Election ‘Chaos’ In UK Could Trigger ‘Lehman Moment’ For Pound
Election ‘Chaos’ In UK Could Trigger ‘Lehman Moment’ For Pound
Posted on April 24, 2015 by Mark O’Byrne — 2 Comments ↓
– UK economy a ’timebomb’ and will explode after election – Albert Edwards
– Telegraph warns of “Lehman Moment” stemming from possible election chaos
– Currency traders view pound as being particularly vulnerable
– Latest data shows UK poised to slip into deflation for the first time since 1960
– Polls place Labour and Tories neck and neck as election looms
– Hung parliament may force either side to enter coalition with potentially disliked partners
– Outright majority for either side would also lead to further uncertainty
– Political uncertainty may impact sterling and UK assets
– UK has massive debt and vulnerable to Eurozone debt crisis
With the British general election due in just under two weeks on May 7, concerns are growing about the outlook for the UK pound after the election and the long term outlook of the UK economy due to the extremely high levels of debt – particularly in the private sector in the UK.
UK debt has continued to rise throughout the recovery and has soared to an eye-watering £1.48 trillion. In recent days, a slew of foreign exchange analysts have warned that the pound is vulnerable to falling in value.
London’s Telegraph warned last week that election ‘chaos’ could lead to a “Lehman moment” for the pound. The pound has been in steady decline since July apparently due to traders pricing in uncertainty around the election. It is currently trading at $1.51, down from $1.71 in July.
The incumbent government have not reined in public and trade deficits and have been accused of juicing the property market and the economy to postpone a crisis until after the election. Indeed, the Guardian reports that the current account deficit “was the widest for more than 60 years in 2014″.
This is under a Tory government. The deficits would likely have been worse under a Labour or coalition government.
To compound the problem, data for February and March show that the UK is on the verge of deflation for the first time in over 25 years.
There was 0% inflation in both months. It was expected that data for March would show negative growth. In the event, the data was neutral which led to what is likely to be a temporary bounce for the pound.
The Telegraph quoted Forex.com analyst Kathleen Brooks as saying “If you got a big shock, say -0.3pc, I think that would be when the panic stations would ring and then we’ll get into a real parabolic phase when you just see the pound drop like a stone.”
Gold’s hedging properties would then come into their own and this would be bullish for gold in pound terms, after a period of consolidation around the £800 per ounce level in recent months.
Gold in Pounds – 10 Years
Election polls variously place both Labour and the Tories in the lead by a narrow margin. It looks likely that the UK is facing a hung parliament in May.
Under the British system only the party who gain 325 seats out of a total of 650 can form a government. Latest polls show that both the major parties are far short of the necessary majority.
A YouGov poll suggests both parties will have less than 290 seats and so concessions will have to be made with smaller parties to entice them into a coalition.
The same poll sees the Lib Dems gaining 53 seats which places them in the strongest position. Nick Clegg has indicated that he would enter into coalition with either major party and act as a buffer to protect against the excesses of either side.
In terms of seats the Scottish National Party are polling at 6 but at this point neither the Tories nor Labour appear willing to enter coalition with them with Cameron suggesting that the SNP would blackmail Labour if it formed a minority government with the SNP.
UKIP are polling well in terms of percentages although how it will translate into seats remains unclear. The YouGov poll sees UKIP with 13% of the vote. The two leading parties have around 35% while the LibDems score just 7%.
So UKIP are increasingly a force to be reckoned with. However, given that their policies are diametrically opposed to those of Labour and following a stream of defections from the Tories – and therefore posing a serious threat to the Conservatives – it seems certain that they will remain an opposition party.
Either way UKIP’s mandate is strengthening and the potential for a “Brexit” from the EU is a growing one.
However, much could change in the interim period. In the event of a hung parliament the incumbent Prime Minister will remain in office while negotiations begin between the various power brokers.
As London’s Independent explains,
“There is only one clear rule for forming a government in the hung Parliament, and even that is a loose one: the politician who can tell the Queen that he has a workable majority in the House of Commons is the one the Queen will authorise to form a government.”
Time will tell how it all unfolds. In the mean time the uncertainty stemming from a hung-parliament and a potential minority government is likely to affect confidence in the pound and UK assets as investors defer making decisions until Britain’s status within the EU, Scotland’s status within the UK and the fiscal policies of the next government are clarified.
Ironically, an outright majority for either side would also cause uncertainty for the pound.
The pall of uncertainty that would hang over a Tory government as the country awaits the “Brexit” referendum could gravely undermine the pound. Miliband’s more traditional Labour party is likely to exacerbate budget and current account deficits.
Albert Edwards, Société Générale
Albert Edwards, head of global strategy at investment bank Société Générale has warned that the current coalition government has left a legacy of “grotesquely wide deficits” in both the public sector finances and on the UK’s current account – its overall trading position with the rest of the world.
He says that the Lib Dem Tory coalition has left the UK economy ‘up to its eyeballs in macro manure’ by failing to cut deficit, sterling will suffer and that the UK economy is a “ticking timebomb”.
Given the fragile nature of the London property market, the UK economy and uncertainty regarding a Grexit and new Eurozone debt crisis, such high levels of uncertainty could not come at a worse time.
Given the interlinked nature of so many financial institutions a “Lehman moment” for the pound and the UK could lead to widespread contagion and quickly morph into a Lehman moment for the world.
When this is viewed in the context of the widespread risks to the financial system globally, it would be prudent for UK investors and investors globally to have an allocation to physical gold to hedge against these risks.
Read more at http://www.maxkeiser.com/2015/04/election-chaos-in-uk-could-trigger-lehman-moment-for-pound/#tmA8HRlIedGm7ab8.99