My job involves understanding all the major macro forces (and there interrelationships) that are in play at any one time, and trying to work out how they impact the economy and markets. Sometimes the resulting view of these trends is very clear and it’s possible to extrapolate into the future and at other times it’s not. Right now however, it looks as if we are at something of a crossroads and the decisions investors make now could have a big impact on their performance over the next six to twelve months.
The US debt ceiling will get raised, and perversely I expect it to cause the dollar to rally. This will trigger a selloff in gold and commodities and quite possibly stocks, but the debt ceiling is just a sideshow and raising it changes nothing.
The big question for investors is will central bankers stand idly by and watch the economy worsen and markets fall or will they rapidly implement a fresh round of stimulus?
The Main Event
My guess is that policy makers will remain in ‘wait and see’ mode until the deflationary wave really begins to bite, at which point I expect to see more QE.
During this deflationary episode I expect to see a selloff in all risk assets – stocks, commodities and quite possibly the precious metals.
As the November 2012 election approaches I expect President Obama to do anything in his power to give the US economy (and markets) a shot in the arm. He may even mail cheques to people in the post as Bush did in February 2008. I also wouldn’t rule out some form of coordinated global QE.
As soon as the printing presses are fired up I expect gold to make light work of $2,000 per ounce. Commodities will also be lifted by the new wave of fresh money flowing through the financial markets. However it’s stocks, in particular the gold and silver stocks, where I see the real gains being made.
How To Profit
Those with dry powder, in the form of cash that are brave enough to deploy it when asset prices have tumbled will be richly rewarded. The alternative scenario is that fresh stimulus comes almost immediately without the buying opportunity a correction would bring. Investors need to decide which scenario is most likely however they should hedge themselves in case they turn out to be wrong.