The Flying Frisby - money, markets and more The British Pound: Big Falls Coming?
I was going to call this article “a tale of national betrayal.” Sterling is a national disgrace. If ever there was something that symbolised the decline of Britain from world leader to tin pot sh*te show, it is our currency. The US dollar has lost at least 93% of its purchasing power since World War Two. The pound, which was a few cents shy of $5 at the onset of war and today sits at $1.24, has lost an additional 75% against the US dollar.
It’s shocking. An appalling betrayal by successive leaderships. When you devalue your currency, you devalue your entire country: the people’s labour, their savings, their assets.
As long-time readers will know, I have identified a long-term cycle in the pound, and the next capitulation is due this year. If this plays out, then the pound is about to hit the skids.
Don’t get wedded to the idea of a cycle
Let me start with my usual disclaimer: it’s easy to look back at the past, find some arbitrary pattern, declare it a cycle, write some persuasive copy, and, all of a sudden, you’re a guru. When things don’t pan out as they should, you blame some outside factor, usually the government.
Cycles do exist. We have the seasons, the moons, the cycle of life. There are good times and bad times. There are investment cycles too: bull markets and bear markets, the Kondratiev cycle, the 18-year cycle in real estate, commodities super-cycles, the 4-year presidential cycle. Mining is cyclical. New tech goes through a clear cycle as it evolves. I’m a big believer in the hype cycle.
Yet actually trading them in real time is hard.
Thinking in terms of cycles does help you to frame the bigger picture: it can give you an idea where you are in the grand scheme of things. But you can easily get wedded to the idea of a particular cycle, and then it’s very hard to break the mindset, even if real life right in front of you is telling a very different story.
I remember people in the years after the Global Financial Crisis (GFC) being wedded to the idea of Kondratiev Winter and the next Great Depression. The Dow was going to 1,000, they said. It never went close and here we are today above 38,000. The problem was that the Kondratiev Winter argument was persuasive, and once you’ve been hooked by a narrative, it’s hard to break its shackles.
If you are interested in buying gold, check out my recent report. I have a feeling it is going to come in very handy in the not-too-distant future. My recommended bullion dealer is the Pure Gold Company.
So to Frisby’s Flux
With all that said, I am now going to argue that there is an 8ish-year cycle in the British pound that goes all the way back to 1968, at least. I’ve called it Frisby’s Flux, because I was the first to observe it and I’ve got to get my name on something.
We’ll start with a quick skim through recent sterling history, then we’ll look at a chart, and finally, we’ll look at what’s coming next.
In November 1967, the British government devalued the pound by 14% from $2.80 to $2.40 in order to “achieve a substantial surplus on the balance of payments consistent with economic growth and full employment”.
In the early 1970s, after the Nixon Shock, the pound rallied against the dollar, but fast forward to 1976, eight (ish) years on, and we are in the year of the IMF crisis when Chancellor Dennis Healy is said to have gone “cap in hand” to borrow money from them. $3.9bn was the agreed sum, at the time the largest loan ever requested. Inflation in the UK reached 24%. From high to low, sterling lost around 40%, reaching $1.60.
The pound recovered, and by the early 1980s, sterling was back above $2.40.
Move forward eight years and we come to 1984 when the pound would drop by more than 55% to reach an all-time low against the dollar – $1.04 - in early 1985. This was during the miners’ strike and shortly after the Falklands War, but the real issue was extraordinary US dollar strength, something which took collusion between the G5 nations of France, Germany, Japan, the US and the UK and the Plaza Accord of 1985 to depreciate it.
Again sterling would recover – this time to $2.
Eight years later and we come to the notorious cycle low of 1992 and Black Wednesday, the day that sealed George Soros’s reputation with his bet against the pound. Sterling fell to $1.40 – a 30% loss - as the Bank of England took the UK out of the European Exchange Rate Mechanism.
Eight years later, in 2000, the Dotcom bubble collapsed, and the pound lost 20% of its value, again falling to $1.40. (The pound is geared to financial markets. When they struggle it usually does too).
But again it recovered. By 2007, it was above $2.10. Can you imagine? The pound above two bucks, and not so long ago.
Then, in 2008, came the GFC and, yup, the pound lost 35%, hitting a low of $1.36. What did I say about the pound being geared to financial markets?
The next low came in 2016 with the infamous Flash Crash , 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%. (As that $1.14 number came in the early hours of the morning, it is not showing up on the chart below).
Here we are in 2024, eight years on. The next capitulation is due. Are we about to enter the drop zone? Could well be.
Here is an illustration of the cycle. You can see how every eight years, the pound hits a low. (The chart starts at 1970, I couldn’t find data going back to 1967-68).
Show this chart to your friends
So what’s next?
And how to protect yourself? And possibly even profit?