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Money Maven Blog by Sheryl Sutherland, Authorised Financial Adviser and Director of The Financial Strategies Group

Recommended Reading

Recommended Reading by Sheryl Sutherland: Girls Just Want to Have Fund$ - Every Women’s Guide to Financial Independence, Money, Money, Money Ain't it Funny - How to Wire your Brain for Wealth, and Smart Money - How to structure your New Zealand business or investments and pay less tax.

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Thursday, 9 October 2008


We are at the point in time when we are faced with a particularly fragile global banking system, a weakening global economy, very depressed and nervous equity and capital markets.

As you are undoubtedly aware, not least from the pervasive and extensive media coverage of recent months, it has been a particularly harrowing time in equity and credit markets. For the quarter, the MSCI Global Equity index returned -4.8%, Irish equity index -31.2% and Merrill Lynch Global bond index 4.5% * with almost all of these losses being incurred in September.

The ongoing bear market that commenced almost one year ago continues to have two overriding elements to it:
• The state of the global banking system?-Systemic risk
• The state of the global economy?-Cyclical risk

Whilst both of these ebb and flow in terms of headlines on a daily or weekly basis, there is absolutely no doubt but that the fear of a systemic failure of the global banking system has been THE key issue that has dominated markets thus far.

The Global Banking System:
The origins of the banking crisis over the last few months were in the collapse of the subprime market in the US, with the recent problems coming from the failure of the global financial system to adapt to the new operating environment.

Historically the basic operations of a bank involved taking in deposits and lending out these funds to trusted clients, carefully vetted by the internal credit department. The amount lent out was determined by the level of deposits taken in, with these items generally in equilibrium. In recent years, banks saw opportunities to earn additional income from interest on credit cards, brokerage commissions and asset management fees. As a result, there was less of a focus on deposit collection and a significant gap opened up between deposits and loans. European banks on average have a loan to deposit ratio of 130% which means that they need to find €1.5tr from non deposit funding sources. This funding has tended to be from the securitisation and interbank markets.

Securitisation is where banks package and sell off a portion of their loan book and earn a fee in return. Due to the collapse of the US sub-prime market, securitisation markets are closed, with no interested buyers for these securities.

The other source of funding is the interbank market, which is simply where banks lend to one another for a specified time period. The collapse of the sub-prime market in the US created a substantial level of write downs for the financial system. As well as being concerned about their own holdings in these high risk assets, banks were even more concerned that other banks to whom they lent (in the interbank market) would have a similar or even larger exposure to this toxic debt. Hence the interbank market simply dried up with banks unwilling to lend to each other due to a fear of the unknown.

As noted above, banks fund their loan book through deposits, securitisation and interbank funding. With securitisation and interbank funding both unavailable, the banks with large funding gaps were left in a perilous situation. The situation was even more perilous for banks who do not have access to any form of retail deposits. This is what created the crisis in the US investment banking sector, where the companies did not have the security of retail deposits, hence the demise of Bear Stearns and Lehman Brothers.

Capital is the other issue that needs to be discussed. The losses related to the sub-prime crisis led to a dramatic reduction in global bank capital. The losses were large and were taken as a once off hit rather than spread over a number of years. The banks were subsequently forced to raise additional capital to fill this hole and thus far over $440 billion has been raised. Regulators are likely to re-visit capital requirements following the various banking collapses and there will be further rights issues and placings ahead.

Looking into the future, the banking model has undoubtedly changed. Banks will be forced to place an increased emphasis on gathering deposits and lending growth will be curtailed as banks attempt to reduce their reliance on interbank funding and securitisation. Deposit gathering and risk management will recapture their once dominant role in banking activity. The various announcements of public sector support for the financial system should help to restore confidence and over time inter-bank lending will likely recommence. Banks will have to increase the level of capital to support their issue equity capital when markets recover but funding is still the bigger concern at this moment in time. The deteriorating macroeconomic environment will undoubtedly lead to an increased level of bad debts and bankruptcies over the coming years. All the issues discussed above will result in a period of slower loan growth, worsening credit quality and capital raisings and we have seen valuations adjusting to reflect this changed environment.

