MoneyWeek roundup: The Bank of England threatens democracy

The big corporate news story this week was that computer giant Microsoft has a new chief executive.

Satya Nadella used to head up the cloud computing division. And hopes are high for him. The share price is up more than 10% since his predecessor Steve Ballmer said he was stepping down.

The stock still looks attractive – at least at first glance. It’s got a 3% dividend yield – which is pretty good for a US stock – and it throws off loads of cash.

But my colleague Ed Bowsher’s not convinced.

The problem is that Microsoft faces a massive challenge to its biggest competitive advantage: its “near-monopoly on desktop operating systems”.

Why? “This week Asus launched a budget desktop PC in the US that is retailing for just $179”. Asus can do it because it runs Google’s Chrome software, which is free, unlike Microsoft’s Windows package.

If consumers keep snapping up cheap Chrome PCs, that could also affect Microsoft’s lucrative business supplying commercial users. “Once a company’s staff gets used to using different operating systems and software on a personal basis, the need to keep splurging big money on Microsoft software may become less obvious”.

Sure, Microsoft will generate loads of cash for some time to come. But the problem is that “the bedrock of the company is being slowly but surely eroded away. And it’s not clear what will replace it.”

While the new CEO could turn things around, Ed is “sitting this one out”. Microsoft is “cheap for a reason”. He still prefers Google (Nasdaq: GOOG).

And if you’re looking to profit from cloud computing, ‘big data’ and the future of technology generally, check out this report from Red Hot Penny Shares newsletter editor David Thornton – this is a field that he pays very close attention to indeed.

(David, believe it or not, was smart enough to buy Microsoft back in the days when it was trading at $1 – so it’s worth listening to his views on what could be the next big thing!)

The Bank of England undermines democracy

This week, our editor-in-chief, Merryn Somerset Webb, looked at how the Bank of England’s interest-rate policy is hurting savers.

As she points out, Dr Ros Altman has crunched the numbers on interest rates on mortgages and savings since 2007. Around a third of households – those with mortgages – have effectively been given a huge income boost since the financial crisis began, due to interest rates being slashed.

But savers have “done predictably badly… if you have £100,000 in a cash Isa, you are making £4,250 less than you were back in December 2007 (you used to get on average £5,350 a year, now you get £1,090)”.

Of course, it’s impossible to say “where interest rates would be if they were allowed to be set by the market rather than by central planners”. But it does show that “our monetary policy is set specifically to benefit one group of the population above others – debtors above savers”.

Merryn is “not sure” that this is “a good idea”. Former Bank of Japan governor Masaaki Shirakawa has argued that, “policymakers need to face up to the issue of who should be responsible for such policy actions in a democratic society”.

Merryn agrees. “Monetary policy is not supposed to redistribute resources – just to keep interest rates at a level that keeps inflation knocking around 2%.”

Such policies are “the responsibility of the elected representative body” – in other words, the government. In her view, “this is one of the problems with today’s Bank of England: it redistributes income and wealth as part of policy rather than as a side effect of policy, but it does so as an unelected body”.

Blog commenter ‘Ellen12’ agrees. “If you are a saver, you are being robbed by the central bank every day. Mervyn King and Mark Carney both apologise for robbing savers and, instead of being put in jail for it, they carry on robbing them some more.”

‘SimonW’ reckons that “cronyism also applies!” Just look, he says, at “how the structure of banking has remained unchanged since the financial crisis as a result of the ‘lobbying’ of the banking community on the politicians both in the US and the UK”.

Whatever your feelings about money printing and the rest, it seems hard to argue with the idea that redistribution is the responsibility of our politicians and not Carney and his team. Give us your views here.

Trouble brewing in the Arctic

Meanwhile, Bengt Saelensminde, who writes the Right Side newsletter, takes a look at the “Suez of the north”. It’s becoming a major potential flashpoint, both in economic and geopolitical terms. It’s something all investors should at least be aware of.

What’s the story? Ships have begun using the Northeast Passage, between Europe and Asia, via the Bering Strait and Arctic Circle, to cut shipping times from around 48 to only 35 days.

It isn’t risk free by any means. “There are no emergency services, at times there’s need for an ice-breaker on standby, and it’s a generally inhospitable ride”.

However, “both China and Russia are taking this new trade route very seriously”, with the number of cargo vessels taking the route growing from four in 2010 to 71 in 2013.

