How To Tell When The Economy's Getting Better
Rick Newman
Friday February 13, 2009, 8:19 am EST
The stimulus package is finally finished. President Obama is promising a tough new bank-rescue plan to boost lending and limit outrageous pay. Troubled homeowners may even get some relief. All told, the government could spend more than $3 trillion to help end the recession.
So now all we have to do is sit back and watch the economy grow like a beanstalk, right?
If only. One risk of the unprecedented government intervention is that it won't do all that much to hasten the end of the recession. Another risk is that consumers, expecting a magic-bullet fix, could fail to prepare for tough times that still lie ahead. "This is going to be a difficult year," Obama himself said at his first press conference. "If we get things right, then starting next year we can start seeing some significant improvement."
[Read 4 myths about Obama's bank-rescue plan.]
Next year? Afraid so. Most economists agree that it will take that long, at least, before the biggest problems - mounting layoffs, the housing bust, the banking crisis, and plunging confidence - start to turn around. Here's what to watch for to tell whether the stimulus package is actually working, and when the economy might start to mend.
An improvement in the unemployment rate.
Of all the economic indicators, this is probably the single most important. But you might want to avert your eyes for awhile.
Obama has talked about creating 3 to 4 million new jobs, and if the stimulus plan works, it might come close to that - over several years, combined. But it's almost certain that through this summer and into the fall, there will be a net job loss, not a gain. Most economists expect the unemployment rate, now 7.6 percent, to hit at least 9 percent by the end of this year. That represents up to 2 million more lost jobs. Many of those cuts are already in the works - just follow the recent layoff announcements from companies like Caterpillar (20,000), Boeing (10,000), SprintNextel (8,000) and Home Depot (7,000). But the pink slips haven't all gone out yet, so the layoffs haven't shows up in the official numbers.
[See 15 companies that might not survive 2009.]
The first sign of an improvement will be...corporate silence. As in no more draconian job-cut announcements. Once that happens (or doesn't), the unemployment rate will plateau. Then, companies might start hiring again, and a couple of months after that, the unemployment rate will start to fall. Three straight monthly declines would be a good sign that the economy is really on the rebound. That probably won't happen until 2010.
If you're wondering what's the point of the stimulus package if it won't do much to help workers in 2009, look to 2010. And 2011. That's where the plan will make a bigger difference. Moody's Economy.com estimates that by the middle of 2010, the unemployment rate will start to drift back toward 8.5 percent. But without any stimulus plan, it would have hit 11 percent. Viva la government.
More stable home prices.
The real estate boom and bust is what torpedoed the economy in the first place, and the economy won't start to recover until the housing bubble fully deflates. The good news is that housing prices have already been falling for more than two years, with prices down more than 20 percent nationwide. And we might be more than halfway toward the bottom: Moody's Economy.com predicts that housing prices should stop falling nationwide by the second half of 2009. Overall, the forecasting firm predicts a 30 percent drop in home values from the peak values of 2006.
[See why the feds rescue banks, not homeowners.]
Others think it will take longer, but whenever it happens, an end to the housing slide will mark an important turning point. Hardly anybody thinks that prices will shoot back up or there will be another buying binge. But a boomlet, maybe. Once prices stabilize, buyers will stop worrying that they could be purchasing a costly asset that's falling in value. As they buy, other kinds of consumer activity - like shopping for furniture and kitchen upgrades - will follow. Slowly.
A consumer confidence rebound.
Since consumer confidence closely tracks the job market, the dismal numbers of the last few months probably won't improve by much until late in 2009, or 2010. Homeowners have lost more than $3 trillion worth of value in their homes over the last three years, and investors have seen their stock portfolios shredded. So even people who feel secure in their jobs are dour.
[See how Wall Street continues to doom itself.]
A turnaround in the housing or stock markets would break the gloom and help some people feel better off. So would easier lending by banks, which would help solvent consumers buy a few more cars, appliances, and other goods. But consumer confidence won't really start to improve until workers start to feel more secure about their jobs and income. Think 2010.
A less volatile stock market.
Every investor hopes that beleaguered stocks will come roaring back in 2009 and regain some of the ground lost since the peak in 2007 - when the S&P 500 stock index was nearly 50 percent higher than it is today. But a better indicator of economic health would be a steady recovery - without the manic swings that seem to come from every hint of undisclosed trouble at some big bank or rumor of new government intervention.
The stock market is harder to predict than most other parts of the economy, since it's deeply dependent on psychology and other intangibles. The market could bounce back by mid-summer. Or it could remain stagnant for years, like it did for most of the 1970s. The experts can't be any more sure than you or I.
[See why "Wall Street talent" is an oxymoron.]
One hopeful sign would be less market sensitivity to events in Washington. The biggest market mover these days is the federal government, since fortunes stand to be won or lost - mostly lost - depending on how deeply the government intervenes in the activities of megabanks like Citigroup and Bank of America, and how much federal spending will be available to stand in for plunging consumer spending. The markets will be back to their old selves when earnings reports, IPO announcements, and M&A deals are what send stocks up or down, and utterings from Washington amount to little more than an echo. Since the government seems to be the only institution spending money so far in 2009, it could be awhile before Wall Street returns to form.
Economic growth turns positive.
By economic standards, the current downturn has already lasted longer than the typical post-World War II recession. Yet there's still a lot more pain to endure. A recent survey of economists by the Wall Street Journal found that the majority think the economy will continue to contract for the first half of 2009, with growth turning positive in the second half of the year. That outlook is much worse than a few months ago, and even when growth turns positive the economy could sputter along without many new jobs or bold moves in the private sector.
[See why lousy unemployment numbers are no surprise.]
It's always possible that impatient consumers will get sick of holding back, and start running up their credit card balances once again (if the banks let them). The bank-rescue plan might spur more lending than expected, goosing businesses and consumers alike. Or the stimulus plan might spread goodwill and optimism throughout the land. If you get the urge to spend, that might be the strongest indicator of all. Call the economists.
http://finance.yahoo.com/news/How-To-Tell-When-The-Economys-usnews-14351762.html
Also read:
Best of Flowchart
How to Tell if You're Rich
Greenspan vs. Buffett
4 Myths About Free Markets—and Their Demise
The Need for Greed
5 Upsides of $4 Gas
Economic Recession, Consumer Depression
Why More Saudi Oil Could Harm American Consumers
Economic Upswing? Ask Again in a Year
What Springsteen Can Teach CEOs
6 Myths About Oil Speculators
Sunday, 15 February 2009
Saturday, 14 February 2009
Adam Smith: The Father Of Economics
Adam Smith: The Father Of Economics
by Lisa Smith (Contact Author Biography)
Adam Smith is often touted as the world's first free-market capitalist. While that designation is probably a bit overstated, Smith's place in history as the father of modern economics and a major proponent of laissez-faire economic policies is quite secure. Read on to learn about how this Scottish philosopher argued against mercantilism to become the father of modern free trade.
Early Life
The recorded history of Smith's life begins on June 16, 1723, at his baptism in Scotland. His birthday is undocumented. Smith attended the University of Glasgow at age 14, later transferring to Balliol College in Oxford, England. He spent years teaching and tutoring, publishing some of his lectures in "The Theory of Moral Sentiments" in 1759. The material was well received and laid the foundation for the publication of "An Inquiry Into the Nature and Causes of the Wealth of Nations" (1776), which would cement his place in history.
Invisible Hand Theory
"An Inquiry Into the Nature and Causes of the Wealth of Nations" documented the industrial and development in Europe. While critics note that Smith didn't invent many of the ideas that he wrote about, he was the first person to compile and publish them in a format designed to explain them to the average reader of the day. As a result, he is responsible for popularizing many of the ideas that underpin the school of thought that became known as classical economics. (Learn economics principles such as supply and demand, elasticity, utility and more in our tutorial, Economics Basics.)
Other economists built on Smith's work to solidify classical economic theory, which would become the dominant school of economic thoughtthrough the Great Depression. (Learn more about the causes of this global economic crisis in What Caused The Great Depression?)
Laissez-faire philosophies, such as minimizing the role of government intervention and taxation in the free markets, and the idea that an "invisible hand" guides supply and demand are among the key ideas Smith's writing is responsible for promoting. These ideas reflect the concept that each person, by looking out for him- or herself, inadvertently helps to create the best outcome for all. "It is not from the benevolence of the butcher, the brewer, or the baker, that we can expect our dinner, but from their regard to their own interest," Smith wrote. (Read about one implementation of Smith's "invisible hand" in The Rise Of The Modern Investment Bank.)
By selling products that people want to buy, the butcher, brewer and baker hope to make money. If they are effective in meeting the needs of their customers, they will enjoy the financial rewards. While they are engaging in their enterprises for the purpose of earning money, they are also providing products that people want. Such a system, Smith argued, creates wealth not just for the butcher, brewer and baker, but for the nation as whole when that nation is populated with citizens working productively to better themselves and address their financial needs. Similarly, Smith noted that a man would invest his wealth in the enterprise most likely to help him earn the highest return for a given level of risk. (Read more in Risk And Diversification: The Risk-Reward Tradeoff.)
Published Philosophy
"The Wealth of Nations" is a massive work consisting of two volumes divided into five books. The ideas it promoted generated international attention and helped to drive the move from land-based wealth to wealth created by assembly-line production methods driven by division of labor. One example Smith cited involved the labor required to make a pin. One man undertaking the 18 steps required to complete the tasks could make but a handful of pins each week, but if the 18 tasks were completed in assembly-line fashion by 10 men, production would jump to thousands of pins per week. (Read more about this concept in What Are Economies Of Scale?)
He applied a similar logic regarding wealth generation and efficiency to British rule over the American colonies. According to his calculations, the cost of maintaining the colonies was simply not worth the return on investment. Interestingly, while much of the philosophy behind Smith's work is based on self-interest and maximizing return, his first published work, "The Theory of Moral Sentiments", was a treatise about how human communication relies on sympathy. While this may seem to be at odds with his economic views of individuals working to better themselves with no regard for the common good, the idea of an invisible hand that helps everyone through the labor of self-centered individuals offsets this seeming contradiction.
Today, the invisible hand theory is often presented in terms of a natural phenomenon that guides free markets and capitalism in the direction of efficiency, through supply and demand and competition for scarce resources, rather than as something that results in the well-being of individuals. (Read more about the evolution of our current economic system in History Of Capitalism.)
Still Relevant
The ideas that became associated with Smith not only became the foundation of the classical school of economics, but also gained him a place in history as the father of economics. His work served as the basis for other lines of inquiry into the field of economics, including ideas that built on his work and those that differed. Smith died on July 19, 1790, but the ideas he promoted live on. In 2007, the Bank of England even placed his image on the £20 note.
For further reading see, How Influential Economists Changed Our History and The History Of Economic Thought.
by Lisa Smith, (Contact Author Biography)
http://www.investopedia.com/articles/economics/08/adam-smith-economics.asp
Related Links
Tablets To 1040s: How Taxes Began - Ever dream of a world without tax? It existed - 3,000 years ago.
How Influential Economists Changed Our History - Find out how these five groundbreaking thinkers laid our financial foundations.
History Of Capitalism - Find out how the economic system we now use was created.
The History Of Economic Thought - Discover the theories that shaped the way we've come to understand economics.
What Is International Trade? - Everyone's talking about globalization, but what is it and why do some oppose it?
What Is The World Trade Organization? - The WTO sets the global rules of trade. But what exactly does it do and why do so many oppose it?
Macroeconomic Analysis - From unemployment and inflation to government policy, learn what macroeconomics measures and how it affects everyone.
What is the candle maker's petition?
by Lisa Smith (Contact Author Biography)
Adam Smith is often touted as the world's first free-market capitalist. While that designation is probably a bit overstated, Smith's place in history as the father of modern economics and a major proponent of laissez-faire economic policies is quite secure. Read on to learn about how this Scottish philosopher argued against mercantilism to become the father of modern free trade.
Early Life
The recorded history of Smith's life begins on June 16, 1723, at his baptism in Scotland. His birthday is undocumented. Smith attended the University of Glasgow at age 14, later transferring to Balliol College in Oxford, England. He spent years teaching and tutoring, publishing some of his lectures in "The Theory of Moral Sentiments" in 1759. The material was well received and laid the foundation for the publication of "An Inquiry Into the Nature and Causes of the Wealth of Nations" (1776), which would cement his place in history.
Invisible Hand Theory
"An Inquiry Into the Nature and Causes of the Wealth of Nations" documented the industrial and development in Europe. While critics note that Smith didn't invent many of the ideas that he wrote about, he was the first person to compile and publish them in a format designed to explain them to the average reader of the day. As a result, he is responsible for popularizing many of the ideas that underpin the school of thought that became known as classical economics. (Learn economics principles such as supply and demand, elasticity, utility and more in our tutorial, Economics Basics.)
