When the Budget was announced, financial journalists breathed a collective sigh of relief. Not because it was so good, but because it meant they would be spared reporting on yet another ‘leaked’ measure. Treasury officials seemed to have given up on any notion of secrecy, with a slew of leaks making it one of the least surprising budgets in recent times.
As for what was inside the red box, it feels like “Gordon Brown never went away”, said John Stepek in Thursday’s Money Morning. The “pointless, symbolic changes to income tax. Micro-management of benefits. Raids on pensioners”, were all ‘Brown-esque’ touches and fell short of the radical changes the government promised when it was formed.
“George Osborne’s Budget does very little to change the outlook for the British economy… for every giveaway, there was a takeaway to pay for it.
“The Office for Budget Responsibility, our new fiscal watchdog, hasn’t done much to change its forecasts. The best that can be said – though this shouldn’t be underestimated – is that things didn’t get any worse. Britain will avoid a technical recession, but it won’t see a rip-roaring recovery in the near future either.”
One highlight was the cut in corporation tax. That “should mean higher profits being paid out to shareholders. And presumably it also means that any companies that were thinking of upping sticks and leaving will reconsider it”, says John.
But that piece of good work was undone by the reduction of the 50p income tax to 45p. It’s not that John wants a 50p top rate of tax, but “you should either stick with it, or ditch it altogether, not end up with this pathetic fudge in the middle”.
And that was “one of the most irritating aspects about the Budget in general. The Conservatives keep prattling on about tax simplification, but every time Osborne stands up, he makes things more complicated”.
Osborne’s treatment of child benefit is another example. He has a created system where parents are means tested to receive a tapering level of benefit. He would have been better to “just scrap it altogether or leave it well alone”.
Osborne’s decision to freeze the amount of income pensioners receive before they are taxed won’t have made him popular with older voters. Especially as pensions have already been hit hard by quantitative easing.
“The good news however, is that the chancellor didn’t touch tax relief on pension contributions. And we should be thankful for small mercies. Because it looks as though anyone who wants a decent standard of living when they retire is going to have to save harder than ever”, says John.
Indeed it’s a topic we cover in this week’s MoneyWeek magazine (if you would like to become a subscriber, get your first subscribe to MoneyWeek magazine).
● The rise of the ‘echo boomers’
Of course, Britain’s not the only country facing an ever-growing pensioner population. The developed world’s population boomed after the Second World War and now many economies are struggling to deal with skewed demographics.
The most commonly touted example is Japan. Indeed, says John in Monday’s Money Morning, “when the subject of Japan crops up, the dreaded word ‘demographics’ is never far behind”.
For many economists, “the make-up of Japan’s population is often seen as the key factor behind the country’s long period of stagnation. There are too many old people, and not enough young people being born to support them. Indeed, Japan is a nation on the road to extinction, at least if you extrapolate some estimates far enough”, says John.
But a new school of thought is challenging that accepted wisdom. Jesper Koll at JPMorgan tells newswire Bloomberg that the children of the baby boomers might be about to give Japan’s economy some much-needed uplift.
“‘Echo boomer’ is the catchy name being used to describe the children of baby boomers. Around 15% of Japan’s population falls into this category, which covers those aged between 35 and 44.
“Demand for houses shot up when the original baby boomers (those born between 1947 and 1949) hit home-buying age in 1987, reports Bloomberg. Housing starts (the number of new homes being built) hit the third-highest level in history.
“So given that the new batch of ‘echo boomers’, is ‘roughly double the size of the post-war baby boom generation,’ that should bode well for demand for Japanese houses.”
This could have a massive impact on the wider economy. Housing already accounts for 15% of Japan’s GDP and could become even more important. Put simply a housing boom would encourage people to buy more stuff to put into their houses and get other sectors moving. Which would be good news for Japan’s domestic companies and its stock market.
