EDITOR'S LETTERMerryn Somerset Webb
In the middle of this week, the UK pound fell to the lowest in 168 years (or possibly more – the data’s a bit dodgy before that) as measured against a basket of the currencies of its major trading partners (Germany, France, the US, Japan and Italy). It is weaker than it was when we left the Gold Standard in the 1930s, weaker than it was when we left the European Exchange Rate Mechanism in 1992 and, of course, weaker than at the bottom of the financial crisis of 2008.
This can’t be dismissed lightly: it’s a big deal. But the question is – a big deal in which direction? Is it a nightmare for Britain, or a scary bout of volatility with a very silver lining. In our cover story, John Stepek has the answer. Sterling has been overvalued for years (we have been writing about this very thing in MoneyWeek since at least 2008) and it is generally accepted that our economy is horribly unbalanced: too much finance, too little of everything else. If we really want a more balanced economy the sterling crash could be “exactly the medicine we need”. It could bring us lower house prices, higher interest rates, better productivity, a genuine manufacturing resurgence, a reduced dependence on finance and perhaps even less of a north-south divide. Who could be against any of those things? They are, of course, the very things that almost all commentators on all sides have been claiming they want the state to deliver for years.
The other thing the 20%-odd fall in sterling does, of course, is render irrelevant all mutterings about post-Brexit tariffs. The top tariff rate is unlikely to be more than 10%, something that, as a letter to the FT points out, would bring “the price of British exports back to a little less than they were year ago”. Net effect: nothing at all.
The problem with this happy interpretion of the sterling slide is that this isn’t going to feel good going into Christmas. The UK imports 40% of its food, 90% of its clothes and around the same percentage of its toys. That means that dealing with all this currency volatility doesn’t just mean focusing on the long-term benefits to us all. It means acting to avoid short-term disadvantages. You might want to buy your Christmas claret and your made-in-China presents earlier than you usually do (price rises take a while to filter through). You should also scroll to pensions. There we look at the attempts by some MPs to water down the inflation protection on defined benefit pensions. Right now – with inflation super low – that might not seem like a particularly big deal. When inflation is 6% it will.
Finally, note that the best way to outrun inflation is to invest in stocks that can outrun it. With that in mind Max King looks at three excellent income trusts, and our interview this week is with Charles Heenan of Kennox. His aim, he tells us, is to make sure that the long-term value of the capital held in his fund is always protected. So far so very good (see interview).