● Last week the eurozone’s leaders told us Europe was saved. This week, it became clear that it’s not.
Europe’s main problem is too much debt that can’t be paid off. The other problem is political instability. This week the Greek PM George Papandreou announced a shock referendum on his country’s bail-out package. A horrified France and Germany forced him to drop the referendum by threatening to withdraw funding. But it was a stark reminder that this crisis is far from over.
When “Papandreou pulls a stunt like this”, says John Stepek on Thursday, you can understand why “Merkel and Sarkozy and the rest” go nuts. But they may not yet appreciate “that this referendum could be the best chance the eurozone has of remaining intact“.
“The problem in Greece is that the pain is being imposed by someone else. Other Europeans might feel that they’re being very decent in stumping up for this bail-out package. But all the Greeks see is the fall-out, the cutbacks, the rioting. And they don’t feel as though they signed up for that. They feel as if it’s being dictated to them by high-handed German officials, or some other unaccountable European bureaucrats.”
“Asking your voters if they’d like to submit to another round of painful wage cuts, rioting in the streets, and general economic stagnation, doesn’t sound like the smartest political strategy.” But “the population needs to buy into this sort of pain if austerity and reform are to have any hope of succeeding”. And “even if Greece sticks with the euro, the region faces a world of trouble“, John points out.
In turn, that’s bad news for Europe’s beleaguered banks. James Ferguson takes another in-depth look at the sector in this week’s MoneyWeek magazine. Yet there are still ways to make money. If you would like to become a subscriber, you can claim your first three issues free.
What’s more, Europe’s woes should also see the single currency lose ground against the dollar. My colleague David Stevenson tipped ways to benefit from such a move a few months ago. They’re still valid.
● Here’s a surprise, though. “It doesn’t feel like it, but October was actually the best month in the stock market since 1974“, says Dominic Frisby on Wednesday.
But it won’t last, he says. In fact, “it looks extemely ugly out there“. On one hand, “we have shrinking economies, job losses, real incomes falling, credit contracting, insolvent, undercapitalised banks – huge deflationary forces, in other words”.
But on the other, we have huge inflationary forces like “quantitative easing (QE), zero interest rates, negative real rates, high and rising prices, and European leaders who have tried to solve the Greek debt crisis with a proposal for more debt and greater leverage”.
The solution to the debt crisis, says Dominic, would be to let insolvent institutions and countries fail, take the required hit and then move on. “But this isn’t going to happen. Our leaders are too obsessed with intervention and re-election to let it happen. People expect them to act. If they do something and it doesn’t work, they have to do more, not less.”
“More and more money is going to be found somehow and thrown down the black hole of southern Europe, and wherever the debt crisis pays its next visit. And, just as they do in Japan, zombies shall walk the earth.”
All of this will put immense pressure on our ‘fiat’ system of money, says Dominic. So his advice remains just the same as before. Hold on to your gold as a genuine store of wealth.
● Of course, gold isn’t the only way to protect your wealth in a crisis. There are still some great value stocks around. We’ve been tipping defensives for a while. And on Friday David Stevenson ran the slide rule over the insurance sector. Share prices have been falling here, and he doesn’t thinks that’s fair.
“The most obvious reason is that [insurers] are being tarred with the same brush as the banks. Investors are worried that insurance company balance sheets contain a number of toxic assets, such as dodgy eurozone debt.”
Insurers also face regulatory headaches. There is a danger that regulators will decide that insurers need to raise more capital though new shares. This would dilute existing holders, says David. “On top of all that, it’s been an expensive year. A spate of natural disasters around the world has lifted claims and payouts.”
But some share prices in the sector are now so cheap, they’re surely ‘pricing in’ any bad news. That’s backed up by good results this week from two leading UK insurers. Find out more on David’s best bets in the insurance sector.
● Lots of people think houses are a safe place for their money, blogs Merryn Somerset Webb. But bricks and mortar aren’t always as sound an investment as people assume.
“The growth rate from 1900 to 1960 was around zero”, says Merryn. “That doesn’t mean [house prices] didn’t move at all. They did – just not always upwards.” So people didn’t regard houses as “wealth generating assets”. They were places to live.
In the late 1950s house prices started a slow, gradual rise until the mid 1990s, “when they went nuts for nearly 15 years. While it’s the last two decades that loom large” and influence our view of investing in houses, the longer-term market picture is quite different. Indeed, notes Merryn, “if house price growth in any way reverts to its long term historical mean of something in the region of 0.7%”, houses might again become simply places to live.
• Merryn’s blog – as ever – provoked plenty of responses among readers. A debate soon developed about the pros and cons of buy-to-let investing. Rob feels the UK’s population growth will make investing in housing profitable. “There won’t be capital growth from property in the UK for some time, but with increasing rental costs over time returns on property still keep improving year on year.”
However, not everyone was so bullish on house prices. Andrew can’t see where the next generation of house buyers will come from. “The young of this country are now saddled with poor employment prospects, massive student debts, crippling inflation on fuel, food and other necessities, and to top it off, ever increasing rental costs. Savings (if they have any) are being eroded by inflation and the huge deposits needed for most decent mortgages are way out of reach for all but a lucky few.”
If you haven’t read the blog yet, have your say here.
● This week you’ve may have seen lots of scare stories about cyber crime. That’s because London hosted a high-level internet security conference.
We’ve covered the topic in previous MoneyWeek issues. In addition Tom Bulford, author of Red Hot Penny Shares newsletter, has been tracking the sector. And he’s taken a key interest in a cyber security firm.
It’s a small British company that has already lined up contracts with a leading global energy firm and the US Department of Defence. It has also just announced a change to its marketing strategy, which Tom believes will open up more sales.
● Share tips are great. But one of the most important ingredients to good investing is an understanding of how the financial system works.
Reading weighty financial tomes on the train to work is never much fun but there are easier ways to learn. Each week MoneyWeek’s deputy editor Tim Bennett tackles a complex topic and explains it in an easy-to-watch video tutorial. This week he explains how inheritance tax works and shows the best way to reduce the bill. Death and taxes get us all so it’s well worth a watch.
● Just before I go, in last week’s RoundUp I mentioned a story in passing that I thought might intrigue you. The piece got a huge response – if you didn’t catch it, it’s about a British man, who 70 years ago, made a startling financial discovery whilst gathering what he called ‘inside information’ on Hitler’s Third Reich and Mussolini’s Fascist regime. It’s an entertaining read and could even change the way you invest.
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!
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• David Stevenson
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