My wife was visiting friends in the UK recently. Mary, an active investor, asked how my investing was going (we've swapped info and opinion on stocks going back to before the dot com thing). My wife replied that these days I was mostly trading currencies. At which point Roger, the husband, launched into a tirade pretty well blaming me, and if not me, then others like me, for global financial misery, and damned me for profiting from the same.
Wow. Well I was quite flattered really. I was also surprised by his ignorance (I know the man has a PhD, but that doesn't mean he's stupid).
I wondered how many people think like him, so I decided to flesh the thing out a little in case (a) you think as he does or (b) you are vaguely interested.
The first thing to grasp is that you don't just buy or sell pounds. Currencies are always traded in pairs. If you "sell" the pound, you are buying dollars, or yen, or another currency.
But you have already done this when you go on holiday. If you go to the States, you may think you are exchanging your money, but you are actually selling pounds and buying dollars. And vice versa, if you have any dosh left at the end of your holiday.
In a way, all transactions are based on pairs. The shirt manufacturer is selling shirts and buying pounds, exactly the inverse of the M&S buyer, who is selling pounds and buying shirts.
Which brings me round to reciprocity. There are always two sides to the transaction. It's not as if you somehow sell your dollars into a big dollar warehouse somewhere. When you sell dollars (and buy pounds) someone around the globe has just bought your dollars and sold you their pounds.
So where do evil speculators come in? It's hard to see. From the above you will understand that I can't just "dump" pounds. Someone, somewhere, will be buying them with exactly the same enthusiasm as I am selling them. Reciprocity.
Sure, if there are lots of pounds because Gordon is running the printing presses day and night, or folks think that UK plc is stuffed, then someone won't want to give up their dollars for them quite so readily, and can only be persuaded to do so if you chuck in a few extra quid. And in this way the pound falls against the dollar.
Am I an evil speculator? Well I try and anticipate the direction of a move. If I believe that the pound will lose value against the dollar, I will sell pounds (and buy dollars) and later buy back those pounds using fewer dollars and keep the difference -- but only if I'm right. Otherwise, it is I, the evil speculator, who will have to buy back those pounds for more dollars than I originally got for them, and I lose! (And my opposite number wins). It's a zero sum game.
M&S does exactly the same thing. If the price of shirts moves against them, when they come to buy pounds by selling shirts, they will get fewer pounds than they may have parted with originally. They lose.
But can speculators move markets? Not really. About $4 trillion is traded daily around the globe. That's a lot of money. Consider that the war in Iraq has "only" cost half a trillion so far ... So no individual or organisation short of a government could swing a forex market. And even governments can't as John Major found to his cost: Black Wednesday, 1992.
They were frantically buying pounds and selling foreign exchange to prop up the "value" of the pound. George Soros was happily selling them pounds and buying their foreign exchange - he was simply the other side of the zero-sum game. The government got very cross with Soros, but in effect handed him a $1 billion profit. The overall loss to the UK was about $6 billion
If they were really smart they would have sold the pound too. History shows that they could then have bought it back later at a cheaper rate and the billions in profit would have come back to the hard-pressed UK taxpayer.
No, I'm not taking the piss, I mean it.