Tuesday, Dec 30, 2008
Shhhhh.....
Daily Mail: Sterling's silent devaluation
The scale of the collapse of the pound has barely been recognised. With retailers falling over like ninepins, house prices in freefall and daily warnings of surging unemployment, it has been below the radar. But now it is a matter of when, not if, the pound will reach parity with the euro. Sterling has plummeted 32% against the euro so far this year, and 17% this month alone. It has also fallen 30% against the dollar from a peak of $2.11 to $1.46. In past decades a currency crisis on this scale would have threatened governments.
But the latest fall in the currency ought to be helpful for exports to Europe. Euroland economies are fragmenting, and the entry of Slovakia into the euro on Jan 1st will not inspire confidence in the currency [WHO KNEW SLOVAKIA WAS JOINING THE EURO???]
42 Comments
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1. dohousescrashinthewoods said...
A spot of food for thought here: http://carboni.co.uk/wiki/doku.php?id=david:pound_in_your_pocket_in_2008
2. drewster said...
LP, I didn't know Slovakia was scheduled to join the Euro, but it's a country of five million people joining a Eurozone of 320 million - not that significant. I don't see how it would affect confidence in the Euro.
Back to Sterling - why isn't anybody using the word CRASH? How else would you describe a 32% fall against a major trading partner?
3. crunchy said...
Hello to my french or was it japanese landlord, who will only accept Euros/Yen.
Great Britian and it's wonderful cultural diversity! SOLD
4. crunchy said...
I see another Museum being built to promote such wonders of Globalism.
"The spice of life"
5. crunchy said...
Crunchy Robbed British Citizen ex HPC vet homeless redundant and hungry!
6. guiriduro said...
Shows the market is expecting an expansion in the money supply for £, probably a ZIRP, and loads of inefficient fiscal stimulus on NuLab vanity projects with long term public debt and tax implications. The calculation being that the inflation in goods brought on by its fall will feed into HPI and counter the HPC more quickly. Houses will lose 60% measured in stable commodity, but may lose only 30% in pounds, the pounds themselves will lose the remaining 30%. Its flawed logic of course, which probably means Nulab are daft enough to do it.
Problem is, the generation that are screwed by their own debts are the 25-45 y.o's - the older ones are savers or pensioners, and the younger ones will be FTB's soon - these should be protected by el Gordo's forgotten friend, Prudence - deflation should be allowed to run its course. But Nulab will do whatever its main demographic want, not what's best for the country.
7. dude said...
This is the Daily Mail, for goodness sake. What are they up to putting in comments such as: "Europe is now the dominant export market for UK goods and services," and "Admittedly the single currency has a strong anchor in the Franco-German economies."
Are their sub editors suffering from absent desk syndrome too, and Ken Clarke's been doing a bit of moonlighting?
8. drewster said...
Crunchy,
I know you're capable of reasoned argument, but your above posts don't show it. Care to rephrase?
9. crunchy said...
8. drewster
What I am saying is the fall in sterling is making property prices attractive to would be overseas investors.
If lets say property devalues another 10% and our currency is still weak of even weaker It would be very tempting for an overseas investor to enter the BTL sector. It only takes a phone call at auction to purchase a property.
10. stillthinking said...
By that reasoning crunchy, there would be a land rush in Bangladesh. Lowering the price of something does not increase demand. Demand affects prices, not the other way. Turd hotdogs will not start selling when they are on sale.
The problem for sterling is that it looks as though it is moving below fundamental value, as described by purchasing parity, which seems a reasonable method of valuation to me. The problem is that Brown is not only economically incompetent, he is really insane, and everybody is scared. I wonder how far he will go.
Brown is a one man currency crisis by himself. I feel sorry for UK savers, even though they did vote themselves into this mess.
Time to ignore the nonsense about assistance to the export sector of the UK economy, what a weak currency means is that although before, we were able to swap 100kg of Cheddar for one video recorder, now we have to swap 140kg of Cheddar. It isn't good.
In fact, it is just bad. Devaluation essentially moves the wealth of savers into subsidies for exporters.
I used to think that UK savers had left it too late to escape, but apparently I was wrong. If you have savings then go and get your thinking cap, jam it on your head, and try and save yourself.
11. stillthinking said...
Imagine you live in a village near a big town. In the town there is a fantastic shop called "Cake Wonderland", full of every exciting pastry and creamy raspberry cakes etc. In your village you have been using Cake Wonderland vouchers(one pastry per voucher) to enable trade, and you normally use the vouchers to buy chickens and hammers. You are quite happy to do so because you know you can get a cake anytime.
