Those stock market rises you’re seeing ain’t real, guys

I am surprised at the nonchalance in the UK personal finance scene about the fall in the pound as a result of the Brexit vote. I am not making a long-term prognosis about whether or not Brexit is a good thing, but what is incontrovertible is that it has led to a sudden drop in the pound relative to other currencies. To avoid the vicissitudes of other countries’ fortunes I am using IMF Special Drawing Rights to compare the pound with. Let’s have a definition

The value of the SDR is currently based on a basket of four major currencies: the U.S. dollar, euro, the Japanese yen, and pound sterling. The basket will be expanded to include the Chinese renminbi (RMB) as the fifth currency, effective October 1, 2016.

Since the SDRs include the pound, a fall in the pound slightly devalues the SDRs, so the picture looks slightly better than it really is for a drop in the pound 😉 If you don’t trust those cheese-eating varmints at the IMF you can see the same effect in the good ole United States Dollar down below.

A fall in the pound relative to other currencies makes us poorer than the rest of the world. We have to exchange more pounds for foreign goods – these foreign goods include most of the food we eat and the fuel we heat our homes with and put in our cars, it’s not academic. Because of lags in the distribution of goods this shows up as higher prices over time, typically over a year. I was a Remain voter so my view is that this change is a strategic impairment of the pound. This is my opinion – it is perfectly possible that the pound will rise over the coming year as the myriad delights of Brexit make themselves manifest in a cornucopia of joy. In that case my thesis is entirely wrong, and it will all come good. If you believe, nay, if you know that to be the case then save yourself the trouble and stop reading this pusillanimous piffle right now.

Let’s have a fact check – has Brexit made the pound fall?

how many IMF SDRs (ticker XDR) for a pound

I think that’s a yes, so far. Probably about 10% this year. It’s not the only time, we all got a hell of a lot poorer following the financial crisis. Stands to reason, we make jack shit[ref]we actually manufacture more in real terms value than we did in the heyday of manufacturing in the 1970s, but do it with far fewer people[/ref] and sell financial services, and the GFC was, well, a global financial crisis. And that’s what most of the services are, I guess.

We don't really make anything any more. Source is linked to image (fig 8)
We don’t really make anything any more. Data source is linked to image (fig 8)

So we took it straight between the eyes

the 10 year story
the 10 year story

Does it matter?

Well, Britain imports most of its food and fuel, while we focus on being clever whizzes at financial services, Ricardian advantage to the fore, eh. So you get to pay more for that food and fuel compared to people in other countries. However, there have been deflationary effects on these – the oil price has dropped since the GFC for instance. So let’s narrow this to does it matter to investors?

Well, yeah. Let’s take a look at the price of VWRL in pounds. Hmm, that’s not so bad, it actually went up after Brexit. I managed to buy some in the confusion, so I am feeling chipper, look at me, ain’t I clever?

VWRL in the GBP I have got
VWRL in the GBP I have got

Now if I were an American and had done that after the initial drop, I would be feeling different. Not bad, but no turbo boosters from the falling pound.

VWRL in the USD I haven't got
VWRL in the USD I haven’t got

So the fall in the pound has made foreign assets dearer for me compared to if I were not buying with pounds. While that makes me think whoopee-do when I look at my ISA screen and I think hey, I am a fantastic investor. Not only did I stay the course through Brexit and even buy, I am up on the deal because all the numbers are going up, it also means something else.

I have lost my compass

I have lost my main navigational instrument, and my ISA allowance has just fallen by 10% in real terms compared to the rest of the world. So have my tax allowances, and for those rich enough to worry about such things, so has your Lifetime allowance.

Now one of the cogent arguments against this mattering is

Some commentators seem to think that there’s both a perfect level for sterling and that they know what it is. I didn’t hear wailing when sterling fell from over $1.70 in 2014 to under $1.50 in 2015. If it ends up at c$1.40 after the current turmoil, so what? No need to sacrifice our first born to Cthulhu just yet.

