John Stepek highlights some of the best bits from our free emails, newsletters, blog and MoneyWeek magazine that we’ve published in the past week.
● The upheaval in the Middle East and North Africa continues to spread – with a brutal crackdown on protestors in Bahrain, 20 reported dead in Libya, and riots in Yemen. The oil price keeps ticking higher.
Yet markets couldn’t care less. Jim O’Neill’s view that this is a “Berlin Wall moment” for the Middle East seems to be the basic template for most investors.
The man form Goldman Sachs who is behind probably the greatest sales pitch in the history of investment banking – the Brics acronym – might be right to be optimistic.
But it’s not as simple as that. The collapse of the Soviet Union in 1989 was very different. The politics were less complicated. People chucked out Russian-backed dictators and opted for MTV and the ways of the West.
The difference now is that the dictators who are being chucked out have been propped up by the West, in the name of geopolitical influence, for decades. You just need to look at the way that the Iranian government has tried to claim the uprising in Egypt as a victory.
Of course, that’s partly an attempt to forestall its own revolution. And I don’t think Egypt is going to go the way of Iran in 1979 either – these people want freedom, not another dictator.
But there’s no certainty of what shape the region will be in, in terms of allegiances and influence, by the time this is through. We have a complex, volatile situation. Iran is trying to send warships through the Suez Canal Canal, which Israel is getting twitchy about. Anger in Bahrain could spread to unrest in Saudi Arabia. Pundits say it couldn’t happen there because the regime is so oppressive and in control – but that’s what they said about Egypt too.
There’s an interesting piece on ‘Saudiwoman’s Weblog‘ (which I found courtesy of the Guardian website) in which the writer notes that “everything I read points to a revolution in our own country in the forseeable future”.
I’m not trying to doom-monger here and I’d like to see all of these countries embrace freedom and for everyone in them to prosper. But I think markets have yet to wake up to just how potentially dangerous the situation is. On Monday, my colleague David Stevenson will be writing in Money Morning on why markets are especially vulnerable right now to any setbacks – look out for it.
● While other nations are tearing themselves apart over rising food prices (you can see which ones on my colleague Merryn Somerset Webb’s blog), Britain was entirely unable to tear itself away from the ‘will they, won’t they’ question over interest rates. Mervyn King’s letter to the Chancellor on Tuesday got the market believing a hike was imminent. Then on Wednesday he slapped them all down by saying a hike wasn’t coming soon. And on Thursday, Andrew Sentance was complaining again that the Bank has to tackle inflation immediately.
What’s the bottom line?. We’re at 0.5% base rate now, and inflation is at 4.0% and rising. As I noted on Thursday (Rates will rise this year – but not fast enough to protect your savings), what will happen this year is that rates will probably go up a bit, but nowhere near enough to cool inflation – that really would demolish the economy.
And that’s really all you need to know. The matter of exactly when and by precisely how much rates rise is of passing interest, but it’s not that important in the grand scheme of things.
What can you do about it? Just what you’d normally do. Fix your mortgage if you’re worried about your payments being unpredictable. Use your Isa allowance (if you’re wondering what an Isa is, my colleague Tim Bennett has done a video explaining exactly what they are – you can see it here). Keep a cash emergency fund in the highest-paying account you can find to minimise the damage. As for your long-term savings, invest them – we can suggest where to do so in MoneyWeek magazine (if you’re not already a subscriber, subscribe to MoneyWeek magazine).
● In any case, the most important central bank to watch this year is probably not the Bank of England. There are a few contenders for the crown, but China is in pole position for now. The country has raised its banks’ reserve requirements again. It’s just its latest attempt to curb inflation and won’t be the last.
Other central banks have been hiking rates too. Take Chile. It just hiked rates from 3.25% to 3.5%. What’s annual consumer price index inflation in Chile? 2.7%, says MarketWatch. Fair enough, Chile’s economy is also growing at around 7% a year, but it puts the UK’s approach to inflation management into some perspective.
The fact is that, even while the West, and the Federal Reserve in particular, might be taking a relaxed view on inflation, emerging markets are starting to tighten. It can only be a matter of time before we start seeing the impact of that – commodity prices could be due a setback.
● People keep talking about the rebalancing of the British economy. We should focus more on making things, and exploiting our brain power, rather than shuffling cash and swapping properties with one another. I don’t know if this is likely or not – manufacturers are doing pretty well at the moment, but they still account for a relatively small part of our broader economy.
But one thing’s for sure. Companies that invest effectively in research and development (R&D) can do staggeringly well for their investors. How do I know? Because R&D spending lies at the heart of Dr Mike Tubbs’ “invisible dividends” investment strategy. And his Research Investments newsletter is coming up with some cracking returns. Just last week, one of Mike’s more recent tips – a stock in the LED lighting sector – saw its profits more than double.
● Everyone was getting worked up about bank bonuses again this week. But what’s really annoying isn’t their sheer size – it’s the fact that academic research shows that bonuses don’t work. “At all,” said Merryn on her blog this week. So what would work? Simple – fine the bankers instead.
You tell them what their total pay, including bonus, will be at the start of the year. Then at the end of the year, you give them the bonus, after knocking off money for bad behaviour – “such as making rubbish deals; bringing the bank into disrepute by spending £10,000 on bottles of wine at client dinners; using Facebook in the office; or inventing complicated derivatives that bring down the world economy. That sort of thing.”
We had a number of comments – but my favourite was: “Imagine if we applied the same rationale to our beloved MPs’ salaries… the poor diddums would all have starved to death by the year’s end – I like it.”
You can have your say on everything from fining bankers, to Merryn Somerset Webb’s blog, to the impact of the 50% tax rate on Britain, on our blog – go on, get on and give us your views.
● And just before I go, in the latest edition of his Price Report newsletter, Tim Price had a very disturbing – and surprisingly little-covered – report on how the Dutch financial regulator forced a pension fund to sell its gold, arguing that it was “dangerously overweight this asset”. This may not seem like a big deal for UK investors, but Tim notes that “it’s indicative of a broader trend whereby governments seek to control what investors do with their assets.” Tim gives his views on the best ways to hold gold, and the sorts of risks involved when considering how and where your assets are held, in the latest edition of The Price Report – to find out more, call our customer service team on 020 7633 3637.
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Have a great weekend!
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