These days I get asked by a lot of people where they should invest their money. It’s a good question given uncertain times. Not only are we experiencing a traditional recession but there are concerns about the actual financial system itself.

This in turn has led to a somewhat deeper examination of money itself: its construction, process and ultimately its value.

Personally I’ve been in cash for the last 18 months having sold out of commercial property investments. Now, as interest rates are cut heavily and our banking system is on its knees, cash doesn’t seem as appealing as an investment class.

What if rates continue to fall? What if new rules are introduced such as limits on withdrawals, foreign transfers, currency trading etc? What if interest is frozen, bonds converted to equity and so on.

Gold is often mentioned as something useful to hold. I’m not a big fan of it myself but it’s likely to be worth something at some point so does have some holding appeal.

What I’m most interested in at the moment is investing locally. This could mean sticking in a decent veggie patch (if you have the space, which fortunately in NZ we do). How about investing in renewable energy for the home, solar heating, a wind turbine, battery pack etc? Normally its a bit upfront payment but at least you know you’ll be getting a decent return in KwH rather than cash.

But also investing in local food systems, local infrastructure or local transport. These all appeal because they can provide a return, real or cash,  and they keep cash circulating locally, which keeps people employed and boosts confidence in the community.

It’s an opportunity for local councils to get involved as they are struggling to riase cash at the moment given the rush into government guaranteed bank deposits. Many people talk about sending money overseas as they are worried about the falling NZ$ or whatever your local currency is. I say be careful. If you can’t access your cash in person then you have a much higher risk profile. Foreign cash deposits can be the first items to be frozen when new rules are applied. If you are worried about currency risk you can always do a forward currency trade with your bank or hedge through an online fx company.

There are some useful websites about this including, of course, Financial Permaculture as well as Catherine Austin Fitts at Solari. If readers have any useful links or ideas on this please let me know.

We’re starting to see real signs of a weakening house market here in New Zealand. Sales for Auckland’s top real estate company are down over 50% and a recent auction saw a 6% clearance rate.

I decided ton investigate this myself in Christchurch and looked at some properties recently. One i saw was a 3 bedroom unit which had been bought for $375,000 a year ago. It could be rented for about $350 a week maybe a bit more if it had some money spent on it. It wasn’t in great condition but looked a reasonable investment property.

It was auctioned yesterday and passed in at $317,500. It still hasn’t sold.

We’re not really seeing this come through into prices yet because we only get the median price which is often misleading. In fact it can go up if a few properties sell in the higher brackets and none in the lower levels.

But it’s clear that prices are falling quite heavily in many areas and there is a buyers strike on at the moment.

Although there is the belief that property prices increase regardless the market is clearly starting to realise that capital gains are not guaranteed and therefore investors are starting to look more closely at the maths.

Mortgage rates are 9.5% for 2 years fixed. Yields are 3-5% and prices are falling. Even with the negative equity tax break that’s a big yield gap to fill. There is also the issue of not being able to borrow 100% of the price anymore.

With many fixed rates rolling over this year to much higher rates, the squeeze is really on. This will really start to impact when banks ask for properties to be revalued and then ask for extra equity.

Property investors, like banks, are facing a major liquidity crisis.  Price falls of 10-20% may not be as outlandish as previously thought.

It’s hard not to feel sympathy for elderly investors who have been sold down the river by financial advisors. This story brings a shudder with one old lady investing $242,000 into ING Funds which were invested in CDOs and CLOs in the main.

There will certainly be some investigation into how financial products have been marketed and sold especially to novice investors or those towards the end of their lives where only conservative investments should be considered.

“safe as a bank” they were told. famous last words.

Yesterday the New Zealand arm of the Dutch giant, ING, suspended withdrawals from 2 of its funds affecting some 8000 investors. The 2 funds were invested mainly in credit securities and were down over 20%-25% over the last year.

So nothing new there except the suspension of withdrawals from the fund. Now we’ve seen this already in the banking sector when Northern Rock closed its doors to depositors. Last month Scottish Equitable told 129,000 investors that they could not access funds for at least a year. Its familiar and sad story.

