Mark Carney, our new Bank of England (BoE) governor, filled the headlines this week. The papers hung on his every word.
And thanks to him, you can forget about getting a real (after-inflation) return on your savings for years to come. In Thursday’s Money Morning, John Stepek explained why.
The cult of the central banker
So what were Carney’s ‘revolutionary’ changes to the Bank of England’s targeting policy?
Well, he introduced an employment target. But, as John points out, all you really need to know is that the BoE has one true goal. And it’s all about dealing with Britain’s debt problem.
“Britain’s problem is debt. Government debt, mortgage debt, consumer credit – you name it, we’re up to our eyeballs in it”.
The easiest – or rather, most politically palatable – way to get rid of that debt is to inflate it away. “In effect, you steal money from savers to ensure that lenders who made bad decisions don’t go bust. That’s Carney’s job. That’s what he was hired to do.”
There are two key messages for investors to take from Carney’s speech. “The first was that he made clear that the BoE’s inflation target has now changed. It used to be 2%. Now it’s 2.5%. So our central bank has officially raised its inflation target by 25%.
“Secondly, Carney is a cheerful backer of the government’s attempts to reflate the bubble before the election rolls around”.
Markets haven’t quite decided what it all means yet. Currency traders “clearly believe that there’s more chance of a stronger UK recovery than Carney expects.” They think that would force him to raise interest rates, driving the pound higher.
Trouble is, they’re wrong. “Even if the data is better than expected, Carney will find a new set of excuses to keep rates low. So don’t expect any rampant recovery in sterling to last for long”.
In turn, this means that “you’ll have to work harder than ever to earn a ‘real’ return on your money. You won’t be able to do it in a bank account.
“So if you want to save for the long term, you’ll have to invest. But investing against such an uncertain backdrop – where many assets are already overpriced on a historical basis – means that you really have to be on top of your risk management too”.
As John notes, my colleague Phil Oakley has put together a strategy that helps you to build “a simple, low-cost diversified portfolio that should withstand most market conditions over the long term”. You can find out more about Phil’s newsletter here.
Debt is a big problem
Bengt Saelensminde was also worrying about debt in his free email, The Right Side. He thinks one of the big problems of today’s society is a lack of respect for money.
“Who will suffer at the hands of today’s monetary irreverence?” It won’t be the über-rich: “They’ll be OK – they always are! And frankly, the way things are set up, the poor don’t have too much to fear either”.
The real victims will be “people like you and me. Those with savings”. For decades, the middle-class has been duped into taking on huge debt just to keep the government and finance industry in clover.
We have allowed this to happen because that debt has sustained the value of assets such as property and stocks. “But it’s become a dangerous obsession.” As a nation, we’ve “simply gone bananas”. Total indebtedness (private and public) has risen from just over twice the size of our economy in the ’90s, to over five times the size of our economy today.
The way I see it, the carnage brought about by the sub-prime fiasco was just a small part of a bigger debt cycle. We’re still only part of the way through. There are far more opportunities (and death traps) to come. And it’s not like this cycle isn’t easy to spot, says Bengt. “Frankly, the only thing that shocks me is how obvious these inevitable train wrecks are, and how long they take to play out.
The good news is, that gives smart investors plenty of time to get out of the way. “In their eagerness to avoid a bust, the planners create opportunities. I’ve enjoyed some nice gains in commodities, bonds and equities since the planners got stuck in with their loose-money policies and money printing.
“And as the planners get more desperate, so opportunities continue to appear. Take Japan, for instance. In desperation, the government launched a fresh bout of money printing in the first quarter of this year. And that has literally yanked the stock market up to a five-year high. The Nikkei is up 36% since the start of the year. That’s been quite a ride!”
The point is, even in the toughest of circumstances, there are always opportunities. You can learn more about what Bengt thinks they are by reading the article here.