Well, I was wailing earlier in the year 😉 There is something up with me, I am much more nervous about the pound than most other people. It scared me in 2009 as I was shovelling money into foreign assets in my AVCs while Mervyn King was printing money and devaluing the pound. So let’s take a butcher’s hook at the GBP against USD (unfortunately I couldn’t find one for IMF SDRs going out that far)

GBP against USD
GBP against USD

This is not a continuous story of success, or even random noise against a mean, and it’s a headwind against UK investment – even against the Euro we are 20% down over the same period. If I’d held exactly the same portfolio as an American investor over those 12 years, I would pat myself on the back because my numbers on my screen would have risen 40% up on his. And I would be lying to myself. The truth lies somewhere in between, and we normally just don’t see that.

So I’m not saying I know what the perfect level of sterling is. Devaluation of the currency is how governments charge us for the taxes we aren’t prepared to pay for the services we demand, though this last hit can’t be blamed on the government. So while I don’t know what the level should be, I do know that it’s headed in the wrong direction, has been for years, and I’m getting poorer relative to the rest of the world if I hold cash in GBP. We will notice that in higher inflation in the years to come, particularly if the oil price continues to rise in USD. Of course Donald Trump may help us with that in November, though I suspect we may have other problems then.

It is true that long term adjustments to exchange rates are A Good Thing. It allowed the Greeks to pay themselves more and more and feel good about that while the Drachma depreciated so tourists could still afford to go there and their rice filled vine leaves were cheaper in British supermarkets in Pounds. And then they joined the Euro. Basically floating exchange rates allow you to be lazy bastards collectively relative to the rest of the world and get away with it. If somebody asks you to take a pay cut of 10% there’s hell to pay and rioting on the streets. If you get the same pay and you currency drops by 10% then there’s the same fiscal result but no rioting. Stopping that happening is the original sin behind the Euro, but that’s a fight for a different day. I am still of the opinion that the Euro will blow one day, and we may be glad of our Brexiteering spirit as blood and guts rain down in the aftermath.

Those stock market rises you’re seeing ain’t real, guys

And being less productive is what we have all just voted for, but I am surprised at the simplicity of UK investors so being chuffed at their portfolios going up. Now of course that’s a win on having sat on the cash, or worse still, having sold and then rebuying, but do the thought experiment. Say you bought your portfolio with pounds the night of the Referendum. For some reason it bounces, so you issue the same purchase order now. And it’s dearer, so you get to pay more money for the same portfolio. That is Not a Good Thing. When that happens to the price of food, petrol, Starbucks lattes, wine and German cars that won’t be a good thing either.

Which is why I wince when people celebrate on the rise in the stock market. It’s not real. Indeed, my portfolio is the highest it’s even been. My pension will be worth less, the cash I hold is worth less, yes I am richer in the ISA but poorer is so many other areas. Oh and I am stuck on an island with these guys.


Deep joy. I’m putting a hold on the champagne.


41 thoughts on “Those stock market rises you’re seeing ain’t real, guys”

  1. I’m not trying to be deliberately awkward, or contrarian – just trying to understand. (For anyone arriving here fresh, the Cthulhu quote was from me.)

    You may be right that what just happened will give rise to increasing inflation. (Park to one side any positives that might come from that, such as more UK exports and UK goods becoming (relatively) cheaper, erosion of debt etc).

    But surely, the proper measure of “how much poorer” I just got is the movement in inflation (postulated over about a year, in your article)?

    While the £ has fallen 10%, I suspect that its impact on inflation will be under 1%. Certainly not 10%. For five reasons:

    1. Not everything we buy is denominated in $.
    2. Other currencies (e.g. the Euro) have also fallen so the inflationary impact on things we buy from the EU (etc) is much lessened.
    3. There are many other factors that impact the cost of things in the shops, other than the strength of the pound. Retailers’ margins. Price wars. Price of fuel (yes, denominated in $, but vastly more variable than movements in £:$). Technological innovation (tech just gets cheaper and cheaper). Etc.
    4. Interest rates (so both good – savings – and bad – mortgages) do not (do they?) follow the value of the £.
    5. House prices might fall / stagnate which will put downward pressure on (some) measures of inflation (maybe the same as point 4?). Ignore whether falling house prices good or bad.

