MoneyWeek Roundup: UK misery hits a 19-year high

The FTSE 100 had a choppy week. But it's still up around 10% since the start of the month. That's a marked contrast with what's happening in the rest of the economy. Indeed, this is a really grim time for the British consumer, says David Stevenson on Thursday.

The Misery Index, which works by adding together unemployment and inflation, is now at a 19-year high. And there's even more gloom in store, says David.

Longer dole queues are a huge problem. They mean "the country's tax burden will fall on fewer shoulders (because fewer people are earning), while at the same time benefit payments will rise. And of course, if you don't have a job, you generally won't have a lot of spare cash to splash around. So rising unemployment will hit consumer spending, which still accounts for around two-thirds of Britain's economic activity."

The inflation side of the Misery Index is hurting too. The consumer price index (CPI) is now rising at 5.2% (you can keep track of this on our 'inflation indicators' page). "The latest surge has been largely pinned on rising energy prices. That's another problem for Britain's consumers. The more money they have to shell out on essentials like fuel, the less they have to spend on anything else."

Of course this doesn't just affect your day-to-day expenses. It hits your investments too, says David. Because "this is all bad news for a whole range of consumer-facing businesses, from holiday companies to high street chains. Just look at yesterday's results from Home Retail, the owner of Homebase and Argos. Sales at Argos fell sharply, while half-year profits plunged from £54m to £3.4m - the lowest ever recorded in a six-month period. And what's really scary is that Home Retail boss Terry Duddy reckons his firm is doing better than its rivals".

"For investors, the message is clear. It's been our advice for a while, but we've no reason to change it: steer clear of consumer-related shares."

So what's been driving UK shares higher this month? We need to look across the Channel to find the answer. "Every time the Europeans pretend they're about to come up with a solution to the Greek/Portuguese/Italian/Spanish/French crisis (delete as applicable), the market leaps", says John Stepek in Friday's Money Morning.

This week the tone has been buoyant on hopes that Germany and France are going to 'solve' the crisis. But is the market's optimism justified? Probably not, says John.

Europe has three main problems. "First, there's Greece. It's going to go bust. The question is, how much money do the speculators who bought Greek debt lose over and above the already-agreed 21%? This is sticky - some private sector Greek debt holders aren't too keen to take a bigger haircut".

"Second, there are Europe's banks. James Ferguson pointed out recently in MoneyWeek magazine that unlike the US and the UK, Europe has never really tackled the gaping holes in its banking system. That means lots of its banks are vulnerable to any further financial shocks, and need to raise more money to remain solvent".

But the biggest problem of all is "how to make the markets stop worrying about bigger eurozone countries going bust". French president Nicolas Sarkozy wants the ECB "to do what the Bank of England and the Fed have been doing. Print money and buy European government debt with it, via the European Financial Stability Facility (the big bail-out fund)".

But German leader Angela Merkel "doesn't want the ECB to start printing money", says John. "Her countryfolk remember what happened the last time a local central banker started up the printing presses. Weimar looms large in the German psyche, and with good reason".

Meanwhile Sarkozy is worried that if France overcommits to boosting the EFSF, it would worsen the country's credit rating. "Sarkozy doesn't want to go down in history as the man who lost France's third Michelin star."

That makes finding a solution all the more difficult, says John. So the market could soon be due another 'disappointment downturn'. "Almost any solution would involve a weaker euro. If the ECB prints, then the euro will fall (although I think you could then expect a big surge in stock markets). But any unsatisfactory fudge is also going to be bad for the euro, because it raises the prospect of more turmoil ahead."

One way to play a falling euro is spread betting. If you want to learn more about this and short-term trading too -sign up to our free email, MoneyWeek Trader.

With the UK, Europe and America all struggling with debt and low economic growth, many investors have been looking to China to lift the world economy. Sadly, even that oasis of good news looks like it could be drying up, says John Stepek.

China is still growing - the most recent stats show the economy expanded by 9.1% in the last year. But that's the worst growth it's seen since 2009, and there's no doubt it is slowing down. The question is: "will it have a 'soft' or hard' landing?" asks John.

"There's a lot of nonsense talked about how China's 'command' economy means they can engineer whatever economic outcome they like", he says. "The idea that a central authority can somehow create a functional, healthy economy by fiddling with the price of money and forcing banks to lend is ridiculous. It's like saying you can change the physical location of a mountain range simply by redrawing the map."

Yet "the jury is still out on China". And anyway, "the horrible truth is that a hard landing in China might be the best thing that could happen to the UK economy. I'm not saying it wouldn't have nasty repercussions you could expect a big plunge in stocks for a start. But it'd also drive commodity prices sharply lower. That would remove some of the inflationary pressure that is currently squeezing the life out of British consumers".

"Unfortunately, we can't bet on that happening either. Who knows? Confronted with a hard landing in China, Mervyn King might just bang the 'print' button even harder. That's why, even although gold might have a period of consolidation ahead of it, it's still worth hanging onto, particularly for sterling investors". And you "should hang on to the defensive stocks that we tipped in our recent cover story" (if you're not already a subscriber, subscribe to MoneyWeek magazine).

OK, so these are challenging times for investors, but that doesn't mean there are no good companies out there, says Tom Bulford in his Penny Sleuth newsletter.

Tom recently met the leaders of dozens of exciting small companies at the Growth Company Investor show in London. "I left the Barbican centre heartened by these innovative companies that are succeeding in markets all over the globe. There were stories about takeovers and deals brewing, booming exports to China, product innovation and sales growth."

Of course Tom doesn't go to these events just to cheer himself up. As a keen small-cap investor he's always on the search for the latest growth company about to take off. And he thinks he's found one. Bioventix (PLUS Markets: BVXP) is a biotech firm with big exports, and Tom thinks it has great investment potential. Why not sign up to Tom's free Penny Sleuth email if you haven't already.

And finally you may well have been watching my colleague Tim Bennett's series of video tutorials. Every week Tim tackles a complex section of the financial world and breaks it down into an easy-to-watch video. And this week the murky world of stock exchanges, brokers and clearing houses come under his spotlight. You can watch it here.

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!

MoneyWeekMerryn Somerset Webb John Stepek Tim Bennett James McKeigue David Stevenson