Only a month ago, I wrote that we shouldn’t be resigning ourselves to a decade of “staycations” just yet. I thought the pound was looking undervalued rather than overvalued – and it wouldn’t be long before eating out in France would be affordable again. Things have moved on since then.
The pound has recovered enough for pretty much everyone to notice. The headline in the Daily Express on Thursday was: “Hooray! Holiday pound is booming”. It is now at its highest level against the dollar for seven months and a comfortable distance from the near parity it reached with the euro last year.
However, while the rising pound is good news for those about to head off on holiday, I’m not sure that it necessarily represents good news in any other way.
It would be nice to believe, as many appear to, that the about-turn is down to the fact that the UK is over the worst of its downturn – and that a mild rise in the mortgage approval numbers (from pathetically low to not quite so pathetically low) along with the fact that we haven’t had to rescue a bank for a couple of months, means that both deflationary recession and inflationary recession have been banished.
Nice, but not very easy. As David Blanchflower – the one member of the Monetary Policy Committee who forecast the current economic crisis – pointed out this week, it is hard to see how things can get better when, with the financial industry down and out, we have no other drivers of growth.
Much more likely is that serious investors, far from thinking the UK is on the up, are noticing what a shocking shape the rest of the world is in. So the rising pound is about the ongoing implosion of the eurozone economies, the almost universal perception (which I don’t share) that the Japanese economy will never recover, the continuing fall in US house prices, the concern that China and other emerging economies are looking for an alternative to the dollar to act as their reserve currency – and so on.
Not good news, you see, but bad news.
This brings me neatly on to the oil price. It is also rising at speed. Back in May last year, it appeared to be heading for $200. Then it crashed. By February, a barrel was a mere $33. Three months on and the same barrel is $65. So what’s going on?
Opec claims the near doubling of the price is all about good news: it sees a global recovery underway and demand for oil picking up. But I suspect it is as much about bad news.
Oil inventories are still at record highs; the International Energy Agency is forecasting a fall of 2.6m barrels a day; and the evidence for global recovery looks pretty scant to me.
There is a long-term fundamental case to be made for holding oil (and other commodities). But the recent price rises aren’t about squeezed supply and rising consumption. Instead, they are probably about fear – fear that the dollar will continue to weaken and fear that all currencies will be debased by the inflationary consequences of global government monetary intervention. When inflation is on the up, or expected to rise, you want to hold those real assets where the supply can’t be artificially increased at the same speed as the currencies they are measured in.
So, while economic optimism is probably playing a part in the rise, oil – like the pound – is mainly being driven up by the expectation of bad news to come.
This trend may continue for some time. The consensus is gradually moving away from expecting long-term deflation to expecting high inflation in the next few years, so investors have every reason to keep looking for hedges.
However, I’m not sure that piling heavily into oil is a good idea. I hold oil stocks for the very long term – look at a decade and the supply/demand argument is compelling, particularly given the fall-off in exploration since the credit crunch started. But, shorter term, I’d worry that, as the rose-tinted spectacles of economic optimists begin to crack, the oil price will be vulnerable to another setback. As we learnt last year when the oil price fell from not far off $150 to under $40 in a matter of months, when fundamentals reassert themselves in this market, they do so at speed.
So I’d prefer a rather purer hedge against inflation, the perfect one being, of course, gold – the one asset class that has an unblemished record of holding its value in inflationary times. Even if disaster comes in the form of deflationary recession, rather than the expected rampant inflation, those holding gold should still survive. Those holding oil won’t.
• This article first appeared in the Financial Times.