Other economists built on Smith's work to solidify classical economic theory, which would become the dominant school of economic thoughtthrough the Great Depression. (Learn more about the causes of this global economic crisis in What Caused The Great Depression?)
Laissez-faire philosophies, such as minimizing the role of government intervention and taxation in the free markets, and the idea that an "invisible hand" guides supply and demand are among the key ideas Smith's writing is responsible for promoting. These ideas reflect the concept that each person, by looking out for him- or herself, inadvertently helps to create the best outcome for all. "It is not from the benevolence of the butcher, the brewer, or the baker, that we can expect our dinner, but from their regard to their own interest," Smith wrote. (Read about one implementation of Smith's "invisible hand" in The Rise Of The Modern Investment Bank.)
By selling products that people want to buy, the butcher, brewer and baker hope to make money. If they are effective in meeting the needs of their customers, they will enjoy the financial rewards. While they are engaging in their enterprises for the purpose of earning money, they are also providing products that people want. Such a system, Smith argued, creates wealth not just for the butcher, brewer and baker, but for the nation as whole when that nation is populated with citizens working productively to better themselves and address their financial needs. Similarly, Smith noted that a man would invest his wealth in the enterprise most likely to help him earn the highest return for a given level of risk. (Read more in Risk And Diversification: The Risk-Reward Tradeoff.)
Published Philosophy
"The Wealth of Nations" is a massive work consisting of two volumes divided into five books. The ideas it promoted generated international attention and helped to drive the move from land-based wealth to wealth created by assembly-line production methods driven by division of labor. One example Smith cited involved the labor required to make a pin. One man undertaking the 18 steps required to complete the tasks could make but a handful of pins each week, but if the 18 tasks were completed in assembly-line fashion by 10 men, production would jump to thousands of pins per week. (Read more about this concept in What Are Economies Of Scale?)
He applied a similar logic regarding wealth generation and efficiency to British rule over the American colonies. According to his calculations, the cost of maintaining the colonies was simply not worth the return on investment. Interestingly, while much of the philosophy behind Smith's work is based on self-interest and maximizing return, his first published work, "The Theory of Moral Sentiments", was a treatise about how human communication relies on sympathy. While this may seem to be at odds with his economic views of individuals working to better themselves with no regard for the common good, the idea of an invisible hand that helps everyone through the labor of self-centered individuals offsets this seeming contradiction.
Today, the invisible hand theory is often presented in terms of a natural phenomenon that guides free markets and capitalism in the direction of efficiency, through supply and demand and competition for scarce resources, rather than as something that results in the well-being of individuals. (Read more about the evolution of our current economic system in History Of Capitalism.)
Still Relevant
The ideas that became associated with Smith not only became the foundation of the classical school of economics, but also gained him a place in history as the father of economics. His work served as the basis for other lines of inquiry into the field of economics, including ideas that built on his work and those that differed. Smith died on July 19, 1790, but the ideas he promoted live on. In 2007, the Bank of England even placed his image on the £20 note.
For further reading see, How Influential Economists Changed Our History and The History Of Economic Thought.
by Lisa Smith, (Contact Author Biography)
http://www.investopedia.com/articles/economics/08/adam-smith-economics.asp
Related Links
Tablets To 1040s: How Taxes Began - Ever dream of a world without tax? It existed - 3,000 years ago.
How Influential Economists Changed Our History - Find out how these five groundbreaking thinkers laid our financial foundations.
History Of Capitalism - Find out how the economic system we now use was created.
The History Of Economic Thought - Discover the theories that shaped the way we've come to understand economics.
What Is International Trade? - Everyone's talking about globalization, but what is it and why do some oppose it?
What Is The World Trade Organization? - The WTO sets the global rules of trade. But what exactly does it do and why do so many oppose it?
Macroeconomic Analysis - From unemployment and inflation to government policy, learn what macroeconomics measures and how it affects everyone.
What is the candle maker's petition?
Giants Of Finance: John Maynard Keynes
Giants Of Finance: John Maynard Keynes
by Andrew Beattie (Contact Author Biography)
If ever there was a rock star of economics, it would be John Maynard Keynes. Keynes shares his birthday, June 5th, with Adam Smith and he was born in 1883, the year communist founder Karl Marx died. With these auspicious signs, Keynes seemed to be destined to become a powerful free market force when the world was facing a serious choice between communism or capitalism. Instead, he offered a third way, which turned the world of economics upside down. In this article, we'll examine Keynes' doctrine and its impact. (To read about Adam Smith, be sure to check out Adam Smith: The Father Of Economics.)
The Cambridge Seer
Keynes grew up in a privileged home in England. He was the son of a Cambridge economics professor and studied math at university. After two years in the civil service, Keynes joined the staff at Cambridge in 1909. He was never formally trained in economics, but over the following decades he quickly became a central figure. His fame initially grew from accurately predicting the effects of political and economic events. His first prediction was a critique of the reparation payments that were levied against the defeated Germany after WWI. Keynes rightly pointed out that having to pay out the cost of the entire war would force Germany into hyperinflation and have negative consequences all over Europe. He followed this up by predicting that a return to the prewar fixed exchange rate sought by the chancellor of the exchequer, Winston Churchill, would choke off economic growth and reduce real wages. The prewar exchange rate was overvalued in the postwar damage of 1925, and the attempt to lock it in did more damage than good. On both counts, Keynes was proved right. (For related reading, see War's Influence On Wall Street.)
A Big Miss, But a Great Rebound
Keynes was not a theoretical economist: he was an active trader in stocks and futures. He benefited hugely from the Roaring '20s and was well on his way to becoming the richest economist in history when the crash of 1929 wiped out three-quarters of his wealth. Keynes hadn't predicted this crash, and was among those who believed a negative economic event was impossible with the Federal Reserve watching over the U.S. economy. Although blindsided by the crash, the adaptable Keynes did manage to rebuild his fortune by buying up stocks in the fire sale following the crash. His contrarian investing left him with a fortune of around $30 million at his death, making him the second richest economist in history. (For more on this period in economic history, check out What Caused The Great Depression? and Crashes: The Great Depression.)
The General Theory
Many others fared far worse in the crash and the resulting depression, however, and this is where Keynes' economic contributions began. Keynes believed that free market capitalism was inherently unstable and that it needed to be reformulated both to fight off Marxism and the Great Depression. His ideas were summed up in his 1936 book, "The General Theory of Employment, Interest and Money". Among other things, Keynes claimed that classical economics - the invisible hand of Adam Smith - only applied in cases of full employment. In all other cases, his "General Theory" held sway. (Read Can Keynesian Economics Reduce Boom-Bust Cycles? to learn more.)
Inside the General Theory
Keynes' "General Theory" will forever be remembered for giving governments a central role in economics. Although ostensibly written to save capitalism from sliding into the central planning of Marxism, Keynes opened the door for government to become the principal agent in the economy. Simply put, Keynes saw deficit financing, public expenditures, taxation and consumption as more important than saving, private investment, balanced government budgets and low taxes (classical economic virtues). Keynes believed that an interventionist government could fix a depression by spending its way out and forcing its citizens to do the same, while smoothing futures cycles with various macroeconomic techniques.
Holes in the Ground
Keynes backed up his theory by adding government expenditures to the overall national output. This was controversial from the start because the government doesn't actually save or invest as business and private business do, but raises money through mandatory taxes or debt issues (that are paid back by tax revenues). Still, by adding government to the equation, Keynes showed that government spending - even digging holes and filling them in - would stimulate the economy when businesses and individual were tightening budgets. His ideas heavily influenced the New Deal and the welfare state that grew up in the postwar era. (To learn the differences between supply-side and Keynesian economics, read Understanding Supply-Side Economics.)
The War on Saving and Private Investing
Keynes believed that consumption was the key to recovery and savings were the chains holding the economy down. In his models, private savings are subtracted from the private investment part of the national output equation, making government investment appear to be the better solution. Only a big government that was spending on behalf of the people would be able to guarantee full employment and economic prosperity. Even when forced to rework his model to allow for some private investment, he argued that it wasn't as efficient as government spending because private investors would be less likely to undertake/overpay for unnecessary works in hard economic times.
Macroeconomics: Magnifying and Simplifying
It is easy to see why governments were so quick to adopt Keynesian thinking. It gave politicians unlimited funds for pet projects and deficit spending that was very useful in buying votes. Government contracts quickly became synonymous with free money for any company that landed it, regardless of whether the project was brought in on time and on budget. The problem was that Keynesian thinking made huge assumptions that weren't backed by any real world evidence. For example, Keynes assumed interest rates would be constant no matter how much or how little capital was available for private lending. This allowed him to show that savings hurt economic growth - even though empirical evidence pointed to the opposite effect. To make this more obvious, he applied a multiplier to government spending but neglected to add a similar one to private savings. Oversimplification can be a useful tool in economics, but the more simplifying assumptions are used, the less real-world application a theory will have.
The Theory Hits a Rut
Keynes died in 1946. In addition to "The General Theory", he was part of a panel that worked on the Bretton Woods Agreement and the International Monetary Fund (IMF). His theory continued to grow in popularity and caught on with the public. After his death, however, critics began attacking both the macroeconomic view and the short-term aims of Keynesian thinking. Forcing spending, they argued, might keep a worker employed for another week, but what happens after that? Eventually the money runs out and the government must print more, leading to inflation. This is exactly what happened in the stagflation of the 1970s. Stagflation was impossible within Keynes' theory, but it happened nonetheless. With government spending crowding out private investment and inflation reducing real wages, Keynes' critics gained more ears. It ultimately fell upon Milton Friedman to reverse the Keynesian formulation of capitalism and reestablish free market principles in the U.S. (Find out what factors contribute to a slowing economy, in Examining Stagflation and Stagflation, 1970s Style.)
Keynes for the Ages
Although no longer held in the esteem that it once was, Keynesian economics is far from dead. When you see consumer spending or confidence figures, you are seeing an outgrowth of Keynesian economics. The stimulus checks the U.S. government handed out to citizens in 2008 also represent the idea that consumers can buy flat-screen TVs or otherwise spend the economy out of trouble. Keynesian thinking will never completely leave the media or the government. For the media, many of the simplifications are easy to grasp and work into a short segment. For the government, the Keynesian assertion that it knows how to spend taxpayer money better than the taxpayers is a bonus. (To learn more about the stimulus checks, read How do government issued stimulus checks improve the economy?)
Conclusion
Despite these undesirable consequences, Keynes' work is useful. It helps strengthen the free market theory by opposition, as we can see in the work of Milton Friedman and the Chicago School economists that followed Keynes. Blind adherence to the gospel of Adam Smith is dangerous in its own way. The Keynesian formulation forced free market economics to become a more comprehensive theory, and the persistent and popular echoes of Keynesian thinking in every economic crisis caused free market economics to develop in response. Friedman once said, "We are all Keynesians now." But the full quote was, "In one sense we are all Keynesians now; in another, no one is a Keynesian any longer. We all use the Keynesian language and apparatus; none of us any longer accepts the initial Keynesian conclusions."
by Andrew Beattie, (Contact Author Biography)
Andrew Beattie is a freelance writer and self-educated investor. He worked for Investopedia as an editor and staff writer before moving to Japan in 2003. Andrew still lives in Japan with his wife, Rie. Since leaving Investopedia, he has continued to study and write about the financial world's tics and charms. Although his interests have been necessarily broad while learning and writing at the same time, perennial favorites include economic history, index funds, Warren Buffett and personal finance. He may also be the only financial writer who can claim to have read "The Encyclopedia of Business and Finance" cover to cover.
http://www.investopedia.com/articles/economics/09/john-maynard-keynes-keynesian.asp?partner=basics2
by Andrew Beattie (Contact Author Biography)
If ever there was a rock star of economics, it would be John Maynard Keynes. Keynes shares his birthday, June 5th, with Adam Smith and he was born in 1883, the year communist founder Karl Marx died. With these auspicious signs, Keynes seemed to be destined to become a powerful free market force when the world was facing a serious choice between communism or capitalism. Instead, he offered a third way, which turned the world of economics upside down. In this article, we'll examine Keynes' doctrine and its impact. (To read about Adam Smith, be sure to check out Adam Smith: The Father Of Economics.)
