For many people from the general population right through to the highest levels of government there are a lot of questions and a lot of hand wringing over the economy these days.It is not without good reason.For starters governments are often blamed for shifting economic conditions; something that is debatable at the best of times.So let’s start with a look at what has been happening.
Why are the stock markets so important?To get a grip on this we need to understand that our TSE is a follower board.It generally follows the NYSE for gains and losses.In the very short term it may not match it exactly but over the longer term its performance is very similar.With that understanding, one needs to understand that businesses frequently rely on stocks for their short term liquidity or operating capital.The money made from selling the stock in their company is used to finance any number of activities of the company.Obviously, the more a stock is worth the more money the company makes.It is for this very reason that Securities and Exchange Commissions have rules about insider trading.It prevents a company or its employees from artificially inflating the value of its stock or buying or selling on information that isn’t public.
So how does a company ensure its stock value remains strong?First of all through positive performance in profitability.To do this the company issues forecasts of its anticipated performance in the short and medium term.These forecasts are used by investors as a guideline for stock purchases.If a company fails to meet these objectives then it comes under scrutiny, and with good reason.Management and financial planning is questioned.
In a nutshell this is how the stock markets are SUPPOSED to work.So what has gone wrong?
The stock markets became a big casino for investors who bought and sold on speculation; often in the very short term.If enough money was invested at the beginning of trading, the floor traders and brokerages would begin to pay more for that stock because it became in short supply and as a consequence more valuable.At the end of the day they would cash in by selling and make a tidy profit for their efforts.This means that stocks were no longer representative of a company’s true value but what people were willing to pay and gamble.Then came the hedge funds.
The hedge funds were investors who came from “brokerages” with large amounts of cash.It was pooled money from investors in those funds.Usually the investors were banks and other financial institutions.Their traders would “reserve” a certain stock speculating that it would drop in value, then at the end of the reserve period would have to buy it.If the stock didn’t drop, the fund paid what it was worth.However, the idea was that it would drop; they would buy and then wait for it to rise in value so they could sell it off and make a profit.So, if a stock were to rise before they were forced to pay for it they could then “sell” the stock for a tidy profit and for not one cent of their own money.This is called margin buying.
What we are seeing is pure greed on an unprecedented scale.Now this is where the catch comes for all these corporate investors.They buy and sell securities.Many of these securities are mortgage accounts; the same mortgages in the US subprime crisis.Banks and financial institutions bought these securities thinking they were solid financial investment.Normally they would be, but in this case greed hit the streets and everyone was making plenty of money on bad investments; mortgages to high risk clients.These mortgages were being bundled as securities and sold around the world.The problem is that when the mortgages began to come due and not be met, the properties went on the market.The securities became worthless as more and more of these mortgages failed.This posed large problems for the financial institutions who could no longer sell them for cash to finance their operations.Instead they were paying out money.
Enter the Central Banks.They now provide money through loans to these same banks and in turn the financial institutions who created this situation so they can stay in business.In the US the collateral for those loans; you guessed it, the bad securities.
So now we have companies whose true value is not reflected in the price of their stock.We have financial institutions taking losses on their investments.We have shareholders everywhere wondering what will happen to their investments due to dwindling stock prices and dividends.
In addition to the stock markets we also have Commodities Markets where consumables are bought and sold to the highest bidder.This is a supply and demand market where traders are acting on the future values of commodities.Again we have those same players from the hedge funds investing, so it is in their best interests to see the price of commodities like energy to continually rise.One of the great concerns here for the consumer is the reduction of size of the markets through acquisition and merger.There are many less companies in the energy sector now than 25 years ago.
With less credit available. companies are now finding it more difficult to borrow money for their operations so growth is limited or shrinking.People are losing jobs and companies are going into bankruptcy.This is called recession.
How did it get to this stage?The answer to that is in a single word.Deregulation.The thinking is that if it is good for business, then it is good for the economy and the people.This concept is called Laissez Faire economics.It has never worked throughout history simply because of greed.
Governments in North America removed trade barriers and many, many of the regulations governing business operations when NAFTA was put in place.Part of this agreement was that government would not interfere in the operation of business allowing for free market forces to work on their own.Specific trade regulations and tariffs were torn down in the name of free trade.NAFTA also prevents government from interfering in the commodities markets in many areas.These are often the source of trade disputes as one group accuses another or a government of artificially manipulating prices through subsidies.
Now, how does all of this come home to you the consumer?
Let’s look at the stocks first.Pension funds invest in the stock market for the long term.If the stock market goes down, so too does the value of the pension fund meaning there is less money for people at retirement.Your funds investments also shrink so your personal worth goes down.
As it has already been pointed out, companies are sitting on uncertainty meaning job losses and increased unemployment.This puts a larger strain on the social system because of the money it must payout but also the reduction of money coming in not only from payroll contributions but also from… stock market investments and dividends.
This reduced credit availability means fewer big ticket items and consumer goods are being purchased because of this and the uncertainty of the job sector.All of this and more comes with an increasingly more costly commodities market.In other words, the price we pay for energy keeps going up; not only for the consumer but for business.
It is a recipe for economic slowdown.Is there a solution?That is a difficult question that no one can answer but it will take a concentrated effort at all levels to address.
What can you do?There are some things that you can do to ease the impact of uncertainty. These economic fluctuations have occurred throughout history and always come back over time.
First, look after your savings.Talk to your financial advisors to ensure that your money is in as safe a place as can be.You may have to give up the growth fund with the 10% annual return for a GIC or a high interest bank account with only a couple of percent annual growth.
Taking care of your debt is also a good idea.Avoid taking on any additional credit responsibilities.This doesn’t mean you should do so at the expense of your savings, but you should try to reduce it as much as possible.Keep your credit cards to minimum balances and pay them off monthly.Look into changing them for cards with low or no cost balance transfers.
Examine your mortgage options.With an economic slowdown, interest rates fall as the central bank tries to spur the economy by making credit more easily available.It frees up credit to the banks who free it up to you and to business.Look at short term open variable mortgages or equity based lines of credit.Renegotiate your credit/loan arrangements wherever possible.
Try to stabilize your own monthly costs.While an economic slowdown domestically may want to drive energy prices down, other countries such as China and India have increasing demands for energy. Oil costs could remain high or even get pushed up.Additionally, many of our own electricity generators are looking into nuclear energy to meet future needs as well as to meet limits on carbon emissions that are sure to come.These investments are expensive and the costs will certainly be passed on.You could look into a long term pricing plan with your provider.
Economic slowdowns or recessions are common.Protecting yourself from financial harm is extremely important.Look after your money, it is yours after all.Just dont put it under your mattress.