● This week the European Central Bank (ECB) boosted stock markets by extending its form of quantitative easing (QE). We’ve written about this several times before, but John Stepek sums it up again here.
But before investors open the champagne, there’s something else to worry about – surging oil prices.
The latest oil spike was caused by rumours of an explosion in Saudi Arabia. This has since been denied. But as John also points out , “the fact that a mere rumour can trigger a surge like that – sending oil to its highest level since 2008 – shows just how jittery the market is”.
Tensions with Iran seem unlikely to go away anytime soon, meaning that we may have to deal with high oil prices for a while. If that happens, it’s likely the consequences will be worse in Europe than America. “For one thing, the European economy is already fragile”, notes John. “Secondly, Europe doesn’t have the shale gas reserves that the US has.”
“Natural gas in the US is dirt cheap, driven lower by the glut of gas released from shale by new technology. That means that what US consumers lose at the petrol pump, they’ve gained in their heating bills. Europe, on the other hand, has had no such offsetting benefit.”
In fact, America’s gas bonanza might even make life even tougher for us.
That’s because ”surging domestic gas production means the US may have to import less oil. That will shrink the US trade deficit. That in turn, will tend to make the dollar stronger. “If the dollar strengthens, the cost of oil in pounds and euros will rise even further. It’s already at record levels in both currencies. And even though higher oil prices are recessionary (they cut into spending power, so hurt demand), they also push inflation up.”
So how can British investors protect themselves from rising inflation? One way is to make the best use of your Isa allowance. In a special supplement in this week’s MoneyWeek magazine, we look at some of the best investments to stick in your Isa. If you’d like to become a subscriber, subscribe to MoneyWeek magazine.
Why an independent Scotland must abandon the pound
Of course, controlling inflation in this country is supposed to be the job of the Bank of England. As we explained last week, we don’t think it’s doing this too well.
But here’s a turn up. One of the Bank’s most unlikely supporters is the First Minister of Scotland, Alex Salmond, says Seán Keyes.
Despite being keen to wrest as much power as possible from Westminster, Salmond wants Scotland to retain the British pound. This would mean Scotland “would continue to import monetary policy from the Bank of England at Threadneedle Street”, says Seán. And he reckons that would be a big mistake.
If Salmond wants an example of how small economies fare when they allow others to control their currencies, he need look no further than Ireland. It used to peg the Irish pound to sterling at a rate of 1:1. But that made Irish exports far too pricy. And the country’s economic performance suffered badly a result, and Ireland “slid down the European income league”.
After 80 years, Ireland changed tack when it switched to the euro. After ten years, that isn’t working too well either.
Seán explains. “When Ireland first joined the euro the ‘celtic tiger’ was nearing its peak. With no control over monetary policy or currency; and no fiscal transfers within the eurozone, the economy roared ahead… for a while. Capital poured in, the property market went into the stratosphere, wages and prices followed.”
“Since 2007, Ireland has faced the other type of shock. Nobody wants all the things it used to produce. If it had its own currency, its value would adjust to reflect this”. So the only way out is for Irish prices and wages to fall – and that’s “a slow and ugly process… meaning mass emigration, mass unemployment and social unrest.”
And the First Minister of Scotland, Alex Salmond, reckons Seán.
Profit from test-tube burgers
Over to stocks – and Tom Bulford, author of the Red Hot Penny Shares newsletter, explains why he thinks the woes of drug companies could be lucrative for brave investors.
“The pharmaceutical industry is facing a huge challenge. The fact is, its traditional model of selling ‘white pills to western markets’ is delivering diminishing returns. It needs to adapt – and that presents you with a great opportunity as an investor”.
“Today pharma bosses know that really attractive profits will only come from transformational innovation. And right now there are remarkable advances being made in biotechnology. None more so than in the hugely exciting field of stem cell research.”
What’s really caught Tom’s attention was the news last week about the development of a ‘test-tube burger’. It might sound like science fiction but this stuff is happening and about to become more commonplace, he says.
“Animals and plants are both made of cells. We have long cultivated plants, and now we are learning how to cultivate human and animal tissue. We will not see hamburgers hanging from the vine in a greenhouse. But it is quite possible that they could be grown in a laboratory”.
“Just think what that could mean for the global food crisis. It could radically reduce our dependence on the scarce water, fertiliser and livestock resources used in food production. This is the kind of exciting, breakthrough innovation made possible by the biotech sector. In fact it’s the kind of technological advance that could ultimately change the world.”
Tom has found an exciting way to play the biotech sector. It wouldn’t be fair on his subscribers to give away the tip but if you are interested in finding out more about Red Hot Penny Shares, Tom’s recently put together a video on another of his big investment ideas – I won’t ruin the surprise here but it’s a UK commodity play that Tom thinks will make some investors very rich.
Are pensions worth the hassle?
Meanwhile, Merryn Somerset Webb has been involved in a lively debate with readers about the pensions industry. Merryn has a number of issues with pensions. They are complicated, expensive to administer and, most of the time, not much good to the people who use them, she says.
The article sparked a massive response from readers, and is currently the most popular piece on the site.
Why we should tax land, not income
Merryn has also called for a reform of the tax system. Regular readers will know that Merryn is keen to scrap income tax and replace it with a tax on land. On Thursday she explained why it would benefit the UK economy.
“The main point behind a land or location tax is that, in general, the price you pay for a property or piece of land (ie, the value the market gives it) is not about the land itself, but about where the land is. A house sitting on a piece of land might cost more or less the same to put up in Wales and London, and as a structure, be worth the same in both places”.
“But the house in London still sells for 20 times the one in Wales because of the wealth of activity around the land on which it sits. The community, the infrastructure, the buses, the airports, the schools, the hospitals, the ease of doing business – the price you pay for the land is a function of all these social rather than private goods.”
As a result those who benefit from these social goods – the owners of the land – should pay something towards it. Aside from being more ‘fair’, a land tax would also be more efficient, says Merryn. The problem with all taxes is that they distort economic activity and discourage people from doing what they would do in a tax-free environment. Yet “of all the four categories of tax (property taxes, consumption taxes, personal income tax, corporate income tax), property taxes are the least harmful to an economy”.
But despite Merryn’s enthusiasm for a land tax, she’d only accept it on one condition. “It would have to come instead of, rather than on top of, all our hundreds of other taxes.”
Readers were quick to add their views with ‘Chilli’, leading the camp in favour of Merryn’s proposal. “Brilliant sentiments!… The UK desperately needs to formulate a new ‘deal’ with its entrepreneurs. Land values and taxes are the yoke that keeps us in ‘non job’ slavery.” But regular commenter ‘Boris MacDonut’ strongly disagreed, arguing that it would be a regressive tax that would favour the rich.
Read the piece in full and have your say here.
● Before I go, I’d like to nudge you in the direction of Tim Bennett’s video tutorials. Every week Tim targets part of the financial world and explains it in short video sessions. Given the ECB’s lending splurge earlier this week it would seem a good time to look at Tim’s explanation of quantitative easing.
If you’ve missed one of Tim’s earlier tutorials – or you’d just like to look at them again – you can access the archive here.
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
• Matthew Partridge
• David Stevenson
• This article is taken from the free investment email Money Morning. Sign up to Money Morning here .