The Cambridge Seer
Keynes grew up in a privileged home in England. He was the son of a Cambridge economics professor and studied math at university. After two years in the civil service, Keynes joined the staff at Cambridge in 1909. He was never formally trained in economics, but over the following decades he quickly became a central figure. His fame initially grew from accurately predicting the effects of political and economic events. His first prediction was a critique of the reparation payments that were levied against the defeated Germany after WWI. Keynes rightly pointed out that having to pay out the cost of the entire war would force Germany into hyperinflation and have negative consequences all over Europe. He followed this up by predicting that a return to the prewar fixed exchange rate sought by the chancellor of the exchequer, Winston Churchill, would choke off economic growth and reduce real wages. The prewar exchange rate was overvalued in the postwar damage of 1925, and the attempt to lock it in did more damage than good. On both counts, Keynes was proved right. (For related reading, see War's Influence On Wall Street.)
A Big Miss, But a Great Rebound
Keynes was not a theoretical economist: he was an active trader in stocks and futures. He benefited hugely from the Roaring '20s and was well on his way to becoming the richest economist in history when the crash of 1929 wiped out three-quarters of his wealth. Keynes hadn't predicted this crash, and was among those who believed a negative economic event was impossible with the Federal Reserve watching over the U.S. economy. Although blindsided by the crash, the adaptable Keynes did manage to rebuild his fortune by buying up stocks in the fire sale following the crash. His contrarian investing left him with a fortune of around $30 million at his death, making him the second richest economist in history. (For more on this period in economic history, check out What Caused The Great Depression? and Crashes: The Great Depression.)
The General Theory
Many others fared far worse in the crash and the resulting depression, however, and this is where Keynes' economic contributions began. Keynes believed that free market capitalism was inherently unstable and that it needed to be reformulated both to fight off Marxism and the Great Depression. His ideas were summed up in his 1936 book, "The General Theory of Employment, Interest and Money". Among other things, Keynes claimed that classical economics - the invisible hand of Adam Smith - only applied in cases of full employment. In all other cases, his "General Theory" held sway. (Read Can Keynesian Economics Reduce Boom-Bust Cycles? to learn more.)
Inside the General Theory
Keynes' "General Theory" will forever be remembered for giving governments a central role in economics. Although ostensibly written to save capitalism from sliding into the central planning of Marxism, Keynes opened the door for government to become the principal agent in the economy. Simply put, Keynes saw deficit financing, public expenditures, taxation and consumption as more important than saving, private investment, balanced government budgets and low taxes (classical economic virtues). Keynes believed that an interventionist government could fix a depression by spending its way out and forcing its citizens to do the same, while smoothing futures cycles with various macroeconomic techniques.
Holes in the Ground
Keynes backed up his theory by adding government expenditures to the overall national output. This was controversial from the start because the government doesn't actually save or invest as business and private business do, but raises money through mandatory taxes or debt issues (that are paid back by tax revenues). Still, by adding government to the equation, Keynes showed that government spending - even digging holes and filling them in - would stimulate the economy when businesses and individual were tightening budgets. His ideas heavily influenced the New Deal and the welfare state that grew up in the postwar era. (To learn the differences between supply-side and Keynesian economics, read Understanding Supply-Side Economics.)
The War on Saving and Private Investing
Keynes believed that consumption was the key to recovery and savings were the chains holding the economy down. In his models, private savings are subtracted from the private investment part of the national output equation, making government investment appear to be the better solution. Only a big government that was spending on behalf of the people would be able to guarantee full employment and economic prosperity. Even when forced to rework his model to allow for some private investment, he argued that it wasn't as efficient as government spending because private investors would be less likely to undertake/overpay for unnecessary works in hard economic times.
Macroeconomics: Magnifying and Simplifying
It is easy to see why governments were so quick to adopt Keynesian thinking. It gave politicians unlimited funds for pet projects and deficit spending that was very useful in buying votes. Government contracts quickly became synonymous with free money for any company that landed it, regardless of whether the project was brought in on time and on budget. The problem was that Keynesian thinking made huge assumptions that weren't backed by any real world evidence. For example, Keynes assumed interest rates would be constant no matter how much or how little capital was available for private lending. This allowed him to show that savings hurt economic growth - even though empirical evidence pointed to the opposite effect. To make this more obvious, he applied a multiplier to government spending but neglected to add a similar one to private savings. Oversimplification can be a useful tool in economics, but the more simplifying assumptions are used, the less real-world application a theory will have.
The Theory Hits a Rut
Keynes died in 1946. In addition to "The General Theory", he was part of a panel that worked on the Bretton Woods Agreement and the International Monetary Fund (IMF). His theory continued to grow in popularity and caught on with the public. After his death, however, critics began attacking both the macroeconomic view and the short-term aims of Keynesian thinking. Forcing spending, they argued, might keep a worker employed for another week, but what happens after that? Eventually the money runs out and the government must print more, leading to inflation. This is exactly what happened in the stagflation of the 1970s. Stagflation was impossible within Keynes' theory, but it happened nonetheless. With government spending crowding out private investment and inflation reducing real wages, Keynes' critics gained more ears. It ultimately fell upon Milton Friedman to reverse the Keynesian formulation of capitalism and reestablish free market principles in the U.S. (Find out what factors contribute to a slowing economy, in Examining Stagflation and Stagflation, 1970s Style.)
Keynes for the Ages
Although no longer held in the esteem that it once was, Keynesian economics is far from dead. When you see consumer spending or confidence figures, you are seeing an outgrowth of Keynesian economics. The stimulus checks the U.S. government handed out to citizens in 2008 also represent the idea that consumers can buy flat-screen TVs or otherwise spend the economy out of trouble. Keynesian thinking will never completely leave the media or the government. For the media, many of the simplifications are easy to grasp and work into a short segment. For the government, the Keynesian assertion that it knows how to spend taxpayer money better than the taxpayers is a bonus. (To learn more about the stimulus checks, read How do government issued stimulus checks improve the economy?)
Conclusion
Despite these undesirable consequences, Keynes' work is useful. It helps strengthen the free market theory by opposition, as we can see in the work of Milton Friedman and the Chicago School economists that followed Keynes. Blind adherence to the gospel of Adam Smith is dangerous in its own way. The Keynesian formulation forced free market economics to become a more comprehensive theory, and the persistent and popular echoes of Keynesian thinking in every economic crisis caused free market economics to develop in response. Friedman once said, "We are all Keynesians now." But the full quote was, "In one sense we are all Keynesians now; in another, no one is a Keynesian any longer. We all use the Keynesian language and apparatus; none of us any longer accepts the initial Keynesian conclusions."
by Andrew Beattie, (Contact Author Biography)
Andrew Beattie is a freelance writer and self-educated investor. He worked for Investopedia as an editor and staff writer before moving to Japan in 2003. Andrew still lives in Japan with his wife, Rie. Since leaving Investopedia, he has continued to study and write about the financial world's tics and charms. Although his interests have been necessarily broad while learning and writing at the same time, perennial favorites include economic history, index funds, Warren Buffett and personal finance. He may also be the only financial writer who can claim to have read "The Encyclopedia of Business and Finance" cover to cover.
http://www.investopedia.com/articles/economics/09/john-maynard-keynes-keynesian.asp?partner=basics2
The Currency Market Information Edge
The Currency Market Information Edge
by Investopedia Staff, (Investopedia.com) (Contact Author Biography)
The global foreign exchange (forex) market had an average daily turnover of $3.2 trillion as of April 2007, an increase of 69% from the previous year, according to the 2007 Triennial Central Bank Survey of Foreign Exchange and Derivatives Market Activity, conducted by the Bank for International Settlements. It is by far the largest financial market in the world, and its size and liquidity ensure that new information or news is disseminated within minutes. However, the forex market has some unique characteristics that distinguish it from other markets. These unique features may give some participants an "information edge" in some situations, resulting in new information being absorbed over a longer period. (For background reading, see the Forex Tutorial.)
Unique Characteristics of the Forex Market
Unlike stocks, which trade on a centralized exchange such as the New York Stock Exchange, currency trades are generally settled over the counter (OTC). The OTC nature of the global foreign exchange market means that rather than a single, centralized exchange (as is the case for stocks and commodities), currencies trade in a number of different geographical locations, most of which are linked to each other by state-of-the-art communications technology. OTC trading also means that at any point in time, there are likely to be a number of marginally different price quotations for a particular currency; a stock, on the other hand, only has one price quoted on an exchange at a particular instant. The global forex market is also the only financial market to be open virtually around the clock, except for weekends.
Another key distinguishing feature of the currency markets is the differing levels of price access enjoyed by market participants. This is unlike the stock and commodity markets, where all participants have access to a uniform price. (For more insight, read Basic Concepts Of The Forex Market.)
Market Participants
Currency markets have numerous participants in multiple time zones, ranging from very large banks and financial institutions at one end of the spectrum, to small retail brokers and individuals on the other. Central banks are among the largest and most influential participants in the forex market. However, on a daily basis, large commercial banks are the dominant players in the forex market, on account of their corporate customers and currency trading desks. Large corporations also account for a significant proportion of foreign exchange volume, especially companies that have substantial trade or capital flows. Investment managers and hedge funds are also major participants.
Differing Prices
Banks' currency trading desks trade in the interbank market, which is characterized by large deal size, huge volumes and tight bid/ask spreads. These currency trading desks take foreign exchange positions either to cover commercial demand (for example, if a large customer needs a currency such as the euro to pay for a sizable import), or for speculative purposes. Large commercial customers get prices from these banks that have a markup embedded in them; the markup or margin depends on the size of the customer and the size of the forex transaction.
Retail customers who need foreign currency have to contend with bid/ask spreads that are much wider than those in the interbank market. (For more insight, see The Foreign Exchange Interbank Market.)
Speculative Positions Vs. Commercial Transactions
In the global foreign exchange market, speculative positions outnumber commercial foreign exchange transactions, which arise due to trade or capital flows, by a huge margin, although the exact extent is difficult to quantify. This makes the forex market very sensitive to new information, since an unexpected development will cause speculators to reassess their original trades and cause them to adjust these trades to reflect the new information.
For example, if a company has to remit a payment to a foreign supplier, it has a finite window in which to do so. The company may try to time the purchase of the currency so as to obtain a favorable rate, or it may use a hedging strategy to cover its exchange risk; however, the transaction has to occur by a definite date, regardless of conditions in the foreign exchange market.
On the other hand, a trader with a speculative currency position seeks to maximize his or her trading profit or minimize loss at all times; as such, the trader can choose to retain the position or close it at any point. In the event of new information, the adjustment process for such speculative positions is likely to be almost instantaneous. The proliferation of instant communications technology has caused reaction times to shorten dramatically in all financial markets, not just in the forex market.
However, this "knee jerk" reaction is generally followed by a more gradual adjustment process as market participants digest the new information and analyze it in greater depth.
Information Edge
While there are numerous factors that affect exchange rates, from economic and political variables to supply/demand fundamentals and capital market conditions, the hierarchical structure of the forex market gives the biggest players a slight information edge over the smallest ones.
In some situations, therefore, exchange rates take a little longer to adjust to new information. For example, consider a case where the central bank of a major nation with a widely-traded currency decides to support it in the foreign exchange markets, a process known as "intervention." If this intervention is unexpected and covert, the major banks from which the central banks buy the currency have an information edge over other participants, because they know the identity and the intention of the buyer. Other participants, especially those with short positions in the currency, may be taken by surprise to see the currency suddenly strengthen. While they may or may not cover their short positions right away, the fact that the central bank is now intervening to support the currency may cause these participants to reassess the viability and implications of their short strategy. (For more on interventions, see Profiting From Interventions In Forex Markets.)
Example – Forex Market Reaction to News
All financial markets react strongly to unexpected news or developments, and the foreign exchange market is no exception. Consider a situation in which the U.S. economy is weakening, and there is widespread expectation that the Federal Reserve will reduce the benchmark federal funds rate by 25 basis points (0.25%) at its next meeting. Currency exchange rates will factor in this rate reduction in the period leading up to the expected policy announcement. However, if the Federal Reserve decides at its meeting to leave rates unchanged, the U.S. dollar will in all likelihood react dramatically to this unexpected development. If the Federal Reserve implies in its policy announcement that the U.S. economy's prospects are improving, the U.S. dollar may also strengthen against major currencies. (For a related strategy, see Using Interest Rate Parity To Trade Forex.)
Conclusion
While the massive size and liquidity of the foreign exchange market ensures that new information or news is generally absorbed within minutes, its unique features may result in new information being absorbed over a longer period in some situations.
