Category Archives: Brexit

UK Election Results Capture Political Schism

In under two years since the country stunningly voted to leave the EU, the same electorate shifted yet again and leant away from the idea of a clean break with Europe and threw the whole thing now into chaos. The youngest of voters sided with Labour, who were selling polices in a throw-back to those last seen in the 70s that, if followed, would lead the country to financial ruin. Corbyn’s plan is not even realistic; yet the youngest among us just have no memory of such irresponsibility. Only the old do, and so they voted Conservative.  

Now hostage to a 10-seat minority of the DUP, Theresa May will be saddled with a back-seat driver at negotiations with the EU. Decision making responsibility will not fall to May; she will have to keep ‘calling home’ to get approval.

Worse of all, the result of this election shows how the entire political system is corrupted. We have the worst of both worlds: a disenfranchised and ignorant electorate (e.g. Most of the young) that falls for platitudes and made-up promises. Of course, the left calls such things as false truths or fake news if the right puts such things out.

Britain will now have a much riskier time with Brexit. All we can hope for is a bank run that requires a bail-out or for the IMF to drop Greece ‘in it’ and a run on the Euro. It’s a matter of time. But now we need it sooner rather than 

US Government Sets Up Next Financial Crisis & Brexit Not the Risk at All

Two articles came accross my desk this week – one caused consternation on my part and the other seemed to offer a sanity check.  The former concerned the US economy and specifically how there are signs that consumers, and lenders, are returning to the same behavior that led to the financial crisis at the source or our current economic challenges.  The latter concerned the hype and over blown concern with Brexit and its impact on Britain’s economy.

In the US print editions of the Wall Stree Journal (Wednesday January 11th) there was an article titled, “New Loans, Same Old Dangers“.  This front page article described a government-led initiative (Property Assessed Clean Energy) that provides subsidies loans to encourage homeowners to buy energy saving devices.  The article gives an example of a homeowner who is not able to afford the loan is still encouraged to take it out.  As is common practice this loan is then sliced up with other loans and sold on as a bond – what is called securitization in the financial industry.  This is analogous to the risky mortgage loans offered, and taken up by people who should have known better, and sold on to governments in Iceland as “AAA” opportunities.

The market is very small – the article suggests around $3.4bn of loans have been made so far – but the model is just damning.  FIrst you have big government trying to force its policies on a free market.  With the housing issues that triggered the financial crisis this was Government demanding ever greater home ownership among poor people and those that could not afford it.  Second you have the lowering of standard for the setting up of loans.  This is identical to what happened with dubious sales efforts of mortgage brokers during the 1990’s and early 2000s.  Finally you have the build up of risky loans and owners of the loans not knowing where the real risk is.

The popular uprising that has brought Trump to the White House would do well to heed these stories.  After all people will be people and when offered a bad apple that looks and smells sweet, many will take it.  Perhaps we should not fault those that do – or should we expect a stronger moral aptitude?  Either way we need to get big government out of the way.  It should not seek to foist its social or political wants on you and me – we should be free to do what we want, how we want, when we want, as long as it does not harm our fellow citizen.  Innovation and opportunity will drive improvement in the energy sector.  And perhaps tax credits would be a safer way to encourage small changes in behavior that do not create risky loans.  

The other article, a commentary piece in the US print edition of the Financial Times (Thursday Janary 12th) was titled, “The City has nothing to fear from Brexit“.  It was penned by Stanislas Yassukovich who is a former chief executive officer of European Banking Group.  The article is a breath of fresh air since it refutes many of the risks and issues that most other “specialists” report in the press.  For example we have heard a lot about “passporting” – the idea that a financial institution authorized to trade in one country of the EU can freely trade in another country.  It turns out that non-member states can use this capability quite easily – so it’s not even needed as a negotiation.  The article goes further.

Passporting was a means to try to level set the complexities of rules across what was meant to be a single market.  It turns out that even with passporting there remains complex and different rules that still need to accommodated when trading across the member-states.  As such, “core retail financial activities – residential mortgages, deposit and savings products and so on – remain almost entirely national, and highly protected.”   This whole think stinks to me.  

The recent news that PM Thresa May fired her senior most civil servant who worke with the EU was greeted in the press as bad news.  It seems he kept repeating to the PM that it was not going to be possible to complete all negotiations in time before the two year window closed for leaving the EU.  Why is this?  He may have had a practical view on things but he certainly did not have a positive view on what is possible.  I think we need clean out the cupboard and get a fresh new look at everything.  Good for PM May to do so.  If the author of this article is right, there is little we should fear from Brexit.   

My Top 5 Biggest New Year Risks to the Global Economy

In order or scale, priority and impact, here are my picks for the five most critical trigger-points that may impact, negatively, a return to ‘old normal’. Currently we stand at the edifice of a new normal, the great stagflation, but the anti-establishment and populist changes taking place seem to suggest a knew-jerk reaction by nations fed up with socialist dressed-up-as-market politics that have led the West for 20 years.

