Wednesday, July 18, 2007

In the end, something s gotta give

Bets push sterling to unsteady highs

"Sterling has become a favourite currency for world central banks and petrodollar powers seeking a rock-solid asset for surplus billions, but it is also the target of vast "hot money" flows that could take flight at any time."... but how much of it is speculative pressure? that s the question. At any rate the situation is "unsteady" since the UK economy does not have enough "depth" to ensure stability (i.e. too many "one way bets": the financial sector & the City, the housing market, influx of cheap EastEurope labour to keep wage inflation down, a lax fiscal regime with foreigners, public-"spend today to pay tomorrow")

Posted by confused76 @ 09:44 AM (525 views)
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18 thoughts on “In the end, something s gotta give

  • …”Jim McCormick, currency chief at Lehman Brothers, said the pound is now 20pc overvalued and vulnerable to a correction. He warns that merger and takeover flows coming into Britain will soon tail off and a current account deficit of 3.6pc of GDP will chip away at sterling over time, while the housing market looks overstretched. The bank expects sterling to fall to $1.93 this year, and $1.79 by late 2008.”

    … ooops… let’s see house prices fall 15%, the sterling falls 15%, I see a lot of Russian and Middle Eastern petrodollars leaving sunny London next year… i mean selling to naive BTLers of course

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  • planning4acrash says:

    If sterling falls 15%, inflation will shoot up and interest rates will go up (higher cost imports), so the value of the pound will go up. The high pound is self reinforcing at present as a direct result of the BOE letting inflation get out of control and pushing the economy to its limits with no buffer for unforeseen circumstances.

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  • stillthinking says:

    If the pound went down 20%, that would mean that prices for imports go up 25%? So that would mean that any imported goods in inflation measures also go up 25% ? If this is the case, and the pound is over-valued, why are people buying sterling? Are they really just holding their nerve while the going is good, and risking major losses or is it that there is nowhere else to put money, which presumably means the currencies of the whole world are due to get inflation everywhere.
    This is just paper isn’t it? I mean, just because the bank puts rates up to 6% it does not follow that all the businesses make 6% profits.
    So speculators must be thinking that there is a hidden wave of inflation coming, and using this interim period to get a paper return from the banks, and then as inflation hits switch out of paper into real assets. But which assets can they switch into? Surely if the end plan involves switching to real assets it would make more sense to buy now.
    Very confusing as per usual. Deflationary crunch or inflationary spiral. Doesn’t seem possible that nobody knows which will happen when they are so different, apart from both being disasters for the real economy. So the everybody in the UK owes vast sums, and they have all promised to work for these sums to pay the cash to their bank in order to keep a roof over their heads, and the borrowed money is all floating around out there. So maybe that money is cheap relative to other currencies.
    ???!!!????!!!!

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  • “If sterling falls 15%, inflation will shoot up and interest rates will go up (higher cost imports), ”

    That is technically true only for internationally traded commodities. those for which the “law of one price” applies… oil, gold, metals, for instance that is not strictly true for petrol (i mean retail, while wholesale is aligned to international prices)
    That is definitely not true for most of the consumer goods. Take electronics, which today is selling at 30% premium in the UK vs US, after exchange rate. Not true for food. Other commodities like labour and housing would not be affected by definition (local, non integrated markets).I do not want to become boring with the currency market, I could talk for hours…

    In conclusion currency devaluation (if whithin reasonable bounds) has little to do with inflation, which is a highly local phenomenon (unless a country is of the size of Luxembourg of course, but in that case the currency would likely be pegged)

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  • tipping point says:

    Sterling is high because interest rates are higher than the US and Europe. Although I think rates should go higher so as to allow them to be lowered sooner I don’t see this happening for 3 reasons. (1) the papers are all full of financial woe stories about higher rates (2) Gordon doesn’t want to cary the can when voters loose their houses and (3) We’re not that different from the US and will react in a similar manner.

    PS In the long term the dollar is doomed. It won’t be long now before China realises that they won’t be allowed to buy any large US assets and what’s the point of money you can’t spend.

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  • A useful article, thanks.

    The pound is now $2.05, a 26 year high. This is on expectation that interest rates will rise further, based trying to keep inflation low.

    The environment is volatile and could change very quickly. It wouldn’t surprise me to see the government inflation target raised to 3.5% as one of a number of scenarios over the coming months.