In addition, the hierarchical structure of the forex market can give the biggest players a slight information edge.
by Investopedia Staff, (Contact Author Biography)
Investopedia.com believes that individuals can excel at managing their financial affairs. As such, we strive to provide free educational content and tools to empower individual investors, including thousands of original and objective articles and tutorials on a wide variety of financial topics.
http://www.investopedia.com/articles/forex/09/forex-information-currency-market.asp?partner=basics2
by Investopedia Staff, (Investopedia.com) (Contact Author Biography)
The global foreign exchange (forex) market had an average daily turnover of $3.2 trillion as of April 2007, an increase of 69% from the previous year, according to the 2007 Triennial Central Bank Survey of Foreign Exchange and Derivatives Market Activity, conducted by the Bank for International Settlements. It is by far the largest financial market in the world, and its size and liquidity ensure that new information or news is disseminated within minutes. However, the forex market has some unique characteristics that distinguish it from other markets. These unique features may give some participants an "information edge" in some situations, resulting in new information being absorbed over a longer period. (For background reading, see the Forex Tutorial.)
Unique Characteristics of the Forex Market
Unlike stocks, which trade on a centralized exchange such as the New York Stock Exchange, currency trades are generally settled over the counter (OTC). The OTC nature of the global foreign exchange market means that rather than a single, centralized exchange (as is the case for stocks and commodities), currencies trade in a number of different geographical locations, most of which are linked to each other by state-of-the-art communications technology. OTC trading also means that at any point in time, there are likely to be a number of marginally different price quotations for a particular currency; a stock, on the other hand, only has one price quoted on an exchange at a particular instant. The global forex market is also the only financial market to be open virtually around the clock, except for weekends.
Another key distinguishing feature of the currency markets is the differing levels of price access enjoyed by market participants. This is unlike the stock and commodity markets, where all participants have access to a uniform price. (For more insight, read Basic Concepts Of The Forex Market.)
Market Participants
Currency markets have numerous participants in multiple time zones, ranging from very large banks and financial institutions at one end of the spectrum, to small retail brokers and individuals on the other. Central banks are among the largest and most influential participants in the forex market. However, on a daily basis, large commercial banks are the dominant players in the forex market, on account of their corporate customers and currency trading desks. Large corporations also account for a significant proportion of foreign exchange volume, especially companies that have substantial trade or capital flows. Investment managers and hedge funds are also major participants.
Differing Prices
Banks' currency trading desks trade in the interbank market, which is characterized by large deal size, huge volumes and tight bid/ask spreads. These currency trading desks take foreign exchange positions either to cover commercial demand (for example, if a large customer needs a currency such as the euro to pay for a sizable import), or for speculative purposes. Large commercial customers get prices from these banks that have a markup embedded in them; the markup or margin depends on the size of the customer and the size of the forex transaction.
Retail customers who need foreign currency have to contend with bid/ask spreads that are much wider than those in the interbank market. (For more insight, see The Foreign Exchange Interbank Market.)
Speculative Positions Vs. Commercial Transactions
In the global foreign exchange market, speculative positions outnumber commercial foreign exchange transactions, which arise due to trade or capital flows, by a huge margin, although the exact extent is difficult to quantify. This makes the forex market very sensitive to new information, since an unexpected development will cause speculators to reassess their original trades and cause them to adjust these trades to reflect the new information.
For example, if a company has to remit a payment to a foreign supplier, it has a finite window in which to do so. The company may try to time the purchase of the currency so as to obtain a favorable rate, or it may use a hedging strategy to cover its exchange risk; however, the transaction has to occur by a definite date, regardless of conditions in the foreign exchange market.
On the other hand, a trader with a speculative currency position seeks to maximize his or her trading profit or minimize loss at all times; as such, the trader can choose to retain the position or close it at any point. In the event of new information, the adjustment process for such speculative positions is likely to be almost instantaneous. The proliferation of instant communications technology has caused reaction times to shorten dramatically in all financial markets, not just in the forex market.
However, this "knee jerk" reaction is generally followed by a more gradual adjustment process as market participants digest the new information and analyze it in greater depth.
Information Edge
While there are numerous factors that affect exchange rates, from economic and political variables to supply/demand fundamentals and capital market conditions, the hierarchical structure of the forex market gives the biggest players a slight information edge over the smallest ones.
In some situations, therefore, exchange rates take a little longer to adjust to new information. For example, consider a case where the central bank of a major nation with a widely-traded currency decides to support it in the foreign exchange markets, a process known as "intervention." If this intervention is unexpected and covert, the major banks from which the central banks buy the currency have an information edge over other participants, because they know the identity and the intention of the buyer. Other participants, especially those with short positions in the currency, may be taken by surprise to see the currency suddenly strengthen. While they may or may not cover their short positions right away, the fact that the central bank is now intervening to support the currency may cause these participants to reassess the viability and implications of their short strategy. (For more on interventions, see Profiting From Interventions In Forex Markets.)
Example – Forex Market Reaction to News
All financial markets react strongly to unexpected news or developments, and the foreign exchange market is no exception. Consider a situation in which the U.S. economy is weakening, and there is widespread expectation that the Federal Reserve will reduce the benchmark federal funds rate by 25 basis points (0.25%) at its next meeting. Currency exchange rates will factor in this rate reduction in the period leading up to the expected policy announcement. However, if the Federal Reserve decides at its meeting to leave rates unchanged, the U.S. dollar will in all likelihood react dramatically to this unexpected development. If the Federal Reserve implies in its policy announcement that the U.S. economy's prospects are improving, the U.S. dollar may also strengthen against major currencies. (For a related strategy, see Using Interest Rate Parity To Trade Forex.)
Conclusion
While the massive size and liquidity of the foreign exchange market ensures that new information or news is generally absorbed within minutes, its unique features may result in new information being absorbed over a longer period in some situations.
In addition, the hierarchical structure of the forex market can give the biggest players a slight information edge.
by Investopedia Staff, (Contact Author Biography)
Investopedia.com believes that individuals can excel at managing their financial affairs. As such, we strive to provide free educational content and tools to empower individual investors, including thousands of original and objective articles and tutorials on a wide variety of financial topics.
http://www.investopedia.com/articles/forex/09/forex-information-currency-market.asp?partner=basics2
Stashing Your Cash: Mattress Or Market?
Stashing Your Cash: Mattress Or Market?
by Lisa Smith (Contact Author Biography)
When stock markets become volatile, it makes investors nervous. In many cases, this prompts them to take money out of the market and keep it in cash. Cash can be seen, felt and spent at will and for most people, having money in hand feels safe. But how safe is it really? Read on to find out whether your money is safer in the market or under your mattress.
All Hail Cash?
There are definitely some benefits to holding cash. When the stock market is in free fall, holding cash helps you avoid further losses. Even if the stock market doesn't fall on a particular day, there is always the potential that it could have fallen. This possibility is known as systematic risk, and it can be completely avoided by holding cash.
Cash is also psychologically soothing. During troubled times, you can see and touch cash. Unlike the rapidly dwindling balance in your brokerage account, cash will still be in your pocket or in your bank account in the morning.
However, while moving to cash might feel good mentally and help you avoid short-term stock market volatility, it is unlikely to be a wise move over the long term.
A Loss In Not a Loss ...
When your money is in the stock market and the market is down, you may feel like you've lost money, but you really haven't. At this point, it's a paper loss. A turnaround in the market can put you right back to breakeven and maybe even put a profit in your pocket. If you sell your holdings and move to cash, you lock in your losses. They go from being paper losses to being real losses with no hope of recovery. While paper losses don't feel good, long-term investors accept that the stock market rises and falls. Maintaining your positions when the market is down is the only way that your portfolio will have a chance to benefit when the market rebounds. (For more insight, see How are realized profits different from unrealized, or so-called "paper", profits?)
Inflation: The Cash Killer
While having cash in your hand seems like a great way to stem your losses, cash is no defense against inflation. You think your money is safe when it's in cash, but over time, its value erodes. (Coping With Inflation Risk explains how inflation is less dramatic than a crash, but can be more devastating to your portfolio.)
Opportunity Costs Add Up
Opportunity cost is the cost of an alternative that must be forgone in order to pursue a certain action. Put another way, opportunity cost refers to the benefits you could have received by taking an alternative action. In the case of cash, taking your money out of the stock market requires that you compare the growth of your cash portfolio, which will be negative over the long term as inflation erodes your purchasing power, against the potential gains in the stock market. Historically, the stock market has generally been the better bet.
Time Is Money
When you sell your stocks and put your money in cash, odds are that you will eventually reinvest in the stock market. The question then becomes, when you should make this move. Trying to choose the right times to get in and out of the stock market is referred to as market timing. If you were unable to successfully predict the market's peak and sell, it is highly unlikely that you'll be any better at predicting its bottom and buying in just before it rises. (This strategy is popular, but can few do it successfully, read Market Timing Fails As A Money Maker for tips.)
Common Sense Is King
Common sense may be the best argument against moving to cash, and selling your stocks after the market tanks means that you bought high and are selling low. That would be the exact opposite of a good investing strategy. While your instincts may be telling you to save what you have left, your instincts are in direct opposition with the most basic tenet of investing. The time to sell was back when your investments were in the black - not when you are deep in the red. (To learn more, read To Sell Or Not To Sell.)
Buy and Hold on Tight
You were happy to buy when the price was high because you expected it to go higher. Now that it is low, you expect it fall forever. Look at the markets over time. They have historically gone up. Companies are in business to make money. They have a vested interest in profitability. Investing in equities should be a long-term endeavor, and the long term favors those who stay invested. (My comment: Totally in agreement.) (For additional reading, check out Long-Term Investing: Hot Or Not?)
Nerve Wracking, but Necessary
Serious investors understand that the markets are no place for the faint of heart. Of course, with private pension plans disappearing and the future of Social Security in question, many of us have no other choice. (Be sure to read, The Demise Of The Defined-Benefit Plan, which provides a closer look at this situation.)
Once you've faced the facts, you need to have a plan.
by Lisa Smith, (Contact Author Biography)
by Lisa Smith (Contact Author Biography)
When stock markets become volatile, it makes investors nervous. In many cases, this prompts them to take money out of the market and keep it in cash. Cash can be seen, felt and spent at will and for most people, having money in hand feels safe. But how safe is it really? Read on to find out whether your money is safer in the market or under your mattress.
All Hail Cash?
There are definitely some benefits to holding cash. When the stock market is in free fall, holding cash helps you avoid further losses. Even if the stock market doesn't fall on a particular day, there is always the potential that it could have fallen. This possibility is known as systematic risk, and it can be completely avoided by holding cash.
Cash is also psychologically soothing. During troubled times, you can see and touch cash. Unlike the rapidly dwindling balance in your brokerage account, cash will still be in your pocket or in your bank account in the morning.
However, while moving to cash might feel good mentally and help you avoid short-term stock market volatility, it is unlikely to be a wise move over the long term.
A Loss In Not a Loss ...
When your money is in the stock market and the market is down, you may feel like you've lost money, but you really haven't. At this point, it's a paper loss. A turnaround in the market can put you right back to breakeven and maybe even put a profit in your pocket. If you sell your holdings and move to cash, you lock in your losses. They go from being paper losses to being real losses with no hope of recovery. While paper losses don't feel good, long-term investors accept that the stock market rises and falls. Maintaining your positions when the market is down is the only way that your portfolio will have a chance to benefit when the market rebounds. (For more insight, see How are realized profits different from unrealized, or so-called "paper", profits?)
Inflation: The Cash Killer
While having cash in your hand seems like a great way to stem your losses, cash is no defense against inflation. You think your money is safe when it's in cash, but over time, its value erodes. (Coping With Inflation Risk explains how inflation is less dramatic than a crash, but can be more devastating to your portfolio.)
Opportunity Costs Add Up
Opportunity cost is the cost of an alternative that must be forgone in order to pursue a certain action. Put another way, opportunity cost refers to the benefits you could have received by taking an alternative action. In the case of cash, taking your money out of the stock market requires that you compare the growth of your cash portfolio, which will be negative over the long term as inflation erodes your purchasing power, against the potential gains in the stock market. Historically, the stock market has generally been the better bet.
Time Is Money
When you sell your stocks and put your money in cash, odds are that you will eventually reinvest in the stock market. The question then becomes, when you should make this move. Trying to choose the right times to get in and out of the stock market is referred to as market timing. If you were unable to successfully predict the market's peak and sell, it is highly unlikely that you'll be any better at predicting its bottom and buying in just before it rises. (This strategy is popular, but can few do it successfully, read Market Timing Fails As A Money Maker for tips.)
Common Sense Is King
Common sense may be the best argument against moving to cash, and selling your stocks after the market tanks means that you bought high and are selling low. That would be the exact opposite of a good investing strategy. While your instincts may be telling you to save what you have left, your instincts are in direct opposition with the most basic tenet of investing. The time to sell was back when your investments were in the black - not when you are deep in the red. (To learn more, read To Sell Or Not To Sell.)
Buy and Hold on Tight
You were happy to buy when the price was high because you expected it to go higher. Now that it is low, you expect it fall forever. Look at the markets over time. They have historically gone up. Companies are in business to make money. They have a vested interest in profitability. Investing in equities should be a long-term endeavor, and the long term favors those who stay invested. (My comment: Totally in agreement.) (For additional reading, check out Long-Term Investing: Hot Or Not?)