    I accept that there are other issues – we all have our own personal inflation depending on what we buy. In addition if “what just happened” causes a job loss, reduction in hours, or a lower pay-rise then, yes, big impact. But if house prices fall, your hard-won deposit gets you more.

    I also accept that a reduction in GDP would cause us all to be poorer, but I’m trying to specifically link the sharp drop in the pound to the “we’re 10% poorer” feeling. (I accept that you’re in the majority on this, and I’m in the minority! :-))

    But the straight “I just got 10% poorer” surely would only apply if you converted your net worth into $ and then only bought $-denominated goods with it? But that’s not me. Or you.


    1. For many people it will be less so, perhaps I am paranoid because they really are out to get me!

      The getting poorer does apply to me more than average, because I am at the end of my working life, as a result all I have accumulated has suffered the loss, relative to people in other First World countries. Some of that has been mitigated in the illusory rise in stock values. To my shame I had never really though of equities as a hedge against debasement of the currency though it’s obvious in hindsight. Most peopel save (if they do save) cash, so they will eat the eventual hit, though I suppose those with mortgages will get a break.

      Brits still working may hope to recoup the loss in inflation-adjusted wage increases, if they are the sort of workers likely to be reading PF blogs. I am fortunate enough to have a deferred pension that is within limits RPI linked, so perhaps that will be me too. Fingers crossed and all that because there are tail risks of low bond values that could wipe that out.

      I accept the charge of journalistic hyperbole ;), it won’t be -10% just like that. But anybody seeing their portfolio go up by less than 10% is still in negative territory. And I’m seeing too many people look at the numbers on their portfolio up and saying it was all right then. It isn’t.


  2. Given that the pound may move lower, how would people recommend trying to preserve the purchasing power of our hard earned savings? Gold, short dated US treasuries, currency ETF’s? I’ve increased my gold position but also looking for other options.



    1. I went for gold and VWRL. The trouble with gold and currency is hedging the £ is all they do – whereas foreign assets hopefully produce an income while they’re covering your backside. Of course a lot of VWRL is the US, and not only is that at high valuations but there are Presidential elections in November. I’m not sure I’d want to buy it now, but with slightly less fallen pounds and while it was down due to Brexit I felt it was worth a go relative to keeping the cash.


  3. I think richard may be right here. the value of the pound *may* have an effect on purchasing power but you have to wait for it to filter through the system to know just how much (unless your buying dollars for a trip to disneyworld). It strikes me that 10% drop vs dollar = 10% poorer is to over simplify and call it too soon.

    in other words, rather than converting portfolios to SDR units (had never heard of those before today). You should just adjust your portfolio returns to account for inflation, i.e. measure real rather than nominal return.

    If you want to get really accurate calculate your own personal rate of inflation from your expenses data (you do do detailed accounts every month right?) then work out your real return based on that.


  4. I do all my financial analysis/forecasting in real terms and keep a monthly watch on inflation. I have no idea about how to forecast future inflation so I use a (prudent?) 2.5% real return on a all-world equity portfolio and 0% real return on cash. I have no bonds – I use NS&I ILSC as a (poor) proxy (i.e. guaranteed c0% real return).

    For various reasons (some in my control, some less so) my expenditure has halved in the last 12m (but my income hasn’t moved). A few pence on the price of petrol / milk / Spanish strawberries pales into insignificance. However to many people even very small price rises can cause real harm to their living standards, so I fully accept I’m more looking for theory here, rather than trying to second guess my future living standards.

    I wished I’d phrased my original post a little more succinctly:

    If, over a week the £ had strengthened by 10% and the FTSE had fallen 3% (so the mirror image of what happened), would financial commentators have written blog posts saying “we’re all significantly better off by c10%” or “the LTA has effectively gone up 10%”?


  5. At varying speeds since the 2008 crash, most of the major economies have been effectively devaluing their currencies to boost exports & inflate away massive debts. They all of course deny this race to the bottom in public as it smacks of poor governance of the economy & as you said, stealth taxation.

    So hopefully the ~10% current UK devaluation may be tempered by parallel devaluations in the currencies of the countries we trade with – that could soften the blow to living standards if it swings in our favour. Then you have China exporting deflation to avoid politically unpalatable mass redundancies in their zombie companies & indeed whole industrial sectors.

