"Because there isn’t go to be a new Cold War!" says Garry White.
The FT’s Lex column is bearish on the prospects for investors in Russia.
"A Russia at loggerheads with the outside world is less likely to have time for economic modernisation or the transformation of Moscow into a global financial centre," it says.
"Reformers in the Kremlin could lose out to hardliners. If reforms are slow or non-existent, long-term earnings growth will be slower too and vulnerability to commodity shocks higher. Investors will demand a premium to reflect the political and event risk."
Garry agrees with this. Russia would like to see Moscow become a financial powerhouse. It has this and more to lose if international tensions escalate.
"But that’s exactly why they won’t allow such a thing to happen," says Garry.
Find out why Garry reckons talk of a new Cold War is overblown — and why today’s tension actually represents a great buying opportunity.
Is this the cleverest economic policy ever? Or the dumbest?
Imagine you’re a commercial property developer. You build several warehouses in the hope of renting them to businesses. But then disaster strikes. The economy begins to slow, and you can’t rent your premises at a profitable rate.
So you decide to take a hit, leave them empty and wait for rents to rise. It’s all you can do, really. Only, the government doesn’t like what you’re up to. By refusing to rent at the prevailing rate, it says, you’re artificially restricting supply. As such, you’re keeping rents higher than the market equilibrium.
Naughty naughty!
In April, the government decided to correct what it clearly perceives as a market failure. It imposed a tax on empty property. Don’t rent it out and you still have to pay for it.
The idea was that it would force a rethink from landlords. They’d stop sitting on empty properties, increase the supply, and push rents down.
It hasn’t worked, though. Rather than accept rent at an unprofitable level, commercial landlords are avoiding the tax by knocking down properties instead. That’s right — government policy has encouraged entrepreneurs to demolish property.
Critics are furious. Comparisons are being drawn with the Window Tax — a seventeenth and eighteenth century levy based on the number of windows a property had.
But maybe we’ve got it all wrong. Maybe this is the cleverest economic policy anyone has ever conceived.
In his ‘General Theory of Employment, Interest and Money’, John Maynard Keynes gave a tongue-in-cheek example of how the government can use its own money to boost the economy when times are hard. Simply bury some gold, he said, tell everyone about it, and private companies would hire men to dig it up. Those men would then spend their wages on goods and services, and the effect would ripple outwards. Ergo, a small initial outlay of public money could create a virtuous circle of economic growth.
Keynes called it the multiplier — a phenomenon by which the benefit to the economy of a given fiscal stimulus is much greater than the extra amount the government spends.
Our government has gone one better than Keynes. Their cunning plan will help the economy without costing them any money at all (in fact, they’ll make a bit!) Think about it — to knock these places down, landlords have to hire a demolition firm. Well, there’s a boost to the economy right there!
If enough landlords knock down enough buildings, we could, thanks to the multiplier effect, begin to see an economic recovery. Once it gets underway, we’ll see a further boost via the construction industry — after all, those buildings will need to be put back up again...
OK, so I jest. But at least you can be assured of one thing — I am trying to make sense of this!
Strong profit growth reported in China
"I’m starting to feel like I’m playing Top Trumps with my China statistics," said colleague Andrew Vaughan at this morning’s meeting.
If he were, Andrew would win. Yesterday I mentioned how, despite some recent weakness, China’s economic performance demonstrates that there are places where growth is happening. Today, three Chinese companies report impressive profit figures.
They are:
- China Mobile — a 45% rise in net profits in the first half of the year
- Bank of Communications — first half net profits up 81%
- China National Offshore Oil Corporation — an 89% boost to first half net profits
But it goes to show that profits can be made right now by companies operating in the right environment. The global economy is still growing, after all. And that presents a big opportunity.
Find out here how we plan to play it.
Until tomorrow
Ben Traynor
Editor
The Daily Reckoning — Things always happen the same way
The Dow rose 89 points yesterday. Oil rose to $118... and has almost reached $119 this morning. The reason given for oil’s rise is a storm in the Caribbean, named Gustav, which threatens to shut down oil rigs in the Gulf of Mexico.
Gold rose $3.50 — to $831. We may have just had — and may still have — a great opportunity to buy into gold. The yellow metal seems to have bottomed out. Time will tell, of course...
"You never know what will happen or when, but things always happen the same way..."
You can read The Daily Reckoning in full here.
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