Britain’s money-printing presses will roll again soon: here’s how to profit

The British economy is in a mess. But up until recently, one of the few bright spots has been that new jobs are still being created.

Of course, this has only been possible because wages are rising more slowly than inflation, so that most of us still feel poorer. But it was better than nothing.

Unfortunately, that silver lining may now be fading. According to last week’s jobs data, unemployment rose by 70,000 in March. Meanwhile, in the same month, retail sales fell sharply.

If people are more worried about the outlook for their jobs, it’s no surprise they’re cutting back on spending. However, falling spending also raises the chances that we’ll have fallen back into recession during this quarter.

And even if we don’t, it looks like growth will be very weak in the year ahead.

What does it mean? Get ready for more Bank of England money-printing.

The jobs and sales figures are worse than they look

You can’t pin too much on one month’s economic data. But we all know that the British economy is fragile, so it’s certainly worth digging for clues as to whether things are getting better or worse.

The bad news is that if you look at March’s rather bleak jobs and retail sales data closely, things look even worse.

On the retail side, the biggest fall has been in sales of big-ticket items (these are bigger purchases such as fridges or TVs – the sorts of items you can potentially put off buying if you don’t feel all that confident in your finances). Sales of household goods fell by 6.2%.

Overall, non-food stores – which again, tend to be selling more discretionary goods – experienced declines of 3.4%. And while total retail sales are still slightly up by 0.4% on the last three months, they are down compared with the same time last year.

On the jobs report side, as well as last month’s rise in the number of people out of work, some of the past data has been revised downwards as well. For example, the original data suggested that employment grew last autumn. Now it turns out that it fell. There was also no employment growth during the last three months of 2012.

Overall the picture is grim. As Vicky Redwood of Capital Economics puts it, “the previous resilience of the jobs market still seems to be fading fast”.

The Bank of England isn’t worried about inflation

We know what the Bank of England’s response to weak growth is: more money printing.

At the last interest-rate setting meeting, the bank’s Monetary Policy Committee (MPC) voted to stick with the current plan, rather than printing more.

However, minutes from the meeting (which took place before the latest data came out) make it clear that the MPC is getting more and more worried about the economy. 

It’s concerned about the impact of the eurozone crisis. And it also reckons that weak wage growth suggests “a significant degree of slack in the economy”. By this, the MPC basically means that there is plenty of room to artificially boost growth without inflation taking off. It even suggests that inaction could hit growth beyond the short term.

It’s clear from all this that the MPC plans to take full advantage of the ‘broader mandate’ that George Osborne announced in the Budget. In effect, this means the bank is explicitly allowed to tolerate above-target inflation in its quest to boost growth.

All this suggests that when the Bank of England’s governor-to-be, Mark Carney, takes over in July, the printing presses will be ready to roll. Carney has been very careful of suggesting that this will be the case.

But it’s worth remembering the role of ‘expectations management’ in central banking. It’s far better to have the market frightened that you’ll disappoint, than for it to price in too much easing.

Just look at what’s happened in Japan. The week before the country’s new central banker, ‘Helicopter’ Haruhiko, announced his massive programme of quantitative easing (QE), prime minister Shinzo Abe talked down expectations, warning that getting to 2% inflation might be too ambitious a target. With the market expecting a disappointment, Haruhiko’s plan worked even better than the Japanese could have hoped.

While we’re not sure Carney will do anything quite as drastic as Haruhiko, we’d take any suggestion that he’ll go easy on the QE with a pinch of salt.

Stay away from sterling – buy US dollars instead

All of this underlines why you should be diversifying out of sterling. The poor economic data and the latest bust up between the International Monetary Fund and George Osborne over austerity suggests that the government is going to have to get more aggressive in its monetary policy.

In turn this is going to force the pound much lower. It’s also going to be bad news for savers, who will see their savings eroded by below-inflation interest rates and taxes.

So what currency should you buy instead? We think it’s a good idea to get exposure to a mix of assets. We’ve been suggesting cheap stocks in Japan and Europe for a while. But in terms of currencies, the US dollar is likely to be one of the strongest this year.

