Don't believe the hype about Mark Carney 
Dear Buzzhairs Buzzhairs, The sun was shining on Mark Carney this week as he took up his position as Britain's top bank manager. As predicted on Friday, the markets are having a right old jolly. It's as if the nation just signed a hot new football manager: Carney has star power, exciting new strategies, and the crowd's getting behind its man. Over the last few years, central banking really has come into its own. These guys are undoubtedly the biggest hitters in global finance, and now they're household names to boot. As the Carneys took up residence in a plush £3m pad, the press even dedicated column inches to Mrs Carney's choice of teabag! The thing is, though, that Carney must be secretly worried. Because there's a problem at the heart of the British economy that he just can't solve…
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2,120 people are profiting, why aren't you? Spare the time to set this up now, and you could start banking up to 42 extra income cheques every year – for the rest of your life. It doesn't matter how old you are – or what your current income is. You can join 2,120 other British investors who are already banking extra income all year round. Pocket up to 42 extra income cheques here. The Dividend Letter is a regulated product issued by Fleet Street Publications Ltd. Your capital is at risk when you invest in shares – you can lose you 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. Forecasts are not a reliable indicator of future results. There is no guarantee that dividends will be paid. Customer services: 020 7633 3609. Happy headlines The headlines have been going on about how lucky the new Bank governor is. How fortunate he is that so many economic indicators are pointing up at the same time. Well, I'm not sure that Carney is happy about any of that. Call me a cynic, but I suspect Carney doesn't even want a healthy economy. He's got more of a political agenda… Carney wants to control the market price of certain assets, like UK government debt and sterling. But more than anything he wants to control the level of UK private debt. And the government is right behind him. The last thing the government wants is for the economy to 'normalise'. That would mean higher interest rates… and if the private debt pile in the UK is a bomb, then higher interest rates are the fuse. So a 'normal' economy… one where the Bank of England can't get away with rigging the debt market is Carney's big worry. Higher rates will sink a lot of Britons, and they'll pull the economy down with them. The Fleet Street Letter team have been obsessed with this for a long time… and now it's coming to pass. They've come up with a plan to help sidestep it - click here to read the plan. So how's Carney going to keep rates low? Well, last week, he introduced a new, political policy… Forward guidance Quantative easing (or QE, printing money to buy government debt) has boosted this struggling government. But it can only go so far. Ultimately, it stretches the credibility of the financial system. I mean, if they can just print money to buy government debt, it makes a mockery of the whole system. Why on earth would anyone else want to invest in bonds paying out next to nothing, yet face the massive risk of anyone calling into question the credibility of these things? Because there are limits to the markets' credulity, central banks have to tread carefully with QE. But as well as QE, the planners use low interest rates to stimulate the economy… effectively to spur borrowing… which helps the economy over the short run. But, as I say, that's just the short run. And the short run is now over. That's why Carney's coming out with his new policy of 'forward guidance'. All it is is a promise that rates will stay low for a long time. It's supposed to help induce long-term debt. And last week, the European Cetnral Bank's head, Mario Draghi, came out with similar guidance. Of course, I've been saying that this is what they'd do for years now. Frankly, there's no way the central bank is going to raise rates. They're too afraid of the consequences of changing the price of all that debt. The markets jumped all over the news – looking for an excuse to go up. But there's no doubt that the politicisation of the central banks brings big dangers. |
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Inflation is sneaking up on us
It's as if we've forgotten the main purpose of these supposedly independent central banks. Let me remind you: the Bank of England's job is to regulate the banks; and most importantly, to make darned sure inflation doesn't go above 2%.
But of course, nothing could be further from Carney's mind. Notice how the pound plunged when Carney announced his new forward guidance strategy.
Now, you don't need me to tell you what that means… it means more inflation down the line. And as for the banks, lower rates for longer means they can make bigger profits from an inflated loan book. But the thing is, more lending adds risk to banks' balance sheets. This is the last thing the Bank of England should be encouraging!
A weak pound, high inflation, and pumping up risk in the financial system… hardly great news!
Where do we go now?
This year, I've already reduced my bond allocation and upped my equity weighting. In fact, recently I talked about how to find value in the FTSE.
I'm not wild about equities… but then again, I don't have to be. It's a case of digging out the cleanest shirt from a dirty laundry pile. At least equities offer some protection against long term niggling inflation.
As for protection against the rising risk in the banking system, you could do worse than to try out the long/short banking pair I described last week.
Ultimately, we're facing a global game of politicised central banking and escalating risk to the financial system. And it won't work out well for a lot of people. Forewarned is forearmed!
Good investing,
Bengt Saelensminde
The Right Side
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The Fleet Street Letter is a regulated product issued by Fleet Street Publications Ltd. Your capital is at risk when you invest in shares, never risk more than you can afford to lose. Past performance and forecasts are not a reliable indicator of future results. Please seek independent financial advice if necessary. Fleet Street Publications Ltd. 0207 633 3600.
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. Appropriate independent financial advice should be obtained before making any such decision.
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