Britain’s money-printing presses will roll again soon: here’s how to profit

With the economy still in a mess, there’s likely to be more money-printing from the Bank of England. Matthew Partridge explains how you can profit.

The British economy is in a mess. But up until recently, one of the few bright spots has been that new jobs are still being created.

Of course, this has only been possible because wages are rising more slowly than inflation, so that most of us still feel poorer. But it was better than nothing.

Unfortunately, that silver lining may now be fading. According to last week's jobs data, unemployment rose by 70,000 in March. Meanwhile, in the same month, retail sales fell sharply.

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If people are more worried about the outlook for their jobs, it's no surprise they're cutting back on spending. However, falling spending also raises the chances that we'll have fallen back into recession during this quarter.

And even if we don't, it looks like growth will be very weak in the year ahead.

What does it mean? Get ready for more Bank of England money-printing.

The jobs and sales figures are worse than they look

You can't pin too much on one month's economic data. But we all know that the British economy is fragile, so it's certainly worth digging for clues as to whether things are getting better or worse.

The bad news is that if you look at March's rather bleak jobs and retail sales data closely, things look even worse.

On the retail side, the biggest fall has been in sales of big-ticket items (these are bigger purchases such as fridges or TVs the sorts of items you can potentially put off buying if you don't feel all that confident in your finances). Sales of household goods fell by 6.2%.

Overall, non-food stores which again, tend to be selling more discretionary goods experienced declines of 3.4%.And while total retail sales are still slightly up by 0.4% on the last three months, they are down compared with the same time last year.

On the jobs report side, as well as last month's rise in the number of people out of work, some of the past data has been revised downwards as well. For example, the original data suggested that employment grew last autumn. Now it turns out that it fell. There was also no employment growth during the last three months of 2012.

Overall the picture is grim. As Vicky Redwood of Capital Economics puts it, "the previous resilience of the jobs market still seems to be fading fast".

The Bank of England isn't worried about inflation

We know what the Bank of England's response to weak growth is: more money printing.

At the last interest-rate setting meeting, the bank's Monetary Policy Committee (MPC) voted to stick with the current plan, rather than printing more.

However, minutes from the meeting (which took place before the latest data came out) make it clear that the MPC is getting more and more worried about the economy.

It's concerned about the impact of the eurozone crisis. And it also reckons that weak wage growth suggests "a significant degree of slack in the economy". By this, the MPC basically means that there is plenty of room to artificially boost growth without inflation taking off. It even suggests that inaction could hit growth beyond the short term.

It's clear from all this that the MPC plans to take full advantage of the broader mandate' that George Osborne announced in the Budget. In effect, this means the bank is explicitly allowed to tolerate above-target inflation in its quest to boost growth.

All this suggests that when the Bank of England's governor-to-be, Mark Carney, takes over in July, the printing presses will be ready to roll. Carney has been very careful of suggesting that this will be the case.

But it's worth remembering the role of expectations management' in central banking. It's far better to have the market frightened that you'll disappoint, than for it to price in too much easing.

Just look at what's happened in Japan. The week before the country's new central banker, Helicopter' Haruhiko, announced his massive programme of quantitative easing (QE), prime minister Shinzo Abe talked down expectations, warning that getting to 2% inflation might be too ambitious a target. With the market expecting a disappointment, Haruhiko's plan worked even better than the Japanese could have hoped.

While we're not sure Carney will do anything quite as drastic as Haruhiko, we'd take any suggestion that he'll go easy on the QE with a pinch of salt.

Stay away from sterling buy US dollars instead

All of this underlines why you should be diversifying out of sterling. The poor economic data and the latest bust up between the International Monetary Fund and George Osborne over austerity suggests that the government is going to have to get more aggressive in its monetary policy.

In turn this is going to force the pound much lower. It's also going to be bad news for savers, who will see their savings eroded by below-inflation interest rates and taxes.

So what currency should you buy instead? We think it's a good idea to get exposure to a mix of assets. We've been suggesting cheap stocks in Japan and Europe for a while. But in terms of currencies, the US dollar is likely to be one of the strongest this year.

In contrast to the UK, the US is starting to recover more strongly. While UK GDP is expected to grow by 0.5% this year, the US economy should grow by around 2.5%. Meanwhile, thanks to the shale gas boom, the US is close to running a trade surplus.

And on monetary policy, the shifting rhetoric of the Federal Reserve suggests that QE might be on the way out sooner rather than later. We're not sure Ben Bernanke will allow that to happen, but he might allow the market to at least believe it, as much to test the water as anything else.

If you want to profit directly from a stronger US dollar, you could use spread betting to short the pound against the dollar. Clearly this is highly risky. But if you're interested, you can sign up to our free MoneyWeek Trader email to learn more about spread betting.

A less risky, but still highly speculative option is to buy the ETFS Short GBP Long USD (LSE: USD2) exchange-traded fund. This follows the dollar/sterling exchange rate. Again, it's not a long-term investment.

Of course, another beneficiary of money printing tends to be domestic stocks. We've seen the impact of Japan's QE on the Nikkei 225 for example. And one reason we like Europe is because we reckon the European Central Bank will have to print money in the long run, which will buoy up cheap stocks there.

UK stocks are not as attractive. But money printing could be good news for some. If you're interested in learning more about picking attractive small stocks, you'll struggle to find a better teacher than Jim Slater. Jim is a well-known British investment guru, the author of bestsellers such as The Zulu Principle. He and his son Mark will be holding a three-hour masterclass on the art of selecting growth shares for profit, in the City of London, on the afternoon of Wednesday 8 May. To find out more and reserve your place, click here.

This article is taken from the free investment email Money Morning. Sign up to Money Morning here .

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Dr Matthew Partridge

Matthew graduated from the University of Durham in 2004; he then gained an MSc, followed by a PhD at the London School of Economics.

He has previously written for a wide range of publications, including the Guardian and the Economist, and also helped to run a newsletter on terrorism. He has spent time at Lehman Brothers, Citigroup and the consultancy Lombard Street Research.

Matthew is the author of Superinvestors: Lessons from the greatest investors in history, published by Harriman House, which has been translated into several languages. His second book, Investing Explained: The Accessible Guide to Building an Investment Portfolio, is published by Kogan Page.

As senior writer, he writes the shares and politics & economics pages, as well as weekly Blowing It and Great Frauds in History columns He also writes a fortnightly reviews page and trading tips, as well as regular cover stories and multi-page investment focus features.

Follow Matthew on Twitter: @DrMatthewPartri