John Stepek highlights some of the best bits that we’ve published in the past week.
● Portugal finally succumbed to the inevitable and asked for a bail-out from the rest of Europe. But this news – which most people had expected – was eclipsed by the European Central Bank (ECB) going ahead and raising interest rates.
This wasn’t a surprise for markets, but the fact that the ECB is the first major central bank to hike rates from emergency levels is a big deal, as my colleague David Stevenson pointed out in Money Morning yesterday.
● But while the action in the stock markets is fairly tame right now, that’s not the case in commodity markets. Oil is up, gold is up – and silver is going wild. As you may already know, we’ve been fans of silver for a very long time now. I remember, when I was just a new recruit to MoneyWeek magazine (back in the olden days, as my kids would say), our editor-in-chief Merryn Somerset Webb telling how cheap it was.
Silver was trading at less than $7 an ounce at the time, and was even more unpopular than gold. Now it’s above $40 an ounce. My colleague David Stevenson tipped silver stock Silver Wheaton last June in MoneyWeek magazine. (If you’re not already a subscriber ot the magazine, subscribe to MoneyWeek magazine.) Silver’s more than doubled since. And our regular precious metals writer Dominic Frisby has been covering it regularly in Money Morning.
Is it too late to get into silver now? I wouldn’t say so. We’ll be looking at it in the magazine again shortly. But I will say that it’s a riskier play than gold. Dominic always describes it as gold’s frustratingly volatile little sister.
And as Bengt Saelensminde pointed out in his Right Side email last week, unlike gold, silver has industrial uses. You’d think this would be a benefit. But in fact, says Bengt: “I hate this aspect to silver. It blurs its function as a precious metal… Industry always dumps silver if it becomes too expensive. Because there are always substitutes… That’s why the fact that silver has uses isn’t actually great for its value as a precious metal. The higher the price goes, the more the automatic stabilisers of industrial demand fall away.”
● So my personal preference is for gold. There are lots of reasons to like gold – the main one cited is the Federal Reserve’s fondness for printing money. But Dominic looked at another reason to be bullish on gold this week – demand from the Chinese middle classes.
Tom Bulford, who writes the Red Hot Penny Shares newsletter, reckons he’s found a perfect play on Chinese demand for gold. Obviously, being a penny stock, it’s risky, but plays on both China and gold aren’t easy to come by – I reckon it’s definitely worth a look at what Tom has to say about it.
● Tom also tackled a rather more controversial topic this week, in his free Penny Sleuth email. It’s a topic, says Tom, that “never fails to upset my readers and guarantee a sack load of abusive letters.”
You guessed it – he was writing about UK house prices. Tom’s basic point is that “the housing market in this country is artificially supported by low interest rates. I am sick of hearing house building executives and estate agents moan that if only the banks would lend more money the housing market would be fine.
“The housing market is under pressure not only because the banks have finally come to their senses, but because incomes are static, taxes are rising, and rises in the daily cost of living are reducing the surplus available to service the mortgage.”
And, says Tom, all of “this will hit the value of land. The cost of building materials and builders’ wages is fairly constant. But there is no reason why house prices should not be lower if builders pay less for building plots.”
Most of our reader comments below his piece were supportive. Austin made an interesting point: “if we are in a globalised market place, paying ever increasing amounts in mortgages makes our workforce ultimately less employable for the legion of foreign-based companies looking to employ. The UK has seriously got to consider whether it wants to tie up over 60% of its wealth in an unproductive commodity!”
Andrew took it a step further: “It is absurd, as Austin says, that so much of our wealth in this country is tied up in property. But it is understandable; the financial services industry rip off the saver, CEOs rip off the companies they work for, and after all that, the government takes nearly 30% of any gain. Tom does not mention the tax benefits attaching to property.”
Steveo’s view meanwhile, was gloomy. “All signs do point towards a crash, but it will not come. We are in a situation where our country is being manipulated by a ruling oligarchy whose interests outweigh ours.
A fully fledged house price crash would cripple the banks at this point and QE and low interest rates would not be enough to keep them afloat.
“This will not be allowed to happen. Economic policy in the UK is currently, and will continue to be, based entirely on the prevention of such a scenario. Prices will be allowed to stagnate, letting inflation ease some of the pressure – to the point that inflation itself becomes the critical issue.”
Go on, throw your tuppence worth into the debate here.
● I hope you’ve been enjoying Simon Caufield’s series of reports on value investing – if you missed it, the last of his three reports came out with Monday’s Money Morning: Three reasons you should buy Microsoft today.
Like the rest of us at MoneyWeek, Simon is a fan of Japan and has some Japanese investments in the portfolio of his True Value newsletter. And of course, that resulted in some fraught moments when the earthquake hit early last month. But Simon reckons there’s a valuable lesson to be learned from having experienced that sort of financial panic – it means you’ll be better prepared mentally for when it inevitably happens again.
Here’s what Simon had to say: “On Tuesday March 15th, we experienced the first major shock to our True Value portfolio. As news of the leak at the Fukushima plant spread, markets went into blind panic – sending Japanese stocks into a tailspin. At its worst point, the Japanese market was down nearly 23% from its February close. With nearly 12% of the portfolio in Japanese shares, we took a pretty serious hit.
“It takes a while to get used to these sudden shocks. I’ve been through many such crashes in my 20 years of investing. And it took a few minor crises before I worked out how to deal with them.
“After years of dithering after market shocks, I now follow a simple rule. Find out why prices dropped. If there’s new information which lowers true value, then sell. If not, don’t sell. Instead, buy more.
“Most investors feel that price falls increase risk. I think the opposite. Risk is lower because you’ve now got a higher margin of safety compared to true value.
“The trick is not to rush. The market often falls for two or three days. Wait a while and gather the facts. It takes courage and confidence. But remember that many great investors make most of their money not on their first purchase of a stock, but on the second and third buy, after the price has fallen.”
Needless to say, Simon didn’t sell out, and the Japanese market has since recovered strongly.
“But before I leave the Fukushima episode,” Simon adds, “I’d like to say one thing: remember what happened on March 15th. Never forget how you felt when the panic set in. Lock the experience away in your memory. Because something similar is sure to happen again. I don’t know when. And I don’t know which of our investments will be affected. But be prepared. And don’t be surprised if I advise you to buy in.”
● There’s one piece on the MoneyWeek website this week that you really shouldn’t miss – Bill Bonner’s review of the last ten years, which forms the introduction to his latest book, Dice Have No Memory: Big Bets and Bad Economics from Paris to the Pampas (which you can order here, incidentally).
Readers have clearly been enjoying it – “Damn ya, Bill! You had me hooked after ‘often, these new technology dotcom companies were managed by people with no business experience…’” notes Ricardo. “Bill Bonner scythes through the crap to poke fun at the buffoons that think they know best,” was how another reader put it.
If you haven’t read it yet, grab yourself a drink, take your laptop outside, and have a good laugh as Bill picks over the bones of the financial crisis and reminds us of what the inevitable consequence of the bail-outs, money-printing, and other madness will be: Dice Have No Memory.
To hear about other bits and pieces on the internet that have amused us or made us think, sign up for our Twitter feeds – we’ve listed them below.
Have a great weekend!
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