Gold and stocks are back up on QE rumours. Or was it the fact that the Eurozone survived another day? Perhaps it’s the RBA rate cut that is expected but never seems to come… Who knows?
One thing we do know is that all this is rather annoying. Whoever heard of investing based on how much money will be printed, whether countries will fail and what disposition central bankers might have to funding their governments’ voracious spending habits?
‘In the last three plus years, central banks have had little choice but to do the unsustainable in order to sustain the unsustainable until others do the sustainable to restore sustainability!’ – PIMCO’s El-Erian
That’s one way of putting it.
El-Erian reckons the central bankers have been covering for their friends the politicians. In most countries around the world, money printing was used to ease the damage that gigantic deficits and debts do to an economy.
What’s ignorant about this is that the central banks do have a choice. Governments couldn’t have borrowed so much if they knew the central banks wouldn’t play along. Without willing accomplices at the European Central Bank, Federal Reserve, Bank of Japan, Bank of England and the rest, deficits wouldn’t be able to reach the levels they are at now.
At least, they wouldn’t remain there for long before descending into a Greek-style debacle. The sovereign debt crisis story would be done and dusted by now.
In fact, it probably never would have occurred. Sovereign debt crises tend to be bad for political careers, creating a disincentive to get there in the first place. This is the whole point of a gold standard, by the way. It creates a wall of restraint between central bankers and politicians because gold can’t be printed. The conflict of interest that the money printers and deficit runners have when they run in cahoots is kept at bay.
Instead, we have this chart. It shows central bank balance sheets (read amount of money) as a % of GDP.
In plain English, central banks have injected vast amounts of money into their economies and GDP hasn’t kept up with the flood. For now, the money is clogged in a banking system with nothing worthwhile to invest in.
At some point, one of two things will happen. Either it will get lent out, or it will be withdrawn from circulation by the same central banks that injected it. Those two scenarios create completely different investment environments.
By allowing the money to flood into the economy (i.e. lending it out), banks would create another boom and bust cycle. Just like the 1920s to the Great Depression, the 1990s to the tech bubble and the 2000s to the global financial crisis. We’d just have another one. Unless the economy can’t be revived with a dose of money adrenalin and the new funds flow towards consumer prices instead. That would mean inflation instead of growth.
Under the second scenario, central banks implement what they call an exit strategy to reduce the amount of money in the economy. But that would mean reversing all those benefits that have been accruing to their mates in government. They would no longer be supporting government bond markets if they tried to bring the money supply down to a reasonable level. In fact, they would be doing the opposite.
And with government debt to GDP near or above 100% in so many places around the world, that would mean disaster. The interest bill on funding government would soar and consume tax revenue.
It’s not likely that central bankers will want to be blamed for the bankruptcy of a major government. So they’ll go back to inflating the money supply as soon as things look bad.
That’s why you hear so much about inflation from us. It seems to be the endgame of so many ways the story of the world economy could play out. What happens in the meantime is a mystery.
Two of our editors have come up with a way to deal with that. They often ponder when the next QE will be announced, or when Spain will get rescued. But how they invest isn’t dependent on getting that right.
While most analysts and investors focus on anticipating the next move of the world’s policymakers, Kris Sayce is taking a different approach. Each new round of QE or stimulus since has had a shorter and much less significant impact on stock prices.
That’s why he’s taken the view that the QE/stimulus discussion is an attention trap. Instead, he’s focusing on finding good small businesses run by true entrepreneurs. With business models that don’t depend on leverage to increase earnings. More importantly, he’s looking for small businesses that can increase their earnings dramatically, even in the current environment.
And that’s a key point Kris makes in his newest report. If you focus on the small end of town and look at businesses from the ground up, you’re doing work that most people aren’t doing right now. That gives you a massive advantage as an investor.
With nearly half the market currently trading below 20 cents there’s a great opportunity to buy great companies at a big discount. And if and when the next bout of QE hits, it can only lift these share’s even higher! To discover Kris’s five most urgent ‘buys’, click here.
Meanwhile, Murray Dawes has adapted his trading system to fit what he calls ‘an inherently unstable market because of the constant intervention by central planners/bankers.’ He says the usual rules of profitable investing no longer apply. Instead of fundamentals driving markets we have the words of a few men driving them instead.
‘Everyone knows that it is useless trying to fight the Fed,’ says Murray. ‘And so everyone tries to front run them instead. All of a sudden everyone is doing the same thing and this is where the instability lies.’
What Murray is doing very effectively is exploiting the mistakes made by other traders in the current climate. Murray identifies these mistake set-ups in chart price patterns. To find out how he does it… and how you could have made a 114% return in a falling market by acting on his trades… click here and watch this.
Nick Hubble
Editor, Money Morning
The Conference of the Year “After America” DVD