    As for the calm with which UK investors reacted to the effective devaluation in the £, I’m guessing it’s because most simply don’t understand the likely consequences & those who do carried out evasive measures before the wisdom of the crowd pressed the red button. My pension, in a basket of currencies [mostly the US $] is nominally up ~8%, but I’m not celebrating because I reckoned that just equals the fall in the £. Where’s wee Willie Hague to save the £ now when we need him hey? 🙂 …..that knight in a white shining baseball cap.


  6. Gad sir, spanish strawberries! I didn’t leave the EU to eat spanish strawberries!

    Good work on halving your expenses – hope its all for positive reasons.


    1. Particularly when you can get British strawberries at this time and they tend to taste a little better. Not because there’s anything wrong with Spanish ones, but simply because they haven’t travelled so far or so long. Will Brexit make our food taste better – well, assuming you can still afford it that is!


      1. yeh – those spanish strawberries coming over here, displacing all our good, honest british strawberries to the top and bottom shelves.

        theres a stewart lee sketch which puts immigration into perspective:

        from about 4:33, but I’d suggest watching the whole thing if you’ve got the time.


  7. Race to the bottom? At last, a sport that the UK can not only participate in, but can win. Go Team UK!

    I always track my expenses and do annual summaries. For 2015 I thought I’d see whether it was possible to cut out all the rubbish. A sort of financial diet. Turns out it was (I’m a lot thinner too; Aldi cat food – cheap and nutritious (“not just for cats”)).

    Now I look back on a comparative basis and wonder how on earth I managed to spend so much previously and have nothing to show for it.

    I probably need to ease off a bit and spend a little more. But I know it can be done; and while I didn’t need to it really gave me a sense of fiscal satisfaction.


    1. Now I look back on a comparative basis and wonder how on earth I managed to spend so much previously and have nothing to show for it.

      hehe – me too. I have come out of fiscal purdah now and still wonder how I spent that much.


  8. It’s definitely a mixed basket.
    Technically, in pounds, the currency you use for your everyday life, you’re richer, because you own securities in USD.
    That makes you richer than your neighbors, which ultimately is what matters. In your position, I’d be happy: you’ve technically done geographical arbitrage by choosing to live in a country that just became poorer, and you didn’t even have to move.

    The only issue would be if you *really* need to buy lots of imported goods. Do you really? I’m sure there’s still some level of “local farmers” and “clean, local energy” effort in the UK to not have to rely on foreign oil, right?


    1. About half of the UK’s food by value is imported, though in times of financial stress we might be able to do better (staples are low-value and Peruvian asparagus is high-value, you can do without Peruvian asparagus easier than you can do without bread).

      The UK imports about 50% of energy (p9), and the direction of travel is very definitely on the wrong track.

      But yes, you have a point inasmuch as food and fuel are hardly the dominant costs in my life. This is not the case for many people in the UK…


  9. I haven’t gloated about rises – I was about flat last weekend in pound terms compared to a month ago, and I am too lazy to have revalued my portfolio since – but to me the fact that I’m down no more than 10% a week after an enormous shock to global markets is pretty good all by itself, especially given I’m living right here at the heart of the disturbance.

    I was late to the diversification party – I started investing in 1997-ish following advice from Motley Fool UK (I think I got a book of theirs from the library – yes, ink and paper, kids!) and back then I suspect global trackers weren’t so common, or cheap, or were viewed as exotic – and when I did get the invite I only had a year or so before the pound started to drop against the dollar (pre-Brexit) and I couldn’t bring myself to invest any more (even though rationally I believe I shouldn’t engage in market timing, I also felt it was wrong to make huge turn-on-a-sixpence changes in my portfolio and wanted to move gradually). But I got some done, and it turns out that in hindsight those FTSE 100 investments are actually relatively globally diversified anyway.

    I do think we’re projecting the current situation a little too confidently into the future. There’s huge amounts of uncertainty over the next 3-12 months and the pound could be much higher or lower in a year’s time – even if you think the probability is to the downside, that still doesn’t argue much for taking today’s valuation too seriously.

