MoneyWeek Roundup: Britain’s economy is still broken

James McKeigue highlights the week's best pieces from the MoneyWeek team, including: things don't look good for the economy; what to buy instead of Facebook; and what happened to all the bees?

This week, Europe's leaders met for the umpteenth debt crisis summit. But about the only thing they could agree on was the need to arrange another summit for June.

There was also bad news closer to home when the Office for National Statistics (ONS) revealed the UK's recession is deeper than they thought.

The signs don't look good for Britain's economy, as Matthew Partridge notes in Thursday's Money Morning.

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"Yesterday saw the first fall in house prices in London for 30 months. Meanwhile, industrial production is falling and the Confederation of British Industry (CBI) trends survey revealed that firms think things are likely to get worse before they get better."

Meanwhile, Marks & Spencer, a pretty good bellwether of the UK high street, released awful results. And to cap it all, the International Monetary Fund (IMF) is also worried about Britain.

"It used to think that the top priority was cutting the deficit. The latest figures made for pretty poor reading the deficit has jumped from £9.1bn in April 2011 to £11.5bn. But the IMF is now more worried about the lack of growth."

Which, in a nutshell, means that the IMF thinks Britain will need to print more money. "The trouble is", says Matthew, "money printing is just window dressing that will perhaps give the stock market another short-term boost." Real growth, unfortunately, is a long way off.

But there are still stocks that can perform well even in the current market conditions. Indeed, Matthew has found one.

Why Facebook flopped

Unless you've been living on a desert island you'd have heard all about how Facebook hit the markets with its IPO, and then promptly slumped. We warned readers not to buy in a few months back and sure enough, events this week proved us right. In Wednesday's Money Morning, Phil Oakley explains why the Facebook IPO was such a disaster and tips a better alternative.

"At $38 per share, the company had a valuation of $81bn. In 2011, Facebook's net profit after tax was $1bn. Facebook was therefore floated on the market at 81 times its trailing profits. History shows that very few businesses have ever justified such a high valuation", explains Phil.

There are already signs that advertisers are becoming uneasy. "Some are concerned that they won't get the big banner ads that they want and so may pay less to advertise with Facebook. General Motors is a high profile example."

Facebook's valuation suggests it is in an unassailable position. But nowadays who still talks about former Facebook competitor MySpace?

So Phil opts for Google (Nasdaq:GOOG) instead. It dominates internet search, video, tablets, and smartphones and has even launched a Facebook competitor, Google+. And it trades on a far more modest 14 times earnings.

The plight of the modern worker

MoneyWeek's editor-in-chief, Merryn Somerset Webb, investigated rising inequality. "In the 1980s around 70% of national income went to workers in the form of wages. By the 2000s that had fallen to 64%. Today in the US, according to Capital Economics, it is around 62%." Where has the money gone? To corporate profits, says Merryn. "Profits averaged about 8.6% of national income in the 1980s, 10.8% in the 2000s, and in the last few years have even risen as far as 14.3%." Why?

One reason could be the executive compensation policies that "skewed the priorities of management away from long-term corporate health and towards the short term profits that come with firing people or slashing their wages".

Globalisation is another factor. "Cheap labour in the East has hit pay in the West. In 1997, total employment by US multinationals in developing Asia was equivalent to around 4% of US domestic manufacturing employment. Now it is 22%."

Thirdly there's "the rise of information technology", says Merryn. Computer systems and increasingly clever automation has been substituted for labour.

Yet this situation can't go on forever. For starters, US profit margins are well above their long-term mean. History suggests that one day they will revert to their past average. Politics may also play a part. Until recently the credit bubble helped people feel' richer. So they didn't notice that the workers' share of the pie was getting smaller. Now the bubble has popped, they might call on "the government to step in and change the direction of redistribution".

The topic proved popular with readers and sparked a stream of comments.

Boris MacDonut' felt that politics is the major driver behind rising inequality: "In 1979/80 Reagan and Thatcher launched a crusade against the poor. A determined effort to attack and undermine the power of ordinary working folk. It was driven home with such determined venom that working and middle class Britons have been systematically robbed of any of the gains accruing from technology and off-shoring, while the fat cats have snaffled the whole of the gains to keep their snout/trough interface intact."

