The gold standard is back... Batten down the hatches... This bubble is about to burst...
From James McKeigue, across the river from the City
Dear Buzzhairs Buzzhairs,
Investors are feeling upbeat again.
The economic data is picking up. America's S&P 500 market has hit all-time highs and even the FTSE 100 is nudging towards a new record.
That's great for shareholders, the owners of the companies – but there are increasing signs that the workers aren't so happy.
The workers of the world are looking for their fair share
In Wednesday's Money Morning, John Stepek investigated what's happening and how it will affect the markets.
"In recent decades, the global economy – the overall economic pie – has grown nicely. But more and more of that pie has gone to the owners of productive assets, and less and less has gone to the workers. To put it in financial jargon: capital has enjoyed a larger chunk of the spoils of economic progress than labour."
Take America, for instance. In 1960, wages were around 65% of GDP and profits were 6%. By last year, however, wages were around 58%. That's allowed profits to rise - to nearly 10% of GDP - despite the economic turmoil. This in turn, has underpinned share prices.
But now, says John, this trend looks like it may change. "America is seeing what looks like its largest-ever strike by fast food workers [with] workers from various chains are walking out across seven cities, over the course of four days."
The protestors want the right to form a union and a minimum wage of $15 an hour, compared to a current average of just under $9.
Politically these strikers may find support, says John. After all they're very badly paid at a time when there is a popular general feeling that "a nebulous group of 'rich' folk got away with murder during the financial crisis, at the expense of everyone else". Also no-one likes fast food companies that much anyway. This makes the cause ideal for an opportunistic politician.
There are also strong economic reasons for governments to support these actions, says John. "A lot of these workers are so low-paid that they also have to claim welfare benefits… At least one reason why corporate profits have grown as a share of national income is because our taxes go on subsidising their wage bills."
And that, says John, is hardly a good use of public money when most major developed governments are stony broke.
"This gradual shift in attitude isn't just happening in the US and developed markets", notes John, "this is a global thing. For example, in this morning's FT, China expert Michael Pettis points out that China doesn't need rapid GDP growth to maintain social stability." What it really needs is rising incomes for consumers.
In short, the decades-long trend that saw workers take a smaller share of the pie looks like it could be about to go into reverse. John has found a number of interesting ways to play this 'long labour, short capital' theme, so click here to read the whole piece – and to have your say.
Batten down the hatches
Increased conflict between bosses and owners isn't the only thing to worry about. My colleague Tim Price is convinced that British investors are about to be hit by another, far more serious disaster. Unlike most other analysts, Tim believes a financial storm is about to hit Britain and destroy the value of billions of pounds' worth of assets. He's put together a report explaining the threat and the steps you can take to avoid it. It's scary, compelling stuff - take a look at it here.
Eastern promise
One set of economies with a more promising future are the frontier markets of Asia. It's a market that Lars Henriksson has devoted the best part of his life too and, as his Profit Hunter subscribers would testify, has achieved considerable success.
I'm always a bit cagey about giving away 'paid-for' newsletter content in this roundup. However, in Wednesday's edition of Profit Hunter, Lars revealed the five measures that he uses to find a good share:
1. Stories you understand
We are limited in our knowledge, says Lars, So don't try and involve yourself in things you are unsure about. "As my mentor used to say, there is nothing wrong with asking others if you do not know."
2. Stories with long shelf lives
"Good investment themes should have a long shelf life. I'm talking about a minimum of two to three years but preferably 8-10 years." Of course "themes are hard to come up with", admits Lars, which is why so many Asia funds are filled with the biggest index stocks.
3. Cheap, high yielding and limited exposure
"I love to buy stocks that are trading on a cheap valuation and pay high dividend yields. This sounds simple, but don't be fooled, it is not easy to find these stocks [but] the thing is that you can find great stocks long before the big money rolls into town." On example of this is Indonesia's insurance sector, says Lars, "which lacks research coverage despite having fantastic growth potential."
4. Reputable management
"Over the last decade, the quality of information in many emerging markets has deteriorated", explains Lars. This is because foreign analysts have been replaced by locals who could "face career risk if they disclose any adverse information". So instead Lars prefers "to compare official statements (annual reports, news clippings) with actual outcomes and to check with friends and brokers."
5. Shareholders with good track record
"Asia often lacks the strong professional institutional investor base that is common in Europe or the US. Instead many companies are in the hands of families or tycoons with variable reputations on how they treat minority shareholders." Making sure you're in bed with the right people is crucial to picking a good investment, says Lars.
It's clear that investing in Asia comes with plenty of risk, but for those who manage it well, it's also full of reward. Subscription to Profit Hunter is currently closed but you can read some of Lars's reports on Asia through the free, fortnightly email The New World
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The return of the gold standard
One of the most popular articles on the website this week was Tuesday's edition of The Right Side. In it, Bengt Saelensminde explains why he thinks most private investors are horribly under-invested in commodities.
The fact is, says Bengt, that investment banks have taken large positions in the commodities markets. But this isn't just because they like a punt on prices, there's something far more sinister going on.
"Back in 2005, the Federal Reserve allowed US banks to not only invest in the financial side of the commodities markets, but in the physical markets too", recalls Bengt.
"The likes of Goldman Sachs and JP Morgan bought huge metal storage facilities. This is where the financial markets meet the real markets… And now – surprise, surprise – the banks are accused of rigging the markets. They're accused of delaying delivery of key industrial metals in order to drive prices up."
Why would they be doing this now? Well "the financial crisis taught us that the value of paper assets can disappear very quickly", says Bengt.
"It turns out that much of the paper that's been created over recent decades is of dubious quality. That is, the collateral (or assets) backing up the paper may either be of limited value (à la subprime residencies), or the collateral may not even be there."
And that's why the banks are so keen to get into commodities. "These are, after all, real assets. Industrial metals have become a key part of the banking industry, providing collateral for contracts."
That's what you have to remember the next time a commodity bear tells you that prices are falling because the market is oversupplied. "The role of commodities is changing. Key metals now have investment as well as industrial demand."
With way too many paper promises flooding the system, investors want something more reliable. "So, although the gold standard is no longer with us, it would appear that metal-backed paper contracts have taken on its role."
It's an interesting theory – Bengt has more details here.
This bubble is about to burst
Bengt isn't the only one who thinks that there is something seriously wrong with the financial system. David Stevenson, investment director at The Fleet Street Letter, believes the banks and the government have colluded to stoke up the biggest credit bubble in British history. Indeed he's analysed the data and found some convincing evidence that when this bubble bursts it will blow a hole in most asset management strategies. Click here to look at his report and judge for yourself.
How capital gains tax could hit your profits
Finally, as is my custom, I'd like to point you in the direction of the latest video tutorial from, Tim Bennett. We all love to focus on paper gains from stocks in our portfolio, but many of us forget that in the real world we often have to pay tax on profits we make. This week Tim takes an in-depth look at capital gains tax and how it can hit your investment returns.
Right that's it from me. Have a great weekend,
James McKeigue
Senior Writer, MoneyWeek
MoneyWeek
John Stepek
David Stevenson
James McKeigue
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