America gave investors a nasty jolt this week. Turns out that the economy shrunk in the last quarter of 2012. Yet, after a brief blip, markets continued to march upwards.
To be fair to the bulls, the GDP fall wasn’t as bad as it looked, said John Stepek in Thursday’s Money Morning. The figure was dragged down by defence spending cuts and falling inventories – both of which are probably one-offs.
Other areas of the economy were more positive: “consumption grew more rapidly, and investment by both businesses and households was up too.”
Of course, John’s not saying that everything is rosy with the US. The biggest worry for investors is how US politicians will deal with its massive debt. But this is a problem shared by most other developed economies.
And compared to Japan and Europe, the US has two big advantages. Unlike the others, it has cheap energy and reasonably cheap housing – two factors that give the US a head start in the race back to the ‘old normal’.
And that’s what British investors should be worried about, says John.
“So far, the financial crisis has very much been a case of “we’re all in this together” – one developed economy looks as bad as any other. If the US pulls away, that’s going to leave the UK in particular looking very flaccid indeed.
“It’s one thing having a lacklustre economy when everyone else’s is rubbish too. It’s quite another when you start to stand out as the ‘problem’ economy. I think 2013 could be very uncomfortable indeed for the UK and the pound.”
We covered sterling’s prospects in depth in the latest issue of MoneyWeek. If you’re not already a subscriber, subscribe to MoneyWeek magazine.
In fact, we’re so worried about the problems facing the British economy – and the impact it will have on our readers’ investments – that we’ve recently published a report on the subject.
It’s proved controversial but we’re not afraid to stick our necks out when we can see the writing on the wall. If you haven’t read it yet, you should.
Generous pensions are a relic of the past
On her blog this week, Merryn Somerset Webb looked at the demise of the final salary pension scheme.
“Only around 13% of final salary pension schemes are now accepting new entrants (that’s down from 43% only in 2005). Some schemes have even shut to existing workers.”
There are some very clear financial reasons for this. The end of helpful tax breaks (thanks again, Gordon Brown), volatile stock markets, and rock-bottom interest rates have all hit the performance of company pension pots, says Merryn.
But finance isn’t the only factor. Society has also changed. That’s left the final salary scheme looking like a relic from an earlier era. They “belong to a paternalistic past”, says Merryn. “A time when you worked at the same company for your entire working life, and one in which the company had obligations and loyalties to you as you had to them.
“We don’t have that any more. Instead, we shift jobs frequently; we freelance; we take on short-term contracts; and we run web businesses on the side. So it makes no sense for us to have bits of pension stuck with institutions to which we have no long-term connection.”
It also seems a bit unfair for companies to be lumped with the long-term pension responsibility of an employee that has long gone, says Merryn. “What if I had a final salary pension at MoneyWeek and then left to work at, say, The Economist? Why should MoneyWeek take on the long-term risk of managing me as a liability while I enrich (as of course I would…) a competitor? Nuts, really.”
Of course, everyone would like a final salary pension scheme, but it’s just not possible anymore, says Merryn. “In an era in which we end up taking more responsibility for our careers, we also, I think, have to take responsibility for our pension arrangements.”
‘Ellen’ agreed with Merryn that the old system was unsustainable. “The pensions crisis has been brewing for decades and everyone just ignored it, passing the buck to future generations. At least it is being discussed now.”
But ‘Neutron Warp’ believes there is another reason for the demise of the final salary pension. “For years CEOs have tried to get rid of FSP schemes and (like the government and the state pension and benefits system) the current climate has provided the perfect opportunity – whilst still paying themselves huge, inflation-busting salaries. One day I hope people will say enough is enough and kick off against the arrogance and double-standards we see all around us.”
It’s a debate that affects us all, so if you haven’t read it yet, demise of the final salary pension scheme.
Stay sceptical on this fitness fad
In the latest edition of his free, twice-weekly email, Penny Sleuth, Tom Bulford gave readers an update on a share he’s been tracking for some time.
The company, Fitbug (FITB), is trying to cash in on the craze for physical fitness and has created a small digital device to help people work out. Probably best if I let Tom explain.
