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.
● The front pages were pre-occupied with Ireland this week. Every time the Irish government looked like accepting a bail-out, markets went up. And any time it looked like wavering, markets went down.
If it doesn’t take the money, the concern is that panic will result. People have already been pulling money out of Irish banks. If it does take the money of course, that just kicks the problem a little further down the line. And more immediately, the focus will probably turn on poor old Portugal.
● It’s a miserable situation to be in. And I feel very sorry for the Irish people caught up in this mess. Is there a lesson that can be learned from Ireland’s experience? There are a few, but none are very helpful right now – they’re mostly along the lines of “I wouldn’t start from here”. Ultimately, all you can learn from Ireland is the same thing that you can learn from most other credit bubbles – “the bigger the boom, the bigger the bust”.
Sure, it was probably ill-advised for the Irish government to say it would stand behind the banks in September 2008, before everyone else had. At the time, this briefly raised fears of a mass exodus of capital from the rest of Europe and into Ireland, before everyone realised – even then – that there was no way the state could really back up its promise.
But while trying to do some sort of Iceland-style default might have got things over and done with more quickly, it would still have been painful. And Iceland didn’t share a currency with the rest of Europe. So the politics were far simpler.
Any route out of this sort of hole is going to involve some very difficult decisions. And that’s why it’s so wrong for central banks to adopt their “see no evil, hear no evil” policy towards asset bubbles. Prevention is better than cure, and a lot less expensive.
Even Ben Bernanke should be able to see that being a bit stricter on lending controls during the boom years would have, on balance, been a less painful option than having to engage in highly experimental monetary policy now that the bubble has burst. He won’t admit that of course, which is one reason why it’s madness that he’s still in charge of the US Federal Reserve.
● Speaking of pricking bubbles, China is trying to tighten its monetary policy. This is the other big worry for the market. While Bernanke has been doing quantitative easing (QE), the rest of the world is looking at QT – quantitative tightening. Less easy money is bad news for the bubble-chasers out there.
Yesterday China told its banks to set aside more money in reserves for the fifth time this year. If banks have to hold more money, they have less to lend. The country’s leaders are getting worried about inflation, which came in at an annual rate of 4.4% last month. And China has more reason than most to be nervous. As Julian Pendock of Senhouse Capital reminded me this week, Tiananmen Square was about frustration over inflation as much as anything else.
As a result, the Chinese stock market has slid this week. And commodity prices have been coming off the boil too. But unlike the Fed, Beijing probably cares more about the Consumer Price Index than it does about the local stock index.
● Obviously this makes playing the China growth story a risky business. But Dr Mike Tubbs, who writes the Research Investments newsletter, reckons he knows the smart way in.
Mike’s service is a global one – not just focused on Asia. But he knows opportunity where he sees it. While he agrees that “many Chinese shares look overvalued,” particularly against a backdrop of rising inflation, “the long-term prospects for China are too big to ignore.”
The good news is that Mike’s portfolio “is packed with top quality Western companies,” many of which “have well-established positions in the Asia Pacific region… Some are even market leaders in the Chinese market. I’m talking about companies with products that customers really want and find difficult to source elsewhere – such as state-of-the-art products that are the fruits of research & development (R&D). Western companies like these give us the protection of wide geographical diversification but with participation in Chinese growth.”
As well as his usual criteria for stock picking – a record of sustainable profit growth and substantial investment in R&D, among other things – Mike has two other things he looks for when choosing stocks he believes will succeed in China.
The company should already have “a significant and successful presence” in the Asia Pacific region. “We want companies that have already shown that they have the product range and market know-how to succeed in the Far East.” Also, “we want to see fast-growing revenues in Asia Pacific/China to demonstrate that the company we are considering has the ability to grow its Far East sales at double-digit rates.” Why double digits? Because such companies “have demonstrated their ability to grow faster than the GDP growth rates of the Asian economies.”
● Inflation is a problem in the UK too. But Bank of England governor Mervyn King is still manfully trying to ignore it. As our editor-in-chief Merryn Somerset Webb noted on her blog this week: “King has just written his ninth letter to the Chancellor explaining why annual Consumer Price Index (CPI) inflation is still so far above his target rate (3.2% instead of 2%). In it, he says that ‘spare capacity within companies and in the labour market will continue to put downward pressure on inflation.’
“There are two problems with this”, says Merryn. “First, it clearly isn’t; and second, it might not even exist.” There might be lots of unemployed people around, as one commenter points out on Merryn’s blog. Yet capacity usage at UK firms “is running at about the same levels as it was in the middle years of the last decade ie quite high.”
Some believe that inflation is the answer to all our problems. It’ll get rid of our debt after all, in a relatively painless manner. However, as Merryn points out, this has a cost – and it’s a cruel one.
“Who suffers most from inflation? Anyone with savings (note that 5% annual inflation would mean that the value of cash would fall by 35% or so over six years); anyone on a fixed income (pensioners and those on benefits); those with no assets and no debt; and the unskilled.
“The well off, the professionals and the skilled can demand higher wages to match price rises, and they can enjoy the collapse in the value of their mortgage debt, and the debt held by their companies. If the worst comes to the worst, they can move abroad.
“The others? They can’t do any of these things. They get to sit and watch as their standard of living collapses around them. Inflation helps the rich and hurts the poor and vulnerable.”
● But how do we deal with the rise in unemployment that will no doubt be the result of the government’s attempts to control the UK’s deficit? Simon Caufield reckons he knows how to tackle joblessness and cut the deficit at the same time. Simon – who writes the True Value newsletter, and is a dedicated value investor – drew several comments, mostly positive, for his four proposals to support “job creators”, written exclusively for the MoneyWeek website.
Among other things, Simon wants to make life easier for entrepreneurs by abolishing employer’s National Insurance surcharge; by “sweeping away regulations which make hiring harder or less attractive”; and by cutting “personal tax rates for the self-employed and entrepreneurs.”
And if necessary, to pay for the changes, says Simon, “tax breaks on capital could be eliminated. Companies would be getting a reduction in employment costs so an offsetting rise in capital costs would be fair. After all, not all investment promotes jobs. Labour-saving machinery actually destroys jobs. I’m not saying for a moment that companies should never invest in productivity-boosting technology, but why actively favour capital investment at the expense of job creation? That way lies the path of Japan.”
Among the supportive comments came many from people who run businesses themselves. One notes: “I used to own a company with 30 employees. The pressures and responsibilities were huge and the employment laws heavily stacked against the employer. I was glad to sell the business and I now run my new business alone using outsourced overseas workers who are cheaper and no trouble to employ.
“The internet is a game changer for many employers – the workforce, the unions and the government bureaucrats need to face reality. The public sector cuts are still nowhere near as deep as they really need to be in order to cut out unnecessary bureaucracy and taxes in order to create an environment in the UK where the odds are stacked in favour of the entrepreneur.”
Read Simon’s piece and have your say here: How we can create more jobs and cut the deficit at the same time.
● By the way, our publisher, Bill Bonner, made an appearance on a Channel 4 documentary on Britain’s debt burden earlier this month – Britain’s Trillion-Pound Horror Story. If you missed it, it’s well worth a look.
● And before I go – my colleague Tim Bennett is back with more video tutorials this week. Tim has produced a follow-up video to last week’s on government bonds, this time about corporate bonds. And if you’ve ever wondered what spread betting is and why investors do it, well, he’s covered that too.
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Have a great weekend!
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