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.
● Europe was finally kicked off the front pages this week. That was mainly the fault of WikiLeaks, of course. If you want to know what all the fuss is about, we’ve a briefing on Julian Assange and co. in the latest issue of MoneyWeek magazine, out now: WikiLeaks uncovered. The organisation has come out with a few interesting revelations so far, but what I’m really looking forward to is the inside scoop on a big US bank they say they’ve got a file on. Let’s hope they don’t get shut down before they get a chance to spill the beans…
● Enough tittle-tattle. The other story that banished Europe back into its uncomfortable “waiting for the next crisis” limbo, was the news that Republicans and Democrats had agreed to extend the George Bush-era tax cuts for another two years. And Barack Obama has slung in some tax breaks of his own.
What does that mean? Truth be told, I’m still trying to figure it out myself. But my gut tells me (this may surprise you) that it’s bullish for the US economic recovery, certainly in the short term.
Put it this way, this is the closest thing to a ‘helicopter drop’ of money that we’ll see. If you’re going to be splashing money around anyway, you might as well give it direct to consumers and businesses who’ll actually use it, rather than sticking it into the gambling accounts of investment banks. (Yes, I know that’s a gross over-simplification of what quantitative easing involves, but it pretty much sums up the end result).
Some argue that consumers will save the extra money – that this is just ‘pushing on a string’, Japan-style. Looking at the state of the US economy, with high unemployment and falling house prices, this argument seems to make perfect sense.
But I’m not sure that’s what’s going to happen. Americans have got used to bad news by now. Remember that house prices started falling in 2006. The economy collapsed in 2008. The sense of looming disaster has gone – disaster’s already happened. Anyone who needs it, has put together a Plan B. And I suspect that they’re getting fed up with frugality. Assuming they don’t have to spend all the extra money filling up their cars (a possibility given the way the oil price is going), then I think they may well use it to splurge.
● In the longer run, this is terrible news for the dollar. The US government has shown that it couldn’t care less about the deficit. Eventually that attitude will end the dollar’s role as the world’s reserve currency. It’ll also tend to drive up US government borrowing costs, which will have an impact on the broader economy. (Check out my colleague David Stevenson’s Money Morning email from yesterday for more on this: Is this the end of the great bond bull market?).
But then again, that’s why the Fed has its printing press at the ready – it can push down yields if it feels it really has to. And in the short run, any pressure on the dollar is likely to be offset by hopes that the economy will be stronger as a result of the tax cuts.
“So what’s the best way to play this?”, I hear you asking. Well, I wouldn’t yet bet the house on a rampant US recovery. I’m just taking this opportunity to share some thoughts with you that I haven’t fully fleshed out yet. But as Henry Maxey from Ruffer suggested in the pages of MoneyWeek a few weeks ago, Japan looks like a good way to play a potential US recovery without taking too much risk. He explains why here: Steer clear of emerging market stocks.
● As you’ll have noticed by now, I’m not that optimistic about the euro’s future. This isn’t down to any strong political stance (I don’t think the euro would suit Britain, but I’m not against Europe per se). I just don’t think it’s very practical.
But one reader, Jonathan F., bravely trying to make the “non-bearish” case for Europe in an email to me last week, did make some rather good points. At least, he notes, “the eurozone is taking the hard choices rather than devaluation, which should leave it fitter for the future. As Germany did in the last decade, the PIIGS are doing now: peeling back the state sector, removing bureaucracy and red tape. There is nothing like a crisis to drive this change, and my biggest annoyance is that the UK government did not leverage this crisis to clear its own house.
“The UK could well exit this crisis with a state-to-private sector ratio higher than any eurozone country, and indeed already seems to be backing away from public sector rationalisation… if Europe gets through the next 24 to 48 months or so, I will then be a relative bull on the euro “.
I don’t disagree with this last point. But if the euro survives that long in its current form, I’d expect the political infrastructure of Europe to have changed somewhat. Tell you what though, one thing made me feel a bit more optimistic on the eurozone’s prospects – our ex-PM Gordon Brown is bearish on it.
“I sense that in the first few months of 2011, we have got a major crisis in the euro area,” he told the BBC this week. If his timing on the euro is as good as it was on gold – well, Spring 2011 will be time to pile in…
● Meanwhile, if you’re feeling adventurous, Joss Smith, investment director of the Zurich Club newsletter, has an idea for you. Frontier markets. “I’m talking about Chile, Colombia, Egypt and Argentina,” says Joss.
“There are very good reasons for considering these markets right now… consumers [in the likes of Chile or Egypt] are only now discovering a taste for debt… It’s vital we invest in these countries while they are in the grip of these changes. In many ways it’s like investing in Britain during the first industrial revolution.”
As a Money Morning reader, you’re pretty clued up, and you probably already realise that Chile is a pretty attractive investment destination in many ways. It’s a politically stable country (these days) with plenty of resources to back it.
But Colombia? Well, according to Joss, despite its troubled recent history, in the cities, “there has long been a prosperous and educated merchant middle-class… the new prosperity is based substantially on oil and gas reserves being exploited.”
● Dominic Frisby dared to tackle Money Morning’s most controversial topic once again this week – the ratio of house prices to precious metals prices. Gold and property are both asset classes that raise strong emotions in a way that shares simply don’t.
Buying gold is often seen as a political or moral statement by some of its fans. And property is in many cases inextricably tied up with the owner’s sense of self-worth, even if it’s just an investment property. So you can see why people get heated when you compare and contrast the two.
To be clear here, Dominic is not making a direct comparison of an investment in property versus an investment in gold and silver. As readers pointed out, you’d have to include rental yields and do more detailed calculations to make a proper comparison.
What Dominic is doing is simply looking at house prices in terms of gold, which can’t be debased by government shenanigans, rather than pounds sterling, which can. But also, looking at the ratio between two asset classes can be a useful indicator of relative values. US investors quite often look at how many ounces of gold it takes to buy the Dow Jones, for example.
It’s not foolproof – show me an indicator that is – but when a ratio is approaching historic highs or lows, it often suggests that something is out of whack. ‘Reversion to the mean’ is a useful and recurring phenomenon in markets. So usually when things get out of whack, you can expect them to get back into whack pretty sharply.
At some point property will look very good value as an asset class, while gold will peak. But Dominic reckons we’re a while away from that point. And I’d be inclined to agree with him. Merryn blogged on the topic of house prices earlier in the week too – you can catch her take on the Halifax numbers (which show that prices are now down on an annual basis once again) here: House prices are already crashing.
● Our magazine cover story this week is all about currency trading and what drives the currency markets. (If you’re not already a subscriber, subscribe to MoneyWeek magazine.) Our spread betting blogger John C Burford makes a guest appearance, outlining the mechanics of a euro vs US dollar trade.
If you’ve ever wondered about timing trades or technical analysis or how to make money by spread betting, you should sign up for his new free trading techniques email, MoneyWeek Trader, which will be launching soon. As well as weekly emails, you’ll get a free report where John lays out his strategy and explains his basic techniques. It’s all completely free and it’s a fascinating read for any investor, not just those drawn to the high-octane world of spread betting.
● My colleague Tim Bennett returns to his accounting roots this week. His latest video tutorial talks us through a basic profit and loss account, in a quest to answer the question: What is profit? That may sound simple, but there are a wide range of ‘types’ of profit, from operating profit to EBITDA (I’ll let Tim explain that one). Every investor needs to know the difference between them – the good news is that if you don’t, Tim can teach you in exchange for a mere ten minutes of your time.
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Have a great weekend!
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