A bad week for banks… Euro-crisis over? Don’t be daft… Gold is still the best insurance…
From James McKeigue, across the river from the City
 Dear Golden Jann,
● It was a bad week for banks.
French banks had it worst. A credit rating downgrade and fears over their ability to fund themselves hammered share prices in the sector, as the Greek debt crisis rolled ever on.
British banks had their own worries, as the Vickers report hit the headlines. It recommended that UK banks be split into retail and investment divisions by 2019. Some pundits argued that it didn’t go far enough (including our own Matthew Lynn: Proposed banking reforms should go further. If you are not a subscriber, click here to sign up and receive three free copies of the magazine), but safe to say that it also wasn’t the whitewash that some bankers might have been hoping for.
Then, as if to prove Vickers right, on Thursday, Swiss bank UBS was hit out of the blue by a £1.2bn loss from a ‘rogue’ trader.
● But just as banking seemed at its lowest ebb, the world’s elite policymakers rode to the rescue again. Terrified of a Lehman Brothers re-run on the continent, central banks stepped in to provide the short-term funding that European banks so desperately needed. True to form, markets bounced on the news.
So can we stop worrying about Europe? Don’t be daft, says David Stevenson in Friday’s Money Morning: What to buy when investors lose faith in the latest bail-out. This move “doesn't tackle the real problem in the eurozone. Which is that Greece is bust, full stop. So is Portugal” – which incidentally, just found a load more losses hiding in the autonomous island region of Madeira.
Ireland’s not much better off, and “the finances of both Italy and Spain are looking increasingly iffy”.
All this means that banks with any exposure to these countries are also in the firing line. Sooner or later, they will have to make massive write-downs to their holdings of sovereign debt. And as we’ve already noted, Deutsche Bank chief Josef Ackermann warned last week that many European banks wouldn’t survive if they had to write down “all their sovereign bond holdings to current market values”.
In short, don’t be fooled by the market’s Pavlovian reaction to the latest “sticking plaster” solution. Europe’s fundamentals still look bad.
ADVERTISEMENT
EXPOSED: The Four Big Threats to Your Wealth in 2011
Four major financial shocks could hit Britain in the very near future.
If you have any money tied up in investment property, stocks, Europe or government bonds... I recommend you watch this video right now.
Be warned: this won’t make for easy viewing.
MoneyWeek magazine is an unregulated product published by MoneyWeek Ltd.
● So what about a more drastic solution? Greece probably has the worst prospects, says Merryn Somerset Webb: “would letting it go be the best way out of this mess?”
Unfortunately some recent UBS research suggests that a breakup wouldn’t be without pain, says Merryn. “The departure of a weak country from the euro would lead instantly to a range of nasty things including sovereign default (as euro debt is forced into the new currency), corporate default, the collapse and eventual recapitalisation of the banking system, and the collapse of international trade.
“The whole thing would end up incurring a cost of around €9,500-€11,500 per person in the exiting country in the first year (40-50% of GDP) and around €3,000-€4,000 in the following years.
“But that's just for the one departure, which is unlikely. The first is bound to prompt a few followers (if Greece went and you had money in a Portuguese or Spanish bank would you leave it there?). So you have to think of these numbers as starter numbers.”
● It’s little wonder that policymakers are resorting to ever more desperate options to maintain the status quo, says John Stepek. And that’s bad news for investors.
When a government feels the need to cheat its creditors or rob its citizens, it’s usually content with a bit of inflation. “It usually works because human beings are wired in such a way that we find dealing with ‘nominal’ returns a lot easier than ‘real’ (after inflation) returns, so we often forget we’re being robbed.”
A more extreme option is ‘forced borrowing’. This is when states “force taxpayers to lend to their government. California did it in 2009 by adding a premium to the income tax withheld from pay cheques, to be repaid the following year”.
That reassures bondholders, because it reminds them why they lent to governments in the first place. But it’s scary stuff for the rest of us. If governments are prepared to coerce people into certain asset classes, then “you don’t know what they’re going to do next. This is one of the main reasons why markets are so jittery. Nothing is safe.”
That’s why you should “hang on to gold” as insurance. Of course you shouldn’t hold all your wealth in gold. And make no mistake about it, gold can go down as well as up, as we’ve seen over the past week.
