At the end of last week, there were two big pieces of news regarding the euro: at his monthly press conference, the ECB head Mario Draghi downplayed the risk of deflation in the eurozone; at the same time, Germany’s highest court decided that the ECB’s big proposed bailout scheme – the fabled ‘OMT’ – exceeded its powers.
While many see this is evidence that there won’t be a round of ECB bond buying, I disagree – and outlined my arguments on Monday.
Germany’s Constitutional Court may have voted to refer bond-buying to the European Court of Justice, but the ECJ is hardly likely to strike down a key ECB policy.
It may seem cynical, “but it rather looks as though the German Constitutional Court wants to appear tough (to appease the Germans), while tacitly approving the OMT”. Anyway, we can “expect them to devise a way around this if push comes to shove”.
In any case, circumstances may “force the ECB to act”.
With the ECB currently sitting on its hands, monetary growth is very weak. Indeed, “Capital Economics thinks the eurozone economy will barely grow at all this year”.
You see, Brussels and Berlin have the same sticky problem they’ve always had. “They can squeeze the troubled nations, particularly Italy and Greece – as long as they offset the pain with a weak euro and loose monetary policy, or they can keep monetary policy tight and the euro strong – as long as German taxpayers are willing to alleviate some of the pain in their southern partners.”
But if they want to keep the euro, they can’t have both. Either they loosen monetary policy, increase debt relief or “eventually a populist politician will lead them to the logical conclusion – ditch the euro”.
From a political viewpoint, money-printing by the ECB will be a more palatable solution, so it seems much the most likely outcome. Of course, “that would send the euro much lower from here”.
You can either “bet against the single currency” or “keep buying the peripheral stock markets”. We’d recommend the latter since “the Italian market still trades on a cyclically-adjusted price/earnings ratio (Cape) of only 8.6”. The best exchange-traded fund for UK investors is iShares FTSE MIB (LSE: IMIB).
Nine risks to the ‘fracking revolution’
We’re “big fans” of fracking here at MoneyWeek. However, if you’re investing in it, you should be aware of some of the risks. So my colleague Ed Bowsher has taken a look at some of the potential downsides.
Firstly, wells don’t last long. As Ed points out, “after a year, production typically falls by around 40%” and “after four years, the decline is roughly 90%”. As a result, “companies need to stay on the move to maintain production levels”.
It also “requires more labour and more investment than conventional drilling methods”, which “drives up the cost”. Another factor is that “alternative energy could get cheaper”. Indeed, the cost of solar power “has fallen by 60% over the last two years” with “further declines to come”.
The oil price could also end up falling. While pundits have fretted that global oil production will inevitably fall, there is a good chance that rising energy efficiency could lead to demand peaking. Ed points out that “if the price falls far enough, fracking may become uneconomic”.
Moreover, while “we know there’s plenty of shale oil and gas in the UK”, we “can’t be sure that any of it can be extracted in a commercially viable manner”. Indeed, “two years ago there was a lot of excitement about prospects for shale energy in Poland.” But then the excitement tailed off as several major oil companies backed out.
Despite these worries, Ed is still temped to invest. MoneyWeek magazine contains “plenty of ideas” on how to buy into this. The Fleet Street Letter has also produced a detailed report on fracking.
To find the latest news and views on the subject, visit our fracking hub page.
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The next generation of GM crops
Tom Bulford, who writes the Red Hot Biotech Alert, takes a look at the “second generation” of GM crops.
In the past, “GM plants focused on the most obvious challenge – how to produce more food”. As a result, “scientists engineered plants to resist a harsh climate, to repel pests, to grow bigger and to last longer”.
However, some big players, ‘are now using genetic modification to solve another problem – how to make plants better for our health”.
For example, “suppose we could genetically engineer plants to produce extra Vitamin C, radically decreasing the incidence of cancer”.
Critics might argue that this could “alter the natural world, and perhaps not for the better”. However, “if it made a real difference in the fight against the dreaded disease, surely that would make it worthwhile?” Recent breakthroughs make this “a real rather than a hypothetical question”.
Companies should reveal less
Our editor-in-chief, Merryn Somerset Webb, has written a lot about how short-termism at many companies has damaged Western economies.
She thinks that the key problem is that, “when everyone’s making money out of short-term share price moves, no-one is paying attention to the long-term investments that companies need to make to create sustainable growth”.
One solution “is to change the way CEOs are incentivised”. Another would be to ensure that investors are “rewarded in some way for holding shares for the long term” – which could be done by “tiered dividends”, with returns dependent on the length of holding.
However, she also likes “another simple idea” – “doing away with the ridiculous business of companies constantly offering ‘earnings guidance’ to the market”.
Merryn argues that “constantly guiding expectations… distracts attention from long-term prospects.”
What’s more, it “allows CEOs, with their own compensation in mind,” to “engage in questionable practices” to move the share price around at times that suit them”. Worst of all, “it commits management to short-term targets at the expense of reduced flexibility in their business strategy”.
Indeed, “life would be better if listed companies offered the markets rather less in the way of information”.
Interestingly, it’s the proposal for tiered dividends – not less disclosure – that gets most support from commenters.
User ‘jimtaylor’ thinks that, “it would be easier (legally) to pay the same dividend to everyone and then pay an additional bonus payment per share where the bonus depends on length of time.”
‘Joerg Standfuss’ proposes a system where “the longer you hold a stock the less tax you pay on your dividends”. He notes that, “we had something like this in Germany where dividends were tax free if stocks were held longer then a year”.
Follow British firms into Mexico
In The New World newsletter, Latin America expert James McKeigue looks at how British firms are moving into Mexico. Last week James watched Deputy Prime Minister Nick Clegg “talking up Britain’s connections to Mexico, and explaining why British companies need to take a bigger interest in the region”.
While sales to Mexico still “account for just 0.4% of UK exports”, there is now a growing recognition from both the private sector and the government that “British firms should pay more attention to Latin America”.
Mexico is opening up its oil and gas sector to private firms, while Colombia already has significant private-sector involvement.
This will help Britain, since its experience in the North Sea” makes it “a major force in deep-sea exploration and production”. As a result, “British firms like BP or Shell, which are already in Mexico and the US half of the Gulf of Mexico”, could end up “in pole position’.
Of the big British listed firms, “BP and Shell are active in both countries, yet their operations there make up a small chunk of their overall business”. This sadly means that, “neither offer the exposure that we’re after”.
Instead, he likes Amerisur (LSE: AMER), which “a low-cost onshore producer of light oil in Colombia’s Putumaya basin near the border with Ecuador”.
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