Central banks have blown yet another bubble – here's how to protect yourself

What has QE achieved?

QE certainly seems to have helped boost asset prices (bearing in mind that it's not just the Bank of England who's been printing money, but the Federal Reserve too). Stock markets around the world have soared since March 2009. The FTSE 100 is up 65%, while the FTSE 250 is up by more than 90%.

Energy prices have soared, with Brent Crude Oil more than doubling, while metal prices – both base and precious – have soared too. Copper, for example, rose almost 150% from $150 to $370 a tonne. Other commodities such as cotton, cocoa and sugar have also all had bonanza years.

British house prices have surged too, albeit on lower sales volumes. Recent Nationwide data shows an annual rise of 10.5% from April 2009.

In short, we have had rampant asset price inflation. In fact more than that – these sorts of across-the-board price rises are the stuff of speculative bubbles.

So what about the 'real' economy?

As ever, this asset price inflation is not being properly reflected in official measures. The chart below from the Office of National Statistics (ONS) shows Consumer Price Index (CPI) inflation and Retail Price Index (RPI) inflation at 'just' 3.4 and 4.4%. (The chart shows RPIX too, which is RPI excluding home loan interest costs, in case you were wondering).

So this speculative bubble (and there are signs it is already starting to unravel; stocks tanked yesterday for the second time in a week) is being ignored, just as the excesses were in 2006-7. This will continue until it's too late – if it isn't already.

But even at 3.4%, CPI is still 70% higher than the Bank's 2% target. Much of this has been driven by rising import prices, as the pound has weakened, another side effect of QE.



Meanwhile, what about the 'real economy'? Let's start with unemployment. These numbers are ugly, ugly, ugly. As of April 2010, unemployment stood at 8%, the highest rate since February 1996. Here are the charts – on the left-hand side is the unemployment rate, on the right, the employment rate.



Pay growth fell throughout 2009, but picked up towards the end of the year. Bonuses were up as banking profits recovered, while public sector pay growth at 3.7% was double that of the private sector. This chart from the ONS shows overall pay growth.



But while all this printed money might have been great for bankers and investors, small and medium-sized businesses haven't seen a penny of it. A recent Bank of England survey of credit conditions showed that, in the first three months of the year, demand for credit from sub-£1m turnover businesses rocketed, yet availability from banks actually fell.

Another survey, by insolvency specialists Begbies Traynor, showed that more than 160,000 UK companies are experiencing significant or critical financial distress. This is 14% higher than in fourth quarter of 2009.

In short, there is a major divergence between asset prices and the real economy. Why? Mike Shedlock of Global Economic Analysis writes: "The thing about stimulus plans is, governments can throw money at problems, but they do not really get to decide exactly where the money goes in the global economy".

Another bubble's been blown

The newly created money from QE and similar moves in the US, has gone straight into assets, creating another speculative bubble. The early recipients of the monetary stimulus – the banks, brokers and other associated players – have benefited the most, as is always the case during inflations and reflations.

Meanwhile, the real economy flounders. And for the man or small company on the street, the UK just gets more and more expensive. And loans are as hard to come by as at any time since the crisis began.

And the higher asset prices go, the more damaging the inevitable collapse will be. The real economy might not be feeling the benefits of the latest bubble, but you can be sure it will feel the pain of the bust.

What's most depressing of all, is that another asset price boom appears to be exactly what the proponents of QE intended. As we noted above, King stated that one of his aims was to "increase the value of assets". How many more busts do we need for these people to learn?

How you can protect yourself

So what can you do to protect yourself? This is not an environment for the long-term, buy-and-hold investor – you have to think with a trader's hat on. So if you take positions in stocks, you have to be disciplined. Have targets and stop losses, and be prepared to get out when you hit them. Also, as always, own some gold. Its price may fall during the busts, but it is the best way to play monetary instability. And keep some cash in reserve, so that you can swoop in and buy when the bust comes and everything is dirt cheap again.

Until tomorrow,

Dominic Frisby