In contrast to the UK, the US is starting to recover more strongly. While UK GDP is expected to grow by 0.5% this year, the US economy should grow by around 2.5%. Meanwhile, thanks to the shale gas boom, the US is close to running a trade surplus.

And on monetary policy, the shifting rhetoric of the Federal Reserve suggests that QE might be on the way out sooner rather than later. We’re not sure Ben Bernanke will allow that to happen, but he might allow the market to at least believe it, as much to test the water as anything else.

If you want to profit directly from a stronger US dollar, you could use spread betting to short the pound against the dollar. Clearly this is highly risky. But if you’re interested, you can sign up to our free MoneyWeek Trader email to learn more about spread betting.

A less risky, but still highly speculative option is to buy the ETFS Short GBP Long USD (LSE: USD2) exchange-traded fund. This follows the dollar/sterling exchange rate. Again, it’s not a long-term investment.

Of course, another beneficiary of money printing tends to be domestic stocks. We’ve seen the impact of Japan’s QE on the Nikkei 225 for example. And one reason we like Europe is because we reckon the European Central Bank will have to print money in the long run, which will buoy up cheap stocks there.

UK stocks are not as attractive. But money printing could be good news for some. If you’re interested in learning more about picking attractive small stocks, you’ll struggle to find a better teacher than Jim Slater. Jim is a well-known British investment guru, the author of bestsellers such as The Zulu Principle. He and his son Mark will be holding a three-hour masterclass on the art of selecting growth shares for profit, in the City of London, on the afternoon of Wednesday 8 May. To find out more and reserve your place, click here.

• This article is taken from the free investment email Money Morning. Sign up to Money Morning here .

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  • Robert

    The cheek of this article, and of Moneyweek. No apology for recommending we invest hard-earned cash in gold (I’ve lost thousands), now a swift change of tack to put money in the $.

    I am SO ANGRY at ever having listened to a word MW had to say. Where’s the house price crash by the way (you couldn’t stop talking about that 18 months ago). Disgusted at the lack of apology and soul-searching quite frankly. DISGUSTED!

  • mr

    My golden rule of investing/trading is never to act on tips or the advice of others. Use the wealth of information out there and consider the advice so freely distributed to form your own opinion as to what action, if any, you wish to take.

    I subscribe to MW solely to get alternative views and analyses I can’t do myself and then to use them to formulate my own views. Often my conclusions differ from MW’s. Sometimes theirs is right, sometimes mine.

    Any other approach can lead to disaster in my experience.

  • fandango

    Robert – You’ve lost thousands if, like many, you had automated stop-losses or sold in a panic, running like the herd over the cliff. Others waited to see what had actually happened after the dust had settled.Seemingly, a lot of paper sold and a discrepancy with demand for physical bullion by some accounts. Gold price creeping up slightly, the jury is still out. I am sorry for your loss, but it would have been a paper loss had you not panicked.

    MW offer advice, not an actual crystal ball or time tunnel to the future. As private investors, we and we alone are responsible for the decisions we make.

  • JP

    It’s not just MW who get it wrong. One of the Goldbug Gurus I follow lost 1/6th of his portfolio value last week. Think Simon Popple and Domnic Frisby will be nursing similar losses. That’ll be worse if QEX ends sooner than expected this year and we see a Dollar rally. I agree with MW that Cable will weaken. Looks like a decent short trade.

  • Tim

    I find Moneyweek interesting and informative, but you have to ask yourself if they were that good at investing/trading they’d be making a lot more money than they would as journalists!

  • HL

    Tim is right. Every advisor, guru and journo claims to know how to make money. Well, not much money if they still need salaries !

    The lesson is clear: don’t listen to others.

  • JP

    Would be interesting if MW did an audit of all of their market calls since 2000 and ran an article on that. I would guess that they are wrong as often as they are right. Is a 50/50 ratio good or bad? Presumably good if you let the winners run and cut the losers ASAP but very bad if you doubled down on your losers only to lose even more.

  • Peter

    Should be recommending Gold now that its dropped from its lofty heights.

    Its what’s going to benefit most when the Global Central Banks/Planners start printing in earnest.

