Everybody hates the pound sterling.
As of March 9 the futures market showed a greater proportion of bearish bets against the pound than back in September 1992 when currency traders wagered that the British government wouldn’t be able to defend the pound and keep the country in the European Exchange Rate Mechanism. That system, a precursor to the euro, required countries to keep their currency within a trading band against other currencies in the system.
When the United Kingdom government finally threw in the towel and let the pound slide it fell 24% in three months. Traders made millions or more: George Soros’ Quantum Fund made $1 billion.
So far this year the pound has lost 6.9% on fears that either the economy will stall short of full recovery or that the government won’t be able to rein in spending—or both. This most recent fall, though, is part of a longer pattern of decline. The pound is down 38% since 1974 against a basket of currencies from the world’s 10 largest economies, according to Bloomberg.
The United Kingdom economy has been the slowest of the world’s developed economies to recover from the global slowdown. In recent months the numbers have actually taken a turn for the worse with factory production falling in January—for the first time since August—and the trade deficit climbing to the biggest gap in 17 months. Forecasters, including those who work for the Labor government, have been left scratching their heads as an expected surge in exports from a cheaper pound has failed to materialize.
But the biggest problem is that the Labor government of Prime Minister Gordon Brown has been singularly inept in its efforts to assure the financial markets that it has a plan for reducing a deficit projected by the government to hit $270 billion in fiscal 2010. (The U.K. economy is about 6.5-times smaller than the U.S. economy so this deficit is equal to $1.7 trillion in U.S. terms. The huge U.S. budget deficit is projected to hit $1.4 trillion in fiscal 2010. For 2009 the U.K. deficit is estimated at 12.4% of GDP. In Greece the deficit hit 12.7% of GDP.)
The financial markets have already rejected the government’s plans for reducing future deficits as based on overly optimistic projections for 3.5% annual economic growth from 2011 on.
In the fourth quarter the U.K. economy grew by 0.3% but on March 15 Kate Barker, a member of the monetary policy committee at the Bank of England roiled financial markets by saying that country could see a one-quarter return to negative growth.
The financial markets had been counting on a victory by the Conservatives over Labor in national elections that much be held by June 3 to restore some fiscal credibility. (The markets are often hopeful that a change in administration will result in spending cuts.) But the race has tightened in recent weeks leaving the markets to confront the possibility of nobody winning a decisive majority.
The degree of uncertainty about the direction of the pound and the depth of the crisis in the United Kingdom is extreme. Bloomberg reports predictions of a drop in the pound to $1.30 by the end of 2010 or a rally to $1.73 by August. The pound now trades at approximately $1.50.
That’s more than enough uncertainty to keep financial markets on edge. The Greek crisis may be over (well, at least it’s out of the headlines for a few months) but investors and traders already worried about potential over-tightening in China still have a European crisis to watch with their other eye.
If you want to see a bankrupt Country, look in the mirror. When our foreign “friends” finally figure out that the US dollar and our government is worthless, they will bail on Treasuries. That’s game over. The UK is doomed, but the World won’t come to an end. When the doom hits the US, the World as we and Mr. Jubak know it may well be over.
rheldmann (the 3rd comment):
“Not all European countries are in financial trouble, for example Germany, France, Norway?” You probably have not been keeping up with things for a while. (1) The reason that EU still can not come up with any Greek rescue plan is exactly because its major force Germany not in good financial shape! Germany’s generous social programs have put this best country in Europe on edge and Germany’s politicians not dare to bailout Greece. (2) France with its well-known socialism killed the golden goose long time ago. That’s why the country is on long-term irreversable decline! France’s employment seems permanently locked in 20%. With more than 40 payroll deductions and none can fire any employee, who would want to open a business there? Have you heard of the new “French Colony” in London? Talents have left the country! (3) The only reason that Norway is doing relatively well at this moment is because of its OIL, not because it has a better system!
The scariest thing of all is that the entire Europe seems quickly fall behind Asia, particularly China in just several years.
You maybe right on “we are not in the position to threw stones”, but if we continue our current path, we are on our way to European style decline.
YX,
Thank you. I’ll resist the urge to comment further, because I’d have to pull out my soapbox for that. But believe me, I know what you mean.
Ed:
Great point at the beginning!
All the European’s problems are essentially that they spent more than they have. Their generous social welfare are beyond their means. Politicians all like promise and hand out sweat deals, but the bills will soon or later DUE TO YOU, the people! This happens even in the surposedly best of Europe Germany.
phillip e,
NLY intrigues me. The financials are awesome UNTIL you get to the debt/equity. At over 5, that’s pretty ugly. Also, they’ve raised cash several times this year, which is not a good sign.
While I would buy it, I wouldn’t hold it for long, and I also wouldn’t pay over $18 for it.
jearly,
Thank you for your kind words.
