MoneyWeek Roundup: Europe’s still in trouble
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Associate Editor
David Stevenson Dec 10, 2011
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● It was much quieter in stock markets this week – the FTSE has been trading sideways. Most investors' eyes have been on Europe as the European Central Bank (ECB) cut its benchmark interest rate by 0.5% on Thursday.
But don't get too excited that the eurozone crisis is about to be 'sorted', says John Stepek in yesterday's Money Morning: Stock up on companies that relish a recession.
"To save you the bother of scrolling through endless pages of pundits opining on the eurozone, here's all you really need to know about today's latest last-ditch summit to save Europe. All the talk of treaty rewrites is irrelevant."
"It's all very well saying that countries need to be held to stricter rules, but that doesn't do anything to get them out of the mess they are in now. Until the European Central Bank prints money to buy the region's dodgy debt, the crisis won't hit a turning point. Mario Draghi, head of the ECB, has made it clear he's still not keen to do that."
So "almost regardless of what happens" over the next few days, "the eurozone crisis seems likely to rumble on and on. That's bad news for Europe, of course. But it's not great for us here in the UK either".
● And Britain is hardly in a good enough condition to cope with any more bad news. Both households and our government are hugely weighed down by too much borrowing.
While interest rates are very low, as they are now, that may not seem to be an over-large problem. But if debt-servicing costs start to climb, borrowing levels will become a big issue.
In his video this week, my colleague Tim Bennett takes a look at "Britain's most important interest rate". It's called LIBOR – the London interbank offered rate. And it affects you much more than you may realise. Find out why here.
By the way, if you've missed any of Tim's videos, or you'd like to get up to speed with any of the topics he's covered in the past, you can access the archive here.
Meanwhile, in this week's MoneyWeek magazine, we take an in-depth look at the prospects for austerity Britain, and how investors can protect their portfolios. And we suggest a number of 'bad news buys' – companies that have a track record of prospering during tough times.
Subscribers can read all about them here: Hard times: how to survive austerity Britain. If you're not already a subscriber, get your first three copies free here.
● MoneyWeek editor-in-chief Merryn Somerset Webb – fresh from being interviewed by the BBC's Panorama programme last week – has been blogging about "how much government the UK can really afford".
"The Brown Bonanza showered money all over the place. In real terms, healthcare spending rose 89%, transport rose 87%, education went up 60% while welfare spending rose 45%."
"Some of that money is surely well spent, but does it really make sense for the number of managers in the NHS to have risen by 77% when the number of nurses is only up by 23%? And should real term procurement costs in the NHS really have risen 80% over ten years?"
"It made sense to privatise BA in the Thatcher years, but not to attempt to introduce 'pseudo competition and spurious choice' into the NHS. Instead of increasing efficiency it's simply produced layers of expensive administration."
What's the answer for our health service? "Undoing it all could save billions", says Merryn. That's "£10bn from dumping the managers and £30bn-£40bn from procurement savings". And that's just the start of the potential cost savings the country could make. To find out more, you can read Merryn's blog here: How to cut £70bn out of the UK's public spending bill.
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● Merryn has also been blogging about one of our favourite subjects – the state of the UK housing market.
"We've heard for years that house prices in the UK can't fall because of the massive shortage of supply. At MoneyWeek, we've always said that supply had nothing to do with the bubble: that was caused by stupidly cheap credit and mortgage deals. However, that doesn't mean supply doesn't matter. The more houses there are, the lower prices will be."
"That's why Channel 4's programme on housing supply last night was so very good. It looked at the scandal of the UK's million-plus empty homes – something we've been going on about for years."
"This is partly about bad general policy. But it's also about the last government's Pathfinder plan, which planned to take old houses out of use and replace them with new houses deemed more suitable for modern families. It managed the first bit, but not the second."
Liverpool spent well over £1m last year on security for empty homes. "That doesn't seem good use of taxpayers' money: there are 21,000 people waiting for a council house in Liverpool. Channel 4 is starting a campaign to "stop this senseless waste". I suspect the rest of want to see that too."
● It's a controversial subject, and one that's stirred on up a fair amount of debate on our site. Here are two of the comments.
"The scandal of empty homes can be solved by a simple change in the law...use it or lose it!" says 'Jaw'. "In the interest of a fairer society and equal opportunity for all, we need a law which states that you cannot own a property you don't actually use. Such a law should apply to individuals and companies as well as to governments."
"Unused properties would have to be put up for auction within six months of becoming unoccupied. This would result in lower property prices, wider property ownership, less homelessness, greater numbers of new business start-ups, lower business costs, and the economy moving towards its greater potential. The parasitic landlord class would be gradually phased out."
Colin Selig-Smith doesn't agree. "Stealing peoples' houses in the name of fairness? How about we sacrifice a couple of sacred cows instead? These are real things we could do which will reduce demand and increase supply of housing, and take us closer to a free market."
"House prices are deliberately kept high through planning regulations. Cut the planning departments. Green belts have to go - they're squeezing prices higher. [Bring in] inflation-linked land tax per square metre, no matter the usage. Cut rail subsidies completely. Why should London bankers have their commutes subsidised. And no council tax rebates for empty houses."
If you want to have your say, you can do so here.
And how about this for an offer? If you want to talk about this – or anything else financial – with Merryn, now's your chance. She's offering to have lunch with the highest bidder, with all proceeds going to Sightsavers. You can submit your bid here.
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● The world's troubles aren't limited to the West. Even China has its problems – and they're getting bigger.
We've already noted that the country "is no longer a one-way bet". Now, says John Stepek in Money Morning, "China's central bank has had to intervene in the currency markets. That's not to keep the renminbi weak against the dollar - but to prop it up. So what's got investors spooked about the world's future economic superpower?"
"A large part of the blame lies with China's property market. As we in the West know only too well, property bubbles can be disastrous for an economy. The good news for China is that its attempts to pop its own property bubble appear to be working. The trouble is that's always painful. And the amount of damage caused depends on how out of whack you allowed prices to become in the first place".
Property sales in November are down 36% on last year, says the country's top real estate developer. And lower demand for property means developers won't have the cash to fund new projects.
"As many as 80% of Chinese firms are complaining that developers are behind on payments. That's hurting companies further down the chain. If land prices fall, the Chinese banking system will be exposed to significant bad debts. A mere slowdown in the flow of new credit could have a serious impact on China's economy."
● How will this play out? One casualty could be Australia, one of the major countries geared up to service China's commodity demand. And that means the Aussie dollar could drop, says John. He reckons that 'shorting' – ie selling – the Australian dollar against the US dollar "could be one of the simplest ways to profit from a China slowdown".
"If you agree, you could use spread betting to make the trade. Sign up for our free email MoneyWeek Trader to learn more about how to spread bet. But if you're not keen on that sort of risk, another option is to buy the ETFS Short AUD Long USD (LSE: SAUP). The fund gives you exposure to a short position in the Aussie dollar."
"Keep a close eye on its performance if you do invest. Currency trades are always highly speculative and you should always monitor these more exotic ETFs to make sure they do what you expect. But if you're feeling adventurous, and don't trust your timing skills, this could be a good way to dip your toe in the currency markets".
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!
• MoneyWeek
• Merryn Somerset Webb
• John Stepek
• Tim Bennett
• James McKeigue
• David Stevenson
• This article is taken from the free investment email Money Morning.
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