  1. China’s economy stagnates or crashes. Debt levels are above EM levels and are now among the largest, approaching the incredulous Japanese levels. This dynamic is not sustainable for a nation whose currency is not a reserve currency. However the economy is the world second largest even without the development and emergence of whole swathes of other sectors such as healthcare and leisure, which may offset contracting first world growth over the next year or two. So the risk is there and there is no clear leaning one way or the other, yet. But debt is growing faster than these new sectors; exchange reserves at $3bn are limited (though huge), and currency value management is not market-bases. So greater risk is with the downside. China’s growth flags, currency sinks, counterbalancing US growth and confidence, creating a massive imbalance in the global economy. Europe watches on as global GDP sinks under its own debt weight. KPI’s to avoid/watch out for: China GDP falls to or below 4.5%; China’s debt load surpasses 300% of GDP.
  2. Trump quits after 18 months due to intractable political limitations that prevent policy changes he seeks related to healthcare, regulatory complexity, tax reform and trade. Trump’s political rhetoric is being replaced with solid business-based policy. However not all such policies have ever been tested at a national level and scale. Some efforts will fall foul to physical, social and political limitations. This may prove frustrating for Trump. As growth will return short term, such medium term frustration will lead Trump to claim, “My policies worked, see? But now the system has reached its limit and there is nothing I can do until the country agrees with me to shut down the whole government system! Since they are not ready, yet, I am ‘outa here’ until they are!” Markets crash, interest rates balloon, inflation rages all within a year. World economy sinks into the abyss. KPI’s to avoid/watch out for: US GDP 1H 2017 reaches 4.5% but Congressional conflict leads to policy deadlock ; vacancy in position at Whitehouse. 
  3. Emerging Marker currency crisis as massed capital investment is siphoned away towards a resurgent US economy and dominant dollar, as well as a stable and even growing China economy. This situation is already underway. The risk is that what is currently a reasonably ordered trend becomes a financial route. This is possible since the financial markets are starved of yield due to the collective policies of central banks to keep interest rates very low for too long and for the build up in their massive balance sheets. If the trend becomes a torrent, EM’s will have to yank up interest rates far beyond what their local economics can support and economic disaster will follow. This will ferment more political instability and drive increased destabilizing ebonies to ruin. Though the US may be growing well, compared to its peers, it’s the imbalance they tips the ship over. KPI’s to avoid/watch out for: dollar index, the weighted value against basket of currencies, surpasses 115. It is currently at 103.33, which is a 14 year high; EM interest rate differential balloons.
  4. Hard Brexit forced through by intransigent Europeans who think the EU experiment is more about political union than economic liberalism. A new trade deal, legal framework and social contract can be negotiated within a two year window. But only if politicians and civil servants want it too. Continental politicians however, under the strain from populist pressures, will equate intransigence over Brexit negotiations with an improved politicos standing with their electorates. Fool for them as this will actually create the opposite response for such behavior will simply worsen the economic climate. The lack of any sign of return to old normal will lead to political paralysis and the clock will time-out. Hard Brexit will be forced upon a supplicant Britian. Europe and UK economies will tank; currency wars will wage; global trade will collapse further. This will not sunk the global economy short term but will act as a dead weight slowing its resurgence down. KPI’s to avoid/watch out for: no agreement at end of two year period lost triggering of Article 50. 
  5. Latin or Indian debt or economic crisis. Much like with other EM’s, growing sectors of significant size around the world may blow up- India being the best example. India’s growth is different to China. It is more integrated socially and politically with the west, but it’s corruption levels are far greater than what one can see or observe in China. It is possible that local economic difficulties, hard to observe today, may trigger a collapse in confidence that leads to a destabilizing debt or currency crisis. Brazil’s economy is certainly in the dock currently; Argentina is struggling. India’s economy looks like paradise right now but the growth across the country is extremely uneven- you only have to look at public sector infrastructure investment. So should two such countries suffer local difficulties, the combination may result in significant risk to the global financial system. KPI’s to avoid/watch out for: two simultaneous financial/debt crisis afflicting EM or India.

These are my top 5 risks the global economy faces in 2017. I hope I am wide of the mark, in a positive way. I left Japan off the top 5 list yet their economy remains anathema to growth. The Japanese market invented the whole new normal cycle with a anaemic growth, massive debt, low inflation, and demographic contraction. And Japan has an amazing debt load that refuses to spook investors. Things may yet have a Japanese tinge before the year end. Does Japan, along with the US, lead the global economy back to the old normal!
What potential risks do you see?

The Two Faces of Europe on Trade

The left hand of Brussels is complaining that should the US focus on ‘America First’ it would harm global trade and therefore be bad for everyone. See ECB wants on risk posed by ‘American first’ policy.  The right hand of Brussels is contemplating stiffing China with tariffs on steel imports due to that country’s subsidized over-capacity. See The EU unwisely sides towards protectionism.

