The four big lies you will be told this year

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!

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  • Nick Fury

    “There’s good money to be made for those who can stay a couple of steps ahead of the central planners”

    That’s a very true statement…….but good luck with that; the usual rules of economics went out of the window a long time ago, so I’m not sure how to second guess them…tea leaves or just use the lowest common denomiator of human greed as a rule of thumb!

  • Aff

    Enjoyed this article but are there are a couple of points I’d sugest. I think the central banks AND politicians are actually puppets. Rich dynastic bloodline families really run the show.

    We haven’t turned into Zimbabwe yet which I’d suggest is because the velocity of money has fallen dramatically as banks are still not lending to Joe Public. When the day comes that a ‘recovery’ entices more lending then the fractional reserve banking system will weave its malignant magic and ensure that every pound created from thin air by the quantitative easing will be multiplied hundred fold. We’ll drown in a sea of worthless paper and broken promises.

  • Aff

    cont ..

    I think trading in and out in order to profit from volatility is very risky. I’d only do that with what I could afford to lose. The markets are designed to take out stop losses before changing direction. HFT algos can determine information which normal market participants are denied. To be honest you will win a few times and then lose bad. (Just my opinion). The only play I have for the time being is holding the physical until this madness plays itself out and buying more whenever a nice big dip comes along.

  • Rajah Brookes

    Re. Aligning with inflation indicators. It seems fairly evident now that the market for precious metals is not ‘free’. If large players like JP Morgan are allowed to short sell unlimited paper promises to sell PMs they do not own for instance, they can effectively push down prices any time they like for profit. If I could promise to sell 1000 Picassos that I don’t own tomorrow I’d force the price down (…but you’d hope that someone check I actually have them!). The current inflationary environment is perfect for them because the consensus keeps stating that gold and silver can only rise…hence there are more people they can pump for money.

  • Rajah Brookes

    The only ways to beat them would appear to be buying and holding physical…or mirroring their every move…or not participating. If everyone went short when the manipulators went short their game would be up. The other game changer of course will be when China, which is increasingly gaining strength over physical markets, calls them out, to deliver physical and takes the whole COMEX scam to the cleaners.

  • Marc

    I wonder if they will pedel out the shameful lie that mortgage holders should be wary of rising rates and switch from their low rate tracker to a fixed rate.

    Many sheeple got scared at the wrong time with that one.

  • Aff

    Rajah, The price suppression is a gift to the few who see it for what it really is and buy some, gold and silver at epic low discount.

    I feel sorry for the sheeple who are getting it completely wrong and swapping their unwanted gold for cash.

  • Stephen Lowe

    No need for banks to accelerate lending in order for money printing to feed thru to inflation, I think. The BoE is accumulating a bigger and bigger slice of debt supporting GDP as QE continues and more of the deficit gets funded with BoE buying (PLUS accumualting interest….) That debt is essentially unfunded and as it is increasing in magnitude, the government cash expended on the real economy is steadily acclerating in quantity, surely? So inflation can result from increased money velocity, provided bank lending doesn’t shrink to offset this effect (and it probably won’t, partly as side-effect of the above).