Market Outlook
• Firstly, we are unquestionably in the midst of THE most uncertain financial environment that has faced the world in many many decades.
• Secondly, it is a time for much disciplined decision making. The volatility and rate of change of material facts is incredible. Take the Irish banking sector’s performance this week alone; despite a 46% fall on Monday, at the time of writing Anglo Irish bank’s stock is up almost 20%!! Global authorities have and are waking up quickly to the challenges currently being faced.
• Thirdly, our key challenge is weighing up the balance between the major uncertainties/risks in the global macro-economic system versus the medium term investment opportunity afforded by assets that are at multi decade lows. At present “risk assets” (equities for example) look cheap, and especially versus cash and government bonds, both of which have attracted safe haven status

Previously outlined events dominating markets:
• The state of the global banking system?-Systemic risk
• The state of the global economy?-Cyclical risk

Over coming months the focus will switch from systemic to cyclical concerns. The two are obviously linked, particularly with the dent to confidence and activity levels that the credit crunch has inflicted on the economy. We are closer and closer to solutions to the systemic banking crisis that should safeguard the system.

Cyclically, the outlook is now most likely for a G7 recession though we will probably avoid a global recession. Cyclical markets and economies are normal and demand lower risk premia than the less frequent systemic crisis scenarios. Our outlook for the next 6 months in that scenario considers:

• The downturn has been led by the banking sector and a deflation of asset prices. Past experience shows that asset deflation cycles take much longer to recover from as deleveraging in itself has very negative dampening affects.
• We face much nastier economic numbers in all western economies. The markets are good leading indicators of what is still to come.
• We face significant earnings downgrades as companies report their earnings and analysts cut their earnings estimates much more than they have so far.
• In a cyclical sense bank funding will remain very difficult to obtain.
• Overall confidence is sapped.
• The levels of uncertainty generally, is causing investors to keep selling equities and demanding higher risk premiums.

• Inflation which was a major concern during the early summer as commodity prices soared, is falling quickly.
• Over coming months as in any normal cycle, we expect relatively aggressive interest rate cuts from many central banks including the ECB, BOE and probably the FED.
• Valuations of equities look cheap, even allowing for the poorer earnings outlook. On measures such as dividend yield some of the European equity markets are now yielding more than their equivalent government bonds, which is very unusual and can be argued as very bullish for equities.

In the short term, I believe that the passing of the US bill, depressed levels of fear and sentiment and very oversold technical levels on markets would mean we could see a 10% or so bounce in equities. Beyond that I believe we remain in a cyclical bear market as despite the positives above, the biggest challenge to being positive on equities is to the timing of going positive. I believe we are too early in the cyclical downturn for markets to enter a new bull market as we need time to work through some of the issues outlined above.

Whilst we are not out of the woods yet that we have been through the most difficult and volatile part, and that the next cyclical phase whilst not overly positive is not as depressing as the phase we have come through

Source: KBC Asset Management.
*Source: Merrill Lynch > than 5 year global bond index


It’s pretty clear that Hollywood pays its male leads more and gives them roles for much longer than women.

This has extended to the world of comics. Five of the six upcoming Marvel movies feature male leads with women firmly relegated to the roles of girlfriends or assistants. Why not a Wonder Woman flick or any true super heroine movie? It’s not because directors and writers lack good material, there are literally hundreds of comic book super heroines, and female characters play integral roles in just about every superhero team and major comic book plots.

We recently saw women flexing their box office muscle giving Sex and the City the highest-grossing opening for an R-rated comedy in movie history; it’s not inconceivable to think that a super heroine flick could draw both the “girls night out” crowd and the already broad fan base for comic movies. That would give the studios a revenue bump of the kind provided by the Spiderman and X-MEN franchises. Don’t the movie moguls want our money? We are an economic force to be reckoned with.


