Britain is booming again it seems.
The new central bank boss, Mark Carney, might be trying to convince markets that interest rates won’t rise until 2016. But the recent flurry of good news means they don’t believe him.
That might bring problems of its own, as my colleague John Stepek noted in Wednesday’s Money Morning.
But in the meantime, unemployment is down, retail sales are up – and the one thing that Britain seems to love more than anything else is back in the headlines – rising house prices.
What’s so good about rising house prices?
Surely it’s odd though, to cheer when the cost of our dwelling places goes up? We certainly think so here at MoneyWeek, and our editor-in-chief Merryn Somerset Webb took to the airwaves on BBC4’s Today programme this week to argue the point.
Expanding on the topic in her blog, she notes that “A rise in house prices might feel nice to homeowners, but it is economically useless.
“We know why prices are going up, and it isn’t because incomes are rising or because prices were getting too cheap (although in lots of places they have properly crashed and do represent some value). It is because a variety of state subsides – from super-low interest rates to Help to Buy – are pushing them up.”
So what exactly is good about rising house prices, given that they aren’t a function of an improving economy?
“Those of us who already own houses don’t gain unless we are downsizing, and those of us who do not own houses don’t gain for the simple reason that seeing something we want, but don’t have, go up in price is more bad than good. The average first-time buyer borrowed £112,500 in May. In June, they had to borrow £117,000. What’s good about that?
“What I would really like to hear on the radio is not a politician explaining that he and his party have policies that allow you to buy houses by making debt affordable in the short term, but rather that they intend to leave the market alone so houses themselves become affordable”.
Unsurprisingly her article has produced a lot of comments.
Boris MacDonut thinks that: “The doom is over now, Merryn. House prices are rising [more rapidly] than inflation, which for all homeowners is a fillip”.
Similarly, GFL argues that homeowners can release equity from their homes – tax-free capital, which is paid for over 25 years. “With the average UK worker saving next to nothing – this ‘extra income’ is a great relief for big costs – or starting a new business. I don’t know a single home owner that is under 45 that has not released equity from his/her home at some stage”.
However, Natalie agrees with us. “I’m with Merryn on this. Rents go up in line with the cost of bricks and mortar. If the cost of housing comes down, so eventually will the rents. Releasing equity from your own house to spend on yourself is fine for your own generation, but not for those coming after you”.
Rajah Brookes also draws attention to the element of moral hazard. “The government has implicitly stated to the banking industry…”Don’t worry about who you lend to. If the borrower defaults the tax-payer will pay off the difference. Heads you win…tails the taxpayer loses”.
Britain’s really doesn’t need any more debt
It seems foolhardy to be encouraging consumers to take on yet more debt when we’re already up to our eyes in it. Our colleagues at the Fleet Street Letter have written in more detail about how bad the problem could be. You can see their report here.
Invest like a Norwegian
Rather than swapping houses with one another, it’s a shame that we haven’t made better use of our natural resources. We’re hoping that Britain might be able to exploit fracking for natural gas, but even if it gets past our planning laws, our history on this score doesn’t bode well.
After all, in the 1970s, oil was discovered in the North Sea. Everyone thought it would make this country rich. Sadly, we just squandered the cash like a careless lottery winner.
You might shrug and assume that this is just the way it is with natural resources. But it doesn’t have to be like that.
The Norwegians behaved a little differently. And you can learn a lot from them, as John pointed out in Monday’s Money Morning.
“Norway’s sovereign wealth fund is managed by the Norwegian central bank, on the behalf of the Norwegian people. At a value of around $760bn, it’s the biggest sovereign wealth fund in the world.
“When it was first started, politicians envisaged the fund lasting for maybe 30 years. Now they reckon it could last for a century or more. So, what can you learn from their success?”
Firstly, the fact that that Norwegians even have the money at all demonstrates “the most important lesson in investing… If you want to build a pot of money, you have to save”.
But that’s not the only tip you can take from them. Their success shows that “it pays to keep things simple. You shouldn’t put all your eggs in one basket. But equally, that doesn’t mean you have to hold 40 different asset classes. The Norwegian sovereign wealth fund holds just three. It aims to have 60% of its money in equities, 35% in bonds, and 5% in real estate”.