But “in a world of ever-changing goal posts, you never know when your ‘safe’ investment might turn risky overnight… This is all part of the reason why buying gold is perfectly rational, despite what economic theorists and the more snobbish financial journalists might argue.”
● Talking of inflation and wealth confiscation, our colleagues over at the Fleet Street Letter have been pondering this story for a while. They reckon we’re heading for a re-run of the 1970s. We sent you their presentation on the topic last week, but if you missed it, we’ll be sending it again later today – take a look at it if you haven’t managed to already.
● Of course, the euro-crisis will also throw up opportunities. On Wednesday, Dominic Frisby highlighted one for currency traders – the pound.
Now don’t get excited. Britain isn’t about to experience a rampant recovery. But nor is the pound the ugliest currency around right now. So Dominic reckons that while sterling will drop against the dollar, it’ll probably rise to around “€1.20 and even €1.25 before you know it”. Of course that’s “no surprise, given the rotten state the continent is in”.
Dominic uses a lot of chartist techniques to analyse currency movements. If you’re interested in learning more about how traders use charts to pinpoint entry and exit levels in various markets, you should check out some of my colleague John C Burford’s online video tutorials. I’d start with his piece on ‘tramlines’.
Have a great weekend,
James McKeigue
Senior Writer, MoneyWeek
MoneyWeek
John Stepek
David Stevenson
Tim Bennett
James McKeigue
 MONEY MORNING™ is the free daily email service brought to you by MoneyWeek. For a 3-week FREE trial of the MoneyWeek magazine & website, click here now:
Sign up for a 3-week FREE trial of MoneyWeek
Or if you prefer to place your order over the phone, just call 0207 633 3780 and one of our Customer Service representatives will take your order for you. Please quote reference number EMYK M803 to get your special discount and free issues.
Know someone who'd like to receive the Money Morning email themselves? Simply forward the following link to anyone you think could benefit from our daily service:
Sign up to the Free Money Morning email here
© 2011 MoneyWeek Ltd. All Rights Reserved. The content of this email may not be reproduced without the written consent of MoneyWeek Ltd. Registered Office: Sea Containers House, 7th Floor, 20 Upper Ground, London, SE1 9JD. Registered in England No. 04016750. VAT No. GB 629 7287 94. MoneyWeek and Money Morning are registered trade marks owned by MoneyWeek Limited.
Forecasts and past performance are not reliable indicators of future performance. Shares are by their nature are speculative and can be volatile and you should never invest more than you can safely afford to lose. Information in Money Morning is for general information only and is not intended to be relied upon by individual readers in making (or not making) specific investment decisions. Appropriate independent advice should be obtained before making any such decision.
MoneyWeek Magazine, and Money Morning are unregulated products published by MoneyWeek Ltd.
Your capital is at risk when you invest in shares, never risk more than you can afford to lose. Please seek independent financial advice if necessary.
MoneyWeek Ltd is authorised and regulated by the Financial Services Authority. http://www.fsa.gov.uk/register/home.do FSA number: 509798
Query?
If you want to email us with a query, simply reply to this email and our Customer Services team will deal with your request. Alternatively, you can contact us by telephone on 020 7633 3780, Monday to Friday, 9.00am–5.30pm (Wednesday, 9.00am–2.00pm only).
If a link doesn't work...
Please note: if you use a web based email service such as Hotmail, you may need to copy and paste hyperlinks into your browser's address bar for them to work properly.
Email address change?
Please contact our customer services team on 0207 633 3780 or email cs@moneyweek.com to change your details.
Syndication
If you'd like to put Money Morning articles on your website, for free, please email - syndication@moneyweek.com. IMPORTANT We do require that: 1. You ask permission first, 2. That you do not use our articles until we have confirmed that you can, and 3. That you clearly attribute any article you use to us, and paste a link back to www.moneyweek.com .
Make sure you get Money Morning every day...
Unsolicited, unwanted advertising e-mail, commonly known as "spam", has become a big problem. Most email services and internet service providers have put blocking or filtering systems in place, or created 'blacklists', in order to protect users. Unfortunately, this may mean that emails you have requested - such as Money Morning - are sent to your 'spam' or 'bulk email' folder, or are blocked entirely. To ensure you get Money Morning to your inbox every day, please follow our whitelisting instructions .
To change your details, please contact our customer services team on 0207 633 3780 or email cs@moneyweek.com
To unsubscribe please click here |
