Western governments are about to set out on another bout of money-printing. So what can you do to protect your wealth? Bengt Saelensminde looks at one sector that could provide you with a safe harbour.
Mervyn King is holding a gun to your head. And he is offering you a very simple ultimatum - 'either you go out now and buy risky assets. Or I start to clear out your bank account'.
That's the choice the average investor faces if the Bank of England launches another bout of quantitative easing (QE).
The guys in charge figure that if you go out and 'risk' your cash, it'll somehow seep into the economy. In fact George Osborne is counting on it. The Chancellor needs this cash to filter into the private sector and somehow create jobs to replace those he's slashing in the public sector.
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And if you don't buy in, they want to frighten you into thinking that inflation will wipe you out.
So what do you do? Well, most investors are probably happy to see another bout of QE. They'll rush out and buy stocks. But they are falling into a trap.
Not all sectors are going to rise on the back of QE. How can they when we're facing such economic uncertainty. And many investors are poised to make serious investment mistakes.
But among the skulduggery lies an opportunity. I think there is one sector that could still benefit - even if the QE plan goes wrong.
Why the politicos need a forest fire
The fact of the matter is that before the economy gets better, it's got to get worse. This is the idea of 'creative destruction' described by economist Joseph Schumpeter. A recession should be like a good forest fire, Schumpeter argued. You've got to burn off the deadwood before you can allow the new growth through.
And there is plenty of deadwood in the British economy. Years of cheap credit and crazy overspend by successive governments has seen to that.
The fact of the matter is that you can't just keep feeding cash into the economy and hope that things will turn out alright. If the economy is to have any chance of sustaining genuine growth over the next decade, then we have to deal with the deadwood.
Unfortunately, the politicos look like they want to take the easy route. They are tempted to bypass the pain with another round of QE. And there is something seriously wrong with this plan.
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QE was meant for another era
There is a good reason why QE didn't work the first time - it's an idea born of a different time.
Bernanke had his Damascene moment about QE whilst at university. The governor of the Federal Reservestudied the US depression - an era when the dollar was pegged to gold. Because of this peg, the guys in charge couldn't just print dollars to counter deflation.
But of course, today's economy is quite different. Now Mr Bernanke can create all the dollars he wants. And he hopes it'll magic his way out of any sort of economic trouble - be it deflation or not. And where the US leads, the UK follows. That's why the markets are expecting QE here too, possibly before the year end.
So what should we do? How do we protect our wealth in the midst of all this madness?
The one sector that could shelter your wealth
When I'm in the London office, I tend to bend the ear of Theo Casey (editor of The Fleet Street Letter). Yesterday, I asked him where he's placing his chips for the anticipated round of QE the markets seem hell-bent on receiving.
Theo reckons the mining sector is the one to watch. And as a big fan of commodities, I agree. But Theo thinks there could be something of a triple-whammy here. Here's his argument.
What if QE works as the Fed intends? Well, growth should kick off again. Commodities should be okay.
What if QE sets off some serious inflation? Well, commodities should provide an inflation hedge. Commodities should do okay.
What if QE seeps into the emerging markets (As I argued recently)? Well, that should create growth in the developing economies and feed their insatiable demand for commodities. Commodities should be okay.
I guess his point is that whatever the effect of QE, it's unlikely to hurt commodities.
And if commodities do well, then a sector set to benefit is the mining sector. It's the one sector that could be poised to make gains however the QE story pans out.
If the US wants to devalue the dollar to help its economy, then commodities should rise. And if the economy genuinely gets a lift from newly minted dollars then commodities should rise too.
This article was first published on 24 October in the free investment email The Right side.Sign up to TheRightSide here.
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Bengt graduated from Reading University in 1994 and followed up with a master's degree in business economics.
He started stock market investing at the age of 13, and this eventually led to a job in the City of London in 1995. He started on a bond desk at Cantor Fitzgerald and ended up running a desk at stockbroker's Cazenove.
Bengt left the City in 2000 to start up his own import and beauty products business which he still runs today.
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