The news this week was dominated by horsemeat. We investigated it fully in this week’s MoneyWeek magazine and analysed the economic implications. However, in his Right Side email, my colleague Bengt Saelensminde took a different angle.
“Some people”, says Bengt, “deserve horsemeat”. This scandal, he says, has a lot of parallels with the financial world.
The first thing to note, says Bengt, is that the horsemeat scandal has financial roots. “Horsemeat is what you get when inflation stokes up input costs. In this case, trying to beat inflation led the producers one step too far.”
This pressure has been building up for a while, says Bengt. “In light of price inflation, the supermarkets have been pushing suppliers to keep costs down. The public can’t afford higher prices, so the supermarkets are desperate to keep commodity price inflation from leaking out into the real world.”
In many ways it reflects the ingenuity of a free-market economy, says Bengt. Though it also shows up one of its major flaws – that people cheat.
This should serve as a warning for investors. “It shows just how wary you should be about labels – be it of financial products, food or anything else. Don’t be fooled into thinking that government regulations will keep you safe. More likely, they’ll have the opposite effect – by making you complacent…”
We all suffer from a false sense of security. “The public over-relies on regulation. We’re assured that regulation means we can trust what the labels tell us.
“But we only need to look at the City to see how things have changed. “My word is my bond” made the City of London a prominent centre of finance. Now, trust has been outsourced to government regulators.” Of course the City has always had its scammers and cheats, says Bengt. “But because there was little regulation, people had to do their homework, and only deal with trusted individuals. It was self-regulation, and it worked.”
His advice to investors: “Sometimes it’s useful to just stand back and reflect for a while. Forget about what’s on the label and certainly forget about what government says. Because to survive in this environment, you need to be able to think for yourself and read between the lines.”
Protect yourself from the plummeting value of sterling
These certainly are difficult times, writes Brian Durrant in The Fleet Street Letter. Indeed, we are in the final stage of the Great Crisis – the currency war.
“In August this year we will mark the sixth anniversary of the start of the global financial crisis, and we are nowhere near out of the woods”, notes Brian. “So far the policymakers have tried rock-bottom interest rates. They have resorted to printing money on a massive scale. They have allowed public sector deficits to spiral out of control. And central banks have spent billions buying government IOUs with money created out of thin air. Yet the economic recovery in the developed world has been tepid at best.”
So now the desperate authorities will try an even more risky gambit, says Brian. “Individual governments are starting to break ranks and bend the rules. At the moment Japan is at the forefront of this new monetary experiment. But others will follow. Because even the traditional “safe haven” currencies are being dragged into this mess.”
“In September 2011, the Swiss National Bank drew a line in the sand and said it would not tolerate the EUR/CHF rate moving below the 1.20 mark and would achieve this by buying euros in unlimited quantities. And it will continue to fight in these terms. Switzerland has already built up the fifth largest stockpile of foreign currency reserves in the world, standing at over CHF427bn in December, up by more than two- thirds over the previous year.”
It’s not just the Swiss and the Japanese, says Brian, the Americans have been pursuing a weak dollar policy for years. And now it seems sterling is about to join the race to the bottom. “For the last five years the UK authorities have engaged in a currency policy that can be best described as “benign neglect”. Since the financial crisis broke, the Bank of England has been broadly in favour of a weaker pound.” Throw in widening trade deficit and money printing and its clear that the only way for the pound is down, says Brian.
The Fleet Street Letter team has worked out a strategy to help British investors negotiate the fall in value of their currency. I can’t give it away for free here. But I can point you in the direction of another piece of their research. In short they’ve come up with a way that investors can double the income they receive from shares. It’s a simple, effective strategy that’s ideal for long-term investors looking to supplement their retirement pot.
China’s growing soft power
Each week The New World email highlights key emerging investment themes in Latin America and Asia. In the latest issue Lars Henriksson examined how China’s rising wealth is reflected in its growing ‘soft power’.
It all began in the Asian financial crisis of 1997/1998 when China’s economy began its rapid ascent. “The experience of the Asian crisis – with vast sums of Western money flooding out of Asia as the economies collapsed – soured relations with the West. And so Asia turned to China. When China succeeded in attaining membership of the World Trade Organisation in 2001, it was a key moment for Asia.”
Lars has spent the best part of two decades in that part of the world. “During that period I observed first-hand how the candidates in the Bangkok mayoral election openly used their Chinese nicknames and stressed their Chinese family heritage. And many Southeast Asian politicians remain eager to curry favour with the Chinese authorities. Just last week I watched the Malaysian prime minister, Najib Razak, appear in a TV advertisement giving Chinese New Year greetings. He was dressed in a traditional Chinese suit and was energetically beating on a Chinese drum during a lion dance scene.”
With Korea and Japan also doing their best to extend their soft power, this trend will throw up plenty of opportunities for alert investors, says Lars. That’s not the only investment theme Lars is looking to exploit. Indeed, he’s just uncovered another way to play the rapid growth in South East Asia. To find out what Lars has up his sleeve, and learn a bit more about the man himself, read this free report.
What the rush to issue ‘convertibles’ means for you
I’d like to take a minute to mention our very popular video tutorials. Each week deputy editor Tim Bennett tackles a financial issue in the news and explains in jargon-free terms why it matters. This week he investigates why companies in Europe are issuing convertible bonds at a record pace. Tim’s video’s have proved an internet phenomenon and are heading towards two million YouTube hits. If you haven’t seen one yet, click here to see what you’re missing.
Don’t wait for the ‘wall of money’
And finally, before I go, a quick nod to one of the most popular articles on the website this week. In Monday’s Money Morning John Stepek highlighted the “three most dangerous words in investing”.
“When you hear the words, ‘wall of money’, it’s time to start shuffling towards the exit door…”, says John. The phrase refers to the idea of huge amounts of cash being withdrawn from bonds and flowing into equities. It’s been talked about for a while but string of huge mergers in America is lending it extra credence at the moment.
“What bothers me”, says John, “is that it’s a classic capitulation phrase. It gets broken out when markets are rising and no one can quite see a good reason for it. It’s a sign that the final doubters are giving up and have just thrown in their lot with the bulls.
“The last time I remember hearing it bandied about so regularly was in 2007. What you have to remember about 2007 is that although stock markets were hitting new highs, it was becoming clear that all was not right with the world.”
There were lots of reasons to feel nervous, says John. “But equity markets just kept rising. So people clutched at straws to explain why – which is where the ‘wall of money’ came in. Back then, the great wall of cash was being stored up in the sovereign wealth funds (remember them?) The SWFs were going to take over the world, and being government-run, the argument went, they wouldn’t care what price they paid.”
Needless to say this wall of money from the SWFs did nothing to prevent the subsequent stock market crash. Now, says John, there is already a wall of money around in the form of quantitative easing. When this falls, shares are likely to get hammered. So what’s John’s advice? “Stick with cheap assets – such as Japanese and European stocks – and to make sure your portfolio has exposure to a diverse range of currencies. You also want to own gold as insurance.”
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