Forget Greece: the Real Problem is the UK

Bill Bonner - Thu 04 Mar, 2010

The falling pound makes it more dangerous to lend money to Britain. Investors have to worry not only about a default... but about a loss due to currency decline.

Baltimore, Maryland

Miserable cities... ghost towns... angry voters...

Market flash:

The Dow was flat yesterday. Gold rose $2. And Greece said it was making progress towards cutting its deficit.

Yesterday we looked at America’s most miserable cities. Today, let’s take a gander at its new “ghost towns”.

There are many towns and cities that are losing population... losing key industries... and probably on the verge of extinction. USA Today mentioned some of them in a cover story this Tuesday.

Ravenswood, W. Va., for example. It has 4,000 people and one major business. It’s a one horse town, in other words, and the nag is leaving. The aluminium works are partly shuttered already, says USA Today; the rest is for sale.

What’s going to happen to Ravenswood? It could become a ghost town…

There are already dozens of towns in West Virginia that are inhabited mostly by ghosts. They’re relics of the booms and busts of the past. Mining, logging, railroads – each one created its own towns. Then, the profitable industries of the 19th and 20th century became unprofitable somewhere along the line. People left. Those who remain live among the shadows.

The booms and busts of our time are simply claiming more victims. Cleveland is losing population. So is Baltimore. So are dozens of US cities.

“In the America where things are made the recession has a depression,” continues the report. “According to a new Northeastern University study, one in every six blue-collar indus trial jobs have disappeared since 2007.”

And one in five adult males of prime working age is out of work. There are fewer and fewer factory towns in the US... and fewer and fewer jobs for people who work in them. And now comes word that auto sales in February fell nearly 4%. And early estimates suggest that the job report coming tomorrow will be depressing.

“Industrial workers are dinosaurs,” says one laid-off worker, now retraining to a traveling nurse.

Hmmm... Let’s see. How does this work? No one makes anything any more. We all become service industry workers… looking out for one another. I give you $5 for cutting my lawn. You give me $5 for cutting your hair. Neither of us has a penny more. How then do we afford to buy anything?

“An industrial town makes products that bring wealth into a community; a post-industrial ghost town as a zero-sum economy – people in marginal jobs ‘serving and paying each other,’” says USA Today.

Services don’t make people wealthier. They may make them more comfortable. But real prosperity requires real stuff – food, cars, tables, lightbulbs, Ipads.

Of course, you could offer services to people who make these things. A small nation, such as Singapore, for example, could earn a living by offering financial services. A Caribbean island could offer vacations. But what can a great nation like the US offer? It can’t get by on services. And it can’t support half its population on welfare, unemployment and food stamps. It needs manufacturing... it needs to make things... and sell them.

Why doesn’t it do that already? How come so many people are out of work? How come men can find jobs?

Oh la la... too many questions. But when was the last time you heard a mother proudly announce that her son was going into manufacturing? Or that he was learning to be a machinist? When was the last time you saw a major factory under construction? When was the last time you picked up something in a shop, turned it over and found “Made in America” stamped on the underside?

And what about China? The next great thing? In today’s news, one of our guys reckons you need to be careful who you follow in…

“Watch out,” writes Tom Bulford in his latest Penny Sleuth email

“Think the financial crisis has made investment managers a little less greedy? Think again. They’re working even harder to concoct ways of parting you from your money.

“Fund manager, Fidelity is desperate for your money. Just check out its latest “great idea”.

“Take the only UK fund manager that many private investors have ever heard of: Anthony Bolton. Now add a hot investment idea: the “mighty Chinese economy”. That’s got to equal a handsome reward, right?

“Well, I’m not going near it personally.

“Apart from the nice fat fee that Fidelity will be getting for managing this £600m fund, it is also going to charge a ‘performance related’ fee – even in years when investors lose money!

“When Bolton started his City career in the 1970s, no investment manager would have the gall to even suggest such a thing. But today, when private investors are there not to be served but to be ripped off at every opportunity, this type of thing has become the norm.

