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MoneyWeek Issue 958

There's a reason MoneyWeek is Britain's best-selling financial magazine. We exist to help you ground your portfolio so that it keeps your money safe during rough patches and growing in the good times. We don't just look at how to maximise your returns and limit your losses, we also like to look at how you can keep more of the money you've made. Week-in, week-out we'll guide you through the financial world as it changes, alerting you to all the opportunities to profit and dangers to avoid, as they appear. Income strategies, rising-star companies, the best funds and trusts, clever ways to preserve your wealth during market turmoil... you will get the best ideas from the sharpest financial minds and investing professionals in Britain.

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from the editor-in-chief...

Good news (for most MoneyWeek readers at least): gold has just hit a new all-time high of £1,175 in sterling terms (see page 5). Bad news: this is as much about sterling weakness as anything else. Since Boris Johnson became prime minister and promised that we would leave the EU with or without a deal in 90 days’ time, the pound has fallen around 3% against the US dollar. This, in part, represents an information vacuum. “The pound’s weakness also reflects a loss of faith in the Bank of England” Right now pretty much anything could happen in the UK. A no-deal Brexit is possible (though, we still think, unlikely). An Article 50 revocation is possible (albeit very unlikely). A revised deal is possible, as is some kind of fudged interim agreement. So…

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tax dodge of the week

HM Revenue & Customs could force several high earners, including some sports stars and actors, to repay £500m after an investment scheme was ruled to have used artificial losses to generate tax relief, reports The Times. A scheme run by Ingenious Media used limited liability partnerships to invest in films, raising 30% from investors and 70% from loans “that only existed on paper”. Most of the investment was written off in the first year and the participants, who include David Beckham and Sacha Baron Cohen (pictured), claimed tax relief equal to the amount they had invested. Ingenious Media said it offered “legitimate investment in the film and games industry”, says The Times. But while not illegal – and “none of those named [are] guilty of any wrongdoing” – the scheme…

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when will we see nikkei 39,000?

This year sees the 30-year anniversaries of several major historical events, ranging from the Tiananmen Square massacre in Beijing to the fall of the Berlin Wall. In the world of investment too, an extraordinary event took place in 1989. One of the largest stockmarket bubbles of all time peaked on the last trading day of the year when Japan’s Nikkei 225 index hit 38,915. The term “bubble” was not in general use then, but by the end of 1990 it had won Japan’s annual prize for new word of the year. You can see why. The Nikkei halved in nine months. That was just the start of Japan’s long journey into the shadow world of deflationary stagnation and financial crisis. When Shinzo Abe became prime minister for the second time, in…

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three scenarios for japanese stocks

Scenario 1: Governance-driven restructuring. Shareholder-friendly boards drive a wave of mergers, spin-offs and tie-ups, supported by easy monetary and fiscal policy. Earnings-per-share grow by 8% per year, of which 3% comes from share buybacks. Valuation rises to 15-year average. Year of new stockmarket high: 2026 Scenario 2: Muddle through. Profitability remains near current levels, but policy mistakes hurt top-line growth. No change in valuation. Earnings-per-share grow by 5% per year, with 2% from buybacks. Year of new stockmarket high: 2032 Scenario 3. Back to stagnation. Deflationists and fiscal hawks reverse Abenomics. Nominal GDP sinks while corporations hoard cash. Earnings-per-share decline at 1% per year, with no buybacks. Valuation slides back to 2012 lows. Year of new stockmarket high: 2045 The reality is likely to be far messier than these scenarios suggest, but it is clear that…

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will the ecb buy up equities?

Persistently low inflation in Europe has prompted Mario Draghi, president of the European Central Bank (ECB), to pledge an “ample degree of monetary accommodation”. Expect interest rates to fall further into negative territory and a new round of asset purchases in the fourth quarter, say Daniele Antonucci and Joao Almeida of Morgan Stanley. The ECB has already purchased more than €2trn in government bonds with printed money. Yet with European bond yields hitting record lows and the supply of German bunds drying up, some are proposing bolder measures. Larry Fink, the chief executive of asset manager BlackRock, has called on the ECB to buy European stocks with newly created cash. Injecting money into the system in this way has been tried before: the Bank of Japan now owns 75% of the country’s…

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“Permanently including quantitative easing (QE) in central banks’ standard toolkit has transformed global finance and capitalism in ways not comprehensible at this juncture. The bond ‘vigilantes’ are extinct. This has provided central banks unprecedented latitude to discard convention and follow their every whim. It has also conveniently removed a major risk (spike in yields) for equities. But is has also opened the fiscal floodgates, where monetary policies ensure the accommodation of huge deficit spending at [very] low borrowing costs. QE and the resulting death of the vigilantes have also empowered the strongman leader to subvert central bank independence… Threatening... the head of a central bank for not cutting rates... is a non-issue for today’s bond market. Ditto massive deficits… No checks and balances. Markets have lost the capacity to self-adjust…