John Stepek highlights some of the best bits from our free emails, newsletters, blog and MoneyWeek magazine that we’ve published in the past week.
● What a week. The emergency Budget took up all the headlines, and most of the column inches on this side of the Atlantic. We were broadly happy with it. But of course, it’s easy for George Osborne to stand up there and talk about huge cuts. Now they need to be pushed through.
As Tim Price put it in The Price Report: “to the extent that it imposed a degree of fiscal prudence where under Labour we had flatulence, this was ‘Mission Accomplished’. We will now have to wait and see whether the savagery of the cuts to the public sector is greeted with continental-style social disunity.”
● Of course, the neo-Keynesians, who think the answer to everything is to print more money, didn’t like the Budget. As I noted in Wednesday’s Money Morning, we’ll never have a definitive answer about who’s right, because these stances are often based more on personal politics than anything else – which just shows that economics really is a poor excuse for a science.
I’ve seen the case made that the Depression in the 1930s was caused by too much government interference, rather than too little. And I’m sure we’ll see the same arguments rage over the “Great Recession” of the early 2000s in the future.
Our sympathies are with the austerity camp – although we don’t think taking either path could save us from a double-dip. My colleague Merryn Somerset Webb explains in an excellent blog on the VAT hike. “One of the things that most worries the ‘must-have-more-stimulus’ crowd about the Budget is the rise in VAT from January. It will, they say, tip the economy over the edge. Next thing we know, we’ll be back in recession.
“The critics point to Japan as an example of how the nightmare of rising consumption taxes unfolds. There, in 1997, the tax rose from a mere 3% to 5%. The economy subsequently shrank in four of the next five quarters.
“I say subsequently rather than consequently for the simple reason that there is little evidence the two were particularly connected. As Graham Turner of GFC Economics points out, the Japanese economy had been slowing for some time before the tax actually rose. And the country’s financial crisis was already “palpably intensifying”, with a number of finance companies having just failed or being publicly on the verge of failure.
“At the same time, a big land auction in Tokyo had just failed (falling land and property prices were at the core of the Japanese financial collapse, just as they have been in ours). Worst of all, one of Japan’s big insurers had just defaulted – the first to do so.
“All this ‘arguably had a far greater impact on consumer confidence than the hike in consumption tax.’ The UK may well end up back in recession. But if it does, I don’t think it will be the rise in VAT that puts us there. Just as it was in Japan, it will be the next leg of the banking crisis.”
● So that was the Budget. But while Britain’s eyes were focused on Mr Osborne, the nation’s broad mood of cautious optimism (no doubt helped by England’s football win) was at odds with the rest of the world.
China got the week off to a good start with its revaluation of the yuan. However, investors rapidly realised that a tiny relaxation in the dollar peg wasn’t going to cure all the world’s ills.
Indeed, as Merryn blogged, China has plenty of its own problems. In fact, the renminbi might even be massively overvalued, rather than undervalued, as everyone assumes. “Let’s not forget that while it has been pegged to the dollar it has nonetheless already appreciated massively against the euro and the pound this year. And in trade-weighted terms it has risen 13% or so since the peg was first loosened back in 2005.”
● Meanwhile, investors are starting to worry about the impact of all this austerity. Government stimulus is the only thing that’s kept much of the global economy afloat. Now that it’s being pulled away, everything is starting to look rather bleak.
But at the same time, governments can’t just keep spending indefinitely. European governments in particular have run out of ammo. The cost of insuring against a Greek default hit another high this week, apparently for no specific reason other than that it was a ‘risk-off’ week. And in the US, the pulling of support for the housing market there has absolutely hammered home sales.
● Another worrying sign comes from the technical analysis side of things. I know a lot of you are sceptical about charting. I don’t blame you. But it’s worth paying attention. Certainly all the best investors and fund managers I know consult charts as at least part of their analysis.
In any case, what’s got the chartists worrying now is the rather grimly-named ‘death cross’. You can see for yourself and read all about it in my colleague David Stevenson’s blog. But in short, it suggests the FTSE 100 could be heading for another big downturn. You might be inclined to blame that on BP’s horrible performance. But a ‘death cross’ is forming in the copper chart too, which suggests it’s about more than just oil.
● Getting away from charts and back to fundamentals – one investment cliché that’s also pretty good advice is to “buy what you know”. Our Asia expert Cris Sholto Heaton agrees wholeheartedly. Of course, Cris being Cris, what he knows includes a whole range of things that most of us rarely encounter – such as obscure Asian soft drinks.
And in the latest edition of his Asia Investor newsletter, I reckon he’s come out with the most exciting share tip he’s recommended yet. “In its home market, this company has the same kind of profile you might associate with Coca-Cola or Pepsi.” The big news is that it’s starting to expand – but the market hasn’t noticed yet.
Now I’m quite wary about the stock markets in general at the moment. I certainly don’t think the recession is done with the West, and I suspect China is heading for harder times than anyone imagines too.
But if you’re offered the chance to buy the next potential Asian multinational, you take it. Because what matters isn’t what the market or the economy might do next month or next year. It’s where we’ll be in ten, maybe 20 years’ time. And by then, however you cut it, Asia’s populations as a whole are almost certain to be healthier, wealthier and consuming a lot more than they are now.
● Another investment cliché that’s worth listening to is – “Never catch a falling knife.” I’m talking, of course, about BP. Earlier this month, I thought it was worth a gamble at around 350p. Merryn disagreed with me, and I have to take my hat off to her, she was absolutely right. The oil major had another shocker of a week this week, and even plunged below 300p at one point.
Well, it’s certainly another useful reminder as to the importance of setting a stop-loss when you’re gambling. David will have an update on what it all means in Monday’s Money Morning.