Well, that’s a turn up for the books. It seems some rather influential people are coming over to our way of thinking. Last week, Saxo Bank’s chief economist, Steen Jakobson agreed that “Tapering is a temporary sideshow… there will be more QE (quantitative easing) coming in 2014, not less.”
And seeing as the whole of the financial world seems to be hanging on this rather tawdry tapering tale, it’s important that we line up the ducks for a profitable outcome.
I mean, though the tapering story stung the gold market earlier in the year, things now seem to be reversing. Gold is on the turn – quite possibly back in bull market territory. But stocks are struggling.
Today, I want to explain why. The taper lie is cover for something much more serious. And it has implications for every aspect of your portfolio.
The real reason for the Fed’s tapering talk
In the wake of the financial crisis, central banks in the West lowered interest rates. Though it looked a bit panicky, the planners said it was a temporary move. And if they say five years (and counting) is temporary, who am I to argue?
But the bigger point is that it was pretty soon clear that low rates weren’t enough. Quantitative easing soon followed. And in order for the planners to maintain an air of respectability, they always maintained that these unconventional measures would be reversed.
But of course, they can’t be. The planners have painted themselves into a corner. As I’ve said many times before, QE is about financing government borrowing – not stimulating the economy.
So, QE will continue. But that doesn’t mean the planners won’t pretend that monetary policy is on its way back to normal. In fact, there is only one option left open to them now. And it could have big implications for your savings…
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Taper talk is cover for rising interest rates
The fact is that Western economies are in desperate need of ‘normalisation’, and by that, I mean, normalised interest rates. Insurance companies and pension funds have been struggling to create any sort of income from their massive bond allocations. And cash savers wouldn’t mind a bit of help too.
So, while the planners can’t undo QE, they can allow rates to increase. Probably just a bit, but increase they will. And rising yields in the bond markets suggest that the markets are onto it.
Of course, rising rates aren’t ideal for the planners. The planners always prefer loose monetary policy – that is, low rates and ‘healthy’ credit creation. But tightening the belt is a necessary evil – they’ve got to show the markets that we’re not heading into Zimbabwean territory!
The only thing is, rising rates aren’t good for stocks. After all, the rising stock market has been a product of a desperate hunt for yield. If investors believe rates will soon approach normalcy, then it could take away an important prop for equities.
That’s why stock markets are struggling – they are discounting the belief that rates will rise. And I think that will continue.
When and how fast will rates rise?
For years, I’ve been saying that interest rates will remain lower, for longer than the investment markets believe. And I’ve been right. Ever since the zero interest rate policy started in 2008, the markets have always factored in rising rates some two years in the future. But as the story played out, the markets constantly shifted expectations so that rising rates were always about two years hence.
Well, it’s now time to change this assumption.
It is now my belief that we’ll see some global moves to increase rates within the next year. Look at it as a quid pro quo for not removing QE. They won’t raise rates significantly, just enough to signal some good will… they need to maintain the illusion that they’re not playing fast and loose with Western currencies. But raise them they will.
That means equities will find it difficult to go much higher in the immediate future. In fact, it may make markets a little nervous as investors begin to read (wrongly!) that rates will move swiftly back to normal (which they won’t!)
But the key point is, QE will not end. Sure, a short-term phoney bit of tapering may appear. That will undoubtedly unsettle stock markets further. But that’ll just give the planners another excuse to re-invigorate QE – and when it comes, it’ll be even more impressive than ever.
For me, that means I’m sticking to my relatively modest exposure to equities. I see no need to top up my 30% allocation during this relatively mild pullback in the markets. The markets could yet fall some more.
I’m also keeping my healthy 20% cash allocation. Always bear in mind that though rising interest rates are good for cash, they’re a downer on most other asset classes. Cash is there in case the market’s really do fall out of bed. I’ll be hoping to up my equity allocation before the next big rounds of QE restart in earnest.
And don’t forget, QE is generally very good for gold. As more investors move over to the view that QE will never end, it’ll continue to drive global demand for old yella.
• This article is taken from the free investment email The Right side. Sign up to The Right Side here.
Information in The Right Side is for general information only and is not intended to be relied upon by individual readers in making (or not making) specific investment decisions. The Right Side is an unregulated product published by Fleet Street Publications Ltd. Fleet Street Publications Ltd is authorised and regulated by the Financial Conduct Authority. FCA No 115234. http://www.fsa.gov.uk/register/home.do
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