Bull and bear: Goldilocks currencies - The Share Centre Blog

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Michael Baxter

Bull and bear: Goldilocks currencies

Written by: Michael Baxter on February 13th 2013

Category: Bull & Bear, News

Bull and Bear – an optimistic and pessimistic view of investment news. Today’s stories: Goldilocks currencies, Inflation stays put, The world’s most expensive Android phone, Are fine wines set to surge? Horsemeat saga shows confirmation bias is alive and well

Goldilocks currencies

Okay, this is rather a UK centric thing to say, but right now, it seems the pound is neither too hot nor too cold. Furthermore, over the last couple of weeks, it hasn’t really been moving. At the time of writing there are 1.16 euros to the pound. Back on January 24 there were 1.16 euros to the pound. The sterling euro exchange has not done much in between.

Last summer there were 1.27 euros to the pound. That was cheaper than in the heady boom years, but probably too expensive to give the UK’s exporters the lift they needed. In the autumn of 2009, the euro to sterling exchange rate appeared to be in danger of heading for parity. That was worrying, because the inflationary shock of sterling falling that low would have been nasty, and there was the risk that if parity was indeed reached, the psychological impact on markets could have been catastrophic. We may have seen a flight from sterling, and indeed UK government bonds.

In short, sterling is well positioned for UK exports, but not so cheap as to risk creating the 21st century equivalent of an old fashioned sterling crisis.

The timing may be perfect. You will know that currency wars are in the headlines a lot these days. With the exception of Germany, just about everybody wants a cheaper currency. That is worrying.

Yesterday the G7 got together, and issued a joint statement. “We will not target exchange rates,” they said.

So there you have it. If the G7 says it, then it must be true.

Mark Carney waded into the debate. You may know that the Bank of England has said it is worried about the high level of sterling (not sure if it still thinks that), but the bank’s next governor said yesterday that he thought it was essential countries did not target their currencies.

Japan’s government agreed, but added that this, of course, does not mean it is not free to engage in more bouts of QE.

You could be cynical and say the UK has timed this one perfectly: quietly brought sterling down to a level it was happy with and then agreed that targeting currency is wrong.

But then again, what the G7 says, and indeed what the G7 governments say they are doing, is often quite different from what everyone else thinks they are doing.

Inflation stays put

Talking of things not changing that much, UK inflation was 2.7 per cent in January as measured by the CPI index. Funnily enough it stood at that level in October, November and December last year too.

So UK inflation appears stuck at a level which is above the 2 per cent target but below the level requiring the Bank of England governor to send one of those Dear George letters.

Incidentally, core inflation (that’s with food, energy and tobacco) was 2.3 per cent.

Capital Economics reckons inflation will peak at 3 per cent later this year – perhaps just in time for Mark Carney to have to pen a letter to George – but will fall back sharply later in the year.

Chris Williamson at Markit said: “Above target inflation also looks to be here to stay for the rest of the year, but the frustration for policymakers is that the upward pressures are largely coming from areas outside of their control.”

Meanwhile, yesterday also saw the release of producer prices data. Manufacturers’ input prices rose 1.3 per cent in January, taking the annual rate of increase to 1.8 per cent, the strongest rate of increase since March and up from just 0.5 per cent in December. Producers’ selling prices meanwhile rose just 0.2 per cent in January, causing the annual rate of increase to slow from 2.2 per cent to 2.0 per cent – its lowest for six months and one of the lowest rates seen since 2009.

Later today the latest inflation report will be released. By the time you read this it may already be out. The report is not likely to make good reading, and will probably entail downgrading growth forecasts and up-rating inflation forecasts.

One puzzle is that many economists are now saying recent falls in sterling will have a knock-on inflationary effect. And so they might, but why didn’t the rises in sterling seen 12 months or so ago lead to lower inflation?

The most expensive Android phone

Did you hear the one about the smart phone retailing for $10,000?

Vertu doesn’t do cheap phones. It sells phones aimed at rich people – Russian oligarchs and the like. Its top of the range model sells for $300,000. And the company does not need to sell many phones to make money. It has apparently sold 300,000 devices over the last decade, which  sounds surprisingly high, and last year sales were near 300 million euros.

Not so long ago Vertu was owned by Nokia, and its phones ran the Symbian operating system. Then it was bought out by private equity, and now the company has decided to ditch Symbian and use the Android system.

But the question is: what features does the phone boast that you can’t have in a bog standard iPhone? Well, it is made of titanium, and – for those who like that sort of thing – is a good status symbol. Customers also gain access to an exclusive concierge service.

That’s all very well and good, but at heart the new Vertu is an Android phone.

The truth is that it matters not how much money you have or are willing to spend, for a product like a smart phone, the actual device will offer few functional benefits over mass market products.

Pity those who paid out a king’s ransom for earlier versions but were lumbered with one of those decidedly antiquated Symbian operating systems.

Come to think of it, a few years ago, James Bond’s latest gadget was a very smart phone. Today’s mass market products pack more punch than Bond phones ever did.

In the ‘SkyFall’ movie the big gadget was a gun that could only be fired by Bond himself. Does that strike you as a pretty old fashioned benefit? In the race for top gadgets, the mass market leads the way, and today you can pay one hundred times more for your phone, but the Internet looks the same, and the voice at the other end of the call sounds the same.

Still, looking at it from Vertu’s point of view, unlike other companies in the smart phone business it does not sell ‘me-too’ designs.

Are fine wines set to surge?

Presumably one of the benefits of investing in wine is that if the investment goes badly you can always drown your sorrows in some pretty good stuff.

The Wine Investment Fund (TWIF) predicts that the fine wine index – the Liv-ex 100 – will see the value of fine wine rise by 14 per cent in 2013.

Apparently, in January the main indices rose by 2.8 per cent (Liv-ex 100) and 2.5 per cent (Liv-ex Investables), which were the sharpest monthly increases since February 2011. The volume and level of bids also continued to increase over prior months.

Of the finest wines, Mouton was much the strongest performer with rises of approximately 10 per cent on average in the top vintages. The other first growths saw average increases of approximately 3 per cent, while La Mission Haut Brion, Pétrus and – for once – Cheval Blanc all beat the market at nearly 4 per cent. Apart from Mouton, it was the lesser vintages that generally performed the best.

Horsemeat saga shows confirmation bias is alive and well

Just one observation on the horsemeat saga and it relates to confirmation bias.

You may have spotted the headline the other day: “UK looks set to ban food imports from EU”. It was all the fault of Johnny foreigner, and somehow the case for the UK leaving the euro strengthened. Then it turned out that some of the abattoirs that may have been putting horsemeat into the chain were British.

It just goes to show that our preconceived notions can do a pretty good job of interpreting data as we see fit.

These views and comments are those of the author alone and do not necessarily reflect the view of The Share Centre, its officers and employees

Tags: Confirmation bias, fine wines investment, sterling euro, UK inflation, value of pound, Vertu Android

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