Financial Crisis Special

MYOB 2008-10-13
Show #91
Release date: 13 Oct 2008

Notes

In this unscheduled, special edition podcast, Guy Kingston and John Richards tackle the current global economic crisis head on.

What led up to it?

What is being done to resolve it?

What should be done to resolve it?

How to protect your cash?

What to do if you are short of cash?

The Parking Problem – Keeping Cash In A Crash

The Gospels, no less, advise us not to store up treasure on Earth, where moth and rust consume them.

The Good Book was, of course, making a moral and theological point, but, like a surprisingly large number of the Parables, draws this analogy from the practicalities of business life.

Most of us dream of having surplus money, imagining everything will be all right when we do, only to find, when and if that happy day arrives, that having it brings almost as many problems as getting it in the first place.

All right, the emphasis is on the word “almost”! It is certainly better to have money than not, but keeping it, and managing it in a way that maximises its utility, can cause as many headaches as earning it – especially in turbulent times.

These are turbulent times. Cash is at a premium. Yet keeping it where it is both safe and accessible is harder than ever.

Accessibility is particularly important now. This is not just about the retired rich investing their millions – it is about where the small businessman is going to keep the small cash reserve that he is going to need to keep his business afloat over the next few months.

The traditional investments, property and the stock markets, are now too erratic: there may be good long-term bargains to be found in both for those prepared to wait, but they are certainly not safe places to park cash in the shorter term.

Even banks are no longer reliable. Expressions like “your money is as safe as if it was in the bank” now have a definite double edge to them with even big name houses collapsing all over the world.

Many see commodity markets as the place to invest. True, a number of commodities are good value in their own right, as demand increases but supply is relatively constant. The influx of cash into commodity markets as other markets fail only increases their attraction.

That, however, is part of the problem. The new money has distorted the values in the market. A newcomer will be buying relatively dear. There is still money to be made, but only if he gets out at exactly the right time. Most newcomers will not be able to judge that moment. They will be the ones left with the commodities when values start to fall because the smart money has already left.

The best strategy is to think in terms of surviving, and perhaps making a reasonable return, not in terms of maximising one’s profits. This is not the time to get greedy.

Applying that principle, it may be that, despite all the horror stories, banks remain the best option.

Governments seem determined to protect their own nation’s banks, and especially the small depositors in them – or, to use the technical description, “voters”.

Some, like the United States, have legal insurance. Others have made formal commitments to guarantee depositors up to a certain amount – although it should be noted that some of these guarantee schemes may take a while to pay out. Most also have an informal understanding that they will intervene if things get too bad.

Irrespective of how these different schemes work, the wise investor with short-term cash may draw two conclusions.

First, it is best to keep money in a bank based in your home country – as British investors in an Icelandic bank discovered. Politicians will always look after their own before anyone else.

Second, spread your money between banks. This not only spreads the risk – it also entitles you to take full advantage of schemes to guarantee or insure small depositors in each case.

Above all, what has always been good business advice is now more urgent that never: never put your money anywhere without first researching the downside thoroughly.