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MoneyWeek roundup: Get ready for a Greek exit
James McKeigue highlights the week's best pieces from the MoneyWeek team, including: why Greece could be set to leave the eurozone; hedge funds uncovered; and profit from eating well.
The big news last week was the European elections. Before the results came through, most investors had been focusing on France. The new socialist French president, Franois Hollande has hinted that he may try to renegotiate the fiscal pact his predecessor had hammered out with the rest of the eurozone.
But Hollande's election was expected. The Greek result was more of a nasty shock. With extremist parties gaining large chunks of the vote, and no guarantee that a coalition government can be created, another election may be needed. And that could lead to an even more resounding rejection of austerity by the Greeks.
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Join more than 165,000 subscribers and keep yourself informed with latest financial news, insights and expert analysis to help you understand what really matters when it comes to your finances.
Join more than 165,000 subscribers and keep yourself informed with latest financial news, insights and expert analysis to help you understand what really matters when it comes to your finances.
Now the Europeans and the Greeks seem to be losing patience with each other. "The head of the leftwing party that came second in the election is declaring that the austerity programme needs to be ripped up. In response, the European Central Bank has politely but firmly said: 'drop dead' (or words to that effect)."
But "a Greek exit doesn't need to be a disaster", says John. "If handled correctly, it could be just the thing that Europe needs to nail the crisis once and for all."
The big fear about a Greek exit is that investors will then begin betting on another country leaving the euro. But that could be avoided, says John. "On the same day that Greece exits the euro, you let the European Central Bank (ECB) open the floodgates. The ECB promises to print what it needs to cap the yields on all European government debt, as long as member countries abide by the rules of their various reform packages."
If the ECB printed money on a sufficiently large scale it would push up stocks.
"It would also be good for the Greeks", says John. "A return to the drachma would allow the country to re-price itself rapidly. Ditching its debts would mean it could focus on growth."
Of course that's the optimistic version. A poorly planned exit could wreak chaos on the financial system, says John. "If that happened, you'd probably see bond yields spike across Europe. Portugal would come under severe pressure, and Spain and Italy wouldn't be far behind. Chances are banking stocks in particular, and shares in general would collapse."
Either way a Greek exit would throw up opportunities for investors so it makes sense to hold some cash in reserve and see how this plays out, says John.
"Earlier this week, a deal was reached between the two main Israeli political parties, Likud and Kadima", says Matthew. This interest in the minutiae of Israeli politics may seem a touch arcane, but as Matthew points out, it "could signal a major development in the Israel/Iran situation."
"The one thing that unites most of the Middle East is a desire to stop Tehran getting nuclear weapons. Given that sanctions are not working, the only way to stop Iran seems to be an Israeli and/or US airstrike. However, the US fears that a strike - quite apart from risking war in the Middle East - could lead Iran to try to shut down the Strait of Hormuz, sending the oil price sky-high."
The latest move, a coalition between the two main Israeli parties, hints that the country is closing the ranks to prepare itself for war. A strike is not a certainty, says Matthew, but it is a possibility that investors should not completely overlook.
"An Iran-related spike in oil prices could hit world growth while pushing up inflation. This would hit both shares and bonds.
"However oil may not be the best hedge. Experience shows that a rapid increase in oil prices can be followed by an equally sharp fall. This is because reduced economic growth will hit consumption."
Gold is a better option, says Matthew. "Not only does it hedge against a wide range of political risks, it will benefit if any of the major world central banks begin another round of quantitative easing which they may have to, particularly if an oil price spike hits the global economy."
Healthy foods make healthy profits
On a more upbeat note (though still with a Greek theme), Tom Bulford took a look at sport in his Penny Sleuth newsletter. "At the very earliest Olympic Games in 6th Century BC" wrestlers would prepare themselves by "demolishing" huge amounts of meat, bread and wine, says Tom.
"You won't find many athletes indulging themselves like that today, but the principle is the same; trying to sneak a competitive edge through their diet.
"As technology has improved our understanding of how the body works, more readily available supplements have been developed to increase performance. If you want to win at sports you had better get used to a joyless diet."
That's not much fun for athletes but it has created a growing market, says Tom.
"In fact, sports nutrition is just one example of a new category called functional foods. The food and beverage industry, spying new marketing opportunities and millions of largely idle and gullible people, are seizing upon this.
"Nestle is no longer a food and drink business but an 'R&D driven nutrition, health and wellness company'. All of the major food companies, especially in the USA, are leaping on the bandwagon, helping the functional food sector to far outpace the broader market."
Of course there is room for cynicism. For most people a balanced diet and some exercise is all they need. And we have always known that certain foods have certain effects - nearly everyone knows that milk is good for the bones.
But don't let your scepticism prevent you from taking advantage of this growth industry, says Tom.
"The industry is now moving beyond mere old wives' tales and trying to get to grips with exactly how we are affected by what we eat and drink.
"The food industry and the pharmaceutical industry are meeting to design 'nutraceuticals' foods that provide medical or health benefits, including the prevention or treatment of a specific disease category."
Regular Penny Sleuth readers will know that Tom was one of the first investment writers to cover the Falklands oil story. Now of course, that's mainstream and pretty much everyone has heard about it.
The good news is that Tom has found another exciting province that's yet to be picked up by the nationals. He's just released an investment report explaining why he thinks it could be the next big thing.
"Much of Europe and the UK seem to think that you can buy growth. They are, we keep being told, voting for prosperity not austerity. But you can't just vote for prosperity. Life doesn't work like that. You have to create it. And, given the overriding problems of the West debt and unemployment - you can't just create it by borrowing more and spending more."
And that's what really frustrates Merryn. Beyond the usual solutions of "a bit more borrow/spend/print" there are no fresh ideas.
"This is a trying kind of policy defeatism and a maddening example of the ideological black hole at the core of conventional modern politics." What's really damaging growth is bureaucracy that favours dominant firms and public monopolies.
"So surely the big idea that might move us all forward is not to keep spending more and more in a drive to preserve 'state-directed privilege', but to take real and well-advertised action to get rid of monopolies and oligopolies."
If the people of the West really want change, it's about time their governments have a real go at giving it to them, she concludes.
Merryn asked people to forward their "big ideas" and there were no shortage of solutions.
Steve agrees that major corporations, like banks and energy companies, are damaging the economy. His answer? Nationalisation. "Imagine if the profits from BP for example were put back to the Treasury, if a state-owned insurance company could compete with the private sector, saving everyone money to then spend on other goods, partially revitalising the economy."
Pete Comley reckons the whole system needs to be reviewed afresh. His plan is "a competition with a significant prize open to all academics, students and anyone else who has a view". Other suggestions included a land tax, nationalising banks and, bizarrely, invading Luxembourg.
However, not everyone thought we need such drastic changes. "We seem to have gotten something right since the renaissance period. I suggest we try to keep that 'something' and basically fine tune it rather than start again."
It's a lively debate and Merryn is still looking for more ideas. So if you think you have a solution to the West's economic problems, have your say.
The truth about hedge funds
One group often blamed for the woes in the financial system are hedge funds. In the national papers they're a byword for vast sums of mysteriously managed cash. Is the reputation fair or have they been misrepresented?
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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 well as writing for Television Business International and covering the European equity markets for the Forbes.com 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 founded LatAm INVESTOR, the UK's only Latin American-focused investment magazine.
He is currently the Business Editor at Compass Media.