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  • tipping point the Chinese already know that the US dollar has no value when they tried to buy the US oil company Unocal and were told to back off by the US government.

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  • stillthinking says:

    The Chinese can trade dollars with others who -can- buy US assets though. Maybe they can’t buy strategic assets, but the US government can’t cancel the purchasing power (whatever it is). They could buy their raw materials from Australia and say, whoops, I left my own currency at home, do you mind taking these dollars?

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  • stillthinking says:

    Sorry to post twice, but it seems to me that the Chinese government probably has a completely different view of cash from American officials. Perhaps they see money as a means to an end. There are military issues between the two after all. Chinese government officials have “power” from their position, Americans only have what they can do with the cash they own. There was a case in Korea recently where some businessman started bashing up some poor bar staff because of some perceived insult, he did that because he had power, not because he had money. There are different cultures out there. Maybe the Chinese just made a bid for a strategic asset to see what happened. They hold the whip after all. If the US refuses to let them buy they can always state, reasonably enough, that strategic assets are all they want, and that if they can’t buy them there is no point holding dollars. That seems like a big threat to me. The fact that the dollar will tank will not put off dollar dumping for people who are not interested in the cash value. Sounds strange but life in China is about your position, not your wealth. I believe the same to be true about Japan hence their relative lack of income disparity. The disparity is just somewhere else.

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  • tipping point says:

    stillthinking, the point is that the US won’t allow any non US organisation to own any large us assets. This means that while millions of dollars can be easily spent no one wants to be left sitting on billions of dollars which can only be used to buy commodities (why do you think commodities prices are so high). The fact is because of the US having the worst balance of payments in the history of trade there are trillions of dollars out there and the owners want to be global players not just iron ore salesmen.

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  • Guys,
    I hate to sound contrarian, but currency markets do not – generally – reflect fundamentals, at least in short term swings.
    I think the clouds on the euro are, in the medium term, far darker than whatever trouble the dollar may have.
    And do not get fixated with the equation: exchange rate = country economic strenght … just look at the Swiss Franc vs NZ$ pair!
    … oh yes, the pound… in ten years it will be remembered as the yen of the 00s

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  • stillthinking says:

    Thanks Tipping Point. I understand. This is blatant cheating then. The Americans are saying you can’t buy what you want, but only what we want to sell, which you don’t actually want. So the dollar, for a holidaymaker like me, will fall further. They can buy whatever in the UK.
    Having the ability to dominate the commodities market must be great for China though. Metals etc are genuinely useful.

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  • planning4acrash says:

    confused76, most of our consumable goods come from China or thereabouts, a 15% fall in sterling would push the price of those goods up by 15%. We do not only import commodities, and produce next to nothing so are extremely vulnerable.

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  • P4C,
    For most goods prices are very, very marginally influenced by the manufacturing and other import costs.
    As I said, look at the price of an Ipod here and in other countries. Or look at the list prices of Ford cars across Europe (have you paid less for your imported car lately, since most of the manufacturing costs are dollar and euro based?)

    “a 15% fall in sterling would push the price of those goods up by 15%”
    Let me assure you, there is no such a relationship between prices in different countries, except for internationally traded commodities

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  • At the end of the day it is the US military that backs the US $ with it’s ability to project America’s power. The only thing backing up the Euro is again the US military, without it Europe will end up a state of Russia. The US has the last laugh because it can force other countries to take a devaluing Dollar as payment of debt, this is the privilege of a imperial power, how long this will last is anyones guess.

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  • Mrmickey – IMO Iraq was the first mistake. The US army is only so strong. It’s recruits are becoming more obese, and fewer in number and stretched further and further in more and more conflicts with fewer adn fewer allies. With a moron like Bush for president, something was bound to go wrong sooner or later.

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  • The US is in a very similar position to the British empire before WWI fighting colonial wars all over the place while Germany grew in strength. If you replace Germany with China the similarities are striking. All empires fall the US is no different when it does will it lead to WWIII?

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  • Third US carrier group heading to the Middle East means only one thing. Iran’s time’s up.

    Can you imagine the potential carnage? Domestic and international. Owning a house is not important, self sufficiency will be.

    What proportion of the people in our country knows how to survive without Sainsbury’s, ASDA and Tesco’s?

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