally what most people are used to see in http://banks-banking.blogspot.com