Are you a little bit confused about the on again off again $700 Billion bailout plan?
Do you have an opinion as to whether the pollies in the White House should give Wall St. a free lunch?
Well, I want to give you my perspective on the $700 Billion Plan in this email… But first, it seems like everybody has got an opinion and also a solution.
I'd hate to say this, but this guy is Australian (Well, maybe in this case we can give him back to the Kiwi's). I'm talking about Russell “Rusty” Crowe.
Damn good actor, horrible mathematician.
Last night on the Jay Leno show, I swear Russell, if he was running for president and the election was held last night, he would have won by a country mile.
Russell said he's been following the financial crisis intently and has got the perfect solution that would cost the American Government only $300 Million, meaning that they would be left with a bit of change from their $700 Billion bail-out plan.
Here's what Russell suggested…
Why not give everyone in the States $1,000,000. Everyone would have lots of money to spend… Problem solved.
Right about then, the audience on Jay's show gave him a huge round of applause, approving his simple but effective bailout plan.
Why wouldn't you love the guy? He's made you an instant millionaire.
That's the financial crisis that I'm sure we're all looking forward to. Why is it that Aussies always miss out?
Jay, being a bit of a smart-ass, and probably not all that good at arithmetic anyway, asked him about the tax on that money. Both agreed that it was a good plan.
Ummm… Rusty, my arithmetic says that 300 Million times $1 Million is actually $300,000,000,000 (3 hundred trillion dollars). I've probably left out a few zeros, because even I don't know what that looks like.
Considering that the War on Terror has cost just $3 Trillion, Russell's plan is a little bit crazy.
Russell's $300 Million bail-out plan, saving the Western World from financial destruction really means that the U.S. citizen gets a whopping $1 (at least they're not in debt).
Not to worry though, I'm sure Russell wont be short of a dollar, he was on the show promoting his brand-new movie, can't remember the name, but I'm sure it's a damn-good one.
Anyway, I thought you'd be amused, I certainly was when I saw it.
So what's up with the markets?
First up, I think most Australians foolishly believe that for whatever reason that it isn't going to impact Australia as much as it's currently impacting Europe and America.
Let me say this… Even the Yankees haven't felt the full impact of this financial tsunami. Most believe that it's isolated to a couple of over-paid, money-hungry investment banking firms that simply are feeling the pinch.
Of course, if you've got any money tied up in shares, you know that it isn't just the fat cats who are losing big-time.
The crash, as evident as it was yesterday, isn't coming – it's already here.
Despite a jump on Wall St. last night and a 180-point gain on our markets today.
So what about the $700 Billion bail-out plan?
Here's the problem with it… It seems to me that there's a war at the moment and that is between Wall St. and Main St.
Wall St. knows all too well the impact of zero liquidity and are desperate for the government to bail them out.
Main St. which is folks like you and me can't think of anything more disgusting than bailing out these greedy investment bankers who lived in the lap of luxury for the last 7 years… Private jets… First class accommodation… Huge fat bonuses… etc, etc, etc.
Unfortunately, what Main St. doesn't really comprehend is that without liquidity in the market, and a sense of calm between the banks, then the impact will be felt on the street, hitting the folks that can least afford it.
I'm not going to go in to details of the bail-out plan… It's far too complex and confusing at best.
From your point of view, it isn't that important. But there is one thing that's important for you to know… And this has been the big area of contention and hence the battle between Wall St. and Main St.
What should the U.S. Government pay for these “toxic assets?”
If they pay too little, then we're going to have a disaster on our hands because the money will be completely ineffectual from a bank and lending point of view, sending banks to the wall and not offering a solution in liquidity – which is the real crisis at the moment.
Pay too much, and they could be indebting the U.S. tax payers for decades to come.
The problem is, no one really knows how to value these toxic assets.
Last night's jump on Wall St was consolidated when it was agreed by the “big-wigs” that the toxic assets should be valued not on current market value (there is no value – because there's no market), but on realised value 3 years down the track.
I hate to say this, and it isn't my money anyway, but it's probably the best possible solution for the markets at the moment.
Here's what's interesting though…
When we had the last similar crisis which lead to a depression (I wasn't around, and probably you weren't either), the way out, back in the 30's was for the government to start spending to get the economy back up and running.
Back then of course, they didn't act as swiftly as congress is attempting to do now, they waited until they went into a depression before they figured out that the only way out was to spend.
So what about Australia? What's our exposure to “toxic assets?”
Well, let me give you some figures…
In Australia, the percentage of our securitised mortages that fell into the sub-prime category was one percent of all mortgages… In the States, it was a huge 13%.
Now that's a big difference. Considering as well that the U.S. market is 12 times the size of ours.
We were at the early stages of the “sub-prime money-lending” when the poo hit the fan here in Australia, with the likes of MFS and Allco.
Our low-doc market, which some Australians mistook as sub-prime money was 8% of total mortgages.
Now the low-doc loans, if you've ever been a borrower, started back in the early 2000's and you had to have minimum 25% deposits.
In 2007, the deposit for some low-doc lenders was just 10%. That by the way was RAMS. No coincidence that when the sub-prime hit hard, they were the first to go in Australia.
Anyway, low-doc loans are not sub-prime loans. With 25% deposits, most lenders are covered.
So we're unlikely to have the same catastrophe that the States are experiencing at the moment.
Here's where it hits us…
The U.S. are probably in a recession and it will be interesting this Christmas to see their retail figures compared to last year… Let me tell you that they're not going to be great.
So if the mother of all consumers stops spending, and retailers stop stocking up, then it will effect manufacturers all over the world.
That's where we come in as a commodity producing nation, riding the boom all the way up in the last 15 years. We'll be effected by the slow-down in consumer spending in the States.
Not sure. Depends on the Chinese and Indian markets as to whether the slow down will be a prolonged one.
Don't worry, the news isn't all gloom and doom… You really do live in the lucky country.
Because with the slow down, I think what you'll see is an acceleration of interest rate cuts, maybe, just maybe, a full 2% spread over a 12-16 month period.
Now of course the current financial crisis is a lot more complex than my simplistic explanation. However, at the end of the day you have to grab on to a simple explanation that puts thing into perspective.
Anyway, I thought I'd give you an investor and business-owner's view. I don't want to complicate it, but let me tell you that it's been an education in itself this week, just watching the market's reaction to news and events.
For what it's worth, U.S. Congress meets on Thursday (their time) and I think that they will pass a “punch-drunk” bail-out plan, calming things down and probably sending the stock market on a rally upwards.
If you're in a position and cashed-up, my intuition tells me that whilst the rally will be strong, it'll be short-lived and the buying season hasn't started yet.
It reminds me early this year, when a friend of mine was jumping up and down, boasting to me that he'd bought BHP at $34.50 in February this year… It was $31 yesterday.
That's the sort of thing I'm talking about. How cheap and how far the market will fall, no one really knows.
I'm personally looking to January/February of 2009 to see some serious consolidation before I enter into this crazy market.
At the moment, all I see is panic, irrational behavior, confusion, volatility.
Good if you're a trader. In and out on the same day.
But if you want to build long-term wealth in the equity market then I think patience is in order.