“Before long, we will be wearing little devices that can sense how much exercise we do, how our heart is beating and various other physical manifestations. Wirelessly this information will be transmitted to smartphones and tablet computers, giving us an instant online check on our level of activity and aspects of our health.”
What’s the benefit? Well, “this will lead us to challenge ourselves to do better, or engage in competitions with others to see, for example, who can walk the furthest.”
To this end, Fitbug is developing three devices, says Tom. “The ‘Orb’ is basically a motion sensor which can track our physical activity. The ‘Fitbug Wow’ is a set of scales that will simply transmit our weight back to our base monitoring station. And the third is the ’Fitbug Luv’, a blood pressure monitor.”
The timing for the devices couldn’t be better. A report by ABI Research predicts that in five years, the number of wearable wireless health and fitness devices will hit 170 million, up from 21 million last year. As a result broker Hybridan is projecting rapid growth for Fitbug.
But Tom isn’t so sure. To him, “this is a business that the electronics industry wants to push, rather than one that is being demanded by consumers”.
Another worry is that the firm will need to raise more cash for product development, says Tom. And “beyond that, it has plenty of competition from giants like Nike, Adidas and Motorola, all of whom are a great deal bigger.”
For now, Tom’s not investing – instead, “I am going to watch this one – from the comfort of the sofa.”
If you want to receive regular insights into the world of small-cap investing, sign up to The Penny Sleuth here.
Profit from the fuel of the future
So Tom’s not too convinced by that fitness fad.
But there’s one trend that has another of our newsletter writers – David Stevenson – very excited indeed.
Over at the Fleet Street Letter, David has long been talking about the ‘shale gas revolution’ in America. Most MoneyWeek readers will be familiar with this theme – indeed you may even have invested in it.
But where David stands out is that he’s predicting that we’ll soon see shale take off in the UK too.
“We have a great wealth of natural gas in the ground and offshore. And it may not be long before we start seeing companies recovering this huge untapped resource”, says David.
“In fact, this is a story where Britain is lagging well behind the rest of the world. In Pakistan and Iran, for example, the governments already have mandated a switch to natural gas vehicles. And according to the Wall Street Journal, the two countries now have about 2.7 million and 1.9 million gas vehicles on the road respectively.
“That can only be good news for the price of natural gas. NG has had a very tough time in recent years. In the key US market, a supply glut has caused the price to fall by about three-quarters since 2008. Indeed, that’s why, as committed contrarian investors, we first became interested in the commodity.”
But now the prospects for gas look more promising, says David. That’s because it has several advantages as a fuel.
“NG is colourless, odourless and non-toxic. That means it’s the planet’s cleanest-burning fossil fuel. With coal considered much too messy, nuclear energy seen as too risky while solar and wind power are proving too costly, gas is a handy, reliable and plentiful alternative.
“We see a major boost in demand from US utilities over the next two decades. Further, vehicles using compressed natural gas (CNG) are set to play a huge role in the transport industry’s future.
“Some estimates suggest that North America’s CNG vehicle numbers – currently expanding at some 10% a year – should keep growing at this rate through to 2019. We won’t be changing our overall bullish view on gas.”
So, how can investors profit from the theme? Well, the most obvious way is the fuel itself, says David. However, “extra ways of playing NG are appearing – from retrofitting power stations to developing new car engines”. Over the coming months David will be exploring the theme and finding cheap ways that his subscribers can invest in it.
Double your income
Natural gas isn’t David’s only investment idea. He is also using a strategy he learned from his days as a fund manager in the City which allows you to earn twice as much income from a company as a normal investor who holds exactly the same share.
If you’re looking to steadily accumulate wealth to finance your retirement, this is for you. David has written a report explaining the strategy, which you can read for free here.
The truth about NGDP
Before I go, I’m going to point you in the direction of the latest MoneyWeek video tutorial. You may have read that the Bank of England’s new governor thinks that central banks should focus on NGDP. That’s caused a bit of a stir with the incumbent, Mervyn King, making a thinly veiled attack on the concept.
So, this week our deputy editor, Tim Bennett, explains NGDP and why it’s so controversial.
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Have a great weekend!
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