Then one day you are visiting your aunt in town, and you happen to pass by "Cake Wonderland", peering in through the window, to your utter surprise, you realise that there are,in fact, no cakes in there !
Reasonably enough, on your return to your village, you attempt to offload all your vouchers in exchange for something else before word gets out.
Unfortunately for the UK, we have -busted- tattooed in red bold ink on our foreheads, and everybody knows.
12. paul said...
crunchy, UK property is not in the remotest part attractive to overseas investors right now - devaluation or not. The devaluation is temporary, the repayment plan is not! Overseas investors are just as likely to be stung as much in future if not more than those UK 'investors' who committed to mediterranean property and are now feeling the sting of exchange rates.
You seem to be fixated on how property is somehow being undervalued right now - it isn't. Property is currently adjusting to its new more realistic price.
13. hpwatcher said...
I really believe that Gordon Brown is an economic disaster area, who has inflicted far more damage on the UK economy than even Hitler managed to. Surely someone must see where this lunatic is leading us?
14. bystander said...
I just hope GB allows the pound to rise in value when the bottom of the rate cycle has been reached, at least in the minds of the major currency players. I do, however, feel very nervous with the arch Europhile Lord mandy in such a high profile ministerial position. Some Traders are even predicting a drop to 63p buying 1 euro in the next three months, which would mean a massive 60%+ devaluation and combined with HPC of 30%+ creates the 90% worst case scenario for HPC stated by JU over the last year or so. Doesn't help us poor sods with our deposits for a house sitting in unproductive savings accounts in 'blighty', but then NULAB was never about helping the prudent, just the profligate, and when inflation takes off, which it will, savers get done twice and the spendthrifts and financial illiteratii (labour voters) get their debt devalued. Labour must never, ever, be given the opportunity to screw the country again.
15. bystander said...
.....also why has this devaluation been so readily accepted by the UK population?????
16. alan said...
I am amazed that the devaluation against the Euro has been so widely accepted. I accept that its bargain season, but when a pack of 10 Stella rise to the price of 14 Stella, surely even the binge drinkers will notice !
Won't we get a lot of inflation in the first 6 months of next year, as old stocks are used up and new stocks are sold at higher prices? How then can Mervyn say that inflation will drop in 2009? Surely the falling £ will push imported prices up, and lots of things in the UK come from Euroland?
Am I missing something, here?
17. bystander said...
"Some Traders are even predicting a drop to 63p buying 1 euro in the next three months, which would mean a massive 60%+ devaluation and combined with HPC of 30%+ creates the 90% worst case scenario for HPC stated by JU over the last year or so".........what I meant to write was 63 euro cent buys 1 pound sterling. Sorry for any confusion.
18. greytornado said...
I don't think that the devaluation has been accepted. I think the truth of the matter is that the bulk of the UK population simply have not got a clue as to what is going on. A very good indication as to what is going on is the gold price which passed the £600 per oz a few days ago. To translate; this means that back in November, bullion dealers were selling bullion grade sovereigns for £117 if I recall. Today, if you want to buy a gold sovereign, the Hatton Garden Metals website, (which lists the buying & selling price of various bullion coins), will sell you a gold sovereign, (I doubt if they actually have any given the demand of late), for £153. That shows the pound is in freefall and the massive devaluation that has happened in a very short space of time. Gold is a store of wealth and although one might tend to think that the value of gold goes up; it's rather more a case of the fiat currency devaluing.
19. uncle tom said...
This appears to be irrational euro strength rather than sterling weakness, and I sense the hand of people like Soros here - deliberately pushing the euro up until something breaks.
What their game is, exactly, and how they will profit, I am not sure.
Is it possible that the Russian state is at play here, punishing it's satellites for borrowing in euros, by forcing them into default?
20. Game Over said...
Uncle Tom
You're wrong. The markets know that a German dominated ECB will not go down the road of quantitative easing. Traders also know that the eurozone contains two basket cases - Ireland and Spain. However, the eurozone also contains strong economies like Holland, Germany and Finland i.e. economies that have huge current account surpluses and with little debt.
21. drewster said...
Uncle Tom,
Russia is too busy desperately trying to defend the sinking Rouble. They aren't involved here.
Crunchy,
Thanks for the clarification. I can't see BTL being attractive to overseas landlords. Tenants pay rent in pounds not euros, a landlord can only charge what the market will bear. To use an extreme example, would you invest in Icelandic property right now?
