The Federal Reserve the US central bank threw caution to the winds this week. It has given itself a licence to print money whenever it likes.
In the long run, that means trouble. But smart investors can profit, said John Stepek in Thursday's Money Morning.
Earlier this year the Fed embarked on QE infinity', says John. That was when it committed to keep printing a set amount of money each month until unemployment fell to a level it was comfortable with. But this week it has announced an even more extreme monetary experiment.
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"The Fed has said it'll keep the main US rate (the Federal Funds rate) at between 0% and 0.25% until and unless one of two things happens. Either unemployment has to fall to 6.5% or lower. Or inflation between one and two years ahead' has to be projected to be no more than 2.5%. The Fed doesn't expect either of these things to happen until 2015.
"This is a pretty big move. For one thing, that's a very loose inflation target. It's a full half-percentage point above the Fed's longer-run' goal of 2%. It's also based on projections'. We all know how little projections are worth.
"Meanwhile, it's also given itself a licence to print more money at any point the employment rate looks like faltering. As long as the jobless rate is sitting at above 6.5%, the Fed can justify any amount of printing it wants. All it needs to do is to say that employment isn't growing fast enough for its liking."
Put these elements together and "you shouldn't expect US rates to rise again until inflation has gone beyond the point of being a clear and present danger".
So how can you profit from it? Well one obvious place to stick your money is gold. Regular readers won't need me to explain that one. Another, less obvious, winner could be Japan. John explains why in the piece so read it in full if you haven't done so already.
We also covered the wider consequences of an inflationary world in a recent cover story. You can read the piece here: A bold step into the unknown are we heading for hyperinflation? (If you're not already a subscriber, you can subscribe to MoneyWeek magazine.)
The end of Britain
Britain isn't going to get off lightly in all of this. As we explained in a recent report, the UK is one of the most indebted countries in the world whatever alternative statistics our politicians peddle. As the report explains, Britain's economic situation is far worse than most people realise. If you want to protect your wealth from the coming collapse, you really should take five minutes to read this report.
Latin America's new corporate giants
Just because the UK and America are heading for tough times, that doesn't mean that there aren't good places to invest your money. The fast-growing markets of Asia and Latin America in particular offer exciting opportunities for investors. Of course, knowing where to invest abroad isn't easy. Which is why, every week, our free email The New World covers these markets and gives useful tips on where to invest.
This week I explained how investors could profit from Latin America's international corporations the multilatinas'.
It's a big piece, so I'll just give you a snippet here.
"In 1999 less than half of Latin America's top 500 firms were local. Now more than three quarters are. Moreover the trend is accelerating. In the last year a host of Western firms have sold up their Latin American businesses to local rivals.
"What's driving that change? One factor is that European firms are losing money at home. As a result, some are using their Latin American operations as ATMs, taking money out of the region to shore up their struggling European businesses. But this leaves them less able to compete with their resurgent Latin American competition. They either lose market share gradually or cut their losses and sell up.
"There are also signs that local investors and regulators increasingly feel more confident in taking on the once-vaunted European firms. For example, when the Spanish electricity generator Endesa tried to raise $8bn of capital from its Chilean subsidiary Enersis, it sparked a revolt among Chilean minority shareholders. The Chileans suspected the Spanish firm, which itself is owned by an indebted Italian utility, was just trying to get cash out of the country to use in Europe. This week Endesa backed down and agreed to cut it to under $6bn.
"The other element to the story is the rise of Latin America's smaller economies. Traditionally most multilatinas came from the region's heavyweights Mexico, Brazil and Argentina. What's different now is that we are seeing firms from some of the smaller countries asserting themselves."
Now, most British investors have probably heard of the region's biggest firms, companiessuch asPetrobras, Vale and Cemex. The thing is, they're good companies but I don't think they'll make good investments. Instead, I've found some lesser-known multilatinas that offer an easy way for a UK investor to profit from Latin America's rapid growth. Click here to read the piece in full and see the tip.
