The eurozone crisis refuses to go silently. In fact, despite the best efforts of the region’s leaders to ‘kick the can down the road’ this crisis is getting louder and nastier. Even watching politicians around the world turning on Rupert Murdoch hasn’t distracted investors from Europe’s frailties.
There are parallels between the two stories. Both rumbled away quietly in the background before flaring up. And in both cases those at the top have been unable to limit the damage as the crises have spread through their respective empires.
We’ve long been saying that some type of euro default is inevitable. Like many other commentators we can’t see how the bail-outs will change the basic problem – that the periphery countries are bust.
• But Italy getting dragged in shows the crisis is entering a new stage, says John Stepek on Tuesday, as “now an economy that actually matters is in trouble“.
Its “farcical politics make it easy for outsiders to forget that…Italy is the third-largest economy in Europe and the world’s third-largest bond market. It also has Europe’s second-highest debt to GDP ratio, standing at 119% in 2010. To put it in perspective, Italy borrows the equivalent to Greece’s total debt every year.”
Sure, people have known about Italy’s debt problem for ages. This week, though, the bond market decided to make the country pay for it. Italy’s ten-year borrowing costs briefly topped 6% – a new eurozone era record. But there’s no “bail-out big enough to prop up Italy in the same way that the Greece situation has been dragged out”, warns John. That “means some kind of endgame has to be approaching”.
“To draw a line under the crisis, we’d now need to see a plan for the eurozone to issue bonds jointly. In other words, Greece would once again be able to borrow money using Germany’s credit card. The alternative endgame of course, is a ‘disorderly default’ by one or more of the countries in trouble.”
• That would be bad for the euro. But it could help the US dollar – and my colleague David Stevenson explains in last week’s issue of MoneyWeek magazine why this could soon rally. (If you’re not already a subscriber, subscribe to MoneyWeek magazine.)
In fact, it’s amazing that the euro “has remained [so] strong for this long”, says Dominic Frisby on Thursday.
After all, “it’s not like the problems in southern Europe have come as a surprise”. But the challenge for euro bears is finding a worse currency to pile into. “What do you short the euro against? The pound? We all know the horrendous economic problems our own country faces. You may as well short manure against dung. The same applies to the US dollar which has its very own southern Europe” – ie with massive debts – “in the forms of Illinois, California and New York”.
In fact, there’s only one currency that really stands out for investors – gold. This week it hit new highs against the euro, pound and dollar. “That shows just how essential it is in these times of increasing currency stress.” As, indeed, our editor-in-chief Merryn Somerset Webb agrees.
If you’re interested in buying gold or gold stocks, Dominic’s latest Gold Report is now out.
• Challenging times or not, we should not lose faith in equities, says Tom Bulford in Tuesday’s Penny Sleuth.
There has been a lot of criticism of shares recently, says Tom. “Bill Bonner has a friend who reckons that investing in the stock market is ‘a crazy bargain’. I couldn’t disagree more. The stock market not only beats the return on cash and bonds over the long term, it does so by a wide margin.” What’s more, time and time again “shares of small companies beat those of large ones”.
Of course you need to beware “bull markets inflated by hot air”. And you shouldn’t “take too much notice of what brokers and analysts say about the companies that pay their bills. But that still leaves you with plenty of established firms run with an eye to the long-term, and shares that are not over-hyped.”
One of the areas Tom thinks has the most potential is energy. In fact he he’s found some exciting companies about to tap a massive new energy source.
• One area that really is suffering right now is the UK housing market, blogs Merryn. Volumes are low and prices are falling. The latest figures from the Halifax survey saw values down 3.5% on last year. The picture is even grimmer – 7.7% down – once you factor in inflation.
The government is doing everything it can to revive the market. And that includes “last week’s ludicrous suggestion from housing minister Grant Shapps that lenders should be offering ‘mates mortgages’ to help the young on to the housing ladder (or housing snake)”.
“So buy with a mate now and you may find you and he are together for a long, long time. That’s not going to be good for your relationship. But things could be even worse for you if your friend isn’t the patient type: if he defaults, the lender is allowed to chase you for the repayments. Then you’ll be down a mate, a bank balance and a credit rating. And wishing that you’d ignored Mr Shapps and just waited for prices to fall and the mortgage market to free up before you tried to buy a house.”
• The blog drew a lot of comment with Robert Carroll noting that: “if you combine the drop since the 2007 peak with inflation in the meantime then this represents a sizeable drop in property prices since the peak… Which means that properties are becoming more affordable for first time buyers, and, as a result we’re seeing buyers coming back into the market. Which makes this hare-brained ‘mates mortgages’ idea seem even dafter.”
However Simon L points out that it is only “wage inflation that makes houses more affordable. All other inflation makes them less affordable as you have to spend more money on other essentials.”
It’s an interesting topic and if you haven’t seen the post yet, have your say here. And there’s more from Merryn on the housing front here.
• Another topic that has been attracting a lot of interest is rating agencies. Last week Europe’s leaders called for a new European agency. OK, the idea was shot down pretty fast by most independent commentators. But that doesn’t mean there are no problems with the existing ‘big three’ credit scorers.
So my colleague Tim Bennett has been investigating what all the fuss is about. And to see what he’s found out, why not take a look at his short video: Do we need ratings agencies?
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• This article is taken from the free investment email Money Morning. Sign up to Money Morning here .