    (Even pre-Brexit I found myself dreamily thinking that I should have piled into US stocks when the pound was at $2 in 2006-ish, but back then there was no Monevator and if I even thought about it I’d have regarded US trackers as a breach of the passive lessons I’d learned from TMF. I feel sad – if not surprised – when I see them pimping their share picking service these days, they seemed such pure passive guys in the early days and they did me a huge service putting their advice out there.)


    1. I’ve tried all morning not to gloat. Been trying to hold it in. But I’m fit to burst. Better Out than In (see what I did there?). I’m rich! Praise all the gods. I’m rich. Rich. Rich, I tell you. Rich!

      Okay, only on paper and maybe tomorrow it will all have gone. But my net asset screen looks like there’s been an explosion in a green paint factory.

      You’re absolutely right (IMHO, but what do I know) about Brexit being overblown. Even if Article 50 were triggered today we’d only be 1% of the way there. Extrapolate on the first 1%? Nah. It’s amazing that some commentators (who called the referendum wrong 24 hours before the vote) are now absolutely certain as to what the next decade holds. Reminds me of the old joke – the only person more dangerous than an amateur economist is a professional economist. Some financial commentators couldn’t find their fundamentals with two hands and a flashlight.

      Look at the facts. 52% Out on a 72% turnout – hardly a landslide. PM Remain, potential new PM “reluctantly” Remain. (Current) Chancellor Remain. All main parties, and majority of their individual MPs, Remain. Mark Carney Remain. BBC Remain. The City and many businesses Remain. Obama Remain. (Trump and Tony Blair cancel each other out!). EU Remain. Well, mostly.

      Is it likely that all of them, plus the G7, G8, G20, G3.14159… Davos, Bilderberg, etc and all the CEOs of Goldman Sachs, Mckinsey, Clifford Chance etc etc are just going to shrug their shoulders, fire their staff, close their businesses and get back to golf?

      I would say that Hard Brexit was never on the cards – it’s not what the average Leaver wanted (despite what some Remainers say). So we’ll aim for soft Brexit with respect to the current EU position. But – once Juncker et al have calmed down and been spoken to by other national heads – the EU will move slightly towards the UK position. There will be blue water between the UK and EU in – what shall we say? – 5 years. 10? But it’s not going to be a Little England moored offshore from a single country called Europa that has full political, fiscal and military unity.

      Still no need to panic. Zombies are not walking the streets. It’s not like there’s been a world-wide banking crash. Or that Tony and George have invaded somewhere most of us couldn’t find on a map. (Is Iraq to the left, or the right, of Iran?) Or that Labour won the election. Jezza as PM? Now THAT would put the wind up my portfolio. And my kilt.

      No-one’s going to be deported. (But, you know, I’d send Mark Carney back to Canada and George Osborne back to Transylvania. Those two aside, I’m all for managed immigration.)

      Portfolio up 6%. Pound down 10% against the dollar. (My personal) inflation might rise c1% in a year. I genuinely reckon that – as of today – I’m 5% better off in my portfolio. House prices might tank, GDP might plummet. Who knows? But today I’m 5% up. Somebody tell me I’m wrong. (That was rhetorical; please don’t…I’m happy in my bubble.)

      And, don’t forget, most of the doom predictions are that we’ll do less well that we would have if we’d stayed in the EU. So, over 15 years we grow GDP by 25% rather than 30% (say)? That end point’s totally different (in effect and psychologically, if not numerically) to growing 30% and then dropping rapidly 5%. You don’t miss what you’ve never had. Perhaps GDP would be greater if Thatcher hadn’t been deposed, or Tony Blair hadn’t become PM, or if we’d not joined the EU (or whatever it was then) in the 70s, or if we’d stayed in the ERM? No idea – but I don’t feel poorer simply because one of those counterfactuals didn’t happen. Less jam tomorrow is different from having the jam, and then someone taking it away. My feeling is that there’ll be a short- and medium-term dip followed by a long-term benefit for Brexit. However as we might be getting Brexit-very-Lite maybe little will happen. But I’m neither an amateur nor a professional economist…


      1. “Less jam tomorrow is different from having the jam, and then someone taking it away.” I do have a feeling we might get some of our jam taken away over the next few weeks or months – to give an artificial example, it might be down 10-30% over the next six months then up whatever% a year until we average out at 25% higher in 15 years, whereas the remain situation might have been smoother growth towards 30% over 15 years. But we just don’t know right now, and there isn’t much we can do about it anyway.

