John Stepek highlights some of the best bits from the past week, including why the spectre of Detroit haunts the rest of America, why China’s growth is too strong for comfort, and the truth about Britain’s emergence from recession.
● It’s been a rough few weeks for the markets. First we had wobbles over China. Then Barack Obama launched a much-deserved, but perhaps overhyped, attack on the banks. And this week it was the turn of Greece to set investors’ hearts pounding.
● But Greece is far from the only country with problems. For one thing, we’re not in much of a position to sneer ourselves. The other big news last week was Britain’s GDP growth coming in at a truly woeful 0.1% for the fourth quarter of 2009. The figure doesn’t tell us much anyway, says Merryn Somerset Webb in the latest issue of MoneyWeek magazine (subscribe to MoneyWeek magazine). It’s bound to be revised. In any case, with the unemployment data still looking grim (for more on that, see our blog: What’s good about the employment data?) and January’s poor data on retail sales, who knows? Even first quarter data for this year could see us pitched back into recession.
● That’s a far cry from the 10.7% growth that China saw across 2009. Those are very strong numbers, as Mathias Wikberg explained in Profit Hunter. Trouble is, they were “a little too good for the market. As soon as the numbers were out, investors around the world worried that China’s growth may be too strong and that the central bank may have to start raising interest rates to curb economic activity.”
That could be a serious problem for the rest of us, says Mathias. “This would have a big effect on the world economy as right now China is the engine for global growth. There are signs that some parts of the Chinese economy – in particular real estate prices – could be overheating. The policy makers are worried about this and have instructed banks to slow down lending. As I’m sure you can see, this would have a knock-on effect. Less lending means less credit available and that could dampen growth in consumption, industrial production and economic growth.”
● But you know, says Paul Hill, things could always be worse. You could live in Detroit. The city is “an apocalyptic place where row upon row of abandoned houses are overgrown with high grass and wild pheasants wander through the empty streets. Ever since the auto industry pulled out in the late sixties, the city has been dying a slow death. Unemployment now scales 29%. And when the city saw a big drop in homicides last year, mayoral candidate Stanley Christmas told reporters, ‘There just isn’t anyone left to kill’.”
That’s what a real downturn looks like. Obama doesn’t want the rest of the US to go the same way. So he’s pumping $83bn into the US education industry. And Paul reckons he’s found a company that could profit handsomely from attempts to turn the US around. For more on his Precision Guided Investments newsletter, click here [LINK to PROMO].
● Paul’s a firm believer that the only way the West can compete with the East is by playing to our strengths – research & development, and intellectual property (he wrote about this recently in MoneyWeek magazine – Innovation – our best chance against the rise of the East ).
However, the structure of the R&D business is changing radically. As Theo Casey points out in the Fleet Street Letter, big pharma companies are increasingly outsourcing their R&D functions to cut costs and give themselves some protection from patent expiries and generic competitors. Now, Theo freely admits that he’s “addicted to drugs – or drug stocks at least”, but his latest tip in the pharma sector was simply “too good to pass up”. It’s both “defensive and positioned to take advantage of sterling weakness”, while a recent acquisition could see it slash R&D costs by $3.3bn or more.
● On a lighter note, with all the uncertainty around, it’s little wonder that people are rushing out to see Avatar, “the 3D film about blue people,” as Ruth Jackson describes it on our blog. But despite the hype, it’s not actually the most successful film of all time yet. What is? The answer may surprise you…
Enjoy the rest of your weekend. My colleague David Stevenson will be back on Monday, looking at the state of commercial property in the UK.
● Useful links. Want to find out more about any of the MoneyWeek newsletters and contributors I’ve quoted today? Just click on these links:
Stephen Bland’s The Dividend Letter
And Merryn Somerset Webb and Ruth Jackson on: The MoneyWeek Blog