Nerve Wracking, but Necessary
Serious investors understand that the markets are no place for the faint of heart. Of course, with private pension plans disappearing and the future of Social Security in question, many of us have no other choice. (Be sure to read, The Demise Of The Defined-Benefit Plan, which provides a closer look at this situation.)
Once you've faced the facts, you need to have a plan.
- Figure out how much money you need to amass to meet your future needs, and develop a plan to help your portfolio get there.
- Find an asset allocation strategy that meets your needs.
- Monitor your investments.
- Rebalance your portfolio to correspond with market conditions, making sure to maintain your desired mix of investments.
- When you reach your goal, move assets out of equities and into less volatile investments.
by Lisa Smith, (Contact Author Biography)
Investing During Uncertainty
Investing During Uncertainty
by Investopedia Staff, (Investopedia.com) (Contact Author Biography)
Every day it seems like the world is getting smaller. If you watch any financial television station or read the newspaper, you are most likely aware of how events in one country seem to have an ever-increasing affect on other countries around the world. We are more interconnected now than at any other time in history. It goes without mention that globalization definitely has its positives, but when threats of financial crisis, war, global recession, trade imbalances, etc, do occur it often leads to talk of moving money to safer investments and increasing government deficits. This rising uncertainty can confuse even the well-informed investor.
Uncertainty
Any time you put money at risk for the chance of profit there is an inherent level of uncertainty. When new threats such as war or recession arise, the level of uncertainty increases significantly as companies can no longer accurately predict their future earnings. As a result, institutional investors will reduce their holdings in stocks considered unsafe and move the funds to other sources like precious metals, government bonds and money-market instruments. This sell-off, which occurs as large portfolios reposition themselves, can cause the stock market to depreciate.
Effects of Uncertainty
Uncertainty is the inability to forecast future events; people can't predict the extent of a possible recession, when it's going to start/end, how much it will cost, or what companies will be able to make it through unscathed. Most companies normally predict sales and production trends for the investing public to follow assuming normal market conditions, but increasing levels of uncertainty can make these numbers significantly inaccurate. (For more, see Recession: What Does It Mean To Investors.)
Uncertainty itself can affect the economy on both the micro and macro level; a description of uncertainty on a micro level focuses on the effect on individual companies within an economy faced with the threat of war or recession, whereas the view of uncertainty on a macro level looks at the economy as a whole (To learn more, see Economics Basics.):
From a company-specific point of view, uncertainty provides a major concern for those that produce consumer goods every day. For example, consumption may fall on the threat of a recession as individuals refrain from purchasing new cars, computers and other non-essentials. This uncertainty may force the companies in certain sectors to layoff some of its employees so that it can combat the impacts of lower sales. The level of uncertainty that surrounds a company's sales also extends into the stock market. Consequently, stock prices of companies that produce non-essential goods sometimes experience a selloff when levels of uncertainty rise. (For more, see The Impact Of Recession On Businesses.)
On a macro level, uncertainty is magnified if the countries at war are major suppliers or consumers of goods. A good example is a country that supplies a large portion of the world's oil. Should this country go to war, uncertainty regarding the level of the world's oil reserves would grow. Because the demand for oil would be high and the supply uncertain, a country unable to produce enough oil within its own borders would be required to ensure that enough oil was stored to cover operations. As a result, the price of oil would increase.
Another macro-level event that affects companies and investors is the flight of capital and devaluation of exchange rates. When a country faces the threat of war or recession, its economy is considered uncertain. Investors attempt to move their currency away from unstable sources to stable ones; the currency of a country under a threat of war is sold and the currencies from countries without the threat are bought. The average investor probably would not do this; however, the large institutional investors and currency futures traders would. These actions translate into a devaluation of exchange rates.
What's an Investor to Do?
When situations of heightened uncertainty arise, the best defense is to be as well informed as possible. Keep updated by reading the newspaper and researching individual companies. Analyze which sectors have more to gain and lose with a war and decide on a long-term plan. Times of heightened uncertainty can lead to great opportunities for investors who position themselves to take advantage of it. Some investors might decide to be offensive and search for companies that provide goods or services that will lead to great returns when things turn around. It is difficult to commit capital during uncertain times, but it can often reap huge rewards in the longer run. Those who want to mitigate uncertainty and risk might be content leaving their money where it is or perhaps moving it to safer securities. Regardless of which strategy you decide to take (if any), you can't go wrong over the long term by keeping yourself well informed and getting into a position so that you can take advantage of prices when the things reverse.
For further reading, see Intro To Fundamental Analysis.
by Investopedia Staff, (Contact Author Biography)Investopedia.com believes that individuals can excel at managing their financial affairs. As such, we strive to provide free educational content and tools to empower individual investors, including thousands of original and objective articles and tutorials on a wide variety of financial topics.
http://www.investopedia.com/articles/basics/03/021403.asp?partner=basics2
by Investopedia Staff, (Investopedia.com) (Contact Author Biography)
Every day it seems like the world is getting smaller. If you watch any financial television station or read the newspaper, you are most likely aware of how events in one country seem to have an ever-increasing affect on other countries around the world. We are more interconnected now than at any other time in history. It goes without mention that globalization definitely has its positives, but when threats of financial crisis, war, global recession, trade imbalances, etc, do occur it often leads to talk of moving money to safer investments and increasing government deficits. This rising uncertainty can confuse even the well-informed investor.
Uncertainty
Any time you put money at risk for the chance of profit there is an inherent level of uncertainty. When new threats such as war or recession arise, the level of uncertainty increases significantly as companies can no longer accurately predict their future earnings. As a result, institutional investors will reduce their holdings in stocks considered unsafe and move the funds to other sources like precious metals, government bonds and money-market instruments. This sell-off, which occurs as large portfolios reposition themselves, can cause the stock market to depreciate.
Effects of Uncertainty
Uncertainty is the inability to forecast future events; people can't predict the extent of a possible recession, when it's going to start/end, how much it will cost, or what companies will be able to make it through unscathed. Most companies normally predict sales and production trends for the investing public to follow assuming normal market conditions, but increasing levels of uncertainty can make these numbers significantly inaccurate. (For more, see Recession: What Does It Mean To Investors.)
Uncertainty itself can affect the economy on both the micro and macro level; a description of uncertainty on a micro level focuses on the effect on individual companies within an economy faced with the threat of war or recession, whereas the view of uncertainty on a macro level looks at the economy as a whole (To learn more, see Economics Basics.):
From a company-specific point of view, uncertainty provides a major concern for those that produce consumer goods every day. For example, consumption may fall on the threat of a recession as individuals refrain from purchasing new cars, computers and other non-essentials. This uncertainty may force the companies in certain sectors to layoff some of its employees so that it can combat the impacts of lower sales. The level of uncertainty that surrounds a company's sales also extends into the stock market. Consequently, stock prices of companies that produce non-essential goods sometimes experience a selloff when levels of uncertainty rise. (For more, see The Impact Of Recession On Businesses.)
On a macro level, uncertainty is magnified if the countries at war are major suppliers or consumers of goods. A good example is a country that supplies a large portion of the world's oil. Should this country go to war, uncertainty regarding the level of the world's oil reserves would grow. Because the demand for oil would be high and the supply uncertain, a country unable to produce enough oil within its own borders would be required to ensure that enough oil was stored to cover operations. As a result, the price of oil would increase.
Another macro-level event that affects companies and investors is the flight of capital and devaluation of exchange rates. When a country faces the threat of war or recession, its economy is considered uncertain. Investors attempt to move their currency away from unstable sources to stable ones; the currency of a country under a threat of war is sold and the currencies from countries without the threat are bought. The average investor probably would not do this; however, the large institutional investors and currency futures traders would. These actions translate into a devaluation of exchange rates.
What's an Investor to Do?
When situations of heightened uncertainty arise, the best defense is to be as well informed as possible. Keep updated by reading the newspaper and researching individual companies. Analyze which sectors have more to gain and lose with a war and decide on a long-term plan. Times of heightened uncertainty can lead to great opportunities for investors who position themselves to take advantage of it. Some investors might decide to be offensive and search for companies that provide goods or services that will lead to great returns when things turn around. It is difficult to commit capital during uncertain times, but it can often reap huge rewards in the longer run. Those who want to mitigate uncertainty and risk might be content leaving their money where it is or perhaps moving it to safer securities. Regardless of which strategy you decide to take (if any), you can't go wrong over the long term by keeping yourself well informed and getting into a position so that you can take advantage of prices when the things reverse.
For further reading, see Intro To Fundamental Analysis.
by Investopedia Staff, (Contact Author Biography)Investopedia.com believes that individuals can excel at managing their financial affairs. As such, we strive to provide free educational content and tools to empower individual investors, including thousands of original and objective articles and tutorials on a wide variety of financial topics.
http://www.investopedia.com/articles/basics/03/021403.asp?partner=basics2
Buffett, a Defense of the Oracle of Omaha
Buffett, a Defense of the Oracle of Omaha
David MacDougall
02/12/09 - 10:58 AM EST
It may be too early to count out the Oracle of Omaha.
Some journalists and investors, perhaps suffering from Schadenfreude, have argued that Warren Buffett, chairman and chief executive officer of Berkshire Hathaway(BRK-A Quote - Cramer on BRK-A - Stock Picks), might be nearing the end of his long track record of phenomenal performance.
They point to investments that have fallen more than stock-market benchmarks, as well as a huge derivative book that is sustaining billions of dollars in market-to-market losses during the worst financial crisis in 75 years.
Buffett, who became the world's richest man about a year ago and has since slipped to second place behind Bill Gates, has beaten the U.S. benchmark S&P 500 Index 37 times from 1965 to 2007, according to data published in Berkshire Hathaway's 2007 letter to shareholders. Investors of Berkshire, a holding company weighed heavily toward insurance holdings including GEICO, had an average annual gain of 21.1% during that time, twice as much as the S&P 500's 10.3% advance.
Buffett hasn't fallen into ruts. The few cases of underperformance are aberrations that have quickly reversed course. In 1999, Berkshire trailed the S&P 500 by 20.5 percentage points. A year later, the company's stock beat the benchmark by 15.6 percentage points. The average outperformance following an underperforming year is 19.4 percentage points.
Although Berkshire has large stakes in publicly traded companies, much of its success comes from investments in private firms. Berkshire has private portfolio companies involved in industries such as home furnishing, athletic wear, candy, jewelry and electrical components, to list a few. Those investments follow Buffett's criteria for investing: solid management with a wide "moat," meaning an easily defensible position in the industry.
None of the private portfolio companies is sexy, which is a reason for their success. It is unlikely that any of them will crash and burn because of excessive leverage or an out-of-control derivatives book.
Beyond investments in retailers and public companies, Berkshire's biggest holdings are in the insurance industry. In 2007, Berkshire posted $3.37 billion in pretax profits from underwriting at insurers, which include GEICO, General Re and National Indemnity.
There are no indications from Buffett that any of Berkshire Hathaway's portfolio companies have significant exposure to the toxic assets that have been weakening the competition. This is due to Buffett's ability to identify businesses that are sustainable and worthy of the Berkshire Hathaway seal of approval.
Still, Buffett has made substantial derivative investments, which may be a surprise to some. While "derivative" has become a buzzword that makes many stomachs turn, Buffett's exposure is far tamer than any of the books that have been sinking investment firms throughout 2008.
Seventy-three percent of Berkshire's $9.25 billion derivative book comes in the form of European "put" contracts written by Berkshire Hathaway at the market price for the S&P 500 and three foreign markets with a weighted average remaining life of about 13 1/2 years. Since these are European option contracts, meaning they can only be exercised at expiration, Berkshire Hathaway will only lose money if the index's value at expiration falls below the level it was when the contract was written.
The remainder of the derivative book is in credit default swaps. However, the main hit on the derivative book comes from market-to-market accounting, which forces Berkshire to write down the put contracts to the current fair value, even though Buffett has said he has no plans to sell the contracts before expiration. Those losses will most likely reverse themselves in the coming years as the market rises and credit markets improve.
Buffett has been active in the financial crisis, and injected capital into an ailing bank with more favorable terms than the U.S. government has. In September, he bought $5 billion worth of preferred stock in Goldman Sachs(GS Quote - Cramer on GS - Stock Picks) along with warrants to purchase an additional $5 billion in common stock at a strike price of $115 a share. The preferred stock carries a hefty 10% annual dividend, which will bring in $500 million every year for Berkshire Hathaway, more than the zero percent the government will be yielding on its injected capital.