Why does money matter? Money matters because like it or not we live in a money culture where money is the universally acceptable medium for exchange for goods and services. Money buys the things that all people want – and deserve; life, health, food, land, hope, education, sexual pleasure and some peace of mind. From Women, Money and Power. Phyllis Chesler & Emily Jane Goodman (New York: Bantam Books, 1977)

Why do we need to learn about money? Because only the powerless live in a money culture and know nothing about money. Ignorance about money and power is not an effective means of acquiring, redefining, or distributing money. A political, ‘sophisticated’, or religious horror of money dangerously avoids the fact that, in a money culture, it is only money that buys the things that all people want – and deserve; life, health, food, land, hope, education, sexual pleasure and some peace of mind.From Women, Money and Power. Phyllis Chesler & Emily Jane Goodman (New York: Bantam Books, 1977)


What can be more everyday than marriage? Ask your favourite married couple what makes their marriage work and they are unlikely to say it’s because they found their financial soul mate.

The smartest financial decision you will ever make may be marrying someone who has the similar attitudes to money. This could in fact be your most valuable asset – or your largest liability.

Although we now marry for love, so much of what we want in life boils down to dollars and cents.

Test the following guidelines with your significant other:

• Talk and share goals, ask tough questions, share your financial health and lifestyle dreams.

• Run your home like a business, make a budget and keep track of earnings, expenses and debts.

• Be supportive of concerns, having a supportive partner helps professionally which trickles down to the bottom line.

• Enjoy – but within reason, create a cash cushion and live a lifestyle you can sustain.

• Use a mediator, an independent third party, whether a financial planner or therapist.

• Maintain some independence

• And invest in your marriage – spend time together.


In Money, Money, Money Ain’t it Funny I wrote a little about our lack of mathematical skill quoting an entertaining example from The Simpsons:

A psychologist is giving a ‘team talk’. He makes the statement, ‘You are all very good players’. The team members mimic the psychologist, ‘We are all very good players’. Then the psychologist says, ‘You will beat Shelbyville!’. And the team, again in unison, reply, ‘We will beat Shelbyville!’ By this time the psychologist is raising his voice, and he shouts, ‘You will give 120 per cent!’ But the team, still in unison, reply, ‘But hold on, that’s impossible. No one can give more than 100 per cent. By definition that is the most anyone can give.’

A host of new studies suggest that the gut instinct has a surprising role in maths. Imagine you are in the supermarket; you routinely survey the checkout lines and pick the shortest. We use our approximate number system an ancient and intuitive sense we are born with and that we share with many other animals. Rats, pigeons, monkeys, babies – all can tell more from fewer.

When it comes to genuine computation we have to use a very different number systems one that is symbolic specific and highly abstract. This is a recently acquired skill which takes years of education to master.

For an example of flawed computation skills, take Russell Crowe’s recent comments on the US Bailout.

The New-Zealand born actor announced, during a US TV talk show appearance on Jay Leno, a mathematically-flawed plan to cure America’s financial crisis.

Crowe believes the US should give each American US$1.00 million ($1.50 million).

His reasoning is the US has a population of about 300 million, so the US$300 billion outlay is a fraction of the US$700 billion bailout package rejected by Washington DC.

“If they want to stimulate the economy and get people spending so they can look after their mortgage...give everyone US$1 million.:

His plan would actually cost $300 trillion.

The researchers say that they don’t yet have any idea of how the two systems interact. FMRI studies show that the approximate number sense (fewer or lesser) has been traced to a specific neutral structure called the intra parietal sulcus. Symbolic math however activates many of the prefrontal regions of the brain, the “new” brain. Somewhere the scientists suggest that these two areas must be hooked up to a party line.


I’ve been counting women lawmakers and politicians. It is true that we have made substantial gains in the last decade but equal representation in the lawmaking and ranks of political power still seems to elude us.

Less than 18% of the world’s lawmakers are women and many developing countries have more women in the corridors of political power than Western democracies. Globally, the proportion of female lawmakers jumped from 11% to 17.7% between 1995 and 2006 according to a survey “Equality in Politic” presented to the Inter-Parliamentary Union.

Rwanda has the highest percentage of women in its lower house, with 48% followed by Sweden, Finland and Argentina.

The United States trailed in at 71st place with women accounting for only 16% of members in the House of Representatives. Sudan’s lower house has 18%.

One third of South Africa’s lawmakers are women and all the Speakers of Parliament have been women since the advent of multiracial democracy in 1994.

It seems the old democracies talk a lot about equality but are not doing particularly well at practising it. This gap really matters. Like men, women with the brains, the desire and the perseverance to lead should be encouraged to fulfil their potential and leave their mark.