● At the start of the week, New York, the nerve centre of America’s financial markets, braced itself for impending catastrophe. This time the fear wasn’t sub-prime mortgages or America’s credit rating, but Hurricane Irene.
New York’s mayor, Michael Bloomberg, evacuated 300,000 New Yorkers and shut down the metro system before Irene hit last weekend. Hurricanes don’t often make it up to New York – the last was in 1985. Some began drawing comparisons with London in 1987. Then too, a rare storm prevented many traders from making it into work. And when they did, they were confronted by the worst stock market crash of the decade.
Fortunately the doomsayers were disappointed – on both counts. By the time Hurricane Irene reached New York it was a ‘mere’ tropical storm. Damage was less than expected, and the stock market crash didn’t materialise either.
● It’s a good example of how it’s all too easy to be distracted by short-term events and news stories, says John Stepek in Thursday’s Money Morning. After a few weeks on holiday, John says he came back to “hundreds of emailed newsflashes” with “plenty of headlines about gold bubbles popping, and others yelping about hundred-point moves in the Dow Jones.
“Yet now both are back to roughly where they were two weeks ago. Which shouldn’t really come as a huge surprise, given that very little has actually changed…”
John’s point is that, for most people, “stressing about daily movements in markets is a waste of time. If you just want to build a decent pot for your retirement, then fretting about your asset allocation on a daily basis is not how to go about it.” Indeed, the more trades you make, the more likely you are to make a mistake.
● So what should your investment strategy be? With the global economy in a wobbly way (some really awful US jobless data was just the latest piece of news suggesting that another recession is a distinct possibility), you should be on the defensive.
For one, we reckon you should hang on to your gold. That doesn’t go down well in some quarters. Warren Buffet, for example, has dismissed buying gold as “irrational” and “speculative”. But that’s missing the point, blogged Merryn Somerset Webb on Wednesday. “I don’t see gold as an investment and I don’t see it as speculation. I see it as insurance.”
What does she mean? It’s like home insurance. “You always have it just in case, but you really, really don’t want to end up claiming on it.” The pricing of gold is oddly similar too. “If you own a house in the middle of a nice safe area you expect to pay a low premium. If you live on the edge of a forest prone to summer fires you expect to pay more. And if you try and take out insurance after a nasty fire has started heading towards your porch you’d expect to pay a huge amount more.
“But you’d still prefer it if your house didn’t actually get burnt to the ground. Same with gold. It costs more now than it did five years ago. But that’s because we have a) noticed the nasty macroeconomic fire headed our way and b) failed to figure out how to deal with it. When the danger rises, so does the cost of insurance.”
● Many of you agreed. Cliff Hanger draws comparisons with one of the most famous instances of hyperinflation – the interwar Weimar Republic. “The Weimar government, and in fact, most Germans, blamed the currency debasement on speculators, holders of gold, foreign governments, in fact anything except their own printing press.”
The scary thing, says Cliff Hanger, is that Federal Reserve chief Ben Bernanke seems to display the same attitude. Do you agree? If you haven’t seen the blog yet, have your say here.
● So just how bad is this “nasty macroeconomic fire” that Merryn is worried about? There’s no doubt about it, says Simon Caufield. “The world economy is in a bad way. It had already weakened in the second quarter, thanks to higher oil prices and the Fukushima accident in Japan. Then political infighting over raising the US debt ceiling battered confidence. Now increasing numbers of investors expect a recession imminently.”
But Simon thinks we’ve still got time before the disaster hits. In fact he thinks things will get better before they get worse. One reason is because of a massive US tax break.
“After last November’s mid-term elections, US politicians passed a law to allow companies to offset against tax 100% of investment spending in 2011.” So now US companies have a good reason to “bring forward all of their planned 2012 investment spending into the second half of this year.”
The long and the short of it is that, if companies decide to do this, US GDP could see a nifty bounce in the second half. “We might even get some job growth.”
Remember, that for all the talk of China overtaking America, the US is still by far the world’s largest economy. Any significant improvement in America would push markets up around the world.
“When the effects become visible, markets will celebrate the arrival of what they’ll believe is the long-awaited recovery. Stocks will rise, embarrassing the bulls that sold out now. Meanwhile, bears will get sucked in to avoid being left behind. The rally could be quite a big one.”
But don’t get too excited, says Simon. The problem is, all the tax break is doing is persuading companies to bring forward their spending. That means its boost can only be a temporary one. If a big chunk of 2012 GDP, “is brought forward into 2011, it only makes sense that there must be a severe recession in 2012. You can’t yank that level of growth from the future and not expect to have to pay for it later. Company profits will be hit hard. And stocks will slump.”
So does Simon think that investors should pile into the market, make huge profits and then sell at the top of the rally? Not a chance. As he points out, “timing the market consistently is impossible”.
Instead, he’s telling subscribers to his True Value newsletter to reduce their exposure to stocks and sell on the rallies. Simon’s newsletter is currently closed to new subscribers, but if you are interested in finding out more, email truevalue@moneyweek.com with “waiting list” in the subject line and we’ll contact you as soon as it reopens.
● Of course, America is not the only cloud on the horizon. Just about the only thing that Europe’s weaker economies seem to produce these days is bad news. Despite the desperate attempts of the region’s politicians, the problems refuse to go away.
My colleague James Ferguson discussed the next stage of the eurozone crisis – and how it will affect your investments – in the latest MoneyWeek cover story. If you’re not already a subscriber, subscribe to MoneyWeek magazine.
You may have heard that the latest plan to save the eurozone is jointly issued eurobonds. The name has caused some confusion as it is already used to describe a completely different type of bond. Confused? Check out deputy editor Tim Bennett’s latest video tutorial on the topic: What is a eurobond?
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Have a great weekend!
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• James McKeigue
• David Stevenson