What’s the world coming to when you savings or cash is not safe.  Well maybe we’ve got too comfortable with our present financial arrangements. Have you ever met a poor investment banker? Well probably not. The last 15 years has seen a phenomenal rise in the idea of money as an asset class itself. The ability of banks to create money via debt and ply the financial system with leverage has led to a new type of investing. The ability to create money out of nothing is how markets have grown to the size they are now. It’s not a zero sum game as long as the supply of money and leverage keeps increasing. No one embodies this more than Stephen Schwarzman of Blackstone. Just as George Soros and Michael Milken of previous years, he will be known as the man who made the most of the situation at the time.

What we are witnessing now is the de-leverage when all that new money goes poof! and people look around to see where the security or asset is and find it’s more of the same. Round and round it goes until it simply disappears (money is destroyed) or an asset is finally found to be sold, usually at an extremely low price.

So its pays to be sensible here. Check your savings and investments. Make sure you understand what type of access you have to them and under what terms.

I read today of Tata’s impending purchase of 2 of Ford’s great brands, Jaguar and Land Rover. Only last year Tata Steel paid $12bln for Anglo-Dutch steelmaker Corus. What’s going on here? What happened to the East India Company and all that? Queen Victoria would be spinning in her grave. It seems the plunder of Asia is over. And now it’s payback.

The Arabs are at it as well having bailed out Citibank not long ago and lets not forget the Chinese pumping in $5bln to keep Morgan Stanley afloat.

Those trade and petro dollars are finally being put to good use. The Arabs in the Emirates are showing their cousins the way foward by buying real assets instead of partying away the cash as they did in the 80s. The Chinese, always astute and long-term, are making obvious in roads into the US whilst continuing to make it hard the other way around.

Reverse colonialisation anyone?

The G7 communiques are out (i can’t find a link at the moment as i have it direct from a trading platform) and there is one clear story and several cloudy ones. The main thrust is that they would like to see the Yuan quicken its appreciation. Well looking at China’s trade surplus that’s pretty obvious. One only has to remember the famous Yen “endaka” from 1971 to 1995 when the $ fell from 360 to just below 80 Yen.

How far will the Yuan rise is anyone’s guess. The day it floats and becomes fully convertible will see a huge increase in volatility and speculative financial flows. However a floating Yuan would actually be beneficial in regulating global imbalances in trade and economic growth.

The Chinese are well aware of it and are probably not minded to open the doors to the Magic Kingdom just yet. They hold the balance of power at the moment and wont be pushed until they are ready. Still continued pressure will eventually tell.

However, it’s not just the Chinese getting a telling off. Some mention has been made of Asia as a whole and of course this refers to Japan. Whilst there was no specific mention of the Yen this will certainly not be lost on those with substantial short yen positions. There was mention of an improving economic situation in Japan and that exchange rates should reflect fundamentals.

The risk inherent in global carry trades was mentioned specifically by Juncker (Luxembourgs PM) saying they wanted the market to be aware of the risks of one way bets, specifically in the foreign exchange markets.

Paulson (US Treasury Sec) mentioned clearly and loudly that the US believed in a strong dollar. Added to that were moans from the ECB crew about the strength of the Euro and how they were bearing the brunt of $ weakness.

The Canadians jumped in on this wagon too noting the Loony is now 3% stronger than the Greenback. Strange times indeed.

So what does all this mean. Well for me it could means the $ depreciation is nearing an end or at least getting into the red zone. From a market perspective i would say NZ/Yen is due for more pounding (back below 80 again) given this is regarded as the major one way bet in the fx markets. The Euro may reverse back to 1.35, the C$ back above parity and the A$ probably could do with a small dusting (maybe down to 85cts).

Stocks could also get pounded this week. Who knows? It’s not a week to be hugely long and comfortable.

FX rates are elastic things and when they get stretched the bounceback (as we saw in August) can be pretty fierce.

P.S. Others may interpret the communique differently so feel free to give me some of your views.