“And Anthony Bolton is no old China hand. Now sixty years old he has made his name in the UK stock market. But, he tells us, ‘I have been a regular visitor to China since 2004 and I plan to relocate to Hong Kong shortly.’

“Well I lived in Hong Kong for eight years but that certainly did not make me an expert on Chinese business.

“In fact, I’ve learnt more about it from my Chinese brother-in-law, who has a factory in Szenzhen. He has told me stories that would make your hair curl. Stories of criminal mafia and pay-offs to local big-wigs.

“China is fiercely competitive and virtually lawless. Accounting standards are flimsy. Corporate governance is virtually unknown. Foreign investors are seen as nothing more than a gullible source of cash. Frankly I would not go anywhere near it.

“So there you have it. A guy with virtually no relevant experience, and not enough years left on the clock to harbour much ambition, punting your money in a highly suspect market. And a ‘heads I win, tails you lose’ fee structure.

“I’d run a mile. In fact, I’d run a mile from the whole Fund Management industry.

“If you want to make real money, invest directly into businesses that you know something about. That’s what has worked for me in my 30+ years of investing.

“That’s why I spent a day last week ‘kicking the tyres’ of one of the UK’s most exciting penny shares. I went to meet the management for the second time. And I saw his company’s product in use. I learned a lot about why this is could be a great investment in the years ahead.

“You can read more about it in the March issue of Red Hot Penny Shares – out this Saturday.”

Red Hot Penny Shares is a regulated product issued by Fleet Street Publications ltd. Forecasts are not a reliable indicator of future results. Commissions, fees and other charges can reduce returns from investments. Your capital is at risk when you invest in shares, never risk more than you can afford to lose. Penny shares can be relatively illiquid and hard to trade. There can be a large bid/offer spread so if you need to sell soon after you’ve bought, you might get less back than you paid. This can make them riskier than other investments. Please seek advice if necessary. 0207 633 3600.

And more thoughts...

*** The Greek story is a universal tale... It will soon be played by the UK... and then it will be the US.

Let us summarize: Innocent fellows are seduced by debt. They fall in love with deficits. Debt proves to be an evil temptress. Our heroes are ruined.

Isn’t the story more or less the same in Britain and America too?

And now the pound is falling. It dropped below $1.50 on Tuesday. Instead of being a refuge against the troubled euro, investors are fleeing the English currency. Why? They figure that what happened to Greece could also happen to England. Britain’s budget deficit – at 12% of GDP – is almost the same as Greece’s, twice as big as the European average.

“If you really want a fiscal problem, look at the U.K.,” said Mark Schofield, a fixed-income strategist at Citigroup.

Not only does the government owe a lot of money, so do ordinary citizens. The overall level of debt is the second highest in the world, according to a Mckinsey study – right on the heels of Japan.

The falling pound makes it more dangerous to lend money to Britain. Investors have to worry not only about a default... but about a loss due to currency decline. This should push up the cost of financing Britain’s deficits, putting the nation is the same fix as the Greeks. Like Greece, Britain needs foreign lenders to fund its deficits. And like Greece, it will be forced to promise austerity measures, if lenders balk.

“This is a ticking time bomb,” said Nick Hopkinson of Property Portfolio Rescue, a company that assists overleveraged homeowners. “There are over 400,000 people who are in arrears with their mortgage rates the cheapest they have ever been. When rates increase, a lot of people will be tipped over the edge.”

“If rates go up, it will be a very dangerous situation for me... It might lead me to consider bankruptcy,” said sales manager, Sheridan King.

“We are just struggling to get by with all this debt,” he added. “It’s time the government got its house in order.”

Until tomorrow,

Bill Bonner
For The Daily Reckoning

P.S. UK investors, the time bomb is ticking. Protect yourself now from the “Great Financial Deception” of 2010…

Your capital is at risk when you invest in shares – you can lose some or all of your money; never risk more than you can afford to lose. Commissions, fees and other charges can reduce returns from investments. Please seek advice if necessary. Fleet Street Publications Ltd. 0207 633 3600.

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