And you need, “to buy stuff when it’s cheap and sell it when it’s expensive. It’s not easy to find anything that’s cheap these days. But if you’re looking for an expensive asset class, the most obvious one has to be bonds.
“Just now, Norway’s sovereign wealth fund is less exposed to bonds than it’s ever been. That’s not because equities are cheap – it’s because bonds are expensive”.
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John especially likes the fact that Norway is a dedicated advocate of “rebalancing”. Under this strategy “you decide at the outset what you want your portfolio to look like. You then review your portfolio regularly – not more than once a quarter, not less than once a year.” Once your holdings get “too far out of line with your ‘ideal’ portfolio, you simply sell those that have grown too large, and invest in those that have become ‘underweight’”.
What does Norway’s current behaviour suggest for investors? Well, it could be time to get back into emerging markets. “Norway holds around 10% of its stocks in emerging market countries. But it aims to double that to 20%… given the fund’s sensible approach to value, and the generally gloomy attitude towards emerging markets at the moment, I think this is a good sign that it’s time to start looking at emerging markets again”.
One emerging market that we covered recently is Russia. (If you’re not already a subscriber, you can get your first three issues free here.)
Another reason to invest in emerging markets
By coincidence (or maybe not), MoneyWeek’s resident Norwegian, Bengt Saelensminde, also likes emerging markets. Indeed, in an edition of his free email, The Right Side, last week, he declared that he is “preparing for the day when the current US dollar hegemony fades away.
“I increasingly take the long view when I think about investing, and as a result, I find myself buying emerging-market (EM) assets. As the relative value of Western currency wanes, I can’t help but think that exposure to emerging markets will be key.
Of course, “I’m not talking about holding cold, hard cash – be it in Thai baht, Indonesian rupiah, or Vietnamese dong. What I’m really talking about is stocks or bonds denominated in EM currencies. There’s every reason to suspect they’ll continue to give EM positions a decent fillip over the long run.”
Why? Because “slowly but surely, liberalisation and globalisation have dragged up purchasing power around the emerging world. As the locals create more and more stuff of value and international appeal, EM currencies tend to appreciate. My thesis is that this process is set to continue – the guys that are working hard to achieve prosperity will be rewarded with a rising currency. This has important implications for your investments.”
The good news is that right now, the market is presenting a great chance to get into emerging market assets. “These currencies are volatile. International speculators drive them up and down on a whim. And right now, that whim has pushed most EM currencies to multi-month, or even multi-year lows.
“Basically, it’s all this talk of ‘tapering’ in the US. The international financiers have got it in their collective head that the US is in strong recovery mode. They say the dollar is set to strengthen as quantitative easing (QE) stalls and rates rise”.
This may be true, “but for me, I’ll take all the negativity surrounding the EM markets as an opportunity”.
He suggests that you sign up (free) to our New World newsletter, which covers emerging markets in Latin America and Asia.
Why gold could be set to rise again
Even after the recent rally, gold is still well below its peak of late 2011. However, in yesterday’s Money Morning, Dominic Frisby outlined why he thinks that history suggests that it could surge again.
In short, gold had an epic bull run between 1971 and 1980. But it was interrupted by a 20-month bear market between 1974 and 1976. By late August 1976, gold was flirting with $100. In 1980, it peaked at $850 an ounce.
There are some similarities between gold back then, and what’s happening today. Since September 2011, gold has seen a similar sort of fall, over a similar period of time. If the pattern holds, gold could end up going a lot higher from here.
Of course, Dominic “wouldn’t invest on the basis of this pattern alone”. However, there’s another pattern that’s also very interesting to look at: “the ratio between gold and the Dow Jones stock market.
During both the 1930s and the 1970s (which were similar in some ways to today’s economy), the Dow-gold ratio fell to a low point (in other words, gold was outperforming stocks) then saw a long rally “reverting to the mean trend line.” In other words, stocks started outperforming gold again.
However, the ratio then reversed course once again, pushing gold to fresh highs. Could something similar happen now? Dominic thinks it might.
“I’m of the mind that our economic problems have not been dealt with. So I suspect that, just as in the ‘30s and ‘70s, the Dow-gold ratio will reverse… The reversal may even have begun (the high in the ratio was 12) with gold’s recent rally”.
We may be “getting nearer the time to be shifting… from stocks back into gold”.
You can read his argument in more detail here, and see the accompanying charts, which make his argument very clear.
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