A Tsunami of Stimulus is on its Way - Investors Need to Prepare

LONDON, October 6, 2011 -

As economic data deteriorates and markets continue their decline, policymakers around the world are faced with a decision: Do nothing and face the likelihood of recession or even depression, or intervene in the economy with more monetary and fiscal stimulus.

Mounting Pressure To Act

As the debt crisis in the Eurozone escalates, pressure mounts on politicians and central bankers to act - something which has been confirmed by a slew of dire warnings from prominent financial figures.

Speaking before the G7 meeting in Marseille on 10 September, IMF chief Christine Lagarde, urged countries to “act now - and act boldly - to steer their economies through this dangerous new phase of the recovery.”

At the annual meeting of the IMF and World Bank on 24 September, US Treasury Secretary Tim Geithner warned that failure to combat the Greek-led turmoil could lead to “cascading default, bank runs and catastrophic risk.”

Speaking at the same event, George Osborne told reporters “there is a recognition here that the global debt crisis has entered a dangerous phase” and that “the countries of the Eurozone understand that they need to take decisive action… We’ve got weeks not months” to sort out the Eurozone.

Evidence They Will Choose Stimulus

On 22 September the G20 said that they are committed “to taking all necessary actions to preserve the stability of banking systems and financial markets” and that they are “committed to a strong and coordinated international response to address the renewed challenges facing the global economy, notably heightened downside risks from sovereign stresses, financial system fragility, market turbulence, weak economic growth and unacceptably high unemployment.”

We’ve also heard from the IMF that they want “coordinated action” to help prevent a global financial crisis and there have been numerous other voices in favour of a strong and coordinated response.

On 23 September George Osborne said “I think what the Eurozone needs to do is show that they’ve got enough firepower to take on the world markets and protect their economies and take their countries out of the danger zone.”

As a student of the Great Depression, US Federal Reserve Chairman Ben Bernanke, is haunted by deflation and has stated in the past that “By increasing the number of US dollars in circulation, the US government can reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services. We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation.”

What To Expect & When

There are already plans to increase the Eurozone’s bail-out fund from $332 billion (£213 billion) to $2 trillion (£1.28 trillion) and we can expect additional stimulus spending from the UK, Japan and China.

Many economists are expecting around $2 trillion (£1.28 trillion) in additional QE from the Fed, especially as President Obama is running for re-election in 2012 and will want a growing economy well in advance of polling day.

In total there may well be around $6 trillion (£3.87 trillion) in coordinated stimulus - around 10% of global GDP. It’s impossible to know exactly when this wave of liquidity will hit the global economy and financial markets but an announcement is anticipated at the next G20 meeting in Cannes, France on 3-4 November.

What Will It Mean For Investors

There is plenty of scope for further market falls between now and any announcement. However, once the stimulus does arrive it’s likely that all risk assets - stocks, commodities and precious metals - will rally together. We will quickly transition from a state of ‘risk off’ to one of ‘risk on’ as investors move out of low yielding safe havens. Any positive effects from the wave of freshly printed money would be followed by high inflation as the new money debases old.

Mark Hanney, Valbury Capital Chief Executive Officer, says “Investors would do well to begin preparing for the coming policy response.  Precious metals may be the standout performers going forward since they are the ultimate inflation hedge and if you print money you will sooner or later experience inflation”.

This article does not constitute investment advice or a recommendation to enter into an investment transaction.

Notes to Editors

Valbury Capital

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