        (Love the jam-based explanation, BTW!)


  10. Compared to the average person in the UK if you have a large portfolio consisting of mostly foreign equities, but denominated in pounds then you will be relatively better off.

    If you look at the average person, they have savings in £’s, and are looking at a potential house price crash.

    Goods and services are sold relative to what peoples abilities to pay for them and necessity. The net effect will be nothing like 10% on everything for most people and will likely bring opportunities.

    Right now I am quite happy. My portfolio is up 12% in GBP terms, thanks to a large 25% gold holding, and foreign REIT’s and emerging markets ETF’s have all done nicely too in GBP. I am looking to sell my house and then upsize to take advantage of the uncertainty and potential house price crash.

    I am not saying I am going to do well out of it, but I think I have a better chance than the average person.


    1. Absolutely agree, it was the precise reason I pitched in for foreign assets, and the HYP is mainly firms form the FTSE100. We have lost less, unless @Richard is right and the inflationary effect only turns out to be 1%. I’m nto convinced that will be the outcome, but either way the tactics of getting money out of the Pound was a decent move.


  11. The pound £ fell 5% against the US dollar in 2014 and again in 2015 and inflation remained subdued.The pound fell much further in 1992 and 2008 and inflation remained subdued. Will a 10% fall in the pound in 2016 have that much impact on UK inflation?


    1. I’m gonna confidently predict “subdued”. Of all the things that effect how “well off” we feel, I think that £:$ is towards the bottom of the list.


  12. In 1992 we were ejected from the ERM, I remember that because I was paying 15% interest rates on the mortgage, and in 2008 it’s hard to tease out the effect from all the crossfire of the GFC.

    The USD may be American exceptionalism, which is why I looked to SDRs to average out against more foreign currencies. And this one is a specifically British change. We didn’t make the USD higher, we specifically caused some capital flight from the UK by telling a bunch of Johnny Foreigners to get out of our way. So I would say this particular change will have more effect on UK inflation because it’s more about us than the others.

    But that’s the devil with forex, there’s no independent absolute reference point.


  13. The effect on the LTA is not so clearcut as it’s now linked to inflation so in theory the increase in inflation due to the drop in the pound could compensate.


    1. Please accept my apologies. I logged in and my posts of today had vanished. I posted my question and they came back. Gremlins.


    2. Now’t to do with me. I don’t think WordPress was griping or that there’s a minimum time limit on successive posts. Seems to be sorted now!


  14. As a Canadian my best currency comparison would be versus the USD. In the 10 years I’ve been retired the Canadian Dollar has ranged from a high of $1.09 versus the USD to a low of $.0.69. As we do the majority of our trade with the United States I would expect that this fluctuation would have a profound effect on my net worth, Strangely enough, I never felt poorer unless I travelled to the US or went on a cruise denominated in USD. Nor did I feel that much richer when the CAD was at an all time high just before the Global Financial Crisis.
    Staying at home the most serious effects to my pocketbook seem to be the unending inflation in local government services and sky rocketing electrical rates based on incredibly stupid decisions taken for “green” energy by the provincial government.
    When I visited the UK the GBP has been as high as $2.25 Canadian and right now it’s $1.70 but I doubt I’d notice a big difference in the cost of a holiday.
    I suppose I agree with Richard that it is very hard to project inflation effects from currency fluctuation.


  15. I suspect its increased taxation rather than inflation that will hit our savings. Even with Osborne abandoning his budget surplus plan, I suspect the economic slowdown will force tax changes. The LTA inflation link will break, and the pension tax relief changes abandoned in March will be back in November.


  16. As soon as there’s any stress on the country’s finances, the rulers of the day will go for the money they can get their hands on easily, so while the printing presses will be fired up again to churn out more monopoly money, stealth taxes are usually the default escape route to pay for bad polices.