Should pension tax relief be slashed?
My colleague Merryn Somerset Webb fuelled some heated debate with her blog on the chancellor's proposals for pension reform.
In the Autumn Statement, Osborne announced that the lifetime tax-free pensionallowance would be cut to £1.25m, down from £1.8m only a few years ago, and that the annual allowance would fall to £40,000, down from its current £50,000.
That's quite a big cut. Yet there were few complaints. Why not? Quite simple really, says Merryn. "Most people who can afford to put that much in their pensions in the first place know perfectly well that they shouldn't be going on about it in this kind of environment. The fact is that over 99% of the population make pension contributions of well under £40,000 a year, if they make any at all."
Moreover, given the state of the country's finances, the cuts are an obvious way for a desperate government to save some money. After all, pension relief is stunningly expensive' to the taxpayer.
"The relief on contributions in 2010/11 came to £26bn; that on employer National Insurance contributions came to £13bn; tax forgone on the 25% lump sum we all get to take on retirement came to £2.5bn; and that forgone on investment income came to £6.8bn. The total? £48.4bn."
That equates to the combined budgets of the Home Office and Departments of Justice; Culture Media and Sport; Environment, Food and Rural Affairs; and Energy and Climate Change. And "almost 50% of this money goes to those making more than £50,000 a year who are using it mostly as a method of tax planning or deferral."
That's why Merryn expects the lifetime allowance to eventually fall to just £500,000. Why? Because the "whole point of the pension relief is to encourage people to save so that they are not a burden to the state in their old age". Any relief above that starts costing the state in lost tax revenues.
The blog attracted a stream of comments, which quickly turned into a debate between readers. Early posters agreed with Merryn.
The response from Romford Dave' was pretty typical. "I'd go further Merryn... Anything over £500k should attract the 55% immediate deduction the man from HMRC demands on ours."
However, ReactiveNonsense', questioned why Merryn thought some forms of tax breaks, such as individual savings accounts were OK, but pension relief isn't. "If you want to march up Whitehall shoving YOUR £50s in the pockets of every civil servant you see, be my guest but don't tell me I should do it with my cash."
It's an interesting debate, so if you haven't done so, click here to have your say.
How to pick a biotech winner
Another popular newsletter is Dr Mike Tubbs' Research Investments. Mike is one of our best-performing stockpickers and has a pretty enviable track record.
In this week's issue, he outlined an exciting investment area biotech.
Right now Mike is really excited by the "large and innovative US biotech sector". I'll warn you now, I'm not going to give away his tip. His is a paid-for newsletter and it wouldn't be fair for me to give away his research for free. What I can do, however, is let him explain his criteria for judging biotech stocks.
"First, I want a company that already has drugs on the market that are selling well and providing a steady stream of profits to fund further R&D on a series of promising drugs in its pipeline.
"Second, the company should have at least one further drug in late stage clinical trials with the potential to become a blockbuster. There is always a risk that such drugs might encounter unexpected problems or delays in the approval process but if successful they can deliver an enormous boost to a share price.
"And, thirdly, it should have a well-stocked pipeline containing further promising late stage drugs to drive further growth and act as a back-up should the lead pipeline drug run into difficulties before it is approved."
With stringent criteria like that, it's little surprise Mike's portfolio is doing so well. Mike's service isn't cheap. Quality products rarely are.
Don't trust the Fed model'
Before I go, a quick mention of Tim Bennett's latest video tutorial. MoneyWeek readers will recognise Tim as the deputy editor of the magazine, but he's also achieved a huge online following for his videos he's notched up nearly 1.5 million views on YouTube.
This week he looks at the Fed model', a well-established formula that is used to spot buy signals for shares. Tim explains how it works, but also why you should be wary of trusting it right now.
This article is taken from the free investment email Money Morning. Sign up to Money Morning here .
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Have a great weekend!
John Stepek
Tim Bennett
James McKeigue
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