Criticism of Berkshire's public holdings may be justified with the benefit of hindsight. Some fault Buffett for missing out on a profitable exit from Coca-Cola(KO Quote - Cramer on KO - Stock Picks) at its peak of $86.13 in 1998. Clairvoyance is a lofty expectation even for an oracle.
Buffett has described himself as a long-term investor. Quick exits should not be expected and could even be regarded as a violation of his mandate. Investors ought to realize that Berkshire's portfolio will change little from year to year. Especially for holdings like Coca-Cola, in which Berkshire holds more than 8%, any exit would be very difficult due to the sheer size of the investment.
The composition of Buffett's current publicly traded portfolio, or what was available as of Sept. 30, seems ideal under normal market conditions. It provides for the benefits of diversification with a mix of blue-chip companies in wide-ranging industries.
When the holdings are compared to TheStreet.com Ratings data, a positive picture emerges. While the current universe of rated stocks has only 9% listed as "buy," Buffett's portfolio comprises 19.4% "buy"-rated stocks. All of those shares outperformed the S&P 500 by double digits in 2008.
Stocks in the portfolio with a "hold" rating account for the vast majority. Sixty-seven percent of the Berkshire portfolio has a "hold" rating from TheStreet.com Ratings. A "hold" rating means a stock will probably perform in line with the market. Forty-four percent of stocks rated by TheStreet.com Ratings are "hold." The average outperformance of the "hold"-rated securities of Berkshire Hathaway was 6.4 percentage points in 2008.
Buffett holds some stocks rated "sell" by TheStreet.com Ratings. They comprise 13.8% of the portfolio. Of the stocks rated by TheStreet.com Ratings, 47.25% are rated "sell." In all, Buffett's holdings as of Sept. 30, if equally weighted, beat the S&P 500 by 5.4 percentage points in 2008.
TheStreet.com Ratings' model can be described as "safety first." Neither the model nor Buffett like excessive risk, volatility or debt, and those aversions fare well in a recession.
Buffett Holdings Ranked by
TheStreet.com Ratings
David MacDougall
02/12/09 - 10:58 AM EST
It may be too early to count out the Oracle of Omaha.
Some journalists and investors, perhaps suffering from Schadenfreude, have argued that Warren Buffett, chairman and chief executive officer of Berkshire Hathaway(BRK-A Quote - Cramer on BRK-A - Stock Picks), might be nearing the end of his long track record of phenomenal performance.
They point to investments that have fallen more than stock-market benchmarks, as well as a huge derivative book that is sustaining billions of dollars in market-to-market losses during the worst financial crisis in 75 years.
Buffett, who became the world's richest man about a year ago and has since slipped to second place behind Bill Gates, has beaten the U.S. benchmark S&P 500 Index 37 times from 1965 to 2007, according to data published in Berkshire Hathaway's 2007 letter to shareholders. Investors of Berkshire, a holding company weighed heavily toward insurance holdings including GEICO, had an average annual gain of 21.1% during that time, twice as much as the S&P 500's 10.3% advance.
Buffett hasn't fallen into ruts. The few cases of underperformance are aberrations that have quickly reversed course. In 1999, Berkshire trailed the S&P 500 by 20.5 percentage points. A year later, the company's stock beat the benchmark by 15.6 percentage points. The average outperformance following an underperforming year is 19.4 percentage points.
Although Berkshire has large stakes in publicly traded companies, much of its success comes from investments in private firms. Berkshire has private portfolio companies involved in industries such as home furnishing, athletic wear, candy, jewelry and electrical components, to list a few. Those investments follow Buffett's criteria for investing: solid management with a wide "moat," meaning an easily defensible position in the industry.
None of the private portfolio companies is sexy, which is a reason for their success. It is unlikely that any of them will crash and burn because of excessive leverage or an out-of-control derivatives book.
Beyond investments in retailers and public companies, Berkshire's biggest holdings are in the insurance industry. In 2007, Berkshire posted $3.37 billion in pretax profits from underwriting at insurers, which include GEICO, General Re and National Indemnity.
There are no indications from Buffett that any of Berkshire Hathaway's portfolio companies have significant exposure to the toxic assets that have been weakening the competition. This is due to Buffett's ability to identify businesses that are sustainable and worthy of the Berkshire Hathaway seal of approval.
Still, Buffett has made substantial derivative investments, which may be a surprise to some. While "derivative" has become a buzzword that makes many stomachs turn, Buffett's exposure is far tamer than any of the books that have been sinking investment firms throughout 2008.
Seventy-three percent of Berkshire's $9.25 billion derivative book comes in the form of European "put" contracts written by Berkshire Hathaway at the market price for the S&P 500 and three foreign markets with a weighted average remaining life of about 13 1/2 years. Since these are European option contracts, meaning they can only be exercised at expiration, Berkshire Hathaway will only lose money if the index's value at expiration falls below the level it was when the contract was written.
The remainder of the derivative book is in credit default swaps. However, the main hit on the derivative book comes from market-to-market accounting, which forces Berkshire to write down the put contracts to the current fair value, even though Buffett has said he has no plans to sell the contracts before expiration. Those losses will most likely reverse themselves in the coming years as the market rises and credit markets improve.
Buffett has been active in the financial crisis, and injected capital into an ailing bank with more favorable terms than the U.S. government has. In September, he bought $5 billion worth of preferred stock in Goldman Sachs(GS Quote - Cramer on GS - Stock Picks) along with warrants to purchase an additional $5 billion in common stock at a strike price of $115 a share. The preferred stock carries a hefty 10% annual dividend, which will bring in $500 million every year for Berkshire Hathaway, more than the zero percent the government will be yielding on its injected capital.
Criticism of Berkshire's public holdings may be justified with the benefit of hindsight. Some fault Buffett for missing out on a profitable exit from Coca-Cola(KO Quote - Cramer on KO - Stock Picks) at its peak of $86.13 in 1998. Clairvoyance is a lofty expectation even for an oracle.
Buffett has described himself as a long-term investor. Quick exits should not be expected and could even be regarded as a violation of his mandate. Investors ought to realize that Berkshire's portfolio will change little from year to year. Especially for holdings like Coca-Cola, in which Berkshire holds more than 8%, any exit would be very difficult due to the sheer size of the investment.
The composition of Buffett's current publicly traded portfolio, or what was available as of Sept. 30, seems ideal under normal market conditions. It provides for the benefits of diversification with a mix of blue-chip companies in wide-ranging industries.
When the holdings are compared to TheStreet.com Ratings data, a positive picture emerges. While the current universe of rated stocks has only 9% listed as "buy," Buffett's portfolio comprises 19.4% "buy"-rated stocks. All of those shares outperformed the S&P 500 by double digits in 2008.
Stocks in the portfolio with a "hold" rating account for the vast majority. Sixty-seven percent of the Berkshire portfolio has a "hold" rating from TheStreet.com Ratings. A "hold" rating means a stock will probably perform in line with the market. Forty-four percent of stocks rated by TheStreet.com Ratings are "hold." The average outperformance of the "hold"-rated securities of Berkshire Hathaway was 6.4 percentage points in 2008.
Buffett holds some stocks rated "sell" by TheStreet.com Ratings. They comprise 13.8% of the portfolio. Of the stocks rated by TheStreet.com Ratings, 47.25% are rated "sell." In all, Buffett's holdings as of Sept. 30, if equally weighted, beat the S&P 500 by 5.4 percentage points in 2008.
TheStreet.com Ratings' model can be described as "safety first." Neither the model nor Buffett like excessive risk, volatility or debt, and those aversions fare well in a recession.
Buffett Holdings Ranked by
TheStreet.com Ratings
TheStreet.com Ratings
Much of Berkshire's performance is dependent on Buffett's actions after the crash in October. Until the results are available for that time period later this month, we are left to speculate on the possibilities. No investment manager can promise gains, but Buffett is more consistent and honest than most. Just because he isn't ringing up a positive return doesn't mean he has lost his edge.
http://www.thestreet.com/story/10463620/1/buffett-a-defense-of-the-oracle-of-omaha.html
Financial Crisis: Mark to Market Accounting Demystified
Financial Crisis: Mark to Market Accounting Demystified
written by Andy on Wednesday, October 8, 2008
Of late there has been a lot of negative press around the accounting requirements for companies and the methods by which they have to value their assets. Some critics and company executives have even attributed the accounting requirements, and specifically the Mark to Market valuation method, as a major cause behind the rapid failure of some of our largest financial institutions, because they were forced to value assets at unrealistically low levels. The Securities and Exchange Commission (SEC) and Financial Accounting Standards Board (FASB) which sets accounting rules for companies, are being pressured by lawmakers, corporation and big investors to overhaul or suspend the current Mark to Market accounting rules that these companies have to follow. This type of accounting (like leverage), works great in boom times but can place a lot of pressure on companies and their stock prices when asset values fall. As an investor it is important to have a general understanding of how this type of accounting works in order to get a better of the state of the company's real financial health (and so you know what those pundits on CNBC are talking about!). Here, Tony Parker assists in breaking down Mark to Market accounting in an easy to understand format with examples and why it is causing so many headaches for companies.
What is it?
The act of assigning a value to an asset based on it current market value (what it could sell for today) as determined by the going "market price". For example, your house may have been worth $300,000 on 1/1/2007 but today according to the market it is worth $230,000. If you kept track of your assets like a company did, you would be required to "write-down" the value of your house by $70,000 to reflect the fact that if you had to immediately liquidate that asset (your house), it would not bring the kind of cash it would have about two years earlier.
Why was it implemented?
It was primarily intended to prevent shady accounting practices that hide underlying liabilities. The Accounting Standards bodies were concerned that companies were keeping "bad" assets on their books instead of "writing them down" to their real value (assigning a new, lower value to the asset). Mark to Market gives investors a much better "picture" of the health of the company if their assets are correctly priced (i.e. market price).
Example: Ford is holding 100,000 F-150 trucks on a storage lot. Ford originally valued these at $20,000 each. So, Ford books this as an asset with a value of $2,000,000 (100,000 x $20,000). But several months go by and Ford has not sold these trucks (high gas prices, economy, etc.). Now it is 6 months later and Ford must mark to market the value of those trucks for their quarterly reporting. Over the six months the true market value of trucks has dropped to $15,000 (based on what customers are currently paying). In this case, Ford should write-down the total value of the trucks to $1,500,000. This means Ford's assets (the trucks) have fallen in value by $500,000.
So why is this important?
To keep it simple, the most basic thing in accounting is the equation: Assets – Liabilities = Equity or, in common terms, Assets (things owned) minus Liabilities (debt) = Equity (value of the company - reflected in the stock price). If you reduce the value of the assets, then the value of the company must drop, thereby pushing down the equity (stock price). So continuing with the example above, Ford's share price will drop as the value of it's assets (trucks) are marked down. So do you see now how the falls in assets prices can quickly translate to stock prices drops under mark to market accounting?
Why is it causing so much controversy?
The Mark to Market rule works well until you cannot get a realistic price for an asset. Currently, many of the Mortgage Backed Securities (a combination of many mortgages pulled together as one security) that are behind the financial crisis have NO market and hence almost impossible to assign a fair value (unlike those of Ford trucks). Because of their perceived risk and unknown exposure nobody wants them and in many cases if there is no demand they become worthless ($0 value). This obviously is NOT true. Even if the value is 5 cents on the dollar, they still have a value. But the securities are so complex and the economic environment so uncertain, that nobody is willing to "stick their neck out" and try to pick the correct price.
Here is an analogy: Say there is a unique subdivision with 100 gorgeous houses. If these houses were any place "normal" they would be worth $1,000,000 each. But this subdivision sits on top of an old graveyard. Now most people would never pay full price for a house sitting on top of a graveyard (the potential for ghosts and all!). But what is each house worth? Some people probably would not care much about the graveyard as long as they got $200,000 off the selling price. So, is $800,000 the Mark to Market price? On the other hand, some people would only buy one of the homes if it were substantially discounted, say to ¼ of the original price. So, is $250,000 the Mark to Market price?
Now lets add one more obstacle. Let's say – as is currently happening – it is very, very difficult to get a loan (mortgage). There is then the potential that NOBODY would buy one of the homes, because they could not get a mortgage, even though they may have been able to get a big discount. One financial quarter (3 months) goes buy and none of the homes sell. What is the Mark to Market value of these homes now? Without any direct comparisons (after all, this is like no other subdivision), the Mark to Market value would be ZERO. We know that is not true, but if the accountants assign an arbitrary value, say $700,000, they may get in trouble if later they are required to write-down the value of those homes to $250,000 each, when they find out very few people are comfortable living on top of a graveyard. So the problem is: What value should you assign to an asset that has no current market (no buyers)? By the letter of law you value them at current value – zero in this example – but as you can see that is hardly fair.