I know my politics are not mainstream, and I try to avoid discussing them except when they are pertinent to the discussion. It is difficult to get too far away from politics when discussing investments, since politics can have such a powerful effect on how we should invest. Although I do try to tone down my political beliefs a little here. But I do recognize many people, and maybe even most people, will not agree with me politically, and I’m cool with it.
Jim, thanks for everything.
and excerpted from the terms of use:
“Further, you agree not to:
* Upload, post, publish, e-mail, …..including any Contribution, (collectively, “Content”), that is … abusive, harassing, ….;”
Regarding HYP.
Any recent thoughts/comments on NLY?
Last week Jim posted his guidelines for his blog. In my frequent visits to this site many of the regular posters, like Ed, don’t violate any of those guidelines. I, like many others, appreciate Ed’s input/insight. I believe Ed is trying to be helpful and as a novice I have learned things from him. Interestingly, however, Ed and I have some very different views on some political issues.
In my understanding of what Jim posted for as his guidelines for this blog, the only potential violators of those are the ones complaining about Ed. Additionally, I have seen very little contribution on Jim’s posts by those complaining.
Jim, once again thanks for this site. I really enjoy coming here. Ed, thanks for your contributions as well, even when I don’t agree with your politics:)
mason,
Amen to that brother!
As for HYP, I’m still looking for something to add to mine in that area. Most of the ones I have are up since I bought them, so I hate to buy more and increase my cost basis. It seems like the high yielding equities are all at a premium, and the premium is growing. If I find anything, I’ll let you know.
We know Ed you are just a helpful kinda guy. And we/I appreciate it. Like Jim, sometimes your comments are right on and somtimes not so much. But, again; like Jim, your willing to put your ideas out there. And if you stumble, someone on these comments will debate you. Jim’s comments section acts like a checks and balance system. You just really need to know what comany to write the check to and hope your balance goes up(lol). HYP–my slang for a high yield portfolio. Sorry.
mason,
What the heck is HYP?
And you’re right. I am NOT the last word. I’ve made plenty of investing mistakes over the years. Don’t even talk to me about when the tech bubble burst. It was ugly.
That said, I do try to help when asked.
I couldn’t said it better dmartin11. Ed can be helpful. But all investment advice including Jim’s need be taken with a grain of salt and a pound(sorry about the pun) of research. I loved Jim’s recent article on Goldcorp–did the research, bought the company. Hey Ed, any ideas for HYP investor? I’d love to hear them.
It is a tough place to get free advice, but it is free!! I was just throwing it out there b/c it’s on topic and seems like a slow day on the chat. I have it rented through the year so I hope there is a turn-around in the future. When considering the exchange rate 2.5 years ago was 2 to 1 I am down 50k just on that. Not to mention thier housing bubble also.
tater:
Tough place from which to ask advice but another view. Everything depends on your equity situation. To the extent you may owe sterling on the property, inflation will help buffer the currency downturn, making it more attractive to hold on. If inflation is not a factor, can you bail on the property and open a sterling-denominated brokerage account through which you invest outside the UK?
I’m with Mason, Ed is just chiming in. Noone likes a know it all, but if comments are short and on topic then it’s what the comment section was intended for and it keeps the conversation going. Jim only comments on the occasional question and I don’t think he wants to spend all day indulging every last inquiry. I trust Jim more than Ed, but hey, both give free advice so do what you want with it.
tater,
Since you’re asking, I’m assuming the real estate market in Scotland is in the tank. If you can actually rent the house, and at least break even after expenses, I’d continue to do so. Wait for the real estate market in Scotland to turn around.
Jim, are you perhaps hinting we short the pound? It seems UPSIDE feels this way(Hi, Upside. Lay off of Ed-he’s only tryng to help. You know Jim can’t answer every ?)And Jim if you do feel we short the pound, whats the investment vehicle we use?
I own a house in Scotland I have been wanting to sell for two years. This doesn’t help my bottom line. Even if it does sell sounds like the exchange rate could be so bad that it won’t make sense to change it to dollars. So, should I sell the house with a small profit and hold the money there and wait for a better day to exchange it or just keep renting and hope for a turn around down the road. FYI, realestate agents work different in the UK you have to pay upfront for their advertising. Not like here when they make their money when it sells. Seems like we have better insentives for the agents to make sales.
Upside- you are starting to make me laugh now!!
Jim-
What’s the trade on sterling, short the FXB?
McGon- Get your own blog.
EdMcGon – Not all countries in Europe are in financial trouble – Germany, France & Norway come to mind. I don’t think we are in a position to throw stones.
Yeah Ed,
That’s why every time Europe cheers for our president (even for what he says he wants to do), I get very nervous.
Yes, let’s bring European-style socialism over to the U.S. It’s working so well for them…