However, NeutronWarp9' felt that the plight of today's worker is exaggerated: "All of us in the UK live in an age of relative comfort. Speak to anyone 80 years plus to find out how life has been for every working class generation previous to the last 3 or 4. Those that are struggling now would, in the day, be dead, in the workhouse or selling themselves to survive."

MoneyWeek conference

Merryn's presentation at the MoneyWeek conference proved a big hit with readers. Listen toa free snippet here.

You can pick up all of Merryn's advice as well as the 13 other presentations by downloading the MoneyWeek conference audio set.

Find out how to download your own copy here.

Why are bees dying?

Another popular speaker was Penny Sleuth newsletter writer Tom Bulford. His presentation on how to pick the best small cap firms was standing room only.

In this week's Penny Sleuth, Tom explained how the mystery of the dying bees could affect one of his favourite sectors - biotechnology.

"The first sign of trouble was the sight of bees crawling from their hive, unable to fly. Soon after, the bees started to expire. Thousands were killed in the following weeks as 'Isle of Wight Disease' spread across the region."

The bee populations in the USA and Europe are in serious decline. They are dropping in the Middle East and Japan too. The direct consequence is higher honey prices, but it could also have more serious implications, warns Tom.

"According to some, bee death is the inevitable consequence of our attempts to tamper with the natural order. In fact we are doing much more than just attempting. Over one billion hectares that is 10% of the world's arable land has been given over genetically modified (GM) crops."

This is part of a biotech revolution that is transforming agriculture, says Tom. "All over the world, from the vast factory farms of north and south America to the subsistence farmers of Africa, producers are using new types of seed and new methods of crop treatment. Plants are being genetically modified so that they can thrive on less water, so that they can repel parasites and so that they can grow bigger, better and riper food crops."

The fact is that there is no conclusive study that proves GM crops are responsible for the problems with bees, says Tom. And besides, a decline in bee numbers may seem "a small price to pay in return for higher food productionThe world is rapidly adopting new farming methods. But they might not have entirely beneficial consequences."

The bee problem demonstrates that managing change won't always be easy. But biotechnology is nonetheless one of Tom's favourite sectors. To find out more about why, try Tom's Penny Sleuth newsletter.

ETFs unravelled

That's it from me but before I go, I'd like to point you in the direction of our latest video guide. Here at MoneyWeek, we are big fans of exchange-traded funds. If you are not sure what these are and why we like them, try Tim Bennett's video. He explains all the basics, and points out a few of the pitfalls too.


To hear about other bits and pieces on the internet that have amused us or made us think, sign up for our Twitter feeds we've listed them below.

Have a great weekend!


Merryn Somerset Webb

John Stepek

Tim Bennett

James McKeigue

Matthew Partridge

David Stevenson

Important Information

The Investing 2012- Protect and Prosper conference has been organised by MoneyWeek Limited. There are a number of speakers at the conference who edit newsletters for Fleet Street Publications Limited (FSA No 115234), sister company to MoneyWeek Limited, and these speakers will be providing investment advice as defined by the Financial Services and Markets Act 2000. Your capital is at risk when you invest in shares you can lose some or all of your money, so never risk more than you can afford to lose.

Shares are by their nature are speculative and can be volatile. Your capital is at risk so you should never invest more than you can safely afford to lose. Information in Money Morning is for general information only and is not intended to be relied upon by individual readers in making (or not making) specific investment decisions. Appropriate independent advice should be obtained before making any such decision. .

James McKeigue

James graduated from Keele University with a BA (Hons) in English literature and history, and has a certificate in journalism from the NCTJ. James has worked as a freelance journalist in various Latin American countries.He also had a spell at ITV, as welll as wring for Television Business International and covering the European equity markets for the London bureau. James has travelled extensively in emerging markets, reporting for international energy magazines such as Oil and Gas Investor, and institutional publications such as the Commonwealth Business Environment Report. He is currently the managing editor of LatAm INVESTOR, the UK's only Latin American finance magazine.