Welcome back to your weekend edition of Money Morning.
This is where we highlight some of the best bits from our free emails, newsletters, blog and MoneyWeek magazine that we’ve published in the past week.
• The markets don’t know where to turn. China is tightening monetary policy, the US isn’t. The Greeks are insulting the Germans, but still asking them for a hand-out. In Britain, GDP was revised up to 0.3% (still worse than the 0.4% that economists had originally predicted) but house prices fell, and the pound tanked.
• Oh, and a shark tank in Dubai’s biggest shopping mall sprung a leak. I’m sure you could turn this into a great metaphor about the hubristic city state. But I think it’s more interesting for what it suggests about ‘build quality’ when you have credit-crazed developers throwing up ground-breaking projects all over the place.
• China suffers from some of the same problems – too much poor-quality infrastructure that won’t end up being used. You can find tales of empty villages and buildings that blow over in a strong wind littering the internet and YouTube.
Yet despite all that waste, investors are still bullish on China. Anthony Bolton is of course launching his new investment trust there, while most of the experts at our most recent Roundtable were upbeat.
But what I find troubling about the China story is that it seems to rest on investors’ faith in the government’s ability to control the economy. Every China bull I speak to ends up falling back on the same point – “the government can’t afford to let the economy go off the rails.” In other words, where the maestro Alan Greenspan and our own Mervyn King failed before them, the bureaucrats in Beijing know exactly how to fine-tune an economy, through lending controls and the threat of brute force.
But can it really work? Here’s MoneyWeek publisher Bill Bonner writing in The Daily Reckoning (sign up for free here) with his take: “Last year, China ordered its banks to lend money to infrastructure programs in order to offset the worldwide financial meltdown. The banks responded, doubling their lending. Observers in the West were stunned… and envious. If only we could ‘get things done’ like that, they lamented. If only our governments had more authority and control over the economy!
“But let us go back a year and put ourselves in the shoes of the bankers. They must have had loan requests. Some of them they must have judged worthy of funding, others not. But how was it possible that the number of projects deemed creditworthy doubled in the space of a few months?
“Well, it didn’t happen. Instead, the Chinese government merely changed the rules of the game. The banks, under pressure to loan out money, reacted by lending it out… to marginal projects. Now, we’re beginning to read about them in the paper – mostly towns without any people. Just wait until China blows up. Then, we’ll read about banks without money. Stores without customers. And businesses without a prayer.
“Central economic planning doesn’t work. China is going to prove it, again.”
• Of course, just because China’s looking a bit overheated, doesn’t mean you can’t make money in emerging markets or elsewhere in Asia. My colleague Cris Sholto Heaton has been writing MoneyWeek Asia, a free email dedicated to Asia, for some time now (if you haven’t already done so, I heartily recommend that you sign up for it – good writing about the region is thin on the ground – and did I mention it’s free?).
Cris is also working on a new project, finding and recommending the best Asian companies to buy now. It is currently only going out to a select group of his MoneyWeek Asia readers, and once we’ve got their feedback, the full newsletter service will launch.
It’s already shaping up well. In his first issue this week he looked at Indian infrastructure. Dubai and China might have more infrastructure than they know what to do with, but, as Cris points out, that’s a charge you could never level at India. “Roads that are more pothole than road. Power cuts that last for most of the day. Water supplies that suddenly dry up, even in leading cities like Mumbai. All of these areas need billions in investment.”
But infrastructure is about more than just dirt tracks and blackouts. It’s about logistics too – things like warehouses and freight handling, which ensure that goods can get from A to B in good time, without getting lost or damaged. “In Britain, goods get transferred and shipped in specialist warehousing and consignment centres. In India, it’s common for goods to be shifted from truck to truck as they park in a layby beside the road.” That’s a huge problem for big companies trying to do business in the country, including Indian conglomerates such as Tata.
“So the need for modern high-quality freight-handling and warehousing facilities is going to grow enormously as India develops. To get some idea of the growth possibilities in this sector, think back to the US economy as it entered its great post-war boom in the 1950s and the modern mobile economy came into being. Many firms that got into the business at the right time in the right locations have transformed into enormous operations.
“Take the Jacobson Companies, which started from one 100,000 square foot warehouse in Des Moines, Indiana in 1968. Today this group operates around 30 million square feet of facilities in 27 states across the US.” India will need lots of companies just like Jacobson, and bold investors who find and invest in them now should do rather well, reckons Cris.
