The world’s powerful central banks are playing a very dangerous game. Trying to manage inflation expectations while pursuing downright inflationary policies has caused, and is set to cause, a great deal of volatility in the market this year.
But as I said on Monday, there’s good money to be made for those who can stay a couple of steps ahead of the central planners.
Today I want to show you how central banks will try to pull the wool over your eyes this year. And what you can do to make sure you stay ahead of them.
The puppets of politicians
Let’s get one thing straight from the start. Though most central banks claim to be independent, they are nothing of the sort.
When it comes down to it, the politicians call the shots. And the politicians generally favour what’s known as ‘dovish’ policy. That is low interest rates and all the easing-type stuff we’ve come to expect.
In Japan the politicians have made no bones about it. They’ve told the Bank of Japan to toe the line on money printing, or else the government will change the law and do it themselves.
And just look at how the composition of Europe’s central bank has changed over recent years. The strong currency hawks from northern Europe (especially Germany) have been completely driven out by the soft doves.
And let’s not forget the incoming governor of the Bank of England. George Osborne did everything he could to bag his man from Toronto – a former Goldman’s guy that’s already talking about the need for more accommodative measures.
So there we have it: a world where central bankers are puppets of the politicians and run policies that are now looking ever more like those you would see in a banana republic.
Why we haven’t turned into Zimbabwe
Now, don’t get me wrong. I’m quite prepared to accept that these accommodative measures have been meted out with great aplomb. And though experiments like quantitative easing (QE) don’t solve the West’s underlying debt problem, there’s no doubt that it can delay the pain and shift the focus of the irritation.
But to get away with their actions, the central banks have had to box clever. They have to continually make it look as though they’re not doing what they actually are doing.
Because if they were honest about their intentions, we might have already seen inflation spiral out of all control.
Can they keep up this ruse? They’ll certainly try. Here are four central bank lies to look out for in 2013…
The four big lies
The first lie you’ll hear this year from central bankers is that they intend to reverse their accommodative measures. For example, they will say that they intend to stop minting cash to buy government debt. Moreover (and more blatantly), they will announce their intention to start selling back to the market government bonds they’ve already bought. That’s impossible at this stage of the crisis… but a lie the markets need to be told nonetheless.
The second lie is that these asset purchases will be small and limited in scope. But from day one, the size and scope (ie, the type of debt they’re buying) has ballooned. Actions that seemed unimaginable just a few years ago are now the norm. Market players have been hypnotised into thinking this is all very normal.
The third lie is that there’s a considered time scale to all of this. In fact, it was a release from the Fed that suggested the reversal is coming sooner than many think that sent the precious metals into a spin just after Christmas. Of course, there is no exit strategy and no timeline here. These guys are making up policy on the hoof. And to my mind it’s only going one way – and that is more of the same and for as long as they can get away with it.
The fourth lie they’ll tell is that they’re fighting deflation. But if that were really true, how can they also say that QE will be reversed? That would surely be to welcome deflation down the line.
No, these guys are pursuing inflationary policies, and they use the four lies to send the markets the wrong way.
They have to! I mean, if the inflation indicators – gold, silver and oil – took off, then the game would be up. Their precious bonds would get crushed under their own weight of debt.
So what happens is that whenever the inflation indicators turn up, the banks come up with some rhetoric to pull them down. And if the paper markets take a turn for the worse, they throw in some easing to pull them up.
This is what’s causing the big market swings. So…
What should you do?
For the main part, my stance has been to align my portfolio to profit from rising inflation indicators. Over the years it’s been a pretty successful strategy.
But increasingly, I’m learning to trade the swings too. As regular readers will know, I’ve used a simple trading strategy to trade in and out of the FTSE 100. Basically, buying the market dips on the assumption that the planners will come up with a wheeze to pull them back. It’s been a great play.
But I’m thinking I can do more. Specifically, trading in and out of the inflation indicators too. In my view, gold, silver and oil trade up only to get smashed down. I reckon it’s time to start making the most of what looks like inevitable volatility to provide some decent trading opportunities.
Either on Friday or next week, I’ll give you some ideas on how we might play it. These opportunities look too good to resist!
• This article is taken from the free investment email The Right side. Sign up to The Right Side here.
Your capital is at risk when you invest in shares – you can lose some or all of your money, so never risk more than you can afford to lose. Always seek personal advice if you are unsure about the suitability of any investment. Past performance and forecasts are not reliable indicators of future results. Commissions, fees and other charges can reduce returns from investments. Profits from share dealing are a form of income and subject to taxation. Tax treatment depends on individual circumstances and may be subject to change in the future. Please note that there will be no follow up to recommendations in The Right Side.
The Right Side is an unregulated product published by Fleet Street Publications Ltd.
Fleet Street Publications Ltd is authorised and regulated by the Financial Services Authority. FSA No 115234. http://www.fsa.gov.uk/register/home.do