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Pound Collapse: “I Just Can’t Wait to Be King”

September 28, 2022

"This week is unbelievable. Uncertainty. What the folks at Foreign Affairs describe as the age of uncertainty, what we exist in now, this is an amazing week to 10 days. The rapid deterioration of financial conditions. There are a few times in our professional lives where we see the rapid deterioration of financial conditions happen so quickly." - David McAlvany

Kevin: Welcome to the McAlvany Weekly Commentary. I’m Kevin Orrick along with David McAlvany. We were just talking to the person who does the editing and recording of the show, and he’s a pilot. I agree with him. He says, “Flying is hours of boredom interrupted by moments of sheer terror.” It reminds me of the Lenin quote, and I know your dad likes this quote, “There are decades where nothing happens and weeks where decades happen.” Look at this week.

David: Yeah, in one week period, can you recall so many macro events unfolding all at once? There are financial dislocations everywhere and most disturbingly, the dislocations are moving to the core of the financial system. You’ve got government debt and your largest governments, the G7 currencies under immense pressure. Reuters defaulted to something very dramatic describing it as a macro tsunami.

Kevin: Well, England lost their queen of 70 years. What is it? 70 years, seven months, seven days. I can’t remember exactly how that works, but I heard this morning that that’s almost a third of American history with one single queen. So you have the loss of the queen, and I know that that’s a big deal in Britain, but you also have the breakdown of the British pound. I mean, do you remember when the pound was two or three times the value of the dollar? At this point it’s just about the same?

David: Yeah, In fact, it was at one time four to one, and then it made that cataclysmic crash to two to one. And now we’ve seen it move basically to one to one. British yields exploded higher, and that was followed by European yields across the periphery if you’re talking about Greek and Italian, and Portuguese, pound reached a record low surpassing the levels that forced the Plaza Accord in 1985. So dollar strength in 1985, of course, we had the Volcker rates, which attracted a lot of foreign capital into the US. And the dollar strengthened and strengthened, and strengthened, to the point where you had a collection of countries gather to figure out how to, in a coordinated fashion, devalue the dollar so that they could relieve the pressure on those other major world currencies. So balance sheet losses right now for the Bank of England are totaling to over $215 billion from the increase in interest rates. Billion with a B. And they’re, of course, just in the next week to 10 days scheduled to sell off assets, reduce the size of their balance sheet, and add more surplus, add more supply, to the bond market at exactly the wrong time, when there’s not much appetite for the British gilts—what they call the Treasurys.

Kevin: And just like Dorothy was no longer in Kansas, we’re no longer in 1985. I mean the dollar, what is it, 20 year highs right now with the dollar’s reaching. Maybe it’s going to go even higher than that. But you look at what’s going on now, we’re not about to try to save the rest of the world by devaluing the dollar at this point. It sounds to me like Powell is fairly committed.

David: Whenever you’re looking at markets and there’s big moves, they tend to gain steam and move towards sort of the parabolic at the tail end. So the most dramatic moves and the most ground is covered in the shortest period of time just as the market is getting ready to tank.

Kevin: You think that’s going to happen with the dollar, another spike up?