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Sabtu, 24 September 2011 | 02.14 | 0 Comments

MoneyWeek round-up: The Fed can't save the world...

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24 September, 2011
Fiat money: the root of all evil?… The Fed can’t save the world… How Europe could topple British house prices…

From James McKeigue, across the river from the City

James McKeigue
Dear Golden Jann,

● Shares have had a horrible week. The FTSE 100 has fallen around 6.5% since last Friday. So what’s been going on? Markets have just woken up to the “horrible truth”, says John Stepek. “The US Fed can’t save the world.”

All eyes have been on the Fed’s latest plan to boost the US. It’s called Operation Twist and my colleague Tim Bennett tells you all about it here: What is 'Operation Twist'? But in a nutshell, the aim is to drive down long-term lending rates and get Americans borrowing again.

The trouble is that, while “the Fed did pretty much what the pundits had expected and a little bit more”, says John, it wasn’t enough. “Lots of people thought Ben Bernanke might pull a bazooka from his back pocket and somehow stun the markets with another flood of money or some brilliant new idea to prop up asset prices. When he didn’t, that left a lot of disappointment. And that’s the real problem. Investors are starting to realise there are limits to central bankers’ power.”

But while “it would be great news if markets finally woke up to the poisonous effects of cheap money, investors might also find out that most assets were worth a lot less than they'd thought”.

John’s advice? “Turbulent times lie ahead. Hang on to gold, be very picky when it comes to stocks, and avoid government bonds and banks. Looking at ways to profit from a stronger dollar isn't a bad idea either – see the recent MoneyWeek magazine cover story on this very topic: Will the US dollar rise from the dead?

● The heart of the problem lies the eurozone, said John on Tuesday: The euro – protect yourself from a big explosion and a terrible mess.

“Europe's woes just keep growing. As if Greece wasn't enough, credit rating agency Standard & Poor's has downgraded Italy's credit rating by a notch. Investors are starting to grasp that this story isn't going to have a happy ending.

“Any route out of this crisis has to be sneaky. Trouble is, Europe has reached the point where there are no sneaky options left. A eurozone-wide bond would need approval and a new treaty. Meanwhile, any attempt by the European Central Bank to print money and embark on an open-ended buying spree of Greek, Spanish and Portuguese bonds is bound to come up against resistance from Germany.”

In short, the eurozone looks almost impossible to sort out. “What do you get when an unstoppable force meets an immovable object?” asks John. “I suspect the answer is a big explosion and a terrible mess.”

Yet this might provide an opportunity for investors. “The good news is that some European stocks are [now] looking very cheap”. Yes, “an implosion in the euro would mean they get even cheaper. But Paul Hill has looked at a few promising candidates in Friday’s MoneyWeek magazine”. Subscribers can read Paul’s tips here. If you’d like to become a subscriber, claim your first three copies free here.


Exposed: The dangerous investment property “illusion”

Estate agents, lenders and politicians will tell you the housing market really has turned a corner...

But there are three key reasons why the so-called recovery of the last 18 months is a dangerous false dawn.

If you have money in property, are tempted to buy-to-let, or are simply thinking about investing this year or next...

You must watch this now.

MoneyWeek magazine is an unregulated product published by MoneyWeek Ltd.

● Even the UK housing market isn’t immune to Europe’s problems, says David Stevenson.

So far “British house prices have been remarkably resilient. What’s kept them propped up? Interest rates. With the Bank of England slashing the bank rate to 0.5%, many homeowners have seen the cost of their mortgages plunge to unheard-of lows. That's enabled people to hang on to homes they might otherwise have been forced to sell.”

But European counterparty risk could change all that, says David . “That’s the risk that you make a deal with someone and they fail to hold up their end. Like backing a winner at the races, and then finding the bookie has done a runner when you go to collect your winnings”.

The International Monetary Fund has just warned that Europe’s banks are sitting on €300bn of losses from the eurozone sovereign debt crisis. That’s making these banks fretful about lending to each other.

“So interbank lending is already falling… and it’ll probably freeze up even more.” Further, “UK banks are being forced to pay more to borrow in the money markets. And if banks have to pay more to borrow money, they'll have to charge the likes of you and me more to borrow as well.”

To see what this could mean for house prices and mortgage rates
and what you can do about the latter read on here: How panic in Europe could hurt UK house prices.

● All these crises have caused massive market volatility. That’s pretty unsettling for the average investor. But for traders, it’s a great opportunity. MoneyWeek’s resident spread-betting expert John C Burford loves trading on market swings. If you’re interested in learning about how he reads charts to make trades, click here to see his latest video.

And if you’re not already a subscriber to John’s email, sign up here.

● Tough markets like these make picking the right investment fund even more important, says our editor-in chief Merryn Somerset Webb on her blog. She was taking legendary fund manager Anthony Bolton to task for the high fees on his Chinese investment trust this week – and she’s got the figures to back her up.

“The conventional investment model (put cash in fund, leave it there, get 6-8% a year, retire) is broken and investors are beginning to catch on”, says Merryn. So how can you boost your returns? By picking low-cost funds.

“Charges are wealth destroyers”, say Merryn. “As you can’t know what the performance will be until it is too late, you are best off investing in low-fee funds in the first place. If you can only know one thing, you might as well get that bit right.”

Unsurprisingly, a lot of you agreed. Tom O’Neill noted that “you might have to pay to get good performance, but that even after paying, you might not well get any”.

Toby went further: “an awful lot of the financial industry is just a sort of scam to get rich off the financially illiterate”. Strong stuff. If you haven’t had a look at the blog yet click here and have your say.

● Finally, if you want some insight into how things have got this bad, you could do worse than take a look at the video from Dominic Frisby, also on Merryn’s blog. Dominic blames the growing wealth gap between rich and poor squarely on one thing – the fiat money system. It’s a controversial topic and very thought-provoking – I’m sure you’ll all have plenty to say about it. Watch it here (it’s only three minutes) and leave your comments.

Have a great weekend,

James McKeigue

Senior Writer, MoneyWeek

John Stepek
David Stevenson
Tim Bennett
James McKeigue

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