Apocalypse, er, flat

When one pound sterling falls to fair value of $1.50 (or overshoots below that), with commensurate impact on UK firms' PPP, will we finally stop hearing about how the magic circle is as profitable as the top NY firms?

joseph -28 Oct 2008 | 00:00

Joseph - Outside of the UK, Magic Circle firms (other than Slaughters) all bill in the relevant local currency, so the strength of the pound would only impact those firms' respective PPP in proportion to the amount of fees generated in London vs. outside of the UK. Since CC, Linklaters, and A&O all have well over 50% of their lawyers based outside of London, the strength of the pound is really only part of the PPP story. The recent drop in the value of the pound relative to the dollar probably won't do much to set back the relative profitability gains made by the Magic Circle in recent years - especially since the Magic Circle has benefited from the recent crisis driven "flight to quality" just as much, if not more than, the top US firms.

guest -28 Oct 2008 | 00:00

Not sure I’d agree about “fair value” for the dollar. The fundamentals of the American economy are every bit as shaky as the UK, it’s just that the Greenback is being propped up by blanket risk-aversion from investors. That’s why currencies even in the emerging markets with rock solid stories are under pressure. That said, I do think that the prolonged drop in the value of sterling is a real opportunity for US firms operating in London. Whether they’re in the mood to seize that opportunity in the current climate is far from certain but the opportunity is there.

Alex -29 Oct 2008 | 00:00

Alex: "Not sure I’d agree about “fair value” for the dollar. The fundamentals of the American economy are every bit as shaky as the UK, it’s just that the Greenback is being propped up by blanket risk-aversion from investors."

Too bad that isn't true, the UK economy is far more dependent on the finance, insurance, and real estate industries than the US economy and for some time these industries will hurt worse than others, and various economic ratios such as house price to income, house price to rent, and government debt to GDP are far more imbalanced in the UK than in the US.

guest: "Joseph - Outside of the UK, Magic Circle firms (other than Slaughters) all bill in the relevant local currency, so the strength of the pound would only impact those firms' respective PPP in proportion to the amount of fees generated in London vs. outside of the UK."

If the sterling and euro both fall to fair value, then I'd think the magic circle hurt more than the US firms because they bill more in sterling and euro than the US firms do. The euro has been overpriced because the market wasn't paying attention to how european banks would be hurt by their large exposure to the emerging markets.

joseph -29 Oct 2008 | 00:00

Joseph: Off the top of my head, I think US total public debt this year was set to crack $10trn and is around 70% of GDP. According to a BBC report I dug up after reading your post, the US Treasury was already forecasting an annual budget deficit for 2008 of around $400bn. That was this summer, ie before the Paulson-backed package went through. Though there is much debate about the equivalent picture in the UK, depending on how you account for liabilities of bodies like Northern Rock, the figure in the UK is generally reckoned to be around the 43% of GDP mark.

So on most measures, US public debt is considerably higher than the UK.

On housing valuations, the UK’s are a bit higher, but then the US had more outright mortgage fraud – which makes its nominal valuations less sustainable. It’s six of one, half a dozen of the other.

On economic resilience, the US has already savagely cut interest rates since last year and put in place a sizeable fiscal boost and the economy is still heading into recession. Probably it has just delayed the it for six months. In the UK, until recent weeks we only had a 75 basis point cut – which was more than cancelled out by tighter credit conditions and the rising cost of living. So basically, very little.

I would agree that the UK is more reliant on the finance and insurance industries and that ain’t great right now.

But how can you argue that the Greenback is not being supported up by risk aversion? No one is piling into the dollar because they want to hold a currency about to yield 1%.

I think you’re reading me wrong – I’m not writing this from some little Englander view, trying to prove that the UK’s is ‘better’ than the US, just giving my take on the economic outlook. The US and UK will both facing a bumpy ride over the next two years and both countries have maintained risky fiscal positions over the last five years that are now hurting them. Personally, I wouldn’t see much of a gap between the overall outlook.

Alex -29 Oct 2008 | 00:00