By Richard Matthews November 18th 2018
You’re gonna be sad, you’re gonna be weepin‘
You’re gonna be blue and all alone
You’ll regret the day you seen me weepin‘
‘Cause when I leave, I’ll be a long time gone
Songwriters: Frank Harford / Tex Ritter
As we rapidly approach the end of the beginning of Britain’s exit from the European it occurred that we have been in a similar situation many times before be it war, economics or football. We as a country have a notoriously ambivalent attitude towards Europe almost as if we enjoy flirting with la Marianne in France but when it comes to the consummation we suddenlybecome British and shy. There was a farce many years ago called No Sex Please We‘re British and perhaps that title reflects our National attitudes. In my lifetime in the city and trading I have witnessed the last vote on Europe in 1973 when Harold Wilson, the Prime Minister at the time, was too canny a politician to lose, as well as our joining of the ERM (Exchange Rate Mechanism) in 1979 and our more familiar, if you are a football fan you were used to this action, forced and unseemly exit from the ERM in 1992.
When Sir Geoffrey Howe, whilst Chancellor of The Exchequer, refused to take Britain into the ERM in 1979 it was considered to be somewhat of a risk but the real damage to the country was caused by Nigel Lawson’s (Chancellor of The Exchequer 1983-1989) shadowing of the Deutsche Mark in a futile attempt to replicate in the UK Germany’s low inflation and employment. Eventually Lawson was replaced by John Major (later to be Prime Minister) who took Britain into the ERM on 8th October 1990. Membership of the ERM guaranteed that the Pound would not deviate more than 6% from its entry level of DM 2.95. By doing this the country and currency were set on course for the perfect currency market storm.
By the early 1990’s the ERM was already under significant stresses due to the cost of German reunification whilst Britain, and at the time the other normal suspects of Italy and France, brought their own particular problems to the party. Great Britain’s economy was being savaged by a weak Dollar and as normal our feelings of national prestige and fear of Europe started to rise over the summer months. Indeed I clearly remember the feeling of fear that pervaded the country as house prices tumbled and people were forced into negative equity. When Denmark voted against the Maastricht treaty, aimed at further European Integration, the winds of storm and change were really blowing hard.
It is widely claimed that George Soros was the man that broke the Bank of England but unless my memory has completely gone large short positions of Sterling, as well as Francs and Lira, were being built as well as significant shorts of the Interest rate contracts throughout the summer. Personally I think a lot of traders were happy for George Soros to take the publicity, as well as Soros himself but we will never really know. In the afternoon of Tuesday 15th September enormous sell orders were being seen across the futures market the sizes of which were previously unheard of. When the market opened on the Wednesday 16th it became obvious that there was only one buyer and that they didn’t have the resources to take the heat out of the market and so the markets in Sterling, including interest rates, were sold and sold again until the government started to panic and raise interest rated first from 10% to 12% and then at the close of the day to 15% in a last ditch effort to save the pound. Neither the Bank of England nor the Government realised that buy orders of £300m were literally a drop in the ocean in the brave new world of derivatives. By the close of business, having had the most thrilling day of our lives my partner and I decided that interest rates of 15% were unsustainable and put on the largest trade we ever did and bought short sterling. By 7.00 that evening the Bank announced that Britain would leave the ERM and cut interest rates to 12% to be followed the next day to 10%.
I thought it was unlikely that we would see another day when the currency remains trapped going down a one way street the wrong way in our protracted exit from Europe. However I’m not so sure as I was. With the government in total disarray and unlikely to be able to unify Parliament, let alone the country, we look like we are headed for a double whammy of a general election and a no deal Brexit. When these risks are combined with a strong dollar it feels to me that we could be heading for parity …and that’s parity against the dollar so maybe a value of 90 euro cents? When you look at the movement of sterling against the Dollar between 1981 and 1985 when its value effectively halved it is interesting to note that although we blamed all our ills on the ERM in reality it was as much US interest rates increasing that did the damage. Guess what? they are on their way up now. Boy this takes me back …sell sterling and sell short sterling futures. I seem to remember that trade. Is there a buy in sterling? Yes, the back month short sterling spreads.
To me the market looks almost too obvious and perhaps as always when markets are driven by politics not economics we should remember Mark Twain’s great observation that “Politicians are like diapers: they should be changed often, and for the same reason.”
At the end of that momentous day in 1992 I remember my first reaction was of relief and fear, oddly not fear that our trade would go wrong but fear that we had not matched all our trades correctly. With days of extreme market volatility working on a floor where you were literally screaming to be heard that was always the overriding emotion, fear. My business partner and I travelled home together in silence, exhausted and as he got out the car we just looked at each other knowing that no one else would understand what we had gone through that day or worse what we may now be facing due to an error.
So what did happen after? Britain prospered and Europe lurched towards the Euro. Maybe that was the day that Britain really started its exit from Europe without an Article 50. My partner and I survived and the trade came good. There is an old maxim “Don’t bet the farm “ well we did and I can’t speak for my partner but that day certainly gave us option money. What was my first option trade, I can hear you ask? I took the option to write to Norman Lamont , Chancellor of The Exchequer , to thank him for giving me the finances through his stupidity to buy the beautiful Red Ferrari 246 that was about to appear in my drive. Vintage Ferrari? Naturally, there had to be some compensation for being constantly moody, tired, hoarse and single!
Richard Matthews, who began in career in 1973, is a former trader-broker in the London money, futures and foreign exchange markets. Twitter @dickiematthews5
Postscript: Now I know some of you will want to know if I still have the car. Sadly no, and yes I sold it too early but as they say you never go bust taking your profit too soon.