This is essentially the problem currently choking financial markets with MBS and other housing based instruments. Critics of the Mark to Market accounting rules say that they cause banks to undervalue assets that have a real value based on fire-sale prices in a frozen market.
"A vast majority of mortgages, corporate bonds, and structured debts are still performing. But because the market is frozen, the prices of these assets have fallen below their true value. Firms that are otherwise solvent must price assets to fire-sale values. Not only does this make them ripe for forced liquidation, but it chases away capital and leads to a further decline in asset values," wrote Brian Wesbury in the WSJ.
Conclusion and Opinions
Tony - My personal recommendation is to keep the Market to Mark rule, but in cases where you cannot come up with a reasonable value – because of usual economic forces or a sufficiently liquid market – then guess conservatively and highlight the item to investors in the financial statements, so they can determine whether the value assigned is reasonable to them.
Andy - One point to note is that even if Mark-to-Market rules were suspended, it won't change the makeup of a company's balance sheet. If investors decide certain company's assets are toxic (like MBS nowadays) then it won't matter how a company accounts for them in its books - they will be assigned a zero or negative value by default. To get out of the current financial crisis, investors need to have confidence in the financial assets/instruments of these companies. That is what the government is trying to primarily do with the bailout bill – restore investor confidence by buying and creating a fair market value for these "bad" and illiquid assets. However, judging by recent market action it doesn't look to be working too well.
http://www.savingtoinvest.com/2008/10/financial-crisis-mark-to-market.html
written by Andy on Wednesday, October 8, 2008
Of late there has been a lot of negative press around the accounting requirements for companies and the methods by which they have to value their assets. Some critics and company executives have even attributed the accounting requirements, and specifically the Mark to Market valuation method, as a major cause behind the rapid failure of some of our largest financial institutions, because they were forced to value assets at unrealistically low levels. The Securities and Exchange Commission (SEC) and Financial Accounting Standards Board (FASB) which sets accounting rules for companies, are being pressured by lawmakers, corporation and big investors to overhaul or suspend the current Mark to Market accounting rules that these companies have to follow. This type of accounting (like leverage), works great in boom times but can place a lot of pressure on companies and their stock prices when asset values fall. As an investor it is important to have a general understanding of how this type of accounting works in order to get a better of the state of the company's real financial health (and so you know what those pundits on CNBC are talking about!). Here, Tony Parker assists in breaking down Mark to Market accounting in an easy to understand format with examples and why it is causing so many headaches for companies.
What is it?
The act of assigning a value to an asset based on it current market value (what it could sell for today) as determined by the going "market price". For example, your house may have been worth $300,000 on 1/1/2007 but today according to the market it is worth $230,000. If you kept track of your assets like a company did, you would be required to "write-down" the value of your house by $70,000 to reflect the fact that if you had to immediately liquidate that asset (your house), it would not bring the kind of cash it would have about two years earlier.
Why was it implemented?
It was primarily intended to prevent shady accounting practices that hide underlying liabilities. The Accounting Standards bodies were concerned that companies were keeping "bad" assets on their books instead of "writing them down" to their real value (assigning a new, lower value to the asset). Mark to Market gives investors a much better "picture" of the health of the company if their assets are correctly priced (i.e. market price).
Example: Ford is holding 100,000 F-150 trucks on a storage lot. Ford originally valued these at $20,000 each. So, Ford books this as an asset with a value of $2,000,000 (100,000 x $20,000). But several months go by and Ford has not sold these trucks (high gas prices, economy, etc.). Now it is 6 months later and Ford must mark to market the value of those trucks for their quarterly reporting. Over the six months the true market value of trucks has dropped to $15,000 (based on what customers are currently paying). In this case, Ford should write-down the total value of the trucks to $1,500,000. This means Ford's assets (the trucks) have fallen in value by $500,000.
So why is this important?
To keep it simple, the most basic thing in accounting is the equation: Assets – Liabilities = Equity or, in common terms, Assets (things owned) minus Liabilities (debt) = Equity (value of the company - reflected in the stock price). If you reduce the value of the assets, then the value of the company must drop, thereby pushing down the equity (stock price). So continuing with the example above, Ford's share price will drop as the value of it's assets (trucks) are marked down. So do you see now how the falls in assets prices can quickly translate to stock prices drops under mark to market accounting?
Why is it causing so much controversy?
The Mark to Market rule works well until you cannot get a realistic price for an asset. Currently, many of the Mortgage Backed Securities (a combination of many mortgages pulled together as one security) that are behind the financial crisis have NO market and hence almost impossible to assign a fair value (unlike those of Ford trucks). Because of their perceived risk and unknown exposure nobody wants them and in many cases if there is no demand they become worthless ($0 value). This obviously is NOT true. Even if the value is 5 cents on the dollar, they still have a value. But the securities are so complex and the economic environment so uncertain, that nobody is willing to "stick their neck out" and try to pick the correct price.
Here is an analogy: Say there is a unique subdivision with 100 gorgeous houses. If these houses were any place "normal" they would be worth $1,000,000 each. But this subdivision sits on top of an old graveyard. Now most people would never pay full price for a house sitting on top of a graveyard (the potential for ghosts and all!). But what is each house worth? Some people probably would not care much about the graveyard as long as they got $200,000 off the selling price. So, is $800,000 the Mark to Market price? On the other hand, some people would only buy one of the homes if it were substantially discounted, say to ¼ of the original price. So, is $250,000 the Mark to Market price?
Now lets add one more obstacle. Let's say – as is currently happening – it is very, very difficult to get a loan (mortgage). There is then the potential that NOBODY would buy one of the homes, because they could not get a mortgage, even though they may have been able to get a big discount. One financial quarter (3 months) goes buy and none of the homes sell. What is the Mark to Market value of these homes now? Without any direct comparisons (after all, this is like no other subdivision), the Mark to Market value would be ZERO. We know that is not true, but if the accountants assign an arbitrary value, say $700,000, they may get in trouble if later they are required to write-down the value of those homes to $250,000 each, when they find out very few people are comfortable living on top of a graveyard. So the problem is: What value should you assign to an asset that has no current market (no buyers)? By the letter of law you value them at current value – zero in this example – but as you can see that is hardly fair.
This is essentially the problem currently choking financial markets with MBS and other housing based instruments. Critics of the Mark to Market accounting rules say that they cause banks to undervalue assets that have a real value based on fire-sale prices in a frozen market.
"A vast majority of mortgages, corporate bonds, and structured debts are still performing. But because the market is frozen, the prices of these assets have fallen below their true value. Firms that are otherwise solvent must price assets to fire-sale values. Not only does this make them ripe for forced liquidation, but it chases away capital and leads to a further decline in asset values," wrote Brian Wesbury in the WSJ.
Conclusion and Opinions
Tony - My personal recommendation is to keep the Market to Mark rule, but in cases where you cannot come up with a reasonable value – because of usual economic forces or a sufficiently liquid market – then guess conservatively and highlight the item to investors in the financial statements, so they can determine whether the value assigned is reasonable to them.
Andy - One point to note is that even if Mark-to-Market rules were suspended, it won't change the makeup of a company's balance sheet. If investors decide certain company's assets are toxic (like MBS nowadays) then it won't matter how a company accounts for them in its books - they will be assigned a zero or negative value by default. To get out of the current financial crisis, investors need to have confidence in the financial assets/instruments of these companies. That is what the government is trying to primarily do with the bailout bill – restore investor confidence by buying and creating a fair market value for these "bad" and illiquid assets. However, judging by recent market action it doesn't look to be working too well.
http://www.savingtoinvest.com/2008/10/financial-crisis-mark-to-market.html
Government thwarts lending, banks claim
Posted on Tue, Feb. 03, 2009
Government thwarts lending, banks claim
Comments (1) Recommend (1)
BY STEVENSON JACOBS
Associated Press
NEW YORK - Banks that are being scolded by the government for not lending are blaming a new obstacle: the government itself.
Fearing more bank failures, federal regulators are forcing institutions to hold more money in reserve and scrutinizing loans. But bank executives complain that the extra oversight thwarts their ability to quickly pump billions of bailout dollars into the ailing economy.
Banks say they are caught in a frustrating Catch-22: How can they make more loans when creditworthy borrowers are scarce, their balance sheets are saddled with bad debt and regulators are hounding them to horde cash?
"We want to lend, but the regulators are flat-out telling us, 'Get your capital up.' Then there's Congress telling you to lend it all out," said Greg Melvin, a board member at FNB, a Hermitage, Pa.-based bank that got $100 million in bailout money.
"Two arms of the government are saying exactly the opposite thing -- it's ridiculous," added Melvin, who is also chief investment officer at investment firm C.S. McKee.
Regulators say they are only being careful, and they deny slowing lending.
"We don't believe that prudence and increased lending are mutually exclusive -- they go hand in hand," said Andrew Gray, a spokesman for the Federal Deposit Insurance Corp.
The tit-for-tat marks the latest problem for the government's financial bailout, known as the Troubled Asset Relief Program, or TARP.
The government rolled out the $700 billion bailout late last year, hoping that injecting money into banks would expand lending and ease the credit crisis. But in a survey released Monday, the Federal Reserve said many banks are making it harder to get credit cards, mortgages and other loans.
Regulators have long required banks to keep a minimum level of capital on their books to stay in business. It was typically a figure equal to 10 percent of assets.
But as the financial crisis has worsened, many banks say they have been told to keep capital equal to at least 12 percent of assets. At the same time, regulators are combing through banks' loan applications and flagging those considered too risky.
It's unclear how broadly the stricter rules are being applied. But interviews with bank executives indicate that healthy and troubled banks are facing more stringent oversight, regardless of whether they have received bailout money.
The goal is to keep banks from getting into more trouble. But to comply, some banks say they have little choice but to scale back lending -- sometimes even to creditworthy borrowers.
Four government regulators oversee the country's roughly 8,500 federally insured banks and thrifts: the FDIC, the Office of Thrift Supervision, the Federal Reserve Board, and the Office of the Comptroller of the Currency.
Regulators shut down 25 banks last year and closed three so far this year because their capital levels fell too low. Meanwhile, regulators have ordered several banks to stop lending until they get more capital.
But the credit crisis has made it harder for banks to raise private capital. And the government doesn't want to give bailout money to banks that might later fail.
The harsh climate has taken a toll on banks such as Los Angeles-based First Federal Bank of California. It was forced to halt lending last month after its regulator, the Office of Thrift Supervision, said it needed more cash to absorb future losses on adjustable-rate mortgages.
Chief executive Babette Heimbuch said her bank wanted to keep lending but had a "difference of opinion" with the OTS over what its cumulative losses were and how quickly it will see them.
"They basically told us to stop lending," she said.
While the Treasury wants banks to lend, "the regulators have a whole different mind-set: They want to protect the insurance funds," Heimbuch said, referring to money that regulators use to insure bank deposits.
Regulators see things differently.
William Ruberry, a spokesman for the OTS, said its No. 1 mission is to safeguard the institutions it oversees. He denied that such efforts were slowing lending.
"We want our institutions to lend, but we want them to lend in a safe and sound way," Ruberry said. "We think creditworthy borrowers shouldn't have a hard time finding loans."
http://www.kansas.com/business/banking/story/686222.html
Government thwarts lending, banks claim
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BY STEVENSON JACOBS
Associated Press
NEW YORK - Banks that are being scolded by the government for not lending are blaming a new obstacle: the government itself.
Fearing more bank failures, federal regulators are forcing institutions to hold more money in reserve and scrutinizing loans. But bank executives complain that the extra oversight thwarts their ability to quickly pump billions of bailout dollars into the ailing economy.
Banks say they are caught in a frustrating Catch-22: How can they make more loans when creditworthy borrowers are scarce, their balance sheets are saddled with bad debt and regulators are hounding them to horde cash?
"We want to lend, but the regulators are flat-out telling us, 'Get your capital up.' Then there's Congress telling you to lend it all out," said Greg Melvin, a board member at FNB, a Hermitage, Pa.-based bank that got $100 million in bailout money.
"Two arms of the government are saying exactly the opposite thing -- it's ridiculous," added Melvin, who is also chief investment officer at investment firm C.S. McKee.
Regulators say they are only being careful, and they deny slowing lending.
"We don't believe that prudence and increased lending are mutually exclusive -- they go hand in hand," said Andrew Gray, a spokesman for the Federal Deposit Insurance Corp.
The tit-for-tat marks the latest problem for the government's financial bailout, known as the Troubled Asset Relief Program, or TARP.
The government rolled out the $700 billion bailout late last year, hoping that injecting money into banks would expand lending and ease the credit crisis. But in a survey released Monday, the Federal Reserve said many banks are making it harder to get credit cards, mortgages and other loans.