● But dodgy infrastructure’s not just a problem in the developing world, as Paul Hill learned this month. “Last Tuesday morning I got a bit of a shock. It was about 6am and I was driving along an unlit road in the pitch black. I could barely see more than a few feet ahead. As another vehicle approached, I dipped my headlights and all of a sudden… bang! The right side of my car bounced up and landed with a bone-crunching thud.” The culprit? “A monster crater that went half way up my shin when I stood in it.”
Of course, Paul being Paul, his first thought – after he’d trundled down the road to a nearby garage – was “how can I profit from this?” And sure enough, he’s found a way. “It turns out the huge snowfall we’ve had in recent weeks has done terrible damage to Britain’s road network. There are now millions of potholes strewn across the country – in fact around one in every 120 yards, that are causing treacherous driving conditions. The total repair bill is estimated to be £10bn just to get all the UK’s highways back into shape and safe to use – equivalent to spending another 2012 Olympics just on resurfacing work.” Someone has to benefit from all that spending – he’s hunting down who for his Precision Guided Investments newsletter readers right now.
● The situation in the Falklands is getting interesting, shall we say. Investors who’ve piled into the main stocks in the region have done very well. We tipped Falklands Oil and Gas (Aim: FOGL) in MoneyWeek in July and it’s up 80%-odd since then. And Tom Bulford, over at the Red Hot Penny Shares newsletter, has been on top of this story for even longer.
Now, the good news could continue. After all, the Ocean Guardian drilling rig has arrived in the area. Everyone will be waiting with bated breath for the results. On the other hand, the Argentinians are sabre-rattling and we’ve an election coming up. So should you take your profits now?
Well, nobody could blame you, says Tom. After all, some of the earliest investors in the various Falklands oil stocks could have quadrupled their money by now. But it’s worth keeping some money in the islands. “And yet I sense that if oil is indeed discovered, these shares are set for one more blow-out. It would be a shame to miss it…
As for Argentina, it “claims sovereignty to ‘Las Malvinas’, and yet looking back through history I scarcely see why. It was an English sailor, John Davis, who first spotted the Falklands in 1592. Since then they have been fought over by the French and the Spanish, but to my knowledge they have never been in any sense Argentinian.
“That nation’s claim seems to be based purely on geographical proximity. It’s a useful nationalistic rallying call at a time when the country’s government is struggling. But apart from making a lot of noise it is hard to see what it can actually do.
“In any case, it should be pleased that others are spending the vast sums needed to identify any oil and gas, money that could yet prove to be entirely wasted. Better to wait for confirmation that these resources are indeed present before risking a cosy chat with Gordon Brown.”
The reality is that “the really smart players did get into the Falklands explorers some time ago. But that’s not to say that those who get in now cannot make money. But inevitably as share prices rise, the rewards are more finely balanced and Argentina’s opposition, though hardly a surprise, is an added complication. Investors here need to keep their eyes firmly on events – and be prepared to move fast.”
From the MoneyWeek side of things, we’d be tempted to lock in some profits and let the rest ride. As for Tom, he’s already looking at the next potential Falklands-style bonanza. We mentioned his report in last week’s round-up.
● As for gold, the International Monetary Fund has caused a bit of a stir with its plans to sell 191.3 tonnes of the stuff. After India had snapped up 200 tonnes in October last year, everyone wondered why there were no central bank buyers this time around.
Theo Casey, writing in the Fleet Street Letter newsletter, reckons he knows why. “It’s the dollar rally.” What does he mean by that? Well, India and China want to decrease their dependence on the dollar. But right now the dollar is going up. They don’t want to spoil that by very publicly swapping their dollars for gold and reminding everyone that the US currency is, like any other, just paper.
“I believe that India and China are watching the ‘flight to safety’ into the dollar and are going to hold onto their dollars until they get maximum bang for their buck. Every pip the dollar rises is another ounce of gold the central banks can buy… They’ll come after the IMF’s gold. And when they do, they’ll be buying in dollars.”
Theo’s not the only one who likes gold. George Soros is pretty keen on it too, as Dominic Frisby pointed out in Money Morning earlier this week (Ignore the IMF sales – Soros is right about gold). It might be the “ultimate bubble,” as Soros put it. But it’s nowhere near to bursting yet.
● Just before I go, there’s a rumour doing the rounds that the election date might be announced this weekend (who knows? It may have been called by the time you get this email). The theory goes that things can’t get any better for Gordon Brown, says Iain Dale on his blog. If he pulls the election forward to 25 March there will be no Budget to deal with, and it’ll also come before the GDP reading for the first quarter of 2010 comes out. The bookies have apparently stopped taking bets on a polling date of 25 March. My gut feeling is that Mr Brown would rather hold on to power for as long as possible. But in terms of the level of uncertainty hanging over the markets, I suspect that the sooner we get the election out of the way, the better. We’ll see.
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