Beware the Sand Devils

I am sure you have seen in those natural history programmes those mini sand twisters that dance around with seemingly little impact - that is until they hit you. Well last week we saw what happened when several of such sand devils combined to cause a global fear of a devastating financial tornado. Each on their own could have had an effect but their combination suddenly brought markets up short as they saw the potential for something worse.

It was not just a sand devil of the fear of sovereign debt and default from Greece and the others on the fault line, but also the actions by the Chinese to try and rein in parts of their galloping economy. Add to that the other sand devils of the new Australian tax on the miners, the worries about BP and its Gulf disaster and we had all the making for a global market shudder. Suddenly our parochial election didn’t seem so important and even the Icelandic volcano couldn’t get its picture in the paper.

The sovereign debt question has still yet to be properly addressed. The key issues come down to the very structure and operation of the Euro. As the USA perfectly demonstrates, you can have at least fifty different economies but all operating under a generally common financial set of disciplines. Some of those states can and do, like California, get into financial problems, but as they are part of a cohesive common political structure, it works!

In contrast the Eurozone does not have much commonality and certainly very little discipline. It is thus going to be fundamentally flawed until such fissures and cracks in the system are addressed. This though is not to say that the Euro has been a failure. Certainly not. After all it managed to dispose of the world’s most useless currency, the Belgian Franc. In fact as a mark of its success it is held as a reserve currency to a much greater extent by overseas governments (roughly 14% I understand) then say Sterling which now languishes at some 4%. However the talk of some two years ago that the Euro could potentially replace the US Dollar as a global reserve currency now seems laughable.

The answer must not be another Euro fudge, but rather some currency surgery either to
establish formal financial disciplines across its members or restrict membership to an inner core of willing participants, leaving the rest still members of the Euro zone, but with a form of ‘Eurolite’ of a domestic currency pegged at a lower level until such time as they can mature into full membership by way of qualification rather than whimsical Euro-dogma.

***

As I write the politicos are no doubt arguing over what sort of party construct can we have for our new coalition world. Whilst they all work out ways to see how they can grab power, might I suggest that the wisest move might well be to let the others ‘win’ for the moment.

Could this not be an example of a Pyrrhic victory for the winner, in that whoever wins this
election and is forced to take the most unpleasant and unpalatable of actions, might well find themselves at the wrong end of the popularity polls in a few months if a further election is forced upon a weak and unstable government. Mr Cameron might yet thank the day he did not get a fulsome majority first time around, and rather wait for the unpopularity to fall upon whoever does take power and starts to enact the most unpleasant of financial medicines.

***

This coming week have a look out for the Bank of England’s Quarterly Inflation report, which is going to give us some interesting insights into their thinking on the inflation outlook. It seems that we are potentially storing up some inflationary pressures but may be not until sometime in 2011. The following day we will get the UK trade figures as well, which with a bit of luck might just continue to show the improving effects of a weaker currency on our exports especially from the SME sector.

***

And finally... if you are bored this weekend - why not go to a fair? Well if you are
happily married then don’t read on. However, if the joy of wedded bliss has faded into
something more acrimonious, may I suggest a visit to Milan this weekend?

Seemingly Italy is holding its first divorce fair, offering services such as life coaching and beauty advice to a booming number of separating couples in the Catholic country.
The organisers said the fair (www.puntoeacapo.it), which will be held in Milan, aims to help divorcing people start a new, happier life.

"Smiling is key to this fair, which also offers serious, practical advice for often dramatic
situations," Franco Zanetti, who created the event, told Reuters.

The services include divorce planning, anti-stalking help, and “new look” tips, the organisers said.

Echoing similar initiatives in the United States and elsewhere in Europe, visitors will also be able to subscribe to divorce gift lists at department stores in Milan.

A growing number of Italian couples file for divorce every year, according to Italy's statistics agency ISTAT.

More than 130,000 couples split or got divorced in Italy in 2007, up more than 3 percent from the previous year, ISTAT said.

On the other side, the number of marriages nearly halved since 1972 to around 246,000 in 2008.

Have a good week.

Justin A. Urquhart Stewart
Director
Seven Investment Management Limited

For previous editions of our Weekly Update, please click here

This article represents a personal and light-hearted view from Director, Justin Urquhart Stewart of Seven Investment Management Limited, and is based on current financial news and events around the world. Its content should not be used for investment purposes and you should contact an independent financial adviser before making any investment or financial decision. Seven Investment Management Limited is authorised and regulated by the Financial Services Authority. Member of the London Stock Exchange. Head office: 23 Austin Friars, London EC2N 2QP. Telephone 020 7760 8777. Registered in England and Wales number 4092911. Registered office: 3 More London Riverside, London SE1 2AQ.