    So, where will it come from? Well, the poor have mostly been squeezed dry & a lot are surviving only by leaning heavily on credit card & other types of debt, so that’s out. Then even if the wealthy mess up by having to pay some taxes, that should be more than balanced out with the unearned rise in their assets being inflated by the central bank printing money. [it seems helicopter money for the rich is Ok as long as it’s not called that openly] That leaves the rapidly shrinking ‘squeezed middle’, who’re mostly unable to escape being fleeced at source via the PAYE system & their employers. Even there it’s going to be a problem though, because as their numbers fall, you’ll therefore get diminishing returns.

    The UK’s economic decline will then pick up speed as it transitions into a second-world country & the ‘rivers of foreigners’ problem will ironically be solved as they self-deport to make better lives for themselves in countries where it’s still actually possible. The crueller irony is that as what is left of the UK stagnates, the young here who were shafted by their elders will not be able to follow/escape to Europe, so they will pay the most for what they mostly didn’t choose. Doesn’t sound like ‘taking back control’ to me…..


  17. At the moment it is early days…very early days…

    Its rather like Wiley E Coyote running over the edge of the cliff and not realising for quite some time that there is no solid ground under his feet and it os a long way dpwn


  18. A weaker pound could be a good thing for the UK.

    Before the vote for Brexit the IMF and Morgan Stanley opined that the pound was overvalued and that a weaker pound would help the UK close its current account deficit.

    “For foreign investors to be attracted by the UK they need to have a yield advantage,” say Morgan Stanley in a note to clients. “Unfortunately this is not currently offered, with the 10y UK gilt yield being 39bp below that of the US Treasury.”

    Therefore, argue Morgan Stanley, it may be difficult to fund the current account deficit via the yield angle, requiring FX weakness to make UK investments attractive.

    A cheaper exchange rate would help boost UK exports as goods and services produced in the country are made cheaper on the global market place.

    It will also offer a more attractive proposition to investors of all types based on the simple fact their currency buys them more of whatever it is they are seeking to invest in.


  19. A further factoid (or guess-oid) on the link (if such there is) between inflation and the strength of the pound (vs the dollar).

    Quoted in Saturday’s Telegraph Money pages “The BoE estimates that a 10% fall in sterling lifts CPI inflation by 0.75 of a percentage point after two or three years”.

    Of course there are wider issues, as discussed elsewhere here. The sharp falls in oil prices a year ago are about to drop out of the year on year CPI measures, so it was likely that inflation would have nudged up anyway even without the fall in the pound.


  20. @individualist I’d agree that the fall has benefits for the wider economy, it’s the illusory lift to portfolio values that needs to be discounted.

    @Richard the BoE report does explicitly state the assumptions of that model are likely to be invalid in the case of Brexit, however. I am surprised the inflationary effects are modelled as being that low, particularly given @individualists link to the balance of payments deficit. I note, however ,that that chart is not in inflation-adjust £, if you’re going to chart across 60 years pretty much everything will look like an exponential curve without inflation-adjustment.

    Perhaps, paradoxically, I am most exposed to the pound fallibg through my investment portfolio, and since the lessons of diversification came through early enough @Stockbeard is right. I’m shifting to the known unknown camp more as to the effect of the £ fall.


  21. @Ermine

    I think you most exposed to Brexit from the Conservative Party turning into the UK version of Law & Justice in Poland or Fidesz of Hungary

    Front runner to be our next prime minister Theresa May on EU citizens’r right to remain in the UK

    Her political bosom buddy Philip Hammond makes it clear she was not misunderstood


  22. Hi Ermine,

    What are your thoughts on Brexit on the future of UK property from the perspective of first-time buyers?

    Here are some of mine:

    1) Uncertainty has been created (negative for house prices)
    2) Interest rates will be lowered (positive for mortgages, hence prices)
    3) The UK Gilt may become more attractive to foreign buyers vs. the European equivalents (positive for mortgage rates, hence prices)
    4) House price:Earnings ratios are on the increase again and almost at the same level they were at the peak (negative for prices)

    My gut, as well as Martin Armstrong, is telling me that the recent increase in prices (from the low in 2013) is a dead cat bounce and I’m dubious to take on at least 15 years of mortgage repayments, with only 5 years of interest rate certainty.

