Misconceptions

Britain’s FTSE index hits 10-mo high despite Brexit hysteria

This is from RT, or Russia Today, which is a propaganda arm of the Russian government. They are technically correct, but not providing the whole picture.

We should certainly be alarmed that Russia is playing down the negative effect of Brexit, because they would only play it down if they thought the effect would be damaging.

The actual reason that the FTSE100 is high is because the pound is weak.

Most companies in the FTSE100 are international and therefore earn the vast majority of their money in foreign currency, so as the pound weakens, the stock value in pounds goes up, despite the fact the company is performing no better than it was two weeks ago.

This is not growth, this is inflation. Your pound is worth less so you need to offer up more pounds to get the same thing. It’s a devaluation of what’s in your pocket.

Similarly, there are many foreign investors in the FTSE100 who are buying into the FTSE100 using cash in a foreign currency. A Japanese investor’s valuation of a FTSE100 stock in Japanese yen is the same as it was two weeks ago, so as the pound weakens, the stock value in pounds must increase for it to be worth the same amount in yen.

Again, this is just the same effect. It doesn’t mean the Japanese investor thinks the British economy is stronger than it was two weeks ago; it’s just that after he converts his yen to pounds, he has more pounds than he did two weeks ago.

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