News

Sovereign Debt problems continue to demand attention

During the GFC, the debt problems of the banks and corporate sector were largely moved to Governments.  Now we are seeing countries with solvency problems.  Liquidity is too much of a generous term.  Greece for example, cannot pay its debts and cannot grow its way out of its problem.  The debts it owes needs to be restructured.  The risk we are facing is that of the flow on effect.  If Greece owes Italy money and cannot pay it and Italy suffers a loss then the problems facing Italy begin to increase.

Greece appears have secured a temporary solution but they and many other countries must make significant changes to reduce their debts.

The US is now making headlines for the wrong reasons.  They have a debt ceiling that is at the limit, meaning they cannot borrow any further.  Unfortunately they are in a position where they need to increase their borrowing (a short term fix but long term, it just makes things worse).  It needs to be approved by their Parliament, which is very likely to happen before the deadline, just as it has before.  In fact the debt ceiling has been increased 70 times in the past 50 years.  However in the meantime the political parties negotiate and drag out the process making everyone else nervous.

The summary is that there is still too much debt around the world, much of it at Government or country level.  This is called sovereign debt.  It must reduce to minimise the likelihood of it becoming unmanageable.  This requires reductions in Government spending, increases in taxes, taking losses on bonds and general economic pain (as indicated by the demonstrations in Greece).  The debt and the actions needed to reduce it, will limit economic growth.

Interest rates see a change in sentiment

In early May, the Reserve Bank sent a message that higher interest rates would be needed to restrain growth in Australia. So strong was the tone that it led to speculation of a possible rise in early June. But then international worries increased and Australia ran into a slowdown in employment growth, so there was no rate rise in June, or July.

The mood has actually changed completely to that of a reduced likelihood of a rate rise and there has even been talk of a rate cut, although don’t hold your breath for this.

As always, what actually happens will depend on what we find out about the Australian economy in the months ahead. If employment growth continues to be only moderate, and inflation remains under control, then the possible rate rises will not eventuate.

Investment Versus Speculation

Much of what is described in the media as investment really is just speculation.

Speculators usually have a short-term horizon. While they like to think that their success is due to their own skill, it really comes down to luck.

They may take a punt on a single stock, sector or country. They may try to time a move out of one market into another. If it pays off, great. More often than not though, it doesn’t – although you tend only to hear the success stories.

This isn’t to say that speculation can’t be fun. Lots of people have firm opinions about what will be the next ‘hot’ stock or sector. And it’s good for their egos when their forecasts prove to be right.

But markets often don’t behave in line with their expectations, however well thought out. If that happens and they lose their own money it is one thing.  If they are speculating with somebody else’s money based on a bad forecast, it is something else.

The good news is that building long-term wealth doesn’t have to depend on individual guesswork and which way the dice roll. It is about building a diversified portfolio based on risks that carry a reliable reward.  This is what we focus on for you.

You might think that you're covered - think again!  Insurance issues to think about.

"Workers' Compensation will cover me"

Workers' Compensation will only cover you for accidents or injuries that occur during work hours or for an illness that is a direct result of your employment (if you are self employed you may not even have Workers' Compensation cover).

Even if your injury is covered by Workers' Compensation, benefits are capped under the different state regulations, in terms of both the amounts of weekly benefit and length of time they are payable for.  For many people, the benefit payable under Workers Compensation will be well short of their normal weekly income.

"I've got Private Health insurance"

Private Health insurance is great when it comes to paying medical bills, but what about mortgage repayments and other costs of living? 

"I already have insurance in my super"

Most superannuation plans offer some insurance cover.  But it may only be cover for death and total and permanent disability.  And who has decided the amount of cover you need?  Usually the super fund trustee who knows nothing about your personal and financial situation.  Also, if you need financial assistance while you're recovering from an illness or injury, you'll need to count on more than this.

"Social Security will be there if I'm too sick to work"

Centrelink benefits are asset and income tested.  So depending on your own personal assets and other income, funding your lifestyle may fall short.  Even if you are successful in meeting the strict eligibility requirements of the Sickness Allowance or Disability Support Pension, you can only receive up to a maximum of $730 per fortnight per couple.

We can provide the advice you need to ensure you have the right type of cover, the amount you need and most cost effective way to hold the cover.

For insurance assistance please contact Sally Jones at our office.

Tax Time is with us again

To help make it easier for you to prepare your 2011 Income Tax returns, follow the link below to the checklist section on our website.  These checklists will make sure you have all the information you need when you see our tax team this year.

www.dmgfinancial.com.au/handytaxtools