Loss of Trust and the Impact on Small Business
Saturday, October 4th, 2008 Posted in Management, economy | No Comments »Markets are tumbling. Numbers are crumbling. And everybody is running for the exits thanks to a whopper of an economic crisis that’s gone global from its U.S. birthplace.The complexities of the problem are mind-boggling even to experienced, studied economists so, understanding the minutia of this economic tsunami is far beyond my skill set. Even the highest level officials in Washington admit that they don’t know how to solve the problem.
When asked if this Congressional buy-out of garbage paper generated by the likes of Goldman, AIG, Fannie and Freddie would solve the problem, not even the U.S. Secretary of the Treasury knows. He was asked if this is “the last wrench in the tool box” by Senator Chris Dodd (D,CT), head of the Congressional Subcommittee on Banking. The Treasury Secretary replied that, “Yes, it is the last wrench.” Dodd, mildly shocked, asked, “Well, what if it doesn’t work?”
The Treasury Secretary of the U.S. stated simply, “It has to work.” Hardly an answer that fills me with the warm fuzzies. If the U.S. Secretary of the Treasury doesn’t have a Plan B, C, D right on down the line, I’m buying gold and burying it. the economic world is on the verge of collapse. Or is it?
Small Businesses Feeling the Credit Freeze
Just last week I ran across an article in the New York Times that exquisitely describes the problem, not in terms of numbers, predatory lending and failed mega-lenders like Bear-Sterns, AIG, Fannie Mae and Freddie Mac – all non-commercial lenders that have been pumping garbage paper into the sub-prime market. Why?
One word: greed. The Times piece explains the dual nature of the current “credit crunch” – the genesis of this domino effect we’re seeing in almost every market sector on a global scale. This isn’t a liquidity problem, even though the U.S. Congress is ready to pump up the world economy with an infusion of USD$750 billion that will now be loaded on to the backs of U.S. taxpayers.
The problem is one of perception – the perception of trust.
Read the whole article here
Will Fannie Mae and Freddie Mac Impact Australian Business Owners?
Wednesday, September 10th, 2008 Posted in Management, economy | No Comments »The big news is that the U.S. Fed took over Fannie Mae and Freddie Mac. These quasi-government agencies, publicly owned and actively traded, are market makers within the US housing sector, providing and guaranteeing mortgages. Both agencies made home ownership in America possible – the realization of the proverbial American Dream.
Unfortunately, the housing market in the U.S. is in the tank with existing home sales at their lowest levels in more than 20 years and property values in steep decline thanks to simple supply and demand. U.S. realtors like to see a two to three month inventory of properties, indicating an active market. Current inventories of existing homes are over 12 months in some portions of the U.S. – especially the high-priced east and west coasts.
Fannie Mae lost $14 billion in the past 12 months, leaving bondholders and shareholders wondering if their positions were secure. This seriously depressed world markets because Fannie Mae and Freddie Mac were always solid financials – until the U.S. housing bubble burst in 2005. Prices have dropped 30% in the Las Vegas area and across America’s expanding Sun Belt alone.
The Feds to the Rescue
Well, fear not shareholders and bond holders. Your paper is safe. This past weekend, the U.S. federal government took over the operation of these two lending giants, and thus guarantees all of that outstanding paper.
Read the rest of this article here.
Reserve Bank’s Minutes: More cheaper money to come
Saturday, September 6th, 2008 Posted in Management, economy | No Comments »
After working my way through the minutes of the Reserve Bank’s August get-together it became obvious that money was about to get cheaper in Australia - so the September rate cut was no surprise. That’s the good news for Australian borrowers.
But it also means the Australian dollar weakens against other world currencies – especially the U.S. dollar that’s been firming up in recent months. A weakening Australian dollar translates into lower revenues for businesses marketing goods and services overseas.
Central bank board members stated in their report that, “ Given there had been a significant change in borrowing behaviours, confidence was weaker, asset prices had declined and slower overall growth was in prospect, tighter financial conditions were not warranted.” With the cash rate at its 12-year high of 7.25%, I think the Reserve is markedly understating the case.