Bystander,
Re acceptance, mortgaged homeowners would rather have low interest rates than a strong pound, I think?
22. jack c said...
@ bystander "why has this devaluation been so readily accepted by the UK population?????" (Tuesday, December 30, 2008 08:07AM) - the UK population are largely unaware of what is going on with regard to the currency markets - they are far more pre occupied with TV celeb shows and no doubt a new series of big brother will be the office talking point for the start of 2009.
Pound is down to 1.02 against the Euro as I type - my guess is that we will end 2008 with parity.
23. jack c said...
@drewster - to expand upon the point you made (from BBC business) - The Russian rouble has hit a low after its central bank allowed the currency to devalue for the twelfth time - including nine falls this month. It fell to 41.6 against the euro - an all time low - and to 29.3 against the dollar, the lowest level since 2005. The currency has lost more than 20% of its value against the dollar - largely due to the slumping price of oil on which Russia's economy heavily relies. The Kremlin has been using reserves to try and support the currency. FULL STORY newsvote.bbc.co.uk/1/hi/business/7803242.stm
24. Spiderchannel said...
yes, I 've been watching the slide of the pound with horror since summer 2007 when the pound was 2.4 Swissfrancs - Today it's 1.54!!! and one euro is 98 pence! Huge devaluation. There's your price crash right there. Everyone (in the rest of Europe) knew about Slovakia and the euro. It's only the British press which is so provincial.
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26. dohousescrashinthewoods said...
15. bystander "why has this devaluation been so readily accepted by the UK population?????"
The fact that John Sergeant can dominate the news suggests people don't want to think about it. Even if "they" are conspiring, people would drag it out and everyone would be talking about it - think of the Iraq war.
Yes, it hasn't been taken up by the media and yes, the stories are out there, but aren't the ones getting the fat chewed in the talking slots after the headlines, but I think it's a symptom, not the cause - it emotionally suits us to bury it.
I have often seen in work and personal lives (including in myself) that we prefer to avoid distressing thoughts, for example when we have a tough decision to make. We shun it for as long as possible, sometimes going to great lengths to hide from it, in the hope that that it will be taken out of our hands by default. We then spend a lot of effort preparing to claim we couldn't help it and act surprised and indignant when others don't believe our transparent story. (think politician who didn't invest budget until it was too late, the husband who "didn't get around to it" or the wife who bought those pricey shoes and tried to cover it up)
I think we should look closer to home before making accusations that it must be "them" out to get us. I'm sure there are conspiratorial motives, not least from Flush Gordon, but I think we are complicit. As a society we tend not to have the spine to acknowledge our own responsibility first, and that makes burying it easy for Go-Go Gordon, because we actually want him to bury it.
I think the nation bought into HPI for the same reason. The refusal to see the impending HPC was the same again. Now everyone wants to believe that it was the Yanks and the Banks and that no one saw it coming except prophets and super-humans. That is the transparent excuse that lets us off - not only was it not our fault, but we can't be expected to be super-human. In actual fact, it is plain that our own crash is our own fault and that we all saw it coming - but refused to be honest with ourselves.
If we project our flimsy self-deceit onto our leaders, then perhaps it's no wonder the nation thinks Brown is doing a good job. We know it was our fault and we're keen to cover it up, so we encourage him to do it, even whilst deriding him as sick and insane. Chances are that's what we actually think of ourselves.
27. wdbeast said...
....it
28. bellwether said...
This must be getting tedious. Not satisfied with missing out on the property boom in the UK, many on this site can now complain about missing out on hedging against sterlings predictable decline. I have always assumed that this site is primarily about sharing information as to how best to cope with what is in front of us, frequently it seems to degenerate into a impotent diatribes about how the populace are complicit in what is going on. There seems to be some notion that we will all rise up against the injustice of it all - its never going to happen but there are a lot of real steps you can take to deal with the current situation.
I'd suggest posting ion this site is pretty low down the list unless we are actually talking in real terms about what can be done on a day to day basis.
29. bellwether said...
Incidentally the comment is not intended to insult, and clearly does not apply to many on the site. It is however intended to move the discussion on. Months ago I mentioned opening foreign trading accounts for savings with eg TD Waterhouse/ HSBC. A simple step but no-one, not one person acknowledged the idea or to my knowledge took me up on it. I guess too busy punning with Crash Gordon or Sheeple.
