The Pound is tanking again. The currency fell as low as $1.0327 over the weekend. It has fallen nearly 8% since Thursday and 21% since the start of the year and the Bank of England is due to jump in this week to tackle the problem. The biggest problem for the pound is the US dollar’s strength. The FED is raising interest rates faster than the UK which makes it a favourable place for investors to park their money. Both the US and the UK are considered risk-free (there’s always a risk) but with the USA Bonds offering a higher rate than the UK Gilts (bonds) it’s obvious the US will get the business.

The bleak economic situation in the UK looks like it could have been easily avoided to me. I am not an economist and as you read this, you may pick many faults and determine I don’t know what I’m talking about, and I will be happy to be educated further.

This government seems to be run by random people, random unelected people. With a new face every time a prime minister has a shuffle. I understand that Rishi Sunak has experience in economics and was made chancellor on the back of this, but did he have the qualifications to run a country? I suspect in the treasury department there’s a well of experience supporting him, but who are these people? I have nerdy visions of a professor with several Ph.D.’s and in the past, I’ve put my faith in their extremely large economic brains. But now I feel my 10-year son could have made better decisions when it came to tackling covid. Who advised Rishi that throwing money at people during the pandemic was a good idea. Four friends of mine whilst working through covid were given a no-questions-asked sum of £4,000 -£10,000. They were the first to admit they were no need for these payments, and they laughed all the way to the local car showroom. The eat-out-to-help-out joke and a pause to stamp duty was another way of throwing money at people, encouraging the spread of covid and supporting industries that didn’t need support. The numerous more disastrous activities coming from the treasury department made it inevitable that inflation was too sore in these post covid years but an attitude of “we’ll deal with it later” has been pursued.

Whilst we were all skipping down to B&Q to buy a new garden lounge set or book a holiday to Bora Bora, why wasn’t the Bank of England slowly raising interest rates, would it have even been noticed? The most probable answer is that the government wants the interest on its debt payments to stay low and inflate their way out of the problem. I think the problem we now have is more severe and reinforces my theory that the advising economists behind the scenes are making grave mistakes and need to be held accountable for the experiments they perform on our financial system.

So, what can the bank of England do? In 1992 a turning point for its membership in the European Union, Britain crashed out of the Exchange Rate Mechanism, a system designed to reduce currency fluctuations ahead of the launch of the euro. This led to a sharp devaluation in the pound. In a bid to prop up the pound, the government hiked interest rates to 15% and the Bank of England sold $40 billion worth of reserves in the months leading to Black Wednesday. A rate increase of this magnitude would indeed prop up the pound but devastate the economy and induced a recession in my view, so severe, it would make 2008 look like a stroll in the park. I don’t think the Bank of England or rather the British people would be able to service the unnecessary debt they have accrued, leading to more failures for decades to come.

A more familiar-sounding situation has me looking at the 1970s whilst Britain’s economy was in dire straits. Attempts to induce a boom early in the decade resulted in a severe bust a few years later.

Inflation topped 25% in 1975 and the pound was in free fall, eventually hitting a then-record low of $1.58 in October 1976.

A dismal set of government borrowing forecasts suggested Britain might no longer be able to pay its way, forcing finance the government to seek outside help from the International Monetary Fund, a blow to Britain’s prestige as a major economic power.

I don’t know what the answer is, I got a D in maths, I just like a ramble on about my thoughts. I also want to be able to explore a way to position my portfolio the best I can to protect it from any more disastrous decisions made by the bank and Government. I suspect I am going to struggle to do this.

I am still sitting on 90% cash and hold one position that is still to hit the stop loss, that being Volex PLC. Volex trades in dollars which is good for the financials, and at present shows no signs of trouble. I need to look at other companies, mainly in the FTSE 100 that also deal in dollars and look for potential buy-out opportunities from overseas investors.

I am not looking to swing trade any US companies soon. If the BoE does increase the value of the pound, that would not be good for any US position.

Quick Example

100 Shares of Amazon @ $113 = $11,300

Pound to Dollar Exchange Rate = $1.03

100 Shares of Amazon = £10,970.87

If Amazon stays the same but the GBP/USD rises to $1.20

100 shares of Amazon = £9,416.66 loss of £ 1,554.21

If Amazon rises 10% but the GBP/USD also rises to $1.20

100 Shares of Amazon = $124.3 = $12,430

GBP/USD @ $1.20 = £10,358 loss of £612.87

So, what I’m trying to say is if you don’t factor these foreign exchange rates into your trade, you could be getting very excited at the moves your US company is making, then feel very disappointed when it comes to selling or very elated if the pound sinks lower, which seems probable. I know the above might sound obvious but in the current volatile currency markets, more emphasis should be put on currency risks, so many equity traders don’t even look at the Forex Market.