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.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
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.
- Discover how to profit from oil without ever owning a single barrel
- Why NOW is the best time to put a few carefully selected oil investments into your portfolio
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.
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.
Managing Editor: Theo Casey. The Right Side is issued by MoneyWeek Ltd. MoneyWeek Ltd is authorised and regulated by the Financial Services Authority. FSA No 509798. https://www.fsa.gov.uk/register/home.do
-
Four AI ETFs to buyIs now a good time to buy AI ETFs? We examine four AI ETFs that investors might want to add to their portfolio
-
Chase boosts easy-access interest rate - savers could earn 4.75%Chase is offering a boosted interest rate which is fixed for six months, on top of the standard variable rate
