By MoneyMorning.com.au
Whrrrrrrrr!
That is the sound of the printing press being turned up to full speed.
Yep, those central bankers are at it again.
The Bank of England (BoE), announced on Thursday night they would increase their quantitative easing program by £75 billion (AUD $118.8 billion), to £275 billion (AUD$435.8 billion).
According to The Age, ‘The policy announcements came one day after official data showed the British economy had flat lined over the past nine months and that the 2008-09 recession was worse than previously thought with a peak-to-trough contraction of 7.1%, rather than the previous estimate of 6.4%.’
Adding to the bad news, between April and June this year the British economy grew just 0.1%.
After the lousy gross domestic product growth report, newspapers like the Guardian anticipated additional money printing from the central bank. But no one expected it to be this size. ‘[The size] … was probably a bit more than anticipated,’ Peter Dixon, an analyst at Commerzbank AG, said.
In an interview with BBC television, BoE governor, Mervyn King said:
The news from the rest of the world in the past few months has been very poor. The world economy has slowed, America has slowed, China has slowed, and of course particularly the European economy has slowed. That’s affecting our ability to engineer a recovery here so we took action today.
That’s part of the problem.
Central bankers, like Mervyn King, are convinced they can fix the economy.
Yet, for all their interfering, bigger problems will be created.
‘Experts claim that while QE can help to kick-start an economy, it also threatens to fuel inflation, which in the long run can actually hinder growth,’ wrote The Age.
Right now, England is looking at an inflation rate of 4.5%. Well above the BoE’s target rate of 2%.
But printing money isn’t a solution. It’s a band aid for a flesh wound.
Economist Chris Williamson from Markit said this strategy from the BoE is ‘…not without risk. Printing more money is inflationary and high prices are already one of the factors hurting household and subduing economic growth.’
In fact, Simon Smith, chief economist at FxPro, sees inflation reaching over 5% in the UK within a few months.
Upon this news, what did the market do?
The FTSE added a massive 3.71%.
‘Welcome to the confused and panicked trading days of late 2011.’ Greg Canavan of Sound Money Sound Investments says.
‘Global markets continue to jump at shadows.’
And in this case, the English market received a temporary boost from 75 billion quid.
The rally will be short lived. All the money printing won’t jumpstart the UK economy into growth.
As Greg wrote to his subscribers on Wednesday, ‘Just as the bear looks to be sinking his claws in, a hope-based rally comes from nowhere.’
By throwing some more money at the problem, all the BoE achieved was a quick jolt to the UK market.
Or so it thinks.
Yet, the 189-point climb just shows how sensitive the market is to news. In one trading day, the market has proven just how volatile it is.
As an Aussie investor, this isn’t good news for your portfolio.
Editor of Slipstream Trader, Murray Dawes has traded volatile markets before. But this one is a little different. ‘…the news flow is creating havoc out there’, says Murray in his latest video. You can find his weekly videos on his You Tube channel.
Murray has a long-term bearish view for the market, but warns listeners of a knee jerk reaction to any of the news that comes through.
As an Aussie investor, the news cycle isn’t good news for your portfolio.
‘Hope isn’t a strategy,’ Greg told his readers in. ‘You just don’t know which string they’re [central banks] going to pull at the moment.’
Understanding how central banking policies interfere with the market, Greg has been warning his readers to hold cash and buy stocks when the opportunity arises. He encourages subscribers to take advantage of market panics:
While I’m bearish, I still think the market is cheap enough to buy selectively. There are some very good companies trading at good prices. In a market like this, everyone focuses on price, not value. So in the short term, prices can definitely go down from here because many investors are not thinking rationally.
‘Remember no one – and I mean no one – can pick the bottom. The best strategy is to buy on the panic down days. Why? You can be sure that the person is selling out of fear.’
Rather than be part of the panic, it’s time to look at ways to invest as soundly as possible.
Shae.