    On the other hand, what’s my alternative? Rent I suppose, but that’s been a terrible investment for the duration of my life (I was 15 years old at the bottom of the market in 1996 and have lived with increasing property prices my entire working life, except for the small correction for 2007 – 2013, which I was hoping would manifest into something more significant).

    Thanks for any sage thoughts, having been there, done that…


    1. The trouble with UK property is that the price level is a political thing as much as a macroeconomic thing. I quite liked this NEF video which brings that out, though we should remember NEF is pretty left of centre.

      There are some positives on the political scene – not favouring BTL landlords relative to homebuyers is a start, though probably cancelled out by the disgraceful IHT exclusion on home capital value.

      There’s more inflation coming down the pike, which assists leveraged homebuyers (as long as they keep their jobs and get inflation-tracking pay rises) which might make you feel better about 15 years of mortgage payments. 15 years in itself implies the price-deposit to income ratio isn’t too dreadful in your case.

      I’d personally take the line that this is a known unknown and try on bet on both sides. If there’s a house price crash while you’re saving a deposit then that is your lucky day, but there are forces against that. But if you save in things that go up with houses then at least you push back on prices reducing your percentage deposit.

      I’d invest the deposit in things that either track the house price index, or are associated, let’s face it, house builders have taken a caning of late. I’ve used Castle Trust, simply because I was so angry at Help to Buy. TFS wrote about the House Crowd though there’s too much commercial property in that for my liking, commercial looks like a sick joke at the mo. There’s Hearthstone. Whatever it is you need to track res prop or the house price index. The downside of the investing approach is liquidity, you shouldn’t be in the stock market for periods of less than 5 years. Castle Trust’s index proposition is more straightforward. A subtle down is that the HPI tracks the UK index, and what’s the betting you want London or the SE which is higher than the average HPI.

      Or think laterally. Go North young man – yes pay is lower but prices are lower too. Although with today’s jobs market you need a city big enough to have options if you get downsized.

      From a big picture POV I wouldn’t personally buy a house at what seems to be the beginning of a contraction if I depended on a salary to pay a mortgage. The one big piece of luck I did have was never losing my job while I had a mortgage

      But look at my track record 😉 I’m the last person to follow regarding property!


      1. Thanks Ermine – I keep trying to treat UK property as a demographic / macroeconomic asset. I’m stupidly forgetting that it’s the most fiddled-with by the political classes!

        Agreed that it’s a known unknown, but that overall I’m probably better off buying than renting. Neither my wife or I want to move in with our parents!

        Prices are not unreasonable where I am (“Go North” you say, and luckily I’m already there – Belfast!) and prices are currently 3.8x average FTB salaries (Nationwide data). Data going back to 1983 provides the average of 3.2x and SD of 1.3, suggesting that they are well within historical norms. As you probably know, we had a much crazier house price bust than the rest of the UK and many of my friends / colleagues got caught out. One chose bankruptcy, another is stuck and another is an accidental landlord.

        My wife and I plan to take a mortgage that we can afford on one salary over 25 years, but aim to pay it off as quickly as possible, fixing for the first five.

        I’m planning, but not counting on, inflation coming down the line too. I hear there’s helicopter money coming soon to a country near you…


      2. 3.8 times isn’t so bad at all, after all, I bought at 5* my single salary ad survived although I had a 20% deposit. As a city Belfast gives you some employer resilience/diversification and a fix is no bad thing – you are most exposed to the risks in the first 5-10 years.

        And let’s face it, if 15 years is a realistic goal you’re on a better track than most FTBs. It’s getting enough equity early on to give yourself breathing space that matters. After all, if the price of your house falls by 10% but you’re moving because you need more space for children for example, you’re actually up on the deal because the fall on the new place is more than the loss on yours. You just need enough equity in the old place to not be underwater so you can move.

        Fingers crossed on Brexit/hard border with ROI issues, which seems a tragic piece of unintended collateral hazard


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