● We said that the US debt ceiling drama was naught but a “tawdry little pantomime”, and so it turned out.
But once investors had stopped being distracted by the antics of Barack Obama and the rest of them, they woke up to what’s really wrong with the economy – it’s barely growing.
Stocks absolutely tanked as investors took fright at – well, almost everything really. On Thursday, America’s key benchmark, the S&P 500, hammered down through the critical technical level of 1,250, which our own Dominic Frisby had flagged up in the previous day’s Money Morning: This slump could be a good opportunity to buy gold stocks.
Now Dominic had thought it possible that the S&P would bottom out there. But what if it didn’t? “My reading of the tea leaves says that if 1,250 doesn’t hold and 1,200 fails too, we could easily go as low at 1,050.”
Well, 1,250 didn’t hold. And by the end of the session on Thursday, the S&P 500 had indeed hit 1,200.
Then the US jobless figures arrived on Friday. They were still weak (the headline unemployment rate is still 9.1%) but with investors primed for carnage, sentiment improved somewhat. Trouble is, you could also see that many investors were also suddenly thinking – but does this mean there’ll be no QE3?
We’ll just have to wait and see.
Suffice to say, it’s a very tough environment in which to be investing. That’s why we’ve been telling you to stay defensive for so long. With so many points of weakness in the system, and so many people meddling with the rules, the only remotely ‘safe’ assets are ones that can withstand the most hostile economic conditions.
● So what’s the problem? As I noted in Thursday’s Money Morning, investors are now worried about a US slump again. Consumer spending is down, manufacturing figures have been poor, and economic growth in general is weak.
They’re right to be worried. James Ferguson looks at why America could be back in recession this time next year in the latest issue of MoneyWeek, out now. If you’re not already a subscriber, subscribe to MoneyWeek magazine.
● Of course, it’s not just the US. The European crisis never really went away. Italy and Spain are now firmly in the firing line. My colleague David Stevenson covered this in yesterday’s Money Morning: Protect your wealth as the eurozone dominoes topple.
People argue that this is a political crisis. In other words, if Europe’s leaders could just get their act together, this would all blow away like a bad dream. If that’s the case then Lord help us, because Europe’s leaders aren’t getting any more competent.
One newsflash noted that Italian prosecutors had confiscated documents at both Moody’s and S&P’s offices. Says Reuters: “The measure is aimed at ‘verifying whether these agencies respect regulations as they carry out their work’,” apparently.
This is pathetic. I defy any Europhile to explain to me how this sort of attention-grabbing bullying, and willful misunderstanding of markets, is helpful. I wouldn’t trust these people to run a bath, let alone an entire continent.
This instinctive desire to crush dissent, whether it comes from the markets or the voters is very disturbing. They deserve to fail.
Am I being too harsh? Or not harsh enough? Give us your comments in the space below.
● Tom Bulford was getting similarly riled by politicians this week. “Ed Balls sends a shiver down my spine. It’s not just the slightly manic glint in his eye, it’s his public pronouncements that really upset me.”
“Balls likes to argue that the solution to our chronic dependence on credit is to borrow some more money. But can he really believe this?” Either way, Balls is talking “a load of nonsense”, says Tom. And don’t even get him started on Angela Merkel.
“Angela Merkel is even worse. In recent months she has been arguing that ‘we must re-establish the primacy of politics over markets’.” This is just plain frightening. After all, it was politics that got us into this mess in the first place, he says.
“Too many people today live in financial fantasyland, expecting a certain lifestyle regardless of whether they can actually pay for it… I am sick of hearing people bleating about their entitlements. You are entitled to what you earn and the returns that you manage to generate on whatever money you save – no more and no less. Get real!
“Save and invest! That should be the mantra of our age. That is the only way to get rich.”
Fierce stuff, and it certainly got our readers going. “I agree with Tom and most of his theme, although we must not lose sight of the fact that there is no point in acquiring money for its own sake, but in order to enjoy what it buys, so being critical of the way some people spend it is a bit harsh!” says Phil.
“Rather than politics, what we need is a cultural change where there is more emphasis on saving and investing, and less on cheap credit,” reckoned jimtaylor.
Critic Al Rick had a more gloomy view of things: “Laudable comments, but… for those that can save, what incentive is there when most of it will be robbed by rich parasites, one way or another – pillaged pension pots as a prime example. It seems to me that investing is becoming more and more of a gamble.”
You can have your say and read the rest here: How to stay sane in financial fantasyland. And you can see Tom personally explain his views on the best way to invest – and the most promising sector around right now – in this video.
● Volatility is clearly going to be a feature of the stock markets in the near future. The currency markets are, if anything, even worse. Both Switzerland and Japan intervened in the markets last week. And the dollar isn’t sure where to turn. One minute it’s a lame duck currency, the next it’s a safe haven.
I suspect that with the mood turning bearish, the dollar is due a big comeback. David wrote about how to profit from this in a recent edition of MoneyWeek – you can read his piece here: The dollar: will it rise from the dead?
● If you fancy your chances at a spot of trading in the meantime – and if you want to short the market, spread betting is one of the easier (though very risky) ways for a retail investor to do so – then sign up for John C Burford’s free MoneyWeek Trader email.
John’s had an exciting week as you might expect. It looks as though he nailed the top of the US stock market for now (he reckoned 12,800 on the Dow was the top a couple of weeks ago. But his view that gold had topped out at $1,628 an ounce (he’s a contrarian even by our standards) was wide of the mark.
However, as John points out, good trading is not about getting your predictions right every time – most traders are lucky if half of their bets go their way. The key to success is to manage your money properly, so that you keep losses on your losing trades to a minimum, and make the most of your winning trades. Find out more here.
● Of course, such huge falls in the market also bring buying opportunities. Paul Hill sent out an urgent email to his subscribers yesterday, warning everyone not to panic and noting that “with the sell-off, a number of stocks on our watch-list are coming in to play”. It could be a good time to find out more about his newsletter, Precision Guided Investments.
● It was a big week for the UK banking sector too, with job losses, tumbling profits, and yet more evidence of dreadful boom-era investments only gradually coming to light. (Did you know that nearly two-thirds of Lloyds Banking Group’s Irish loans are now impaired? What a great deal that merger with HBOS was for Lloyds shareholders. And some people wanted Gordon Brown to head up the IMF? Save us).
Anyway, David will be rounding up the sector in Monday’s Money Morning, but he’s already given his rundown on Lloyds and RBS.
I’m sure it won’t surprise you to hear that we’re not buyers…
● One last thing. In choppy markets like this, it’s more important than ever to make sure you understand what you’re buying when you invest. MoneyWeek deputy editor Tim Bennett has put together a video on the six numbers that every investor needs to know before they put money into a company.
Tim’s video gives an overview of the key numbers, and there are links to six separate videos giving details on these crucial ratios. It’s like a complete beginner’s guide to analysing stocks. Set aside a bit of time this weekend – each video is a nice bite-sized 15 minutes – and brush up on your investing skills. The more you know, the more able you’ll be to take advantage of opportunities when they arise.
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Have a great weekend!
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• Tim Bennett
• Ruth Jackson
• James McKeigue
• David Stevenson