Markets turn against the UK, but are they over-doing it?
Category: Thought for the day
This weekend it was difficult to move without seeing a report predicting the crash of sterling. But for all the despair, and the sense that all was lost for the UK, I think something is being overlooked.
Were you surprised? Moody’s has downgraded the UK’s credit rating. I was surprised in two respects. I was surprised it was Moody’s, and not S&P or Fitch. I would have put the odds at one in three. I had no idea which credit rating agency would be the first to break ranks. Well now we know. I was also surprised it happened last Friday. I knew it was probably going to happen. But had no idea on which day in February or March the downgrading would occur. So there you have it. The details may not have been predictable. But the thing that mattered was.
As for falling sterling, well, what I find quite odd is that earlier this year the Bank of England’s MPC suggested it was worried about the strength of sterling; that the UK desperately needed a cheaper pound to give exporters a helping hand. Now that has happened, but all we read in the press is gloom.
I completely understand it if you think the Bank of England has no credibility, and what it wants is probably by definition the opposite of what we need. But that point is not being made. The media is not saying the UK has the one thing the Bank of England says is needed, but since the Bank of England is run by clowns that means we should be scared. I am not reading that. Instead all I am reading is ‘woe is us’.
But there is one other thing that does puzzle me. If it is so obvious that sterling is set to crash, why have the markets not already forced it to happen? As a general rule of thumb, once the mass media gets hold of an idea you know it is too late.
No doubt you know the story about Joseph Kennedy and the shoe shine boy who asked for his advice on what stocks to buy. The late President’s father reasoned that if even shoe shine boys were speculating on stocks it was time to get out. He did. The 1929 crash followed soon afterwards, and the Kennedy family fortune was made.
There has been no shortage of predictions that sterling was set to stumble all year. This column has warned as much. Now this has penetrated the mass consciousness I would suggest it may be too late.
The usual suspects have jumped on the bandwagon and said the UK is bankrupt; without hope. The French industry minister Arnaud Montebourg took time off from defending France from the criticisms made by the boss of a US tyre company that the French turn up for work, talk, have a three hour lunch, then talk some more. He took time off from slating the ‘Economist’ for the story it ran last year saying that France was the time bomb at the heart of Europe. And what did he do with his time off? Why he spent it saying the UK was in a far worse position.
The ‘Telegraph’, quite brilliantly, ran two pieces, one saying how all this goes to show that Osborne is being too timid and needs to implement proper cuts, and the other saying how it all shows that austerity is not working, and the UK needs stimulus. Not all of the media seem aware of this contradiction.
It is worth noting that in some senses the fall in sterling is down to good news elsewhere on apparently improving economic prospects. I told here last week how the Fed has hinted QE is drawing to a close, and how the central bank in China is tightening. There is also a view that the Eurozone is now on the road to recovery – I am still unclear why, and have this funny feeling that the optimism is wildly misplaced, but there you are: that is what the markets are saying at the moment.
Then there are currency wars. It seems Moody’s may have done the UK a favour. If the rhetoric on currency wars is right, countries around the world want a cheaper currency but all have agreed that they won’t deliberately try to manipulate this situation. Well, in the UK there is no need because the credit ratings agencies are doing it for us.
Of course from one point of view the fall in sterling is bad news indeed. It will lead to higher inflation, and it will take even longer before growth in average wages outstrips growth in prices. I have pointed out before that there is a contradiction in the two remedies economists are prescribing for the UK. One remedy is for falling inflation so that real wages start to rise. The other is for sterling to be cheaper. Well, we can’t have both.
Has the sterling sell-off come to an end? If I could answer that with certainly I would be in the process of becoming very rich. But I would say that the odds of further falls in sterling have lengthened since the blanket coverage predicting falls.
Last week I said I thought the yen sell-off was overdone, but sterling had further to fall. The implication of that was to sell pounds and buy yens. I think I was right to say that then, but not sure, but it may now be too late.
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