MoneyWeek roundup: The biggest financial fraud in history

John Stepek rounds up the week's best insights from the MoneyWeek team, including: the biggest financial fraud in history; the comic genius of Alan Greenspan; and China's inflation worries.

John Stepek highlights some of the best bits from our free emails, newsletters, blog and MoneyWeek magazine that we've published in the past week.

Alan Greenspan gave us the biggest laugh of the week when he accused the US of pursuing a weak dollar policy in the pages of the Financial Times. The ex-chairman of the Federal Reserve has probably done more than any human being in history to destroy the value of the US currency.

US Treasury Secretary Tim Geithner responded (between gritted teeth I suspect): "I have enormous respect for Greenspan but that's not an accurate description of either the Fed's policies or our policies." He didn't quite explain how printing another 600 billion of the things would make for a stronger dollar.

Subscribe to MoneyWeek

Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Get 6 issues free

Sign up to Money Morning

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Sign up

But no matter. We should have guessed that Greenspan's comments would mark a bottom (in the short-term at least) for the greenback. And indeed, our gold correspondent Dominic Frisby noted that despite the Fed flooding the market with dollars, the US currency was overdue a rally.

And as if to provide the perfect excuse for a rebound in the dollar, the eurozone decided it was time to crack up again. We discussed the grisly details in Money Morning more than once this week, but the basic problem is thatsome countries Ireland's the one in the spotlight this week are bust.

That would be fine except that Germany (and now France) are hinting that they might expect private bondholders to take some (note some, not all) of the pain in future, rather than offloading it all to the EU taxpayer in the form of bail-outs. That's got everyone in a bit of panic, which has sent the euro toppling again.

What's the endgame? It's hard to say for sure. The market relaxed a bit on Friday as European finance ministers indicated that any future arrangements wouldn't affect current bondholders. But it won't take much to get the market fretting again. In all, we suspect the euro is in for another rough ride for the next while. The currency markets have been taking it in turns to nominate different punching bags this year, and it looks like it's the single currency's turn again.

Heading over to China inflation came in a fair bit higher than anyone expected 4.4% year-on-year versus expectations for 4%. And one Chinese think tank the Chinese Academy of Social Sciences published a research piece that had the audacity to suggest that inflation is a lot higher than it looks, as I noted on my Twitter feed yesterday. According to Reuters, the article argues that the Chinese consumer price index has been understated by more than 7% over the past five years.

So on the one hand, we've got China fretting about inflation and looking at more interest rate rises. Yet the US is still pumping out money. Why? Because inflation isn't high enough and unemployment is too low, says Fed chief Ben Bernanke. We're not sure all this money-printing will be helpful.

As my colleague Merryn Somerset Webb pointed out on her blog this week, inflation in food and energy prices which is the sort of inflationquantitative easingseems to be driving right now will actually cut into any disposable income US consumers have left. "It's tough to repair your household balance sheet when your costs are rising and neither your perceived wealth [the value of your house] nor your wages are rising. And it is tough to be a confident spender when your household balance sheet remains in utter disarray."

And as one commenter on Merryn's blog notes: "Exactly the same thing is happening in the UK. I find it unbelievable that Mervyn King can say outright that inflation is high, and will stay high, and that he'll keep the interest rate ultra low in the meantime. What he isn't saying is that the banks need more time to feed at the trough before they've recovered their gambling losses. Only then will he "acknowledge" inflation and raise the interest rates. Truly saddening."

We cover QE in more detail in this week's MoneyWeek magazine cover story: Quantitative easing: What Bernanke's billions mean for you (I'm quite proud of this week's cover image by the way we hope you liked it). But Tim Price sums it up very succinctly. In fact, he reckons it is "the biggest financial fraud in history". It's "really just a Ponzi scheme designed to suit one particular constituency: Wall Street".

There are four reasons why QE is bad news, Tim tells readers of his Price Report newsletter. Firstly, "it is forcing investors desperate for yield into markets that are being supported primarily if not exclusively by hopes of more QE which is hardly a sustainable investment backdrop."

Secondly, it's "badly distorting the capital markets, particularly those for government bonds, and giving a false sense of market strength." Thirdly, "it is inflating another bubble in assets when that is precisely the sort of thing that central banks should be preventing". And finally, "it is devaluing the currencies of all those who are engaged in it which is effectively the same as destroying wealth, rather than creating it."

So what's the solution? Tim has two basic solutions stock up on 'real' assets ie stuff the government can't print; and 'diversify', so that your portfolio has some protection regardless of the outcome of this massive monetary experiment.

One beneficiary of all this money printing (at least at first) will be emerging markets. At least, that seems to be the current consensus. As you'll know, we're not keen on going with the crowd. But at the same time, that doesn't mean you should be dumping Asia and the rest of the emerging world wholesale. It just means you need to be picky.

And one man who is very picky about his investments is our Asia expert, Cris Sholto Heaton. Cris is out there now, touring China and South East Asia looking for promising companies. This week, he told subscribers to his Asia Investor newsletter about some of the potential picks he's been looking at.

"There's a little Singaporean company that caters to Asia's growing taste for baked goods. I've known about this company for quite a while. But on this trip, I've been struck by how visibly it's expanding across the region and how busy its outlets seem to be." Cris also reports that he "came across an opportunity at the bottom of a glass of the tarik, Malaysia's signature drink." But I'll draw a veil over that particular tale for now.

Anyway, Cris's key point has always been that simply following the herd in Asia isn't the best way to profit from the region's undoubted potential. Particularly not now that "the rise of the East" is a theme on everyone's radar. If you'd like to know more about his strategies, then find out more about Asia Investor here.

What with QE, rising inflation, and Ireland threatening to go bust, one specific asset class has rarely been out of the headlines in recent months bonds. I think it's fair to say that most private investors are more comfortable with equities than they are with bonds. It's perhaps understandable there's no 'penny' bond market, and investors normally access them via bond funds.

But the fact is, you're going to see a lot more talk about the impact of rising yields, potential sovereign defaults, and the dangers of a bursting 'bond bubble' in the months to come. The good news is, there's a quick and painless way to get your head around the basics of bonds just watch the latest video from Tim Bennett, MoneyWeek deputy editor. For everything you wanted to know about bonds, but were afraid to ask, just click here: Beginner's guide to investing: bonds.

And before I go rapping seems to be turning into the favoured way to communicate economic concepts to a wider audience. I'm not sure if we'll be able to convince Tim to start doing his videos in this style, but I can point you to an amusing video that explains the 'currency war' between China and the US using giant pandas with guns, among other things.


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

Ruth Jackson

James McKeigue

David Stevenson

John Stepek

John is the executive editor of MoneyWeek and writes our daily investment email, Money Morning. John graduated from Strathclyde University with a degree in psychology in 1996 and has always been fascinated by the gap between the way the market works in theory and the way it works in practice, and by how our deep-rooted instincts work against our best interests as investors.

He started out in journalism by writing articles about the specific business challenges facing family firms. In 2003, he took a job on the finance desk of Teletext, where he spent two years covering the markets and breaking financial news. John joined MoneyWeek in 2005.

His work has been published in Families in Business, Shares magazine, Spear's Magazine, The Sunday Times, and The Spectator among others. He has also appeared as an expert commentator on BBC Radio 4's Today programme, BBC Radio Scotland, Newsnight, Daily Politics and Bloomberg. His first book, on contrarian investing, The Sceptical Investor, was released in March 2019. You can follow John on Twitter at @john_stepek.