● A failed German bond auction, bad economic news from China – this week even the safer bets in the world economy started to look iffy. Throw in a reminder from America that it still hasn’t sorted its massive debt worries and it’s little wonder that stock markets around the world tanked. The FTSE 100 was down almost 4% this week despite a rally on Friday.
Germany tried to borrow €6bn over ten years. But it could only raise €3.64bn. That’s pretty bad, says John Stepek in Thursday’s Money Morning. “This can’t be seen as a technicality. It was the worst auction seen in the euro era. People just weren’t queuing up to lend to Germany.”
But investors aren’t “getting worried that Germany won’t pay them back. The real problem is the euro. Who wants to buy a government bond that’s denominated in a currency that will either fall apart, or be colossally devalued in the name of continental unity? The big worry is that investors are starting to avoid Europe as a whole, rather than just discriminating against the ‘periphery’ “. That could mean “a big chunk of demand for European government debt will just fall away”.
“So how can you profit from all this? The most obvious way to play a general flight from the euro is to buy dollars”. We urged readers to invest in dollars a couple of months back, and that advice is playing out well.
John also suggests holding gold – the classic safe haven in troubled times. Further, “if you have a strong stomach and fancy your hand at trading, you could short the euro by spread betting”. OK, it’s highly risky and you can lose more than your initial stake – but why not sign up for our free MoneyWeek Trader email to find out more.
● If doubts about Germany weren’t bad enough, the other ‘great white hope’ is about to let us down, says David Stevenson in Friday’s Money Morning.
“There have been high hopes that China might also bail out some of the busted countries in the eurozone. But don’t count on it. China is facing more than enough problems of its own to worry about bailing out Europe, or anyone else.”
For starters, China’s economic growth is slowing quickly. Early reports indicate that its factory sector is shrinking at the fastest rate in nearly three years.
But “the real worry is what’s behind the slowdown”. Until now China’s economy has grown by importing goods to the West. “But with much of the rest of the world struggling, that may not last”, says David. The bulls say that won’t be a problem. They claim “that China will ‘rebalance’ away from its dependence on exports, and will rely more on its own consumers to drive its economy forward”.
Domestic demand, though, is now dropping. Why? Because “China’s property bubble – inflated by state-promoted bank lending – is in the process of bursting. As everyone in the West knows to their cost, nothing puts a stop to consumer spending like a falling housing market.” The fallout for the economy could get very nasty. And the Chinese authorities won’t be able to stop the rot“.
“Investors have already suffered heavily. Hong Kong shares – the easiest way into China for UK investors – have dropped by 22% this year in sterling terms”. That could get worse. Further, a sharp economic slowdown could also cause China’s currency, the renminbi, to lose value. “If you’re looking for somewhere to shield your cash from the turmoil in the markets, China is not the place to go.”
David also favours the dollar as a safe haven. And if you’re looking for some lesser-known safe havens, check out the cover story in this week’s MoneyWeek magazine. My colleagues Eoin Gleeson and Sean Keyes run the rule over some safe places to store your wealth. Subscribers can read the piece here: The search for safe havens for your money. If you’re not already a subscriber, subscribe to MoneyWeek magazine.
● Is all this too bearish? Tim Price, author of The Price Report newsletter, doesn’t thinks so. Investors need to be nervous, he reckons. Why? Because “we are not in a remotely normal market environment. I believe we are in the most dangerous market environment in living memory”.
Sure we’ve all seen bubbles and bursts before. “But this time round, we’re potentially facing the endgame of a multi-decade expansion of credit and debt. Whatever was inflated by easy credit – be it property, subprime mortgage assets, stocks, or bonds – has already started to fall in value, in some cases by precipitous levels. But the debt still exists, and the guilty parties have not even begun to write it down. We are now seeing what happens when virtually all the developed world goes into deleveraging mode simultaneously. It’s not a pretty picture.”
So investors need to see the world differently. “Instead of thinking about investments in terms of ‘how much can I make?’ you start to think instead, ‘How much do I stand to lose?” Tim’s primary benchmark is cash – “because cash deposits remain the only investment that cannot decline, at least in nominal terms”.
And Tim’s other strategy for dealing with the tough market conditions and volatility? Panic. “If you’re going to panic, panic early“, says Tim. With markets swinging around violently, a losing strategy can wipe out most of your wealth fast. “If any investments you hold are giving you sleepless nights, then the path of least resistance is simply to liquidate them, and build cash holdings. The trick is to be among the last investors standing.”
Of course Tim’s investment style is not just about selling. He has suggested a mix of different asset classes – bonds, funds, precious metals and cash – that he thinks will benefit from the current conditions.
● Understanding how the markets work is key to making good investment calls. And that’s where MoneyWeek deputy editor Tim Bennett’s video tutorials can help.
Every week Tim tackles part of the industry and explains how it affects your investments. This week he turns the spotlight on compound interest. In fact, Tim thinks that mastering this is the key to successful investing.
● This week the government unveiled a new housing policy for first-time buyers. But our editor-in-chief Merryn Somerset Webb, you won’t be surprised to hear, isn’t a fan.
“The coalition’s big idea is to underwrite a portion of the [new] home loan, so that buyers need a smaller deposit.” That means a bank can offer a 95% mortgage but – thanks to guarantees from taxpayers and housebuilders – only be on the hook for 86% of the loan.
No wonder housing market bulls are happy, says Merryn. Marsh & Parsons summed up the general estate agent/builder view: welcoming any new moves to help unlock the first-time buyer market because, they say, “a healthy housing market is a crucial cornerstone of a healthy economy”.
But how can a subsidised and manipulated housing market really be healthy? asks Merryn. “Would-be first-time-buyers are being lured by a desperate government surrounded by housebuilding lobbyists into taking on loans the market has already told them they can’t afford”, says Merryn.
“Strip this scheme back to its basics and you will see it’s no more than a form of the securitisation that got us into all this trouble in the first place. The buyer holds the worst strip – the first 5% of losses via their deposit. But we the taxpayers hold the second most toxic strip – the 5.5% we are guaranteeing for the banks.”
Further, if interest rates return to normal, unemployment rises or recession returns, buyers will end up in negative equity and the taxpayer will be hit for millions.
The blog sparked a flurry of comments with most of you agreeing that scheme is ill conceived. ‘Jimbo’ says this is “truly scary”. He thinks that interest rates will “go up via the Bank of England or via the bond markets and when they do we will be consigning an extra generation of people to the scrap-heap”.
‘Roland’ is also sceptical. “It’s a road paved with good intentions to help people own their own homes but Governments need to stop faking wealth. The way to get people into their own homes is to grow the real wealth of the economy.”
It’s been one of the more one-sided blog debates, with almost everyone criticising the proposals. So if there’s anyone out there who sees some good in the scheme, we’d love to hear from you. Read the post and have your say here.
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Have a great weekend!
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• David Stevenson