The eurozone and News International dominated headlines this week. Both were big, important stories. And yet both had an air of farce about them.
In the Rupert Murdoch saga of course, there was the shaving foam pie attack thwarted by the quick reactions of Mr Murdoch’s third wife, Wendi Deng.
But Europe’s leaders are the real masters of comic timing. Last Friday they waited until the markets had closed in Europe before declaring results of a hopelessly benign ‘stress test’ on the region’s banking sector.
The findings – basically saying that all is well – fooled nobody. They didn’t even factor in the possibility of a Greek default. The week started with a market rout as investors feared the worst.
Yet on Thursday, when euro leaders announced their latest cunning plan to save Greece, it sparked a market rally and a surge in the euro.
The latest plan gives Greece a “ridiculously low rate of interest” on its bail-out cash and more time to pay it back, as David Stevenson noted in Friday’s Money Morning. Meanwhile private creditors will also take a hit.
So should you buy into the euro-euphoria? No, says David. Europe’s politicians are “masters of the art” of disguising bailouts: the latest buzz phrase is ‘selective default’.
But “whatever the euphemism used, it boils down to the same thing. The eurozone is still in one heck of a mess. And the creditors of Greece – and probably Ireland and Portugal too – are still set to lose at least part of the money they’ve put in.
“That means that yesterday’s rallies in Europe’s stock and bond markets are unlikely to last. What’s more, the bounce in the euro versus the pound and the dollar could well prove to be short-lived. So buying into the current euro-euphoria could turn out to be very risky.”
• Europe is far from the only thing to worry about, says Tim Price in his Price Report newsletter. On the other side of the Atlantic, America’s “broken” political system is struggling to work out how to deal with its huge debts. It might seem strange that investors can be bullish in such a bleak situation. But we have a history of ignoring terrible situations, says Tim. Take 1914, the eve of the Great War.
“Europe’s financial markets were buoyant well into the summer of 1914. They initially shrugged off the assassination of the Austrian heir, Archduke Franz Ferdinand, in Sarajevo.
“But as investors began to grasp the implications of a European war with Russia siding with Serbia, both bonds and stocks started to sag as the more proactive among them began to raise liquidity. European investors began selling Russian securities, followed by Americans.
“This repatriation of capital led to a flight to quality: sterling surged; the rouble and dollar sold off. Counterparty risk blossomed, with bill brokers caught with customers on the continent unable to remit funds. There were fears of a banking crisis.
“The Viennese stock market closed, on 27 July. Within a week all the continental exchanges had followed, along with London and New York. The world’s major stock markets remained closed for up to five months.”
The lesson to be learned? That those who are too complacent for too long get stung.
* But that doesn’t mean you should just be hiding your money under your mattress. Crises also offer lots of opportunity, says my colleague John Stepek in Thursday’s Money Morning.
So how do you take advantage of this one?
“I’d build up a watch list of stocks you’d like to buy for a start, particularly in the eurozone. When a panic comes, it’s handy to know exactly what you want to ‘buy on the dips’ so that you can take advantage.”
There are still plenty of decent companies in Europe: it’s the governments that are the main problem. And David points to one particularly attractive sector – telecoms – in his Money Morning. Have a read of it to find out should you buy into the euro-euphoria?.
• One MoneyWeek favourite that’s had a good crisis so far is gold. It broke records this week, hitting £1,000 an ounce. That raises a pretty important question, said Dominic Frisby in Wednesday’s MoneyMorning: “How much higher could gold go?”
After all, there are some worrying signs that gold is going mainstream, says Dominic. “This week, gold made it onto the front page of the FT. And this lowly writer was even asked to come on BBC Radio 2’s Drivetime show to talk about it.”
The reason that’s worrying is that “gold usually only hits the mainstream like this towards the end of runs”.
But don’t panic. Although there might be a correction, “longer term we are going much higher”. Gold still has much further to go on several metrics. For example, from 1800 to 1920 between 15% and 50% of UK money supply was backed by gold. Today just 4% of the Bank of England’s balance sheet is backed by gold. “In other words, there is a lot of room for gold to appreciate” if it is to return to the long-term average of 25% of money supply.
• His post has drawn a lot of interest from readers. Not everyone is bullish – Andrew T says: “There is no way on earth I would buy gold right now. It’s completely off my radar. I think most bad outcomes are priced in and the downside could be catastrophic compared to any remaining upside.”
However, others are more keen. Tom says: “Gold is money, it is in the process of reasserting itself as money. Hold your gold, hold your silver and rest assured safe in the knowledge you own real money, which can’t go to zero. Unlike an enforced fiat currency backed by the promises of bankrupt corrupt governments.”
Dominic’s latest Gold Report is out now for those who want to find out more about the stocks he reckons you should buy now – to find out more, click here.
• Another investment that has paid off during this crisis is the Swiss franc, blogs our editor-in-chief, Merryn Somerset Webb. “We started suggesting that those interested in diversifying away from the pound looked at holding Swiss francs some years ago. Anyone who did so will be pleased. It is up 11% against the euro in the last three months alone.”
It’s now starting to look a bit pricey and trades 30% above its long-term average, so is it time to sell? Probably not, says Merryn. The Swiss franc isn’t strong because the Swiss economy is flourishing or because the Swiss National Bank is the most disciplined in the world. The reason it is doing well is “because Switzerland is one of the few places in the world that is definitely solvent“.
Having a strong currency might not be great for the country’s manufacturers but “Switzerland might just have to accept that its own fiscal discipline has doomed it to having the strongest currency in the West.”
• Elsewhere, my colleague Tim Bennett’s online tutorials are proving a big hit. This week he takes a look at how leverage can boost your returns – and also your losses. If you haven’t had a look yet check it out.
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Have a great weekend!
• MoneyWeek
• Merryn Somerset Webb
• John Stepek
• Tim Bennett
• Ruth Jackson
• James McKeigue
• David Stevenson