'Household Crunch' Might Replace 'Credit Crunch' - Further Potential Risk For Stockmarket Investors
At present the two phrases Credit bubble and credit crunch are most probably repeated several hundred times a day in the media world of print, internet and TV.
But what about the phrase household crunch or something similar - currently few people are referring to that one.
One point that makes me sigh slightly about the credit crunch is the majority of talking heads suggesting that it's almost over.
These people want us to believe that if the global banks collectively take a trillion dollar hit over a year they'll suddenly be able to come out of the whole mess unscathed. Then, it will be business back to normal the following year as if nothing has happened.
However, to be fair to the people suggesting the bad times will soon be over, most of them are politicians, fund managers, CEOs of investment banks who always have an interest in being bullish. And if we're honest with ourselves we would be saying the same platitudes if in their shoes.
Nevertheless it always pays to and try automatically filter out those with agendas, hidden or not.
My Experience Of Those With Personal Debt
Through the LearnMoney money website we get many emails from all kinds of people. Many of them over the last few years have asked for help with their debts. Normally they're battling against one or more of the banks/Credit Card companies and are seeking help on how to deal with their problems.
Although I cannot offer specific financial advice I do what I can to help. Normally I would refer them to the excellent and 100% free National Debtline (see next page for more details).
Some of these people keep in contact over the years and without doubt ALL of them (assuming their debt was large in relation to their incomings) take many years to get back on a secure financial footing.
Generally it is the same with companies. You don't get a company which today is almost broke reporting bumper profits the following year as if its recent problems were nothing more than a minor irritation.
Look for example at any price chart of a company that was in trouble and you'll probably see a share price that has continued to be under pressure for at least 2-3 years if not more.
Again, it's hard to be on financial death row today and become a great performing stock the following year. Present management normally have to thrown out, new bosses brought in, an audit done of the company's operations, staff lay-offs, selling unprofitable subsidiaries, reorganisation of the business plan, hard negotiations with the banks and suppliers.
This takes hard work, and above all time whether you're a company or individual. This is the key point to remember and one which many people have forgotten or are conveniently brushing aside.
Is The Stockmarket Currently Working Properly?
The phrase credit crunch might be redundant by the end of 2008 but that won't mean the affects of it will be. It is similar to a nasty attack of damp in a house which can be cured but its musty smell takes longer to purge.
So with a stockmarket supposed to be a forward pricing mechanism I'm starting to feel that with the FTSE 100 at its current levels (about 100-200 points lower than the 2006 year-end) the odds of it moving lower outweigh the odds of moving higher.
But the question I keep asking myself is this - is the stockmarket acting correctly right now and forward pricing all the risks in the economy.
If you are unfamiliar with the term forward pricing it means that stocks are usually priced on what the future may hold rather than what is happening to a company or general economy at present. For example, say there is a nasty recession that ends in the summer of 2011, stock prices will most probably bottom out and start rising towards the end of 2010 even though the recession is still full on.
Right now I think that many market participants are so focused on the banking problems the potentially more serious problem of personal debt has been forgotten and in turn the affect this might have on consumer spending for ALL goods and services.
The Foundations Of Stockmarket Gains Have Disappeared
In the US for example (and the UK), which nobody can doubt has been the major driver of stockmarkets worldwide, the recent boom was built on two main factors -
- Banking profits from cheap money and trading of securities/products. This was not just by the finance companies, but by many different firms such as the behemoth General Electric which makes (or at least made) a significant amount of its profits from financial based trading and services
- Consumer spending, which in turn was driven by both property appreciation either from re-mortgaging or from access to cheap and easy personal credit (credit cards, personal loans etc)
We know that point 1 above is over, it's been front page news every day for the last 2-3 months. But I feel that point 2 hasn't been properly addressed yet, either by the media or the stockmarkets.
For example, in the UK the only thing we hear when the media talk about personal economics is 'house prices', 'house prices', 'house prices', and in turn how the mortgage application spigot has been welded shut.
Look for this imbalance of opinions to start changing over the coming months. So the personal debt problem and general lack of consumer buying power replaces the credit crunch in the banking sector.
So if the stockmarket is a forward pricing tool then personally I don't think it's doing much forward pricing right now towards the personal debt problem and what this will mean for future consumer spending.
The risk to me, and it's a big risk (perhaps as much as 25% lower), is for stocks to start sliding with the negative momentum and news feeding off itself.
I've Cut My Personal Spending By 10% So far This Year
Fortunately my financial situation is in fairly good shape but that doesn't mean my spending hasn't been affected. I'd estimate that so far this year I have cut my overall outgoings by at least 10%, mainly to defeat the effects of the 8%-10%+ inflation (regardless of the ridiculous and insulting 4% Government figure).
I've cut down on all my utility bills (heating on for 2 hours less a day, plus summer is coming), not going out as much, flatly refuse to buy anything that's even a remote rip-off (£1 bottle of water at the Train station), always on the lookout for deals especially in the supermarkets, and other simple and logical money-saving tricks.
So how many people are there in the country who are not in financial trouble who have also cut their spending by at least 10%? I would think a fair few.