Many of my clients have been forced to delay plans for expansion and upgrade due to the high cost of borrowing in Australia. Of course, we all function in a world economy that’s been decelerating for about a year now.
The American Federal Reserve Bank has indicated in the notes of its last meeting, that we shouldn’t expect further declines in rates on American dollars. With the U.S. dollar gaining strength against the Euro and other currencies, Fed Chair, Ben Bernanke sees no reason to lower the cost of borrowing in the States, despite the continued real estate meltdown across the U.S. where many homeowners live in homes worth less than the outstanding mortgage – if they can stay in their homes at all.
What does all this mean for small business owners?
Don’t borrow yet. Expect another rate cut in the next couple of months.
What the US dollar means to Australian companies
Saturday, July 19th, 2008 Posted in Management, economy | No Comments »Like most Australian business people I keep a close watch on the A$ - US$ exchange rate.
We’ve seen the American dollar take a beating in foreign exchange markets around the world so how does this work to the benefit of Australian businesses – especially those doing business in the US?
First let’s look at the local benefits.
The Price of Commodities
The cost of raw materials is measured in US dollars. The cost of a barrel of oil, for example, is measured in US dollars. So, as the dollar shrinks in value, the cost of those raw materials – everything from pork bellies to petrol will continue to increase in price.
Small companies that rely on raw materials can expect to see higher prices, not simply because of rising demand (the increase in the price of a barrel of oil is not driven by supply and demand – demand for oil in the US has dropped in recent months), but expect to see the cost of goods increase as the dollar continues to weaken against most foreign currencies, including our own dollar.
The Cost of Doing Business With US Companies
Our Australian dollars grow in value against the US dollar so we get a bigger bang for our buck when converting Australian into US dollars. However, what happens if the Federal Reserve Bank moves in to shore up the US dollar? Will that help the Australian economy? Not in the least. Take a look at the US stock market reaction to the Fed propping up Freddie and Fannie (Mac, that is).
Buying US Debt
Wars in Iraq and Afghanistan, the mortgage meltdown and the uncertainty of who the next US president will be (the race between Obama and McCain is still too close to call) have all taken down the US dollar.
Consider the Euro – one of the most important currencies on the world market. On July 11, 2008, 0.62901 € bought $1.00 USD. No wonder Europeans are flocking to the US this year. It’s almost a bargain. But before you fly off to LA for a little shopping spree, expect to see changes in the coming months.
Ben Bernanke, Fed Chair, has already indicated that rate cuts for the US dollar are in stalled mode and the bank buzz is that the Fed is actually planning to raise interest rates. This, will of course, prop up the dollar’s value by making borrowing more expensive. But it’s going to have a negative effect on American consumers with adjustable rate mortgages and credit cards. US dollars become more expensive, Americans spend less. Want proof?
Petrol consumption in the US dropped 11% since the price per gallon topped US$4.00. So, as money becomes more expensive, Americans spend less on non-essentials, and that’s NOT good for Australian businesses that export goods and services to the States.
And, as the world economy sees the US take action (as politically painful as it will most certainly be for the next US president) to prop up the American dollar, we should see commodities actually drop in price – deflation at the expense of the American consumer.
Your Bottom Line
If you’re an Australian business owner, this is one of those good news-bad news scenarios. If your business base is almost exclusively Australian, you’ll see improved margins as commodity prices stabilize with the stronger dollar. Of course, this assumes your business purchases raw materials on world exchanges.
On the other hand, if you export services or goods to US consumers, expect to see a pullback in consumer spending in the US. Heating oil prices in the US have almost doubled and Americans will be spending whatever earnings they bring in on heating their homes, driving to work and putting food on the table.
This week’s rise in the US stock market doesn’t hide the fact that the US is in what prognosticators call a “technical recession.” I wonder how American homeowners facing foreclosure feel.
It’s not a technical recession when you’re about to lose your home.
