MoneyWeek roundup: The next big banking scandal
James McKeigue Feb 08, 2013
This week, the future Bank of England governor Mark Carney was grilled by politicians over his plans for the UK’s monetary system.
Traders and pundits listened closely for clues as to how Carney might move the market in the future.
But in many ways, all the attention on central bankers misses the point, says John Stepek in Thursday’s Money Morning.
It’s not about the bankers, it’s about the politicians behind them. This year, “the myth of the independent central bank [will] finally, and brutally, [be] put to rest.”
In the US it has always been clear that the central bank and government pander to Wall Street. As for Japan “any pretence of independence is gone. New prime minister Shinzo Abe has effectively told the Bank of Japan to weaken the currency and kickstart inflation, whether it likes it or not.”
And in Britain, Carney has landed the top job at the Bank as a result of George Osborne’s desperate desire to get the UK growing again – by any means possible, says John.
Osborne isn’t the first chancellor to interfere with monetary policy in the name of votes, says John – in fact, it’s an essential part of the job.
As bond fund giant M&G notes “the creation of the Bank of England’s inflation target in 1997 ‘aligned the economy to the electoral cycle in Tony Blair’s first term’. And then ‘the amendment of the consumer price index target by Gordon Brown in 2003 brought a handy monetary stimulus ahead of the 2005 election’.”
In other words, says John, “a central bank is only independent for as long as the government of the day wants it to be – that is, for as long as it does what it’s told. If it isn’t doing what it’s told, then the gloves come off.”
Carney is Osborne’s man and looks keen to stimulate growth. The trouble is that he is only coming into the job in summer, which won’t give him much time to stimulate the UK economy.
“So as far as Osborne is concerned, now’s the time to go for broke”, says John. “If the government can at least talk up the prospect of looser monetary policy, then the markets might start to price it in that bit earlier – perhaps by sending the value of the pound even lower.”
Of course you can debate whether Britain needs a weak pound or not until the cows come home. “But if slack monetary policy is the only tool you’ve got, then it’s the one you’re going to use. So expect sterling to suffer this year – the government wants it to.”
You can read more about weak sterling and the currency wars here: How to avoid a pounding in the currency wars. If you’re not already a subscriber to the magazine, get your first three issues free here.
Oh, and if you’re interested in the state of the UK economy, keep your eyes open for MoneyWeek’s first ever documentary. Our production team is putting the finishing touches to the piece now, and it should be ready for its first screening on Saturday 16 February. Watch out for it.
The hidden dangers of self-employment
The other big problem facing the UK economy at the moment lies in the workplace. At 7.7%, unemployment remains well above pre-crisis levels. But given the state of the UK economy, many pundits are surprised that it’s not even worse.
On her blog, Merryn explained why. It has, says Merryn, a great deal to do with self-employed people.
First, the statistics: the number of self-employed people is up by 367,000 since 2008, with the majority of the rise coming between 2011 and 2012. Well over 80% of the rise was in those over the age of 50. There are now 4.2 million self-employed people in the UK.
Now when we think of people working for themselves, it’s often a good thing, says Merryn. “How great to be your own boss, to have no one to answer to etc, etc.” But it isn’t always like that.
“I asked Louis Clark of PCG (an association for freelancers, contractors and consultants) what has actually driven the rise. All their research points to much the same thing.
“Sure, it makes more sense in some professions to be self-employed than it used to (see the row under the last post about the way in which work has changed) but the majority go freelance ‘because they are forced into it by redundancy or other issues regarding permanent work’.”
Another worrying trend is that once self-employed it seems hard for people to get back to full-time employment, says Merryn. “You could take that positively (once they are freelance, people rarely want to go back to having a boss) or it could be the case, particularly among the over-50s, that once you are out of employed work it is hard to get back in.”
Sadly, says Merryn, quoting a CIPD report, “it’s far from clear that the recent rise in self-employment marks a resurgence in British enterprise culture… many of those taking the self-employed route back to work looking more like an army of part-time ‘odd jobbers’ desperate to avoid unemployment.”
Merryn’s post soon sparked a stream of comments.
Some, led by ‘GFL’, disagreed with Merryn and pointed out the benefits of self employment: “Being a contractor is becoming a way of life for more and more people, the salary is double and the taxes are lower. Also the work-life balance is a lot healthier.”
Yet ‘Concerned of Teddington’, came up with some interesting additional points to support Merryn’s argument: “I manage a team that has about 50% contractors and I think contracting is the cheap option for companies, not employees.
