● The outlook for the UK is unremittingly grim, if the chancellor’s Autumn Statement was anything to go by. Europeans seem no closer to resolving their crisis. And the Chinese economy is showing clear signs of slowing.
But investors don’t care. This week, the FTSE 100 shot back up, having tanked last week. Why? Because the easy money cavalry came riding over the hill to make sure asset prices stay propped up in the face of grim reality.
On Thursday, wrote our editor John Stepek in Money Morning, “the world’s central banks got fed up waiting for Europe to do something. The Federal Reserve and the rest of them ganged up for an assault on the forces of bearishness, spraying more cheap money into the system in a concerted effort”.
First, the Chinese central bank relaxed reserve requirements, allowing China’s banks to lend more. That’s a major shift – for the last three years near enough, the Chinese authorities have been trying to slow lending.
But what really cheered the markets was a move by the Western central banks to make it easier for struggling European banks to ‘swap’ their euro assets for dollars.
“Banks – like any other businesses – need a steady supply of cash to perform their every day functions,” says John. “And global banks need a steady supply of the global currency – the US dollar. It’s usually easy for them to get hold of this cash. Other banks will happily lend it to them. Or if times are troubled, and you’re a US bank, you can get it direct from the Fed.
“But if you’re a European bank, and no one trusts you, it’s harder. You can’t get dollars from a US bank, because no one will lend to you. You don’t have a hotline to the Fed. And your own central bank doesn’t carry enough dollars to lend to you.”
(For more on how all this works, see deputy editor Tim Bennett’s video tutorial on this topic: Has the Fed saved Europe? – it’s a painless, textbook-free way to learn everything about currency swaps that you’re ever likely to need to know.)
● But maybe investors are getting a bit ahead of themselves. The move ensures that Europe’s banks can get their hands on the dollars they so need, for now at least. The problem is, while that has solved a short-term cash, or liquidity problem, it doesn’t answer the more fundamental solvency issue, says John.
“Greece is still bankrupt. Italy and Spain are still on shaky ground. In other words, the toxic assets remain toxic. And Europe’s leaders seem no closer to figuring out a solution.”
In short, despite what the markets might hope, the European debt problem hasn’t gone away. That’s why we’re happy to stick with defensive stocks (more on that in a moment).
We’d also stick with gold. In a world where you have no idea what central banks or politicians will do next, you need an insurance policy against uncertainty. Gold’s about the best one you’ll find. My colleague Dominic Frisby elaborated on the case for gold earlier this week: Get ready – we’re close to another buying opportunity for gold.
● Why do we like defensive firms? Because they sell things that people need and won’t cut back on. And George Osborne’s Autumn Statement made it clear that companies will need that trait in the coming months, says John in Wednesday’s Money Morning: Osborne is fiddling like Gordon Brown. Here’s what to do.
The statement was depressing, says John. And “one of the most depressing things about it was that, even although it was gloomy, it probably wasn’t gloomy enough”.
Britain’s borrowing is still not under control and economic growth will be lower than expected. Why the bad performance? The Office for Budget Responsibility (OBR) pins much of the blame on the Bank of England’s policy of quantitative easing (QE – printing money).
By trashing the pound, the Bank has driven prices higher, and hacked away at consumers’ spending power. “Households spent roughly as much as the OBR had expected. But because inflation was higher, that spending bought less”, says John.
But don’t expect QE to end soon. The Bank’s gilt-buying programme has also helped keep Britain’s borrowing costs down. From a lender’s point of view, “it makes it much less risky to enter a market if you know that you have a guaranteed, relatively price-insensitive buyer to sell to at a later date”.
And that’s why QE won’t be dropped. It “might be hurting the UK’s growth, but the Bank is also convinced that it’s necessary to keep the financial system alive. So we can probably expect more of it. That will mean more pressure on consumers, and more reason to stick with companies that can withstand recession”, says John.
● Things could be worse. We could be in Vietnam. In Monday’s MoneyWeek Asia, Cris Sholto Heaton looked at how the economy, once seen as the next ‘Asian tiger’, came a cropper.
The trouble stemmed from – and isn’t this a familiar story? – overly-easy money. In 2009, when the Vietnamese economy was booming, “the government kept monetary policy too loose, while encouraging the growth of inefficient state-owned enterprises.”
As a result, credit growth was rampant, and Vietnam ended up with “the worst inflation problem in Asia”. Investors lost faith in the currency, which tanked, and in many people’s eyes, Vietnam went from a tiger to “basket case”.
Sounds awful. But don’t speak too soon. Unlike Britain, the worst could now be behind Vietnam, says Cris. For a start, all these problems mean the Vietnam market is still very cheap. “Depending on what estimates you use, the VN Index is on around seven to nine times forecast 2011 earnings and six to eight times forecast 2012 earnings. There aren’t many markets on those kinds of valuations.”
And with the authorities finally tightening up on lending, they are starting to conquer inflation. Yes, the lending squeeze is having a painful impact on the economy – “many smaller banks and overextended real estate firms are scrabbling for cash” – but once inflation is reined in, the country should be able to grow its manufacturing industries successfully and the economy will boom again.
To find out the best way to invest, read Cris’s piece here: Why you should ignore the crowd and buy Vietnam. And you can sign up to his free email here.
● Meanwhile, our editor-in-chief Merryn Somerset Webb has been blogging about a new cult in Britain taking advantage of the desperate and the poor. She’s talking about ‘wealth creation seminars’.
What happens at these seminars? Financial experts promise to tell a paying audience how they can create “multiple streams of income”. That might sound good, says Merryn, but really it just boils down to buy-to-let property.
“‘Wealth creation’ is simply the US name for borrowing a whole pile of money and using it to buy houses you can let out to other people. And wealth creation seminars are buy-to-let seminars, just with a bit more glitz and finesse”.
Unfortunately, “most people never go into buy-to-let. They just go to a lot of seminars and end up deeply in debt”. Moreover, “in times of recession, the vulnerable are even more open to this kind of thing than usual. Add that to the cult-like atmosphere of the events and wealth creation is on the way to creating a new world of misery”.
The only ones who manage to create any wealth are the so-called experts who cash in with seminars, DVDs, books and coaching sessions. And as the economy gets more and more miserable, they have more and more chances to cash in.
As more people lose their jobs and get desperate, they “throw all they have at buying hope”, which is why UK-based wealth creation coaches are now popping up all over the place. The strangest thing, says Merryn, is that “most forms of financial advice are somehow regulated while property advice of this kind is not”.
The blog provoked a strong response. Most of you agree with Merryn. Dr Ray noted that, “the other reason these confidence tricksters are doing well is that as the economy contracts and people are made redundant they will often receive a few thousand quid redundancy money”. And sadly, continues Ray, “the financially unsophisticated with a pocketful of cash are easy pickings”.
Ellen called it a “triumph of hope over reason” and wondered why gambling was regulated but this type of property advice isn’t. She also drew a parallel with alternative medicine, as they both “offer promise without responsibility”.
However, Billmac disagreed that more regulation could help, pointing out that “there will always be conmen and fraudsters”. Merryn enjoys a debate with readers, so if you haven’t read the piece yet, you can do so and have your say here.
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