En route to London, England

The British rock group Genesis inspired our lead title about the British pound. Mike Rutherford and Phil Collins didn’t include the word “short” so please excuse my blunt creativity.

Despite a big rally off its oversold levels earlier last winter the pound is still expensive, as far as I’m concerned, while most British assets are not cheap – even after the crash. The only sector worth buying is British stocks, which at some point should benefit from a devalued pound, rising exports and a recovery in European assets. The problem is I can’t make a long-term case for buying anything British let alone European because I don’t think there’s a case to be made for sustainable consumption anywhere.

I’m en route to London Heathrow this evening as I embark on a 10-day road trip to the United Kingdom, Norway and Denmark. I’ll be visiting bankers, money-managers and admittedly, my Norwegian girlfriend. This post is literally “jet-fresh.”

The British pound has always been expensive compared to other major currencies. Ever since my first trip here in 1988 I was always stunned by how pathetically little my Canadian dollars purchased; but the Canuck buck has come back sharply this year and even if the pound has rallied even more against the dollar and the EUR, the loonie buys more in the U.K. than it did 20 years ago.

The British economy is stabilizing and that’s certainly good news. But the country is now in the midst of a severe debt deflation that encompasses all asset classes, including real estate – the prime jewel in London. The country is a basket-case, mired in a massive debt liquidation that requires an all-out war against falling prices; the Bank of England has pumped an enormous amount of money into the economy and it’s finally responding judging by recent economic data. In fact, Mervyn King, the central bank governor, might even suspend his “quantitative easing” schedule as domestic prices begin to stabilize.

As for the pound, I wouldn’t buy it now. The currency has already mustered a huge rally off its lows earlier this year and is overbought. I wouldn’t short it, either. I just don’t see anything to get particularly excited about in the United Kingdom.

If you’re going to buy something British then look at the vast universe of investment trusts or England’s version of closed-end funds. To be sure, investment trusts have posted a big rally off their March lows and discounts to net asset value (NAV) have markedly narrowed. But some of the biggest bargains remain in venture capital and private equity where discounts exceed 30%. Problem is I can’t make a case for private equity when most funds are struggling to raise fresh capital.

A bear in London can find other things to do. I think I’ll head to Knightsbridge tomorrow after my meetings and enjoy some British tea; now there’s something worth buying!