● The Greek debt crisis rolled on, with private holders of Greek debt unable to agree a deal with the IMF on just how sharp a ‘haircut’ they’ll submit to. But investors weren’t worried. Why not?
Because Ben Bernanke was back, promising to keep US interest rates as low as he could – until late 2014, in fact. As a result, the US market, the S&P 500, managed to nudge into bull market territory. It’s up by around 20% since October.
In fact, in this week’s issue of MoneyWeek magazine, our roundtable experts look at the best way to play the American market, and pick their favourite UK-listed US stocks. If you’re not already a subscriber, subscribe to MoneyWeek magazine.
● If Bernanke’s promise to keep money cheap and maybe even print some more convinces investors to take more risk, how can you take advantage? Gold has benefited of course – but we’ve been fans of gold for a long time.
If you’re looking for something riskier that might do well out of the Fed’s promise, we have a couple of other suggestions. The secret to profiting from a ‘dash for trash’ rally is not to buy the ‘trash’. Instead, buy stuff that you would want to hold on to anyway.
For example, now might be a good time to buy into India – the only Bric we’re particularly keen on. Or gold mining stocks could make a comeback, after having a tough time in 2011. Dominic Frisby looked at the sector in more detail last week.
● The promise of cheap money is, of course, what got us all into trouble the last time, as John Stepek said in Thursday’s Money Morning. “When Alan Greenspan was at the helm of the Fed, it was called ‘the Greenspan put’.” The ‘Bernanke put’ is “likely to end in tears all over again.”
And Tim Price, author of The Price Report newsletter, agrees. The Fed’s interference in the markets meant that “the US equity market was never allowed to bottom out after the dotcom crash of the new millennium… Courtesy of an interventionist Fed, interest rates were slashed to protect the stock market – and to allow a property boom to inflate, with all the resultant damage.”
As a result, says Tim, shares look overpriced. And thanks to low inflation, bonds aren’t much better. “In the early 1980s, investors could lock away ten-year bonds with yields approaching 16%. Today, the most you can get is around 2%.”
The sad but inevitable conclusion, says Tim, is that the money game is getting a lot harder. But “dealing with an environment of seemingly perpetual gloom like this can be exhausting”, says Tim. His solution? “I’m going to take a break from the stupidity and madness that is the debt crisis, and instead take a look at the practice of investment from 20,000 feet, in the company of some of the world’s best investment managers.”
Tim takes a look at Jonathan Davis’ analysis of three of the most successful money managers in history: Warren Buffett, Anthony Bolton and Sir John Templeton. While each is different – Templeton is Tim’s favourite by the way – there are certain traits that they all share, including an aversion to leverage, and a fondness for what they see as “simple, common sense principles”. In short, successful investment “can best be described as simply but not easy”.
Tim’s own conclusion is that: “to really succeed in investment, following the herd is unlikely to help. You need to dare to be different, to keep to your own path when everyone around you is sprinting in a different direction. If managing your own money, you need to understand what risk really is – volatility is one thing, and is unavoidable, but the permanent loss of capital is quite another.”
● Fed-bashing is a pretty popular sport these days but not everyone thinks that its loose monetary policy helped cause the crisis. On her blog, our editor-in-chief Merryn Somerset Webb looks at James Livingston’s new book, Against Thrift, which challenges the orthodoxy that overconsumption – fuelled by loose money – caused the crisis.
“Livingston thinks that rich people have too much money; that bubbles are formed by those with excess capital and nowhere productive for it to go pouring into one nonsense after another; and that the solution is for it to be removed it from them and given to lower income groups to spend on stuff.”
Livingston might not be right on everything, but he has a point, says Merryn. “Those benefiting from profits have become progressively richer; those benefiting from rises in output as a whole and from the share of that output going to labour have become relatively poorer.
“The former, who have a lower propensity to spend than the latter, then become the bubble creators of Livingston’s book – chucking their ill-gotten cash around the globe in the search for a further return. The latter, scrabbling around for the rent, fail to spend, to consume and hence to prompt the rises in output that benefit us all.
“The result? Crisis – in the form of a toxic mixture of bubbles and low growth.”
And this is what the acres of coverage on the current bonus debacle is missing, says Merryn. It’s not just about public anger and making things look fair. Getting bonuses right “is one of the key things in making sure that the economies of the West can start to grow again”.
The post sparked a debate, with two basic camps emerging. One, typified by ‘Boris MacDonut’, agreed with the idea that more income equality would be good for the economy. “I couldn’t agree more and will get this book asap. The concentration of spending power in the hands of the richest 1% has starved the economy of genuine demand.”
The other camp, headed up by ‘Critic Al Rick’, feel that “it’s spending (money we’ve not got) that’s got us into the crisis”. Plenty more commenters have joined the fray: read the piece and have your say here.
● Amid all the fretting about the macro outlook, it’s easy to get distracted from the fact that, regardless of how things are in the wider world, there’s always an opportunity to make money. Tom Bulford, author of the Penny Sleuth, likes to target small companies with a technological advantage. In this week’s issue he trained his eye on the “green energy revolution”.
“So far, the green energy revolution has been a bit of a damp squib. The emergence of the electric car and the development of hydrogen vehicles have certainly got the ball rolling. But there are still major flaws in both technologies and we are yet to see a real take-off.”
But Tom has found “a fascinating little company that’s doing its bit to make this planet-saving technology work. And it’s doing it by inventing new ‘wonder’ materials that could solve a broad range of technical problems…”
“A spin-out from Southampton University, Ilika (Aim: IKA) is a world leader in the development of new materials. New materials change our daily lives for the better. New lightweight but super strong plastics make cars and aeroplanes lighter; new metal composites enable consumer electronics.”
The tiny firm – it has a market capitalisation of around £18m – has already signed partnership deals with Toyota and Shell to help it develop and test new technologies. With Toyota it is working to improve the efficiency of lithium-ion batteries, while its project with Shell is an attempt to make hydrogen fuel cells safer. In short the firm’s technologies can be used in all sorts of green energy solutions, meaning it could benefit regardless of which technology eventually comes out on top.
Of course, says Tom, Ilka still faces the “big challenge” of “converting its know-how into profit”. So “for now, it’s one to watch for the future”. Every week Tom unearths exciting small-caps like Ilika, so if you want to get his free Penny Sleuth newsletter you can do so here.
● Probably the best way to be a successful investor is not to invest in companies that go bust. Obvious I know, but it’s surprising how many investors do. The reason is that companies which appear healthy on the outside sometimes have serious flaws with their business model.
MoneyWeek deputy editor Tim Bennett investigates the subject in his latest video tutorial, and it’s well worth a watch: Why do profitable firms go bust? And I’d just like to add a quick congratulations to Tim, who was highly commended as the financial journalist of the year in the recent CFA Society’s Journalism awards.
Also, a quick mention for my MoneyWeek colleague David Stevenson. David has taken up a post as the Fleet Street Letter’s investment director. David will still contribute to the Money Morning emails and maybe even make a cameo appearance in the magazine, but from now on his focus will be the newsletter.
To hear about other bits and pieces on the internet that have amused us or made us think, sign up for our Twitter feeds – we’ve listed them below.
Have a great weekend!
• MoneyWeek
• Merryn Somerset Webb
• John Stepek
• Tim Bennett
• James McKeigue