Housing is not the only thing Japan’s economy has got going for it right now, says John. “The yen has weakened sharply against the dollar since the Bank of Japan set a formal inflation target and promised more quantitative easing (QE) earlier this year. This makes life a lot easier for the country’s hard-pressed exporters.”
My colleague James Ferguson explored the case for Japan in full in a recent MoneyWeek cover story: Why Japanese stocks are set to soar.
● Is your stockbroker about to go bust…?
Making sure you don’t lose money on your investments is hard enough. But the recent collapse of WorldSpreads, a spread betting broker, showed that even when you pick the right investment you can still lose money. It was an important reminder that investors need to make sure that they are prepared for this sort of collapse, says Bengt Saelensminde on Wednesday.
Bengt should know. After all, WorldSpreads was the broker that he had recommended for one of his currency trades. “Most punters with WorldSpreads should be covered as the limit for any one person is £50,000. And given that with spread bets you only need put down a fraction of your full exposure, I can’t see many traders having more than £50,000 in their accounts.”
But let’s face it. Even though most people will get their money back it’s still not something that investors want to go through. “I guess this just goes to show the value of spreading your investments around.
“I know the more accounts you have, the more paperwork and admin hassle it creates. But if ever there was a gentle reminder that you shouldn’t have all your eggs in one basket, then surely this is it.”
Safety isn’t the only reason you should use more than one broker, says Bengt. “I use a discount online broker to deal in large quoted stocks (where the spread is tight); but when it comes to less liquid stocks, I always use a ‘premium’ broker. I don’t mind paying a higher commission when they can save me much, much more by getting me a decent price on the stock.
“The same is true of SIPPs – for your self-invested pension. There are many different levels of service and you may get some benefits by spreading your pension assets between a couple of providers. And of course, the same is true of spread bet providers. Some offer different markets, different bets and different prices.”
Bengt goes into more detail on how exactly the Financial Services Compensation System (FSCS) works in the rest of the piece. If you’re interested in signing up to his free newsletter, you can do so here.
My colleague Phil Oakley also investigates the fallout from the WorldSpreads debacle in a recent article: WorldSpreads: will you get your money back?
● Is the US bond bubble about to burst?
People have been warning that US bond prices are about to collapse for a long time, blogs Merryn Somerset Webb on Thursday: The end of the bond bubble? It’s all about China. For a while bond prices proved them wrong but they’ve started “to look more credible”.
To back up her point, Merryn quotes Halkin Services who note that last week “benchmark bond prices that had appeared well supported in a tight trading range were suddenly unsupported in a wide trading range”.
So what’s rattled the bond markets? There’s no shortage of possible causes, says Merryn. “It might be worries about the lack of new quantitative easing in the US; it might be the news that the US ran a $232bn budget deficit in February; or perhaps it is something to do with the wave of good news sweeping the US economy.
“After all, if deflation isn’t the biggest risk out there, and if US nominal growth is knocking around 4%, who wants to be holding ten-year bonds offering a yield of under 2%?”
But maybe there’s a far bigger threat to the bond market. It could be that China, the largest buyer of US Treasuries in the world, is losing it’s appetite for American government debt. “In December alone, China sold at least $20bn in US Treasuries. From the end of 2007 to the summer of 2011, foreign central banks bought around 45% of Treasury issuance (so something in the region of $2.2trn). Since then, they have been not buying but liquidating -something that clearly affects demand, and then yields.”
If that trend continues then someone else is going to have to start lending money to America. Even more importantly, “it represents the beginning of a very major shift in post-crisis global rebalancing”. Merryn is going to explore the theme in the coming weeks, so keep tuned to her blog for more.
● Beware of goodwill
Finally, MoneyWeek deputy editor, Tim Bennett, tackles the shady subject of goodwill in his latest video tutorial, and explains why these write-offs matter and how directors use goodwill to pull the wool over your eyes.
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Have a great weekend!
• MoneyWeek
• Merryn Somerset Webb
• John Stepek
• Tim Bennett
• James McKeigue
• Matthew Partridge
• David Stevenson