  • Gus

    Kinda related to this Topic and Particularly. “CPI” and “Food Prices” etc., I found this US related article inmy mailbox today. Is there anyone in UK (Perhaps even in “Moneyweek”) that can provide us with a UK Equivalent??. (click link below..)
    http://www.wallstreetdaily.com/author/louis-basenese/
    http://www.wallstreetdaily.com/2013/04/22/food-inflation-myth/
    Thanks!, Gus G.

  • Ian

    Robert, my approach is exactly like mr and a few others. You have to do two things; (1) weight up all the information via your OWN research – I go for a mixture of mainstream versus Zerohedge/Keiser/Moneyweek and few others, (2) take a longer term view if investing. Moneyweek is just one view. And just because the housing market hasn’t crashed yet, doesn’t mean it won’t in the near future. Just because gold’s gone down in a week, doesn’t mean it’s diving to oblivion. As for gold, I bought mine in stages and on the premise that I was going long. That’s how you hedge against immediately losses and the uncertainty of the market going either way. Of course nothing in life is 100% certain and of course, you get get run over by a bus tomorrow. Blame yourself for mistakes, not Moneyweek. I don’t know one investor who hasn’t made a mistake and felt foolish on occasion. Take it on the chin and learn.

  • Impromptu

    @JP

    I know it’s not quite analogous, but a trader will tell you a ratio of maybe 55:45 is enough to make a handsome living. And a penny share hound accepts the risk that they’ll be wiped out on 8 out of 10 investments, but the remaining 2 will make them a bundle.

    I’ve been convinced of weakening cable for some time now, and my approach has been securities denominated in, or that distribute in dollars and letting my dollar balance build up.

    You don’t have to spreadbet or use long-short ETFs to play FX trends. As the author points out though, such things are short-term trading instruments (particularly the ETF which will munch away at you over time due to daily rebasing) and more suited to hares than tortoises. I’m a tortoise.

    Something like 20% of my income stream is in dollars, and it would be more if I didn’t need some of it to supplement my real-world income.

  • sm

    Fandango,

    Excellent comment. Just to reinforce; how often are we warned that investments can go down, your money is at risk etc?

  • Rob

    Moneyweek have been consistently wrong on house prices.

    Moneyweek have been consistently wrong on gold.

    Moneyweek have been consistently wrong on the economy.

    Now the dollar is the next big thing? Yeah right.

  • harry

    i think my post on ‘what killed off the gold rush’ on sat. was rejected/deleted
    with all the recent wailing and gnashing of teeth, all i was saying was how hilarious i found moneyweek especially the natty little cartoons on the front cover.
    i just made the suggestion to distill all the useful financial info in to a single page and put that page on the front cover, with the rest of the magazine as cartoons (you could call it Foneyweek)
    c’mon moneyweek where ‘s your sense of humour

    ps (apart from gold) if the nikkei225 ishares tracker gains another 2.8% it should break even with a mw japan recommendation from 2006-wonderful thankfully its only in my ghost portfolio!

  • Goldenfreude

    Losses are hard to take Robert but as others have said – don’t blame MW. I made a 5 figure profit (just), from gold thanks to Dominic. When he highlighted the $1520 resistance I started selling from $1560 as the price fell. Thankfully I was out by $1510. I don’t think that now is the time to buy back in as a long term investment. The risk of further downside is greater than the risk of missing out on a big rally IMO. I don’t know when you bought Robert but I would wager that we will see $1900 again in the not too distant future.

  • Ian

    @Robert,

    Who cares who you think is “consistently wrong” thrice. Stop moaning! If you can’t read the markets yourself and make your own judgement, then steer clear. Go and take your blinkers and bet on the horses instead, or go to some “Independent Financial Advisor” and take their advice. No-one forces you to part with your money. If someone had stolen from you, then I’d have some sympathy. But if you want to take ALL your advice from one basket without spreading your investments, that’s your look out.

  • dave G

    You have to admit though that MW shift from recommendation to recommendation in a very blithe manner. This article has a deafening silence on the subject of gold (it was only a couple of weeks ago that we were being urged to buy gold as a hedge against a stronger $ – as someone said at the time why not just buy dollars?)

