Saturday, Feb 10, 2007
US slowdown is starting to hit Britain's economy
The Independent: Britain's trade gap widest on record
As a proportion of GDP, the trade gap is now running at 4.3 per cent, and is fast approaching the 4.9 per cent peak hit in the mid-1970s. Thirty years ago, the deficit triggered a sterling crisis and Britain was forced to go cap in hand to the International Monetary Fund for a loan. Yet yesterday's news caused barely a ripple in foreign exchange markets.
Posted by sold 2 rent 1 @ 11:19 AM (143 views) Add Comment
8 Comments
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1. japanese uncle said...
Although I have no statistics, we have every reason to believe that influx of property investment/speculation money from overseas is sustaining the strength of sterling, now that property value in London is a significant parameter in the national economic accounting in this economy. This means HPC could trigger a cataclysmic effect over the value of sterling. Just a thought for an argument.
2. harold said...
I've been casting around for reasons for sterling to be so high; apart from the fx markets expecting MUCH higher interest rates in the UK in the near future, I've not been able to explain the £'s strong performance.
3. Whiteknight said...
Regarding the current pricing of risk (of any form) in the market:
I am coming to suspect that unfortunately most of the city "wunderkind" are under 35 these days and cannot remember what a really grizzly bear market looks like.
I also suspect that some of the "behind the scenes" bailouts such as LTCM lead them to believe that the same type of thing is possible now. It isn't. (didnt the IMF suddenly state a policy of moving its gold reserves into dollars recently .. it was phrased differently .. i have been busy this week and didnt get a full chance to absorb the implications and so this may not be accurate ..... normally thats called a bailout when it has concerned any Asian country for example)
... And the low interest rate response which halted previous problems (and has eventually caused the monster of problems) causes them to believe that dropping rates again will be solution. It wont be.
I am also mildy suprised that with so much at stake with the stability of currencies and what backs them that market players arent more awake to what has happened in these situations before in history (and i am not just talking about the past 70 or 80 years) and more responsive to the general rise in the level of agression between 3 or 4 major power blocks.
I could however be wrong. We shall see soon enough in any case.
4. sold 2 rent 1 said...
harold,
Currency markets pay little attention to trade and budget deficits when there is so much other money sloshing about.
This is what makes the yen so low when the trade surplus is huge and what makes the pound so high when budget and tade deficits are large.
Once liquidity is drained from the system and the "carry trade" comes to a halt the normal budget and trade rules will apply again.
This make take a while to hapen but when it does it may happen very fast.
5. harold said...
s3r1, so basically once liquidity is removed from the system, i.e., when BoJ finally raises interest rates, we can expect currencies backed by strong economies to attract investors, which means the £ and (especially) the $ are toast, leading to potentially steep inflation in these countries? We have seen in the past the BoE desperately trying to prop up the £ by buying it - the situation now is possibly much worse in that our gold reserves are depleted. For this reason I have switched some of my saving to the euro (I wish I had switched to gold, but that's another story). So far the switch to euros has not paid off, but as I'm in it for the long haul I'm not too worried. I'm a euro bull in that I see it replacing the $. Although Europe has some dodgy economies (like Italy) it is, on the whole, not run on a massive deficit, and ultimately is backed by the German economy. Its long-term prospects are okay, I guess.
6. sold 2 rent 1 said...
harold,
You are right but there are other factors too that need to be considered.
The money coming into the UK is coming from China, India and Asia (trade surplus), the Middle East and Russia (oil and gas), as well as from the carry trade (Japan).
If oil and gas prices remain high and the Asian economies keep their massive trade surpluses then a lot of money will still roll in despite any IR rises around the world.
The euro is potentially a good place to make money from a falling pound. The low IR by the ECB is keeping the pound strong though.
I think it is all about timing and how fast various crises will unfold.
I think when the yen “carry trade” unwinds it will do so very fast (like in 1998).
Buying into the Japanese stock market could be a good option now.
Sterling’s fall will be over 2-3 years and not after more rises in the near future (6-12 months).
The euro is already very high against the dollar and yen and is hitting exporters hard.
If it rises further then there could be a big political fallout.
The euro will remain high for the next 1-2 years but if Euro-land goes into recession and the club med countries feel the pain of HPC and high euro then I think 2 or 3 euro counties could bail out of the currency by 2012
I have a lot of euro left over from the sale of the house in Dublin.
I am looking to move some of that cash into Gold/Silver and Japanese stocks.
7. harold said...
s2r1, thanks for your comments.
The one thing I'm not so clear on is:
"I think when the yen “carry trade” unwinds it will do so very fast (like in 1998).
Buying into the Japanese stock market could be a good option now."
Why would stopping the carry trade be necessarily good for J. stocks? Or am I wrongly connecting the two sentences?
8. sold 2 rent 1 said...
harold,
Buying any Japanese asset is good if the yen appreciates.
Holding yen itself won't earn much interest and it could be a lengthy wait.
Holding stocks could give you the double bonus of a rising stock market with a rising currency