● Britain’s printing presses are rolling again.
On Thursday, the Bank of England’s Monetary Policy Committee voted to launch QE2 (the second batch of quantitative easing). At a touch of a button, the Bank will create £75bn of new money to spend on bonds.
The idea is that this will push down long-term borrowing costs and leave banks with more money on their hands. In an ideal world, they’d spend this and lend it out, encouraging consumers to spend and businesses to expand.
The market, well trained by now, reacted with typical enthusiasm. Gilt yields fell and the FTSE jumped by almost 4%. So can investors take off their hard hats and start making some risky moves?
No, says David Stevenson in Friday’s Money Morning. “What’s good for the bankers is far less helpful for the rest of us. This extra QE is likely to do more harm than good to the economy. And even share prices – which soared after QE1 in March 2009 – are unlikely to benefit much either this time around.”
If you look at what happened last time around, there’s little reason to be cheerful, says David. “The banks didn’t lend out their QE windfall into the economy: small businesses and individuals didn’t see any benefit. Instead, money was punted in places like commodity markets. In turn, that pushed up food and fuel costs – and overall inflation.
“Further, QE meant more pounds sloshing around. This extra supply of sterling lowered our exchange rate, making our imports pricier and adding to inflationary pressure. In total, it was more economic bad news.”
That means even the boost to stocks could be short lived. Once investors realise that this will just make matters worse by squeezing consumers harder, they won’t be keen to hang on to shares.
● Of course, here at MoneyWeek, we don’t have much faith in central bankers. This crisis was in large part down to their pricing money too cheaply in the good times – Alan Greenspan bears particular blame for this. Trying to make money even cheaper now isn’t going to help matters.
The fact is that we had a boom, and now we’re having a bust. Yet people still seem to think there’s a magic wand to be waved that will make the pain go away, says John Stepek in Money Morning.
The spenders – they would probably prefer the term neo-Keynesians – “think you should spend more money. They ignore the fact that at a certain level of indebtedness, adding more debt doesn’t help anything – it may even hinder”.
Meanwhile the cutters – or Austerians – want to slash spending. Yet they “ignore the fact that if people still have to service debts accumulated during the boom years, then cutting government spending alone isn’t going to do anything to encourage the private sector to step in. It’ll just make the debt servicing all the harder, because you’ll have a weak economy to contend with too”.
Until we deal with those underlying debts – in some cases through writing them off – the problems will remain. Unfortunately it doesn’t look like the issue will be solved anytime soon.
“What does this mean for your investments? There’s no way of telling exactly how the eurozone crisis will pan out” and there’s likely to be plenty of “bloodshed” in the markets in the coming months and years. “This means investors will be putting a premium on safety, and safe balance sheets in particular.”
● One such company is Tesco, said David on Thursday. Sure the outlook is grim for retailers. Real wages are falling, and the Bank’s money printing will just make that worse.
But even in this tough environment, Tesco can make money. “Business in Britain may stay in the doldrums for several years. But the company is stacking up sales around the rest of the world at a relentless rate… this is translating into decent profit growth too. Asian profits rose 19%, while Europe was up 12%. Even the tricky US market is improving.”
And unlike the UK, where Tesco has reached saturation point, it has plenty of room to expand overseas. “That means it can keep expanding and adding to sales even if the overall size of these markets doesn’t increase or even shrinks”.
Combine this potential for growth with a chunky 4% dividend and “a practically flawless track record of making more money, and dishing more of it out to shareholders, every year”, and you can see why David, who tipped it back in July, is sticking with the stock.
● Another long-term MoneyWeek favourite is gold. It has been pretty volatile in the last few months but resident gold expert Dominic Frisby still feels it’s a sound investment. “I don’t go with the argument that gold was in a bubble. Overbought, yes, extended too. But bubble? No.
“A bubble is uranium in 2007. Uranium was the silver bullet that was going to save us from our looming energy crisis. Every company that had even the vaguest association with uranium went skywards. That hasn’t happened with gold. Not yet. I still think we’ve got that ahead of us.”
Dominic also thinks that gold will get a boost if it becomes “the currency of last resort“. At the moment the US dollar – which MoneyWeek recently tipped – remains the safe haven in times of trouble. But Dominic sees that gold is trying to “decouple from the broader indices” and establish itself as an independent currency.
In short, Dominic’s advice remains to stick with gold and cash.
● Right now, small caps may not seem like the best things to invest in. They take a kicking when risk appetite flees the market, and it’s fair to say that investors can be pretty indiscriminating when that happens.
But that’s when opportunity knocks. And Tom Bulford, who writes the Red Hot Penny Shares newsletter, is a man who knows a good opportunity when he sees it.
Tom’s been looking at plastics a lot this week. If there’s one market that just won’t go away, it’s the market for ‘biodegradable’ goods. Despite the economic downturn, the push to make industries ‘greener’ continues.
Tom’s been looking at a stock that can provide companies with biodegradable alternatives to PVC advertising banners, and another that creates compostable bio-plastic. It’s an intriguing market and it’s only set to grow. To find out more, you should sign up for Tom’s email
● If you’re new to investing, or feel like it’s a long time since you took that economics class at school, you should watch my colleague Tim Bennett’s video tutorials. Every week Tim tackles a financial question and breaks it down into a painless, easy-to-grasp video. This week’s is on the controversial proposal for a European ‘Tobin Tax’. Tim explains the case for the tax – then demolishes it.
● The latest data showed that house prices remain flat, neither rising nor falling. That’s bad news for first-time buyers, who seem to have little hope of saving enough to ever buy a house. Is there a solution?
To us, the problem isn’t that we don’t have enough property – the trouble is that low interest rates have kept the market artificially high. Hike rates and you’d soon see prices fall to affordable levels.
But even if you’re one of those who blame a ‘shortage’ of housing, there’s an easy way to deal with this, says MoneyWeek editor-in-chief Merryn Somerset: tax unused rooms and houses.
“You could tax spare bedrooms, houses over a certain square footage or houses over a certain value. And you could put a horribly punitive annual tax on any home not used as a primary residence.” Soon everyone could afford a house, and most people wouldn’t have more space than they needed.
This, she says, wouldn’t be a ‘mansion tax’ or a ‘wealth tax’, but a tax on ‘luck’. Because it “would primarily be paid by those who bought their houses when they were cheap and who made their money during the fabulous years for wealth creation before our great crisis”.
Unsurprisingly the controversial notion attracted a lot of debate.
Simon said: “Eminently sensible and wholly fair… work hard for thirty years to build a business from which you start taking a good income and the state demands over half of it. At the same time, someone who has lived on state benefits all his life can get lucky on the lottery, win £5m, and the state demands not one pence of it”.
SL disagreed: “It is grossly unfair to penalise a family that has suffered from an accident of geography… You can live in a £2m house in London, or the commuter belt, and have much less income than someone in a £500,000 home in Yorkshire.”
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