    This is more than a matter of one tip going wrong, MW have practically made a religion out of gold, until it decides to crash. Their credibility is pretty thin IMHO.

  • Aff

    The advice to buy gold was sound advice. The first commenter has made a big mistake isf he sold after this crash. Now that gold is at a discount its an even better value investment.

    I’ll give the US dollars a miss thank you, have you seen how many of those are being printed every single month?!!! Reserve status is being lost as other powers around the world find ways to trade oil around it. The chickens will soon come home to roost for the pound and the dollar.

  • Chris

    The credibility of MW is a damn sight better than the zero credibility of the MPC, the BoE and its Governors.
    The UK economy is in a mess because absolutely nothing of substance has been done to change anything since the crisis. The talk about rebalancing the economy was just that TALK. There is no recovery and never has been. The powers that be are still wedded to the idea of Globalisation and sending all the good jobs abroad and running the UK as some sort of ponzi scheme based on house price inflation.
    The level of government and BoE interference in the market to prevent house prices from crashing has been extraordinary and it is costing the UK dearly.

  • Ian

    @Dave G. You may be right and it’s good that you put that view out there, but I never follow the advice of one person or entity and then blame them for my losses. I try to look at the bigger picture and take my choice. I’m cautious but I make more gains than losses. MW is just one channel to read of many. I think some people covert others for going in early on investments with relatively small amounts and project that by buying high in the hope that massive gains can be replicated. They rarely can. I missed the boat on bitcoin but just accept it. Perhaps if I go in now I might be able to double my money, but others who went in at $1 have since moved to $120. That’s life. (1)

  • Ian

    (continued)….But gold and bitcoin for some aren’t about fiat profits, they’re about alternatives to the “Establishment Scam” that hedges against financial collapse, social decay and disaster. That’s a massive leap of faith to take, but has an alternative bearing on how investments are viewed in the longer term.

    I think @Goldenfreude hits the nail-on-the-head for me. (2)

  • Ian

    Market Watch talk about the “herd mentality” on Gold amongst other things: http://t.co/AvD7IzMM5U

    “In the end, investors should look at their quarterly statements and see the reasons behind their disappointment. If the cause can be isolated as too much exposure to any stock or asset class, that’s a sign that it’s time to look for better balance from the funds in a portfolio”

  • dave G

    MW has – in their efforts to attract new subscribers – used any number of video presentations to suggest that (a) doom is coming and (b) we can show you how to navigate the storm. The trouble is a key plank of that (gold) has gone belly up and it is suddenly no longer mentioned, like a disgraced relative. The message is always ‘you can trust us’, and it’s all very well for folks here to say that they make their own decisions, but you can’t escape the fact that MW have sucked in inexperienced investors on the basis that they can guide them through.

    MW are not just claiming to dish out tips, but an overarching strategy, and quite frankly in those circumstances it is a bit rich to change the tune overnight. As someone said above, why aren’t they telling us to buy gold in the slump at bargain prices???

  • Dan

    As MW often tells us, the performance of fund managers is largely random. Similarly the predictions of financial journalists are largely random. Really the only people who reliably and consistently profit from trading are the big players (banks/hedge funds), who are operating in a market rigged for their benefit. I read MW for fun but nothing else. Don’t lose your shirt on their predictions.

  • harry

    @ dave g #17 & #23

    good comments -absolutely spot on.

  • JT

    @ dave G and harry,

    To be fair to MW, there have been a series of articles on gold since last week’s crash – some freely accessible, some subscriber only. From what I’ve read, they are sticking to their guns on the basis their advice is intended for a medium term investment horizon – not just a few days / weeks.

  • Steve

    I keep a note of MoneyWeek’s tips in my Sharescope Gold. They get some right, usually not calling the bottom of a dip but close enough. And they get some wrong, sometimes very wrong given that they do not give ‘sell’ recommendations so investors are on their own once they have bought. Overall, I find it fairly heartening that they are fallible like the rest of us. Investing is hard. I prefer to do my own research and make my own mistakes. MW provides a point of view, but no more.

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