30. techieman said...
bellwhether - you can say "i was right" on that. I am sure many people have privately undertaken some hedging against the £. Personally i see this as a great opportunity to short the Euro soon v £ (yep some may think i am bonkers! but thats never worried me before). As for UT - the swiss (something i've been alluding to ...subtley) has gone from 2.30 ealier this year to 1.51 today v GBP. So im not sure its Euro strength per se - although admitedly i havent checked the Swiss / Euro cross. As for GBP/ US - am looking for Us strength to reverse soon. (was looking for 1.45 when the counter trend rally was at 1.55) And we are basically there.
I have held Euros for quite some time - hedged 30% (admitedly too early - although it didnt seem that way then - when ever does it).
Anyway Bellwhether you cant assume that everyone has large lumps and the inclination to take a punt against £ (its unpatriotic isnt it ? :-)). Thats a bit unfair in my view. In any case there are all sorts of ways you can get involved in currency speculation. As you know i punt with IG - its tax free and i have never had any trouble getting hold of the spondolies.
31. Britishblue said...
Over time, everything goes back to equilibrium! The simple lessons of supply and demand mean that when demand goes up, prices go up, unless there are extraordinary factors which create a temporary move from the norm). On a more global scales, these factors can be bubbles,(Led by greed and consumer confidence), trade barriers, individual government subsidies, restraints at borders, cultural barriers, etc.
This Christmas I drove from Calais through the Polish border in just 8 1/4 hours in a very average family car. A year ago I had an extra 4 hour wait at the border. Now that final restriction has been removed and Polish goods can travel straight through Europe to the UK. So now why should a Polish person residing in Poland earn 1/4 of someone residing in Wales or Scotland? There are no longer trade barriers, restraints at borders and with the immigration in and out of the Uk a lot of the culteral barriers have now been removed.
Longer term a Polish person residing in Poland shouldn't earn less, Just as back in tme the average chines and Indian earned the same as the average American. So in the abscence of world war three, over the next 50 years there has to be an evenning out of living standards across the whole of Europe. The devaluation is just part of this. Its not just the Euro. 5 years ago you could get 7.2 Polish zloties to the pound, now its 4.2. As a final point, last year our house prices were 800% more than Germany on a square metre basis. (http://www.globalpropertyguide.com/Europe/square-meter-prices/ ) So the Uk has some devaluation and house price crashing to do before german BTL's will be queuing up to buy.
32. techieman said...
Way too simplistic British Blue
33. bellwether said...
Cheers Techieman. I've been wondering about when to short the Euro and had assumed at parity or thereabouts.
The thing that bothers me however is that I can't see any reason for a strong counter trend in favour of sterling anytime soon ie next few weeks.
For Euro v £ i think the current trend will continue purely based on the current perception of the Euro (and Sterling) coupled with the ECB's more hawkish stance on interest rate cuts - most likely scenario. What is being termed a run on Sterling is also an o/s possibility. The instablity in the housing market remains a massive concern and I think we are going to see some horrendous figures in the first quarter
The only alternative scenario over the short term that I I can envisage is that the Euro and £ trade at or around around parity for months as happened around about £0.8/1E until something happens to change that.
That something might be the ECB indicating clearly that it is/will taking IR's to zero, also eventually people must start to absorb the bad news that is actually out there about the Euro.
IE I'm holding on Euro v Sterling for now.
Noted on unpatriotic but it is also risky I think to hold savings in same currency as earnings. We are already exposed to our own currency as it is
I actually see sterling continuing to decline against the USD as we see more liquidations in assets strenthening the $. A futher stock market crash is due in the next few months. Have no target but think £ will go WELL below $1.40.
I own no Yen but while sterling has held its own against yen over the past month or so I fancy it will weaken in Jan.
Things looking brighter for gold.
34. bellwether said...
British Blue I like the idea that what we are seeing is an averaging out of wealth - to take an extreme example if eg slavery still existed we could have kept the party going longer, the demands of the underclasses expressed in eg inflation in china is a factor here.
What I can't see here is a way out without balancing population v resources sometime soon - this very worringly does infer war. With ever greater communication/information people are finding it more difficult to accept their lot and will inevitably become very restless
35. techieman said...
Bellweather -re USD i have not yet determined where to go for the reversal. I need to see some "toppy" price action first. 1.45 is/was a target against shorts @ 1.55. and however big this move is (and i take your point re a run) we are close to an interim low re £/USD at least. What form that takes is what interests me - so yes am taking profits ( a 10 cent move is big enough for me... but might keep a small position).