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The most important number in the world
One harbinger of disaster to watch is the yield on the ten-year US Treasury bond, says Tim Price. In short, the cost of borrowing for the US government is on the rise. This suggests that “the market is losing faith in the ‘creditor in chief’, the debt on which the financial market is built”. This could be disastrous in a still heavily-overindebted world.
While “no asset will be immune” from a Treasury crash, Tim has made some major changes to his portfolio, identifying some shares that he thinks are worth buying. You can learn more here.
Stamp tax should face the axe
This week, Merryn Somerset Webb returned to a familiar topic – stamp duty, and why it’s a bad idea. According to The Times, at least one in four people are facing tax bills of at least £7,500 when they buy a house in the UK.
Back in 2004, the average family lived in their house for 14 years before moving. Now, in part thanks to the fiscal drag of stamp duty, that number is 29 years.
Stamp duty is “almost perfectly designed to ensure the inefficient allocation of housing. It is also worth remembering that stamp duty was introduced as a temporary tax back in 1694, and that when it moved from a flat rate to a tax based on value, it was supposed to only hit the rich. So much for that.”
Add in all the costs of moving, says estate agent Ed Mead, and it can easily add up to 8% of the purchase price of a house in the south-east.
It is hard to imagine that the government doesn’t know how rubbish this tax is. That makes it impossible to see why they don’t do something about it, and completely incomprehensible that, instead of talking about removing it, they prefer to talk about piling more property taxes on top of it.
Merryn thinks it why it should be replaced with “a low and inflation-linked capital gains tax (CGT) on primary homes”.
In the comments section, ‘Romford_Dave’ had his reservations. “I’m not sure I’d ever be happy about getting rid of one tax in favour of another, having witnessed endless examples of unintended consequences where the bludgeoning hands of the state gets involved. Tweak it for sure to get rid of the ridiculous, precipitous approach each price band dictates – but why get rid of a tax that’s effectively optional for those considering a house purchase?”
Meanwhile, Jay argued that we should bring down land prices by creating “two million planning permissions for individuals to develop, not for big builders to hoard.” Have your say here.
Latin American tech boom
On Monday, my colleague James McKeigue covered the Latin American tech sector in his The New World free email. Yes, that’s right –Latin American has tech stocks too.
As James points out, when it comes to investing in the region, people mostly think of commodities and infrastructure. Yet “under the radars of most investors, Latin American tech firms have been expanding.
“Tech researcher Gartner ranks Mexico as the world’s third-largest IT outsourcer, just behind the Philippines and India. Last year 130,000 Mexicans graduated as engineers – that’s much more than in the US and the most in the Americas”.
But one of the most interesting and convincing recommendations of Mexico’s tech ability comes from Chris Anderson, the former editor-in-chief of Wired magazine. Last year, he decided to quit the magazine and set up his own, suitably high-tech, 3D robotics company.
And where did he decide to set up one of his factories? South of the border in Mexico, of course.
Another interesting area is the internet. According to comScore, a US-based digital analytics firm, last year Latin America had the fastest-growing internet population in the world. Unique visitors rose 12% to 147 million in March 2013, but with an entire population of 600 million, it’s clear that there is more room to grow.
Internet penetration in Latin America currently sits at about 40%, compared to almost 80% in the US. Analysts expect that penetration will reach 60% by 2015.
And Latin American politicians would love to turn their countries into ‘knowledge economies’. In Chile, the government offers small tech entrepreneurs a visa and “$40,000 of seed capital”, while Brazil and Colombia have established similar schemes. In Mexico, the government is building an extensive $5bn ‘creative digital city’ in the country’s second-biggest city, Guadalajara.
One of the key elements in the success of Silicon Valley is a strong network of venture capitalists and angel investors. While, Latin America is nowhere near that level, things are getting better.
For example, annual Mexican venture capital investment has grown from $211m to $1bn since 2010. Overall, venture capitalists invested $8bn in more than 200 deals across the region, with around half of those being in the IT sector.
James has found one Latin American internet stock that offers really great opportunities. To find out what it is, read the full article.
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