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.
● This time last week, Dominique Strauss-Kahn was still head of the International Monetary Fund (IMF), and a serious contender for next president of France. Now he’s posting $1m for bail money, and Gordon Brown is gunning for his old job.
That’s a hell of a fall from grace. But his arrest means little for investors. It might make life that little bit more complicated for the eurozone, but it seems likely that another European will take over as IMF head (though I very much doubt it’ll be Brown). After all, the eurozone is the IMF’s main disaster area just now. And the Americans don’t want to give up their hold on the World Bank, so I can’t see them making a fuss.
As it is, Europe has enough problems anyway. Paul Hill made a bold prediction in his Precision Guided Investments newsletter this week. He thinks Greece is going down.
“Some time this year, after the markets close on a Friday night, there’ll be a conference call between all the 17 member states. The European Central Bank will announce that Greece has defaulted on its debts, and will refuse to lend it anymore funds. The ECB will then flood the whole financial system with liquidity in an effort to prevent contagion.
“But the Greek government will be left staring into the abyss. The new drachma will go into freefall – immediately causing its own banks to collapse and plunge the country into depression.
“The Prime Minister will be forced to introduce emergency controls over capital flows and currency conversion – locking down its domestic banks. Any foreign depositors caught in the crossfire will be toast. They’ll see their savings frozen and then partially wiped out as the accounts are converted into drachma. A similar fate could befall those foreigners owning property, such as holiday homes.”
● That’s a big call. But Paul makes a pretty convincing case. Greece has too much debt to have a hope of paying it back. So it’s going to default somehow. But Paul’s view is that, for all the warnings, banks in the eurozone are big enough to take the pain if Greece defaults.
The real problem, he reckons, is “moral hazard. If Greece was allowed to walk away from its debts and remain in the euro, this would open the floodgates for other countries to follow suit.” So to avoid similar action by other stragglers, Greece will have to be made an example of.
“The quid pro quo for membership in the single currency is that each sovereign has to stand by their own banks’ obligations and pay their dues in full. The system can’t work any other way. Hence I suspect this whole official spiel about no restructuring until mid-2013 is one giant bluff. In reality patience is wearing thin. The ECB, whatever the party-line, is about to strike. I believe it has sufficient fire-power to kick Greece out of the euro anytime.”
It’s an interesting possibility. And it’s a story that we’ll be keeping a very close eye on.
● Over here in the UK, inflation surprised on the upside again. Although these days, it’s more of a surprise if inflation meets expectations. The Consumer Price Index (CPI) rose at a 4.5% annual rate in April.
There were all sorts of excuses about how the timing of Easter had thrown all the calculations out, but at the end of the day, the cost of living is rising and most people’s wages are not. And as long as wages aren’t surging, Mervyn King is unlikely to feel the need to raise interest rates.
So that means you need to get used to protecting your wealth from inflation. You should have heard all about National Savings & Investments buy now. The new release is out, you can put £15,000 away and earn the retail price index (RPI) plus 0.5% a year over five years. Read more about it here.
● If you’ve already loaded up on NS&I, and are willing to take a little more risk, then Bengt Saelensminde has been looking at some interesting Royal Bank of Scotland bonds. We’ll be investigating them in the next issue of MoneyWeek, out next Friday. But I certainly think they’re worth closer inspection. Read what Bengt has to say about them in his free Right Side email: How you could beat inflation by 30%
And if you’re really feeling adventurous, you could consider putting your money into Asian currencies. We look at how to do so in more detail in the current issue of MoneyWeek magazine.
But don’t invest in buy-to-let property if you’re looking for a decent inflation hedge, says MoneyWeek editor-in-chief Merryn Somerset Webb. You can read her reasoning here – and add your comments to the swathe of responses already there.
● Elsewhere on the site, several articles have proved good talking points this week. My Money Morning on why the Malthusian view of human society is flawed drew a few comments.
To sum up, I was discussing a Deutsche Bank report that argues that the global population will peak at around nine billion by 2050, then start to fall. That’s a lot sooner than the UN has been estimating. And I’d say that’s good news – or at least, it should help ease some of our worries about resource scarcity.
Neil disagreed. “Once fossil fuels are depleted, the carrying capacity of the planet (for humans) will be 1 billion or less. I think Tim Price has got a good handle on these issues, and I can say this because I have a mountain of research on the subject.”
Tim Price, who writes our Price Report newsletter, certainly does write about resource scarcity regularly, and has come up with some excellent share tips in those sectors. I suspect he’d find my view a touch overly optimistic too.
All I’ll say for now is that this is a subject we’ll be returning to over and over again in MoneyWeek – and it’s going to be a major investment theme for a long time.
● Another topic that drew attention was the idea of ‘free banking’. This is where you ditch all central banks, deregulate ordinary banks, have them issue their own currencies and allow the dynamics of supply and demand to set interest rates. We have more on how this would work in the current issue of MoneyWeek.
As for this week’s talking point – I suspect Merryn’s latest blog, on how Scotland could become the new “tax exile” destination of hedge fund managers, might get you talking. Merryn argues – as did Matthew Lynn a couple of weeks ago – that if an independent Scotland made a few smart decisions on taxes, then London could find itself with a genuine rival for its status as a global financial hub.
As a Scot myself, I would be sad to see the union go. But maybe it would be good for Scotland to be independent. Scottish voters have certainly taken full advantage of having their own parliament – devolution is what finally managed to shake off Labour’s stranglehold on the country.
And a pro-business, small government Scotland might force England to up its game. No more 50p top income tax rate? We can but dream… Have your say on the matter here.
● We had two big IPOs this week, social network LinkedIn and commodities trader Glencore. Both pretty much at opposite ends of the investment spectrum, yet both in fields where people are fretting about bubbles.
My colleague Tim Bennett looks at valuation in general, and the difficulties with valuing hot tech stocks in particular, in this week’s video tutorial. If you’ve just discovered Tim’s videos, it’s worth having a look through his back catalogue to brush up your investment knowledge – check it out here.
● Another good read for you this weekend. MoneyWeek publisher Bill Bonner has followed up his piece on “compound effort over time” with his views on how to build intergenerational wealth.
The archetype of the ‘self-made’ man is a compelling one, particularly in Western societies. But Bill’s point is that if you want to build lasting wealth, then each generation has to build on the foundations of what went before. We can’t all aim to pull ourselves up by our bootstraps.
I found this piece to be quite an eye-opener. See what you think, and give us your comments, here.
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Have a great weekend!
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