“Freelancers allow managers to chuck people under the redundancy bus when it stops by once a year. Need a 10% cut? No problem - no worrying about performance reviews, dealing with HR and putting a permanent member of staff in the mud, just chuck forward a contractor...”
The debate is still going on, so if you haven’t had your say, click here to get involved.
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The defence stock set for a fight back
In the latest edition of his free Penny Sleuth email, Tom Bulford told the fascinating story of Britain’s last machine-gun maker.
This firm has a colourful past, counting three World War II fighter aces among its founders. Its recent history isn’t drab either, as it recently bought the US assets of an alleged weapons smuggler.
Yet interesting anecdotes don’t always make good investments, and the shares have plummeted since listing on AIM at the end of 2010, says Tom. The share price fall has been caused by troubles integrating the new US assets, and some delays on important contracts.
However, there are several reasons why now could be a good time to buy the shares.
“Today, Manroy’s product range features machine guns, armoured turrets, weapon tripods and mounting systems, ammunition, and a quick-change barrel kit.
“When machine guns are firing bullets at a rate of 1,500 a minute, the barrel understandably gets hot.
“Previously they were cooled by water but this added weight. So Manroy has come up with a second barrel that can quickly be fitted to replace the overheating barrel and give it time to cool down.
“As one of the few domestic suppliers to the UK Ministry of Defence, and with a foothold in the USA, Manroy should be well placed. The credibility bestowed by MoD contracts has allowed Manroy to sell into 30 countries overseas, while the USA spends more on defence than the next 14 countries combined.”
So it’s definitely a stock worth keeping a close eye on. If you want to get more updates from Tom you can sign up to his free, twice-weekly Penny Sleuth email here.
Britain’s secret oil strike
Regular readers will know that Tom was one of the first pundits to point out the potential of the Falklands oil province. Well now he’s found another huge oil play and this time, it’s right here on the UK mainland.
He’s brought out a special report to explain how investors can profit. It’s a great story with some interesting company profiles, and it’s free, so if you haven’t read it yet, don’t miss out.
How to profit from Germany’s gold fears
Since the launch of his Metals and Miners newsletter last summer, Simon Popple has been causing something of a stir. By targeting certain international miners that meet his criteria, he’s managed to make some hefty gains. In his latest edition, he analyses how central bankers could help his readers make even more profits.
“The Bundesbank took an extraordinary step a few weeks ago. It announced plans to repatriate 300 tonnes of [its] 1,500 tonnes of gold held in the Federal Reserve Bank of New York and all [its] gold stored in Paris – 370 tonnes.
“Why are they dragging billions of pounds’ worth of gold halfway across the world? It’s a question of trust. Fiat money is based on trust in our government. When trust disappears – as it eventually has for every fiat currency in recorded history – the system collapses.
“So these signs of distrust between the world’s most important central banks should make ordinary investors double-take!”
The idea that central banks might be worried that their gold isn’t actually there, might smack of conspiracy theory. And the fact is, we won’t know until it’s too late. However, it is worth remembering that central banks have lost out before, says Simon.
“That was the situation a few years ago when the investment bank Drexel Burnham Lambert went down. They’d borrowed 17 tonnes of gold from the Bank of Portugal, and when Drexel failed, the Bank of Portugal never got it back.”
But while all this uncertainty and doubt might be bad for the world’s financial system, it suits Simon just fine. “Stick with the supply kings. It's the miners who are getting huge reserves of gold and silver out of the ground that will deliver the most exciting returns as the fiat money system breaks down.”
To that end he’s found an exciting new tip to his already successful portfolio. I’m not going to annoy his readers by giving it away for free here. But what I can do is point you in the direction of his latest report.
The next big banking scandal
And just before I go, I'd like to draw your attention to Tim Bennett’s latest video tutorial. These video sessions are proving phenomenally successful with well over a million online views.
This week Tim looks at the latest banking scandal – mis-sold ‘swaps’. Don’t worry if you’re not quite sure what swaps are. Tim explains that and why this scandal could land the banks with their biggest compensation bill yet.
And if you’ve not already done so, sign up for Tim’s free tutorials email here. It means you’ll never miss one of his videos again. We’ll also be adding some extras to the email in the near future – so sign up now to ensure you don’t miss it.
That’s it from me. Have a great weekend.
• This article is taken from the free investment email Money Morning.
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