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.
● It’s been another tumultuous week for the markets. It started off with everyone back in a reasonably good mood, buoyed by quite a spurt of M&A activity – including BHP Billiton’s hostile bid for Canadian fertiliser giant, Potash.
We can understand why BHP wants to buy Potash. We’ve liked the stock for a while, as I noted in Wednesday’s Money Morning. Fertiliser demand is rebounding and it’s undeniable that the long-term picture looks great for agricultural commodities in general. It’s a key investment theme to get exposure to.
● But anyway, getting back to the wider markets. Thursday brought with it a swathe of grim economic data from the US. Jobless figures were higher than expected, and manufacturing activity worse than expected. Jittery investors fled stocks. And you can see why. Things really don’t look pretty in America at the moment, as our own Simon Wilson points out in this week’s issue of MoneyWeek magazine.
● Indeed, reckons Tim Price, “the deflation monster” is “lurching ever closer”. In his Price Report newsletter, Tim looks at how to invest for the frankly chaotic environment we’re in. On the one hand, governments are trying to push prices up, by printing more money using various methods. On the other, people and companies are paying down debt. In effect, the money is being pumped in at one end of the economic system, but it isn’t coming out of the other end.
The danger is that the entire Western world ends up looking like Japan. Tim quotes from a letter to this week’s FT from a Japanese correspondent: “For so long people have sneered at the Japanese for their inability to steer their economy to recovery. Perhaps because they have sneered so much, it is no longer possible to admit that after a huge housing bubble bursts, there is nothing to do except suffer many years of economic indignity.
“The fixation with Japan was not helpful during Mr Greenspan’s watch, nor I fear will it be of much use this time. The Japanese may be different, but they were not stupid.”
So what can you do? Tim reckons that what we’ll see is even more quantitative easing, even although QE “never achieved anything in Japan. But as more and more inflationary fuel (inflation of the money supply, that is) is poured onto the tinderbox, the risk of an ultimately inflationary upsurge (an inflation in general prices) gets higher and higher. So we’re not there yet, but the situation requires careful monitoring.”
What do you invest in for these conditions? Well Tim has his strategy all worked out. One thing’s for sure – another deflation scare will be very bad news for stocks.
● Of course, when people start fretting about deflation, you normally get the old “the government must spend more” nonsense rolled out. That didn’t work in Japan either (they just ended up with lots of apparently hideous bridges to nowhere – so I’m reliably told by our editor-in-chief Merryn, who worked there as a stockbroker for years).
Despite his views on deflation, Tim thinks the coalition’s spending cuts are a good idea. And he’s right – the fact is that cutting public spending doesn’t have to be the disaster that the likes of David Blanchflower and Paul Krugman like to make out. On our blog, Merryn points out (see: Why Britain’s public spending cuts are good for the economy) that “there has been a considerable amount of research done into the effect of government spending or the lack thereof on economic growth. On balance, says Andrew Milligan of Standard Life, the results show a fiscal multiplier of around 0.3-0.5. So a cut back in government spending of, say, 1% would only reduce actual GDP growth by something between 0.3% and 0.5%.”
It’s not the cutting that matters, it’s how you go about it. Cutting spending works better than raising taxes, and longer-term savings (such as raising the retirement age) work well too. “However, possibly the most vital thing of all in this equation is credibility. A government that isn’t cutting spending into a sovereign debt crisis, or one that is cutting the wrong things, can easily lose it. And that is worse for GDP growth than almost anything else. Investors and entrepreneurs need to know that they have governments who understand that their job is to create an environment conducive to investment and long-term growth.”
● Merryn also wrote the cover story for MoneyWeek magazine this week. It’s a big milestone for us – our 500th issue. It’s fair to say that we’ve been pretty gloomy on markets and developed world economies in general for the first near-decade of our existence. Will we be able to ease up on the bearishness at some point over the next ten years? Well, Merryn’s taken a look at the case for optimism – and finds there might just be some light at the end of the tunnel. If you’re not already a subscriber, don’t miss our next 500 issues – sign up here and you’ll subscribe to MoneyWeek magazine.
● My colleague David Stevenson caused a bit of a stir yesterday. His Money Morning basically suggested taking a punt on Zimbabwe (and let me emphasise, it is a punt, for your ‘cross your fingers and hope for a ten-bagger’ money only). We got a couple of outright outraged comments. And a few others complaining that we should look at investing in the UK more, which I must confess, I believe were probably motivated by distaste – I’ve never seen anyone complain when we write about the US or Japan.
Let me make one thing clear. This isn’t an endorsement of Robert Mugabe. As many people pointed out at the time of the Iraq War beginning, if we really thought that Saddam Hussein should go for humanitarian reasons, then Mugabe should have been in the queue ahead of him.
But let’s be blunt here. Zimbabwe very recently suffered the biggest economic collapse of pretty much anywhere on the planet that’s not actively at war. Did that result in the ousting of Mugabe, as Peter Stanton in Amsterdam is hoping for? Nope. Made life even more grim for the rest of the Zimbabweans though.
If you’re going to be forced to live in a corrupt dictatorship run by an evil despot, better to live in one where you might manage to hold down a job and where foreigners, who tend to come under a bit more pressure from their own home populations to act ethically, actively want to invest.
So the way I see it, you’re not helping anyone by withholding your money from the country. As another commenter put it, “So the people of Zimbabwe not only have to put up with Mugabe, but also outside investors who are too proud and media-led and so refuse the urgent investment this struggling country needs.”
But then, that’s just our opinion, and we do enjoy a good debate on ethics over here at MoneyWeek, so
stick your tuppence worth in under David’s piece here. Let’s try to keep it civil…
● Anyway, come back on Monday when David will be looking at another ethically dubious sector and asking – is it time to invest in British pubs again? And here’s a quick run down of some other pieces you might have missed this week that you should have a read at. Our personal finance writer Ruth Jackson looks at why free solar panels could be more hassle than they’re worth; Bengt Saelensminde talks about how the Bank of England is pulling the wool over our eyes in his Right Side email; and Tom Bulford looks at how to solve the looming timber shortage.
● And if you haven’t already, don’t forget to sign up to our Twitter feeds:
● MoneyWeek articles on Twitter
● John Stepek
● Tim Bennett
● Ruth Jackson
● James McKeigue
● David Stevenson
The Price Report and The Right Side are regulated products issued by MoneyWeek Ltd.