● It’s been another good week for the FTSE 100, which is now up by around 10% in the last two weeks. One reason for the gains, say the pundits, is the ‘super bail-out’ apparently being planned by Nicolas Sarkozy and Angela Merkel. So are our economic woes over?
The French and German plan to extend the European Financial Stability Facility (EFSF) is definitely ambitious, says John Stepek in Wednesday’s Money Morning. The EFSF “currently has financial firepower of €440bn. The ultimate plan is to turn it into a mega-big bail-out fund, with closer to €2 trillion in ammunition. The idea then is that no one will have the temerity to bet against the eurozone surviving, because even the likes of Spain or Italy could be saved with that kind of money.”
The problem is “Europe’s leaders still haven’t figured out quite how to gear the EFSF up to those levels”. And given that “the eurozone isn’t built for speed” they may well get overtaken by events.
“Remember the 2008 crisis? Remember all those melodramatic stories about Hank Paulson getting down on one knee and begging politicians to pass the US bail-out bill? All manner of weird concessions and tax breaks got added to that bill as bribes to get people to vote it through. That was just one country”, notes John.
“Europe has to do the same thing, only with 17 different countries. And that’s just including the ones that are actually in the eurozone. On top of that you’ve got the banks, who have their own agendas. And of course, the voters, who may eventually get sick of being largely overlooked in this whole process.”
Meanwhile, we have a series of weekend meetings to look forward to. This week, the G20. Next week, a European summit. Come November, a summit in Cannes… who knows what expectations will be raised then dashed during that little lot?
In short there is plenty more drama left in the eurozone story. But that doesn’t have to be bad news for investors. In fact it throws up opportunities. For starters, Europe’s travails mean that some European countries are looking cheap. We’ll be getting some Europe experts in to discuss potential opportunities in an upcoming edition of MoneyWeek magazine. If you’re not already a subscriber, subscribe to MoneyWeek magazine.
● And if the euro does survive “it will be a lot weaker by the end of the process than it is now”, says John. That creates opportunities for currency traders. If you’re new to trading or want to learn more, sign up for our free MoneyWeek Trader email to find some useful tools that will help you to play the foreign exchange markets (and most other markets for that matter).
● Of course you need to be careful. Currency trading is not as easy as it might look. Take recent movements in the pound, says Dominic Frisby in Thursday’s Money Morning.
“The Bank of England announces the next round of quantitative easing (QE). At $75bn, it’s 50% more than expected. Yet the pound rallies. It doesn’t make any sense, does it?”
But with currency trading you need to look at a number of factors, says Dominic. For example, from August to September the pound had fallen from $1.66 to $1.53. “Given such a furious fall, some kind of bounce was inevitable.” As for QE, traders had long suspected that it was on the way. It was already in the price so “as soon as the announcement came, the turnaround came”.
The final factor to remember is that “it takes more than forex speculators to move a currency”. The stock market was rising when the pound bounced and “when global stock markets rally, the pound rises”, says Dominic.
Analysing why rallies happen is crucial to working out if a trend is going to be short-lived or part of a long-term move. In this case, Dominic reckons it’s “nothing more than a countertrend rally, a relief rally, and an opportunity to get out”.
Why? Because for the pound to really push on to $2 we would need: “a stronger (ie more popular) government, higher interest rates, less debt, an economy in better shape and a bull market in equities.”
Unfortunately “we’re a way off that”.
● We most certainly are, blogs Merryn Somerset Webb. Perhaps the most shameful aspect of our current malaise is Britain’s youth unemployment problem. There are now more than a million unemployed 16 to 24-year-olds in the UK. That’s thanks in part to their “lousy educations” and our “employment-inhibiting regulatory environment”, says Merryn.
Some of the young have responded by using freelance sites such as peopleperhour.com to sell their time by the hour. Yet a look through the website shows why many of these people are struggling to get fulltime jobs. It is all services, ranging from accounting to marketing. “That’s all fine. But it isn’t enough. A dependence on the circularity that is the services sector is part of what got us into the trouble we are in now….
“Maybe we owe it to the youth we have so let down with our idiotic credit bubble and bust; our failed education policies; and our woefully ill-balanced economy to introduce some kind of special treatment for all fast-growing employers whenever they were founded.” (This is something that Merryn discussed with Luke Johnson when she interviewed the serial entrepreneur recently .)
It’s clearly a topic that matters to you, and the blog attracted plenty of comment and debate. Jon reckons that “what seems now to be showing up in the unemployment statistics is the ‘youth’ that were encouraged into higher education five to six years ago”. He believes that the investment in higher education back then merely “deferred an increase in unemployment figures that would have otherwise shown up at that time.”
Meanwhile, DickyJim blames the UK education system, which he believes is “a national embarrassment of the highest order… Anyone and everyone that has addressed the issue over the last twenty years or so and had the temerity to call a spade a spade knew it and said so from the beginning. The system has now had time to work through a whole generation of kids and they are the ones who are paying the price. Sadly they are poorly educated and that is how they will remain.”
Ellen’s a bit more forgiving: “The whole point of being educated is to open up more opportunities… to make a living doing something you enjoy doing. I don’t believe the education teenagers receive now is sub-standard [compared] to what went on years ago… Unfortunately for them, it looks like they will be asked to take on the burden of our old age without getting the benefit of our help to enable them to get a really good start after they leave school or university.
It’s one of those subjects where everyone has a view or a solution. Click here to read the blog and have your say.
● It’s not just the young who feel aggrieved, says John Stepek in Friday’s Money Morning. The “Occupy Wall Street” protests show that “lots of people who wouldn’t normally be upset by income inequality are far more irritated now”. They’re annoyed because “lots of people who are still mega-rich today, shouldn’t be. They have only been able to hang on to their wealth and their jobs because governments and central banks have conspired to make others pay for it”.
Take Britain. “The Bank of England seems hell-bent on demolishing the pound, while inflation is well above twice its target level. So people with savings are seeing them vanish at an ever-increasing rate. And it’s being done largely to prop up the banking sector.”
Fine, but it’s all politics – why does it matter to you as an investor? Because if inflation keeps going up, angry savers might “tackle it by getting out there and protesting”. The BoE might be content to miss its inflation target but “politicians tend to be far less stubborn in the face of an aggrieved electorate”. That means rates could rise.
John reckons that, assuming the BoE bank rate stays at 0.5%, the ‘panic’ zone for consumer price index inflation would be 7% – what do you think? Have your say here.
● And how is real wealth created anyway? That’s the question on Tom Bulford’s mind. And he’s fed up with all the nonsense that gets talked about borrowing and spending and how the economy can’t grow if no one is spending money. Looking at the question like that gets the whole cause and effect the wrong way round.
“It is through work that we generate wealth… what we need in this country today is an entrepreneurial spirit, with which to find what others are willing to pay for and then supply it. This is the formula for economic success at a national level, and also the formula for success at a business level.”
● Of course, ‘banker bashing’ is a pretty popular pastime at the moment. They’re right up there with unscrupulous journalists as the pantomime baddies of our times.
If you want a more detailed understanding of how the modern banking system works you should watch my colleague Tim Bennett’s latest video tutorial “How bankers create credit“. Every week Tim tackles a complex part of finance and explains it in short, very watchable videos. His videos have been a big success so far so if you haven’t watched one yet, watch them here.
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Have a great weekend!
• MoneyWeek
• Merryn Somerset Webb
• John Stepek
• Tim Bennett
• James McKeigue
• David Stevenson