Regulators have long required banks to keep a minimum level of capital on their books to stay in business. It was typically a figure equal to 10 percent of assets.
But as the financial crisis has worsened, many banks say they have been told to keep capital equal to at least 12 percent of assets. At the same time, regulators are combing through banks' loan applications and flagging those considered too risky.
It's unclear how broadly the stricter rules are being applied. But interviews with bank executives indicate that healthy and troubled banks are facing more stringent oversight, regardless of whether they have received bailout money.
The goal is to keep banks from getting into more trouble. But to comply, some banks say they have little choice but to scale back lending -- sometimes even to creditworthy borrowers.
Four government regulators oversee the country's roughly 8,500 federally insured banks and thrifts: the FDIC, the Office of Thrift Supervision, the Federal Reserve Board, and the Office of the Comptroller of the Currency.
Regulators shut down 25 banks last year and closed three so far this year because their capital levels fell too low. Meanwhile, regulators have ordered several banks to stop lending until they get more capital.
But the credit crisis has made it harder for banks to raise private capital. And the government doesn't want to give bailout money to banks that might later fail.
The harsh climate has taken a toll on banks such as Los Angeles-based First Federal Bank of California. It was forced to halt lending last month after its regulator, the Office of Thrift Supervision, said it needed more cash to absorb future losses on adjustable-rate mortgages.
Chief executive Babette Heimbuch said her bank wanted to keep lending but had a "difference of opinion" with the OTS over what its cumulative losses were and how quickly it will see them.
"They basically told us to stop lending," she said.
While the Treasury wants banks to lend, "the regulators have a whole different mind-set: They want to protect the insurance funds," Heimbuch said, referring to money that regulators use to insure bank deposits.
Regulators see things differently.
William Ruberry, a spokesman for the OTS, said its No. 1 mission is to safeguard the institutions it oversees. He denied that such efforts were slowing lending.
"We want our institutions to lend, but we want them to lend in a safe and sound way," Ruberry said. "We think creditworthy borrowers shouldn't have a hard time finding loans."
http://www.kansas.com/business/banking/story/686222.html
Credit crunch
Synchronised drowning
By Christopher Hughes
Credit crunch: More than 18 months into the financial crisis, some observers are saying that things just might have stopped getting worse. But even cautious optimism is hard to square with what companies are saying and doing.
True, some recent business surveys – in the US, eurozone, UK and China – showed sentiment rising, albeit from dismal levels. The Baltic Dry Index of shipping rates has doubled although it is still down 90% from its peak last May. Goldman Sachs said its Global Leading Indicator (GLI) suggests “a trough in the global industrial cycle may be in sight”.
But the credit crisis continues to advance with tragic predictability. Ferretti, the Italian yacht maker which epitomised the easy wealth and casual leverage of the credit boom, has skipped an interest payment on its acquisition debt, according to Bloomberg. Hammerson, a UK commercial property developer, announced a rights issue on Monday. And Germany's Schaeffler is battling against a break-up after loading up on debt to gain control of Continental, another heavily indebted German car parts maker.
This is a global crisis. India’s largest discount retailer, Subhiksha Trading Services, suffered widespread vandalism this weekend after running out of cash to pay security staff. The company reportedly admitted to having “mucked up on not raising equity”. In the Far East, suffering is the order of the day. Japanese carmaker Nissan forecasts big losses and Korean electronics producer LG warns revenues, expressed in dollars, will be down 20% this year.
Of course, bad news will keep flowing freely until well after the recession’s trough is crossed. So perhaps the worst is indeed almost upon us. But a more plausible interpretation of the less bad surveys is that the rate of decline has slowed. After the failure of Lehman Brothers last September, credit markets were frozen and modest GDP growth turned suddenly into rapid shrinkage. The shrinkage may now be proceeding at a more moderate pace.
But whether the times are pitch black or only very stormy, there are always opportunities to make money, if only from companies under pressure. Private equity firms specialising in secondary buyouts see rich pickings in the portfolios of capital-constrained banks that are looking to sell what assets they can. And Frank Quattrone, the former Credit Suisse banker who became synonymous with the excesses of the technology boom, is expanding his boutique advisory firm into London. He expects a spurt in tech mergers. As they say, there is always a bubble inflating somewhere.
chris.hughes@breakingviews.com
http://www.breakingviews.com/2009/02/09/credit%20crunch.aspx?sg=telegraph2
By Christopher Hughes
Credit crunch: More than 18 months into the financial crisis, some observers are saying that things just might have stopped getting worse. But even cautious optimism is hard to square with what companies are saying and doing.
True, some recent business surveys – in the US, eurozone, UK and China – showed sentiment rising, albeit from dismal levels. The Baltic Dry Index of shipping rates has doubled although it is still down 90% from its peak last May. Goldman Sachs said its Global Leading Indicator (GLI) suggests “a trough in the global industrial cycle may be in sight”.
But the credit crisis continues to advance with tragic predictability. Ferretti, the Italian yacht maker which epitomised the easy wealth and casual leverage of the credit boom, has skipped an interest payment on its acquisition debt, according to Bloomberg. Hammerson, a UK commercial property developer, announced a rights issue on Monday. And Germany's Schaeffler is battling against a break-up after loading up on debt to gain control of Continental, another heavily indebted German car parts maker.
This is a global crisis. India’s largest discount retailer, Subhiksha Trading Services, suffered widespread vandalism this weekend after running out of cash to pay security staff. The company reportedly admitted to having “mucked up on not raising equity”. In the Far East, suffering is the order of the day. Japanese carmaker Nissan forecasts big losses and Korean electronics producer LG warns revenues, expressed in dollars, will be down 20% this year.
Of course, bad news will keep flowing freely until well after the recession’s trough is crossed. So perhaps the worst is indeed almost upon us. But a more plausible interpretation of the less bad surveys is that the rate of decline has slowed. After the failure of Lehman Brothers last September, credit markets were frozen and modest GDP growth turned suddenly into rapid shrinkage. The shrinkage may now be proceeding at a more moderate pace.
But whether the times are pitch black or only very stormy, there are always opportunities to make money, if only from companies under pressure. Private equity firms specialising in secondary buyouts see rich pickings in the portfolios of capital-constrained banks that are looking to sell what assets they can. And Frank Quattrone, the former Credit Suisse banker who became synonymous with the excesses of the technology boom, is expanding his boutique advisory firm into London. He expects a spurt in tech mergers. As they say, there is always a bubble inflating somewhere.
chris.hughes@breakingviews.com
http://www.breakingviews.com/2009/02/09/credit%20crunch.aspx?sg=telegraph2
Europe's leaders need to wake up to their own recession
Europe's leaders need to wake up to their own recession
French and German leaders have repeatedly called for an overhaul of the global financial system.
By Pierre Briançon, breakingviews.com
Last Updated: 1:09PM GMT 13 Feb 2009
In spite of a poor personal relationship and differences on many other matters, Nicolas Sarkozy and Angela Merkel seem to agree on what the French president calls "the reform of capitalism". Calls for more regulation on banks, hedge funds, rating agencies, short-selling or tax heavens - to name only a few - play well in both Paris and Berlin.
There's a bit of schadenfreude in continental Europe at the crisis of the now much-criticised "Anglo-Saxon" model. That's understandable, after years of being talked down to by the model's practitioners and leading beneficiaries in the City and Wall Street - even though French and German banks tried hard to play with the big boys. But European leaders understandably want to seize the moment to push for greater coordination of global rules, so that tighter regulations in one country won't be undercut by deregulation in another.
Global reforms are certainly desirable, but regulation should not be at the top of the European agenda right now. There are more pressing matters.
The recession is deepening throughout the continent and governments have failed to come up with credible stimulus packages. Germany's GDP is expected to contract by some 2pc this year, France's by more than 1pc. EU members have responded with some sensible ideas, but many are tempted by the dangerous sirens of protectionism and economic nationalism - most recently demonstrated by the French auto industry bailout plan.
This weekend's meeting of finance ministers from the G7 group of industrialised countries in Rome will be the first opportunity for European finance ministers to meet Tim Geithner, their new US colleague. Instead of trying to put regulation on top the agenda, the Europeans should focus on the deepening recession.
Without sensible and coordinated policies to share the economic pain and get the financial system back in operation, the bad times could become much worse. If governments don't rise to the urgent economic and financial challenges, they may find there won't be much left to regulate.
For more agenda-setting financial insight, visit www.breakingviews.com
http://www.telegraph.co.uk/finance/breakingviewscom/4611966/Europes-leaders-need-to-wake-up-to-their-own-recession.html
French and German leaders have repeatedly called for an overhaul of the global financial system.
By Pierre Briançon, breakingviews.com
Last Updated: 1:09PM GMT 13 Feb 2009
In spite of a poor personal relationship and differences on many other matters, Nicolas Sarkozy and Angela Merkel seem to agree on what the French president calls "the reform of capitalism". Calls for more regulation on banks, hedge funds, rating agencies, short-selling or tax heavens - to name only a few - play well in both Paris and Berlin.
There's a bit of schadenfreude in continental Europe at the crisis of the now much-criticised "Anglo-Saxon" model. That's understandable, after years of being talked down to by the model's practitioners and leading beneficiaries in the City and Wall Street - even though French and German banks tried hard to play with the big boys. But European leaders understandably want to seize the moment to push for greater coordination of global rules, so that tighter regulations in one country won't be undercut by deregulation in another.
Global reforms are certainly desirable, but regulation should not be at the top of the European agenda right now. There are more pressing matters.
The recession is deepening throughout the continent and governments have failed to come up with credible stimulus packages. Germany's GDP is expected to contract by some 2pc this year, France's by more than 1pc. EU members have responded with some sensible ideas, but many are tempted by the dangerous sirens of protectionism and economic nationalism - most recently demonstrated by the French auto industry bailout plan.
This weekend's meeting of finance ministers from the G7 group of industrialised countries in Rome will be the first opportunity for European finance ministers to meet Tim Geithner, their new US colleague. Instead of trying to put regulation on top the agenda, the Europeans should focus on the deepening recession.
Without sensible and coordinated policies to share the economic pain and get the financial system back in operation, the bad times could become much worse. If governments don't rise to the urgent economic and financial challenges, they may find there won't be much left to regulate.
For more agenda-setting financial insight, visit www.breakingviews.com
http://www.telegraph.co.uk/finance/breakingviewscom/4611966/Europes-leaders-need-to-wake-up-to-their-own-recession.html
Friday, 13 February 2009
50 ways to save cash
50 ways to save cash
In hard times, it's more important than ever to ensure that you pay no more than necessary for the essentials of life. Here are 50 ways to get the most from your money.
By Emma Simon
Last Updated: 1:56PM GMT 13 Feb 2009
Hard times make it more important than ever to ensure you do not pay more than necessary for goods and services, while making your savings work as hard as possible for your benefit.
Many hard-working families are feeling the pinch as the economy nosedives, savings rates plummet and cheap credit deals have vanished from the high street. But saving money may be easier than you think. While the weather remains inclement and the children are off school next week, why not take some time to spring-clean your finances?
The Telegraph has compiled 50 ways for families to save money. Work through the list by following the links below and see how much healthier and wealthier your pocket feels (links open in new windows).
Mortgages: Nos 1-7
Credit cards: Nos 8-14
Current accounts: Nos 15-19
Savings: Nos 20-26
Household bills: Nos 27-33
Insurance: Nos 34-41
Pensions and benefits: Nos 42-43
Shopping: Nos 44-48
Investment: Nos 49-50
http://www.telegraph.co.uk/finance/personalfinance/consumertips/4611025/50-ways-to-save-cash.html
In hard times, it's more important than ever to ensure that you pay no more than necessary for the essentials of life. Here are 50 ways to get the most from your money.
By Emma Simon
Last Updated: 1:56PM GMT 13 Feb 2009
Hard times make it more important than ever to ensure you do not pay more than necessary for goods and services, while making your savings work as hard as possible for your benefit.
Many hard-working families are feeling the pinch as the economy nosedives, savings rates plummet and cheap credit deals have vanished from the high street. But saving money may be easier than you think. While the weather remains inclement and the children are off school next week, why not take some time to spring-clean your finances?
The Telegraph has compiled 50 ways for families to save money. Work through the list by following the links below and see how much healthier and wealthier your pocket feels (links open in new windows).
Mortgages: Nos 1-7
Credit cards: Nos 8-14
Current accounts: Nos 15-19
Savings: Nos 20-26
Household bills: Nos 27-33
Insurance: Nos 34-41
Pensions and benefits: Nos 42-43
Shopping: Nos 44-48
Investment: Nos 49-50
http://www.telegraph.co.uk/finance/personalfinance/consumertips/4611025/50-ways-to-save-cash.html
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