Today we consider the pound and ask - is that it? Have we seen the high for this cycle?
But before we do that a brief comment on the budget or the “spring
statement” as they call this one. It was the usual.
Tinkering around the edges, political point scoring, sound and fury, no meaningful reform.
Rishi Sunak might have a picture of Nigel Lawson on his wall, but he’s not emulating him. I had a
picture of Kenny Dalglish on my wall for most of my childhood. Didn’t make me a good footballer.
Lawson removed a tax with every budget,
incrementally simplifying the tax code and lowering taxes over his six years in office.
Every chancellor since has incrementally bloated it to the point that we now have a tax code
something like ten times the length of all the Harry Potter novels combined.
And so what Dominic Cummings refers to as “the blob” distends...
Here’s a graphic I used in a show at the Edinburgh Festival in 2016.
After three years of Philip Hammond and two of Rishi Sunak, I’m sorry to report that that red bar
is now that much bigger – while the others remain the same.
Look at that - 4x longer than the Chilcot report About 11 or 12 times longer than
the complete works of Shakespeare and the Bible
The Hong Kode is less than 2% of the size
Tax reform is one of the few ways and one of the most effective ways by which a politician
really can change things. And Rishi - as we all knew he would - has missed his chance. He’s yet
another one who tinkers with a label on the paintwork while the steam roller rolls on.
Right that’s today’s rant off my chest. Sorry about that. I hope you don’t mind indulging me.
I wanted to talk about sterling today, the Great British Pound. As regular viewers will know,
there is a cycle that I have observed, a long-term cycle, and, given the state of the world,
and of British finances in particular, I thought it is worth checking back in on.
I’m going to start with a three-year chart to get you up to scratch with the
recent action. Here it is. Cable, that is to say, the pound versus the dollar.
You can see the collapse in 2020 with the Corona panic to $1.15; the subsequent bull market,
which lasted over a year, topping at $1.42 last summer; and the declines that have followed.
Currently we sit at $1.32 – 10c off the high – and we are in an entrenched
downtrend, that looks rather like an expanding
funnel. The pattern recognition people would call this a descending, broadening wedge.
This is symptomatic of a leadership that has chosen
the Brussels-on-Thames route, rather than the more business-friendly Singapore-on-Thames option.
Assuming that wedge keeps its shape, the projected short-term action would be a rally
to the $1.35 area, followed by further declines.
I want now to put this in the context of my longer-term
cycle, dubbed, as keener readers will remember, Frisby’s Flux.
The Frisby Flux strikes back Let me issue the usual disclaimer:
cycles are arbitrary patterns put on past events, usually by
academics. Real life in real time is often a very different matter.
Nevertheless, they can help give you an idea of where we are in the grand scheme of things.
My observation is that every eight years, after a major bear market, the pound hits a tradable low.
We start with 1976, the year of the IMF (International Monetary Fund) crisis. At one point
inflation reached 24%. The Labour government borrowed $3.9bn, at the time the largest
loan ever requested. From high to low, sterling lost around 40%, reaching $1.60.
But it recovered. By the early 1980s sterling was back above $2.40.
Then came the next bear phase, in which the pound would drop by more than 55% and reach an all-time
low against the dollar – $1.04. This was the era of the Falklands War and then the miners' strike.
But on the other side of the trade, the US dollar was showing extraordinary strength – so much so
that France, Germany, Japan, the US and the UK eventually colluded to depreciate it.
This was the Plaza Accord of 1985. Again sterling would recover – this time to $2.
In 1992, sterling hit another marked low. This was Black Wednesday, when the Bank of England
took the UK out of the European Exchange Rate Mechanism (ERM). It fell from $2 to $1.40 – a 30%
loss. The killing that George Soros made selling the pound sealed his reputation.
Eight years later, around 2000, as the dotcom bubble collapsed, so the pound lost 20%
of its value. Again it recovered. By 2007
it was above $2.10. Can you imagine? The pound above two bucks only 15 years ago.
Then we got the financial crisis of 2008 and the pound lost 35%, hitting a low of $1.36.
The next low came in 2016 with the infamous Flash Crash of 2016, shortly after Theresa May's speech
at the Conservative Party Conference. Having been above $1.70 at one point earlier in this cycle,
it hit a low of $1.14, according to some measures. The overall drop from high to low was almost 35%.
The subsequent bull market was about the limpest in living memory – I expected much more. The 2016
low was retested in the Corona panic, and then we got that rally above $1.40 which peaked in August.
To cut to the chase…by 2025 the pound will go to parity with the US dollar
Here’s the illustration of everything I’ve just described. Don’t you love
charts? They get to the point much quicker.
Now the big question is: was that high at $1.42 last summer the high?
Well, in previous articles on this subject I’ve often said we should be looking
to get short on strength in the 2022-23 time frame. So last summer is perhaps a bit early.
And it’s worth noting that the pound trades in line with financial assets – no surprise
given how geared our economy is to finance – so
when you get stock market panics (eg 2008 and 2020) the pound always takes a hit.
The stage is certainly set for another market decline – international conflict, out-of-control
inflation, weak, strategy-free leadership, jittery markets – but these circumstances are
not unique to the UK. Are we that much weaker than our competitors? I’m not sure.
I would hope for one last hurrah before the declines, but they may already have begun.
Hold on to your gold and your bitcoins! You’ll be glad of them.
By the way, gold might have been a rubbish asset through the past decade, if you measure it in
US dollars. But sterling owners of gold will have a very different perspective.
I predict that by 2025 sterling will have hit parity with the US dollar.
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I’ll be back with another video very soon.
Until then cheerio