At the same time, the US Geological Survey has said that the Arctic may be the biggest unexplored oil and gas prospect on Earth.  As a result, oil and gas firms are already flocking to the area. And countries are staking their claims.

“Russia, the only non-Nato Arctic state, has made a military build-up in the Arctic a strategic priority”. One Moscow newspaper says Russia is “restoring airfields, reviving Soviet-era hydrometeorological services, and deploying the naval means to convoy ships and defend Russia’s economic zone of interests”.

Of course, says Bengt, no one will “be making gazillions out of their Arctic ambitions any time soon”. However, “there’s no doubt that as the region becomes more hospitable, so nations such as Russia look set to take advantage”. After all, “already Russia is a commodities powerhouse”.

Many other countries are already becoming “concerned” and “some shipping executives fear that Russian control will keep them from using this new and potentially lucrative trade route”.

While this is “a slightly unsettling story, he thinks “we ought to align ourselves to make the most of it. Bengt plans to spend a lot more time looking at how to profit from Russia (and it’s an area all of us here at MoneyWeek are interested in right now), so sign up for his free email, The Right Side.

 Confused about fracking? Bookmark our dedicated page

Arctic reserves aren’t the only big story in the energy sector just now – ‘fracking’ is a term bandied about all over the front pages these days, to the point where writers seem to take it for granted that everyone knows exactly what it is and what it involves.

We’ve been writing about fracking for a long time now, but I thought it’d be a good idea to get back to basics this week. So if you’re at all baffled by what all the fuss is about, check out my beginner’s guide to fracking here.

It’s a controversial topic but it could be hugely profitable for investors. You can keep a close eye on the latest news and what’s going on at our dedicated fracking page. And please feel free to contribute your views on the site, or send us your comments to

Buy in to Turkey

Oh and if you’re feeling adventurous, here’s something you’ll be interested in – investing in Turkey.

The country has been “one of the biggest losers from the taper”. Thanks to a trade deficit and a political crisis, “dollars are flowing out”, while the “Turkish stock market has plunged”.

But that spells opportunity. The political problems are definitely troublesome, but the country remains one of the most stable in the region. In fact, the political “crisis could benefit Turkey if it splits the two Islamist factions, allowing more moderate parties to take power”. A potential oil deal with Kurdistan could also help to sort out the trade deficit and Turkey’s “energy supply problems”.

But “the best reason to invest in Turkey is quite simple – it’s cheap, especially its banking sector”. Indeed, “the six largest banks in Turkey are worth the same as their equivalents in Qatar” – “despite the fact that Turkey’s economic output is six times larger”.

Yet “the stock market trades at under seven times 2015 earnings and at only an 8% premium to current book value (net assets of the companies)”.

There are two ways to buy. “The most direct is via a tracker fund, such as iShares MSCI Turkey (LSE: ITKY)”. However, a more diversified option is an actively-managed fund such as the Blackrock Emerging Europe (LSE: BEEP) investment trust”. While it invests across Asia and Eastern Europe, it has a large chunk of its portfolio in Turkish shares.

And we’ll be looking in more detail at promising ‘frontier’ markets in the next issue of MoneyWeek magazine, out next Friday. If you’re not already a subscriber, get your first three issues free here.

• This article is taken from our free daily investment email, Money Morning. Sign up to Money Morning here.

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Have a great weekend!

The MoneyWeek team
Merryn Somerset Webb
John Stepek
Matthew Partridge
Ed Bowsher
David Stevenson

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  • herder winkelman

    Chin was as close as any regarding causality. We have allowed assumptions about finance/markets to be incorporated into textbooks that are fundamentally flawed in terms of our asserted aspiration for free markets and belief in the integrity of financial institutions. If we do not demand to examine these assumptions critically and seek alternative influence- we can enjoy the same chicanery that favors the benefactors of manipulation. Be open to some ideas that the proponents of the status-quo may regard as “radical”.

  • Critic Al Rick

    “The Bank of England threatens democracy”

    Will that be the understatement of the year?

    As I see the greater picture, it is those who are effectively in control of, not at, the BoE that have all but eliminated any vestige of democracy. And it certainly ain’t our elected representatives ultimately in control, apart from the latter either being used as puppets and/or being ‘home-grown’ infiltrator representatives of the real Powers-that-be.

    Open your mind! Democracy is effectively dead.