Re Euro / GBP - yes everyone thinks that and also that parity is a fait acompli (i remember years ago when the £ went to 1.05 USD and the world and his mate were predicting parity ... which was of course never acheived). Im not saying that we wont have parity i just think nows the time to see if we have topping paterns. Of course you could argue that the rate differentials and / or where they go forward, are priced in. I am quite nervy re this and am going to hedge another 30% around here. (not an outright short - which will still leave me with 40% exposure - on a quite large cash Euro value). However i will at some point hedge the rest and / or short the Euro. I may have to have a couple of bites at the cherry (and take a sensible loss in the process) but i am convinced the falls cant go on forever. Well thats my view for what its worth.... Happy New Year!
36. crunchy said...
20. drewster
If you were an overseas investor with a strong currency and lets say house prices in uk were down 35% from peak by next years end, which is very likely coupled with a weak pound, I do think at auction buying with cash would seem an attractive long term investment.
With all things considered that would be a discount from peak of over 50%. lets face it there are not many places around the globe where property investors can buy hard assets with total confidence anyway. The UK is perceived as quite a peaceful place in comparison with other countries. I think that there must be money out there looking for safer havens next year. I am not talking about retirees of your average BTLer. I may be wrong but it is a thought.
Iceland, I see your point.
37. bellwether said...
Yeah happy new year to you Techieman
38. Britishblue said...
To Techeiman,
of course my posting is simplistic because I only gave a few of the factors when in fact there are very many.
But with regards to Eastern Europe I speak from experience.I first worked as a management consultant in Poland 10 years ago. I have run my own business there and own a property in Poland. The gulf between the UK and Poland 10 years ago was astronomical. 6 years ago I had Polish bricklayers building my Polish house for 90p an hour. The speed of change has been enormous. Salaries and expectations are rising and the infrastructure is vastly improving. For examples, potholes are appearing on many UK roads, whilst they are being eliminated on Polish roads.
One other factor I missed was the mobility of labour which longer term will lead to an even more evening out of living standards. Polish Builders who were earning 90p an hour six years ago in Poland and have spent the last 4 years in the UK are now going back to Poland! Why, because the differential between the UK and Poland isn't what it was. Or they are going to Norway where good money can still be earned. Countries like Poland an Czech republic are visibly getting wealthier and unless something is wrong with my eyes the average British person is visibly getting poorer and will do for some time to come.
39. inbreda said...
bellweather - what you say is a bit unfair. As a result of reading this site I have bought gold (which has acted as a currency hedge recently. I also opened an igindex account and also an oanda currency trading account. I haven't made as much as I could have, but I am not doing too badly, thanks to HPC.co.uk. I am only holding off buying more gold now in case the dollar falls sharply, which is overdue IMO, which would of course raise its GBP price.
40. bellwether said...
inbreda, I should have made it clearer that don't think it applies across the board and have also learned a great deal from site also. I get frustrated, perhaps too frusrated by posts commenting on the obvious perhaps because they just seems to me to be an alternative to actually doing something.
41. techieman said...
inbreda to defend bellwether - not that he needs defending - @ 29 he said "Incidentally the comment is not intended to insult, and clearly does not apply to many on the site". I think he therefore brings back balance to his prior comment. I would say "doing something" is very difficult in most cases. Lets face it we have had ternding markets particularly in the second half of the year, as i have always said trend-following (or anything else) works ...until it doesnt. Its reading when its time to range trade , when its time to trend follow and when its time to liquidate and reverse that are the holy grails. Thats why i have Kenny Rodgers "the Gambler" as my ringtone.
42. Tenyearstogetmymoneyback said...
bystander wrote "why has this devaluation been so readily accepted by the UK population?????"
I suspect that the reason is that there is as big a delay in retail prices as the Land Registry house price figures.
I went round Currys at Cribbs Causeway (just down the road from the infamous Sadly Broke / Bradley Stoke) and they had so many
plies of Flat screen TVs there that I wondered if they had sold any before Christmas ? However, what will happen when they
have sold the piles and need to import some more.
The only thing I have noticed was in an Amateur Radio magazine where one of the announcements boldly stated.
"Buy now. We are expecting some large price increases in the new year".
I still have bitter memories of when the £ dropped out of the ERM and the camera I was saving up for went up from
£200 to £240. It has happened before and will happen again.
:- Duncan