Yet the articles covering both stories appear in different parts of every newspaper. The EU is blatantly two-faced. Better yet the US won’t be insular; Trump has more business skill than all the politicians of the EU. He is using the hint of tariffs as a negotiation tactic. Trump will likely do more for global trade than any political group, period. It will take time for the world to catch up, I am sure.  I suspect the US and UK will fast-track a western union trade deal within the next 12 months.

Hopefully the EU will follow Britain and the US with some more rational, economicall liberal, free-trade leaders in the upcoming elections.  Left leaning, socially progressive types are too focused on short term personal gain and not focused on the bigger issues.

How Low Can Sterling Go – and How to Make Money on That!

In this weekend’s US print edition of the Financial Times, the FT Big Read was on “Brexit and Sterling“.  It was a great article.  More interesting was a commente from Mohamad El Erian (of whom I am a fan).  Here is the quote: “If the UK secures a comprehensive new free trade agreement for goods and services, current levels [dollars to Sterling of $1.29) will look very cheap.  If, however, such an arrangement lags behind or is not comprehensive enough, then currency levels would be seen as the new normal for sterling.”

There you have it – just what I called out with my “leave” vote.  Cool and rational heads need to prevail on both sides of the Channel.  Let’s see how European the EU team will really be… 

Post Brexit Blues

While in the UK last week, on vacation with friends, I was lambasted by groups that were in the ‘remain’ as well as ‘leave’ camps. I myself had started as a ‘remain’ back in the early spring, but a week in London in March changed all that, after talking with many including some business people from Italy and Austria.  But the news from the UK is now jaundiced and suggesting difficult times ahead. The pound has suffered hugely since the Brexit vote, sinking to 30-year low against the dollar. It has gone from about $1.46 just before the vote to now $1.30.  I wrote this blog on the flight home to the US, landing to find that the pound had dropped again to $1.28.

The FTSE also took a big hit but it has since recovered. The bad news is that, according to reports, some business actions and conditions are changing even before the UK government starts the official application to exit the EU. Some banks are talking of moving headquarter staff to mainland Europe. More troubling some insurance and construction firms are already changing behavior. In Tuesday’s UK print edition of the Daily Telegraph, there was an article, “Standard Life Halts Trading at Property Fund after Exit Rush“. The report explores the impact of massive withdrawals from property investment portfolios. In summary, long term investment strategies related to construction in the UK are suffering a lack of confidence. 

Economically the UK is in a strong position. It does not suffer from as many of mainland Europe’s issues. It is even now at liberty to remove other EU restrictions and after Brexit is complete, it no longer will be held back in setting policy by 27 other independent groups.  But confidence is the issue here, along with ignorance. There is little material that really proves the UK economy will be worse off as a result of Brexit. Another story in the same print edition of the Day Telegraph reports that the German finance minster (Wolfgang Schäuble) was asked by David Cameron to weigh in on the Brexit ‘remain’ vote with comments emphasizing economic disruption. The press had thought the such comments were based on fact independently developed and facial: they were not.  

On a hugely positive note two other articles highlight really interesting points. One (see Never mind Brexit, real hope is in UKs soaring company start-up rate) suggests that the number of start-ups is running at historically high levels. This is a little known analytic that suggests that economic renewal is improving and this operates as a future driver for growth. Alas the same analytic in the US is in the doldrums and government policy is not targeting to improve this goal.

At the same time a report by S&P addresses (see Weaker pound to cushion the shocks of Brexit, predicts S&P) some of the pointless scaremongering that was created during the run-up to the vote.  The new article projects solid economic growth and a safe passage for the UK economy post Brexit, assuming a calm, rational set of trade and economic actions.  Finally some sensible reporting; no ‘end of the road’ reports now. It is just a matter of time before more of such reports are understood.

The U.K. print edition of the Financial Times offered some other interesting angles too. Some the ‘Remain’ camp won’t find all that comforting. Firstly in, “German employers warn against ‘punishing’ the UK“, the head of Germany’s employers body BDI was reported as saying that negotiations regarding trade between the EU and the UK should not penalize the UK. This is sage advice given that the UK is Germany’s largest export market behind the US and France. Equally Germany is the UKs largest export martlet outside of the US. Even Angela Merkel, the German chancellor, recently said that the UK should be given time to determine when it wants to kick off the official two year divorce process.

A second article, “EU Budget: British Breakaway to spark wider disputes on financing“, demonstrates that clear fact that the UK is a net contributor to the EU, to the tune of about £10bn (real, 2015).  As such, post execution of Brexit, the U.K. will have more money to spend on its own priorities and the EU will need to cut back spending unless it seeks to fill the gap made by the UK’s leaving by increased contributions from its remaining members.

The final FT article I spied calls out an unintended consequence of Brexit that may have long term impacts on global security and power. And this is not from the point of view of an aged and retired empire but from the point of view of tipping points. The article is called, “Tokyo fears Brussels Will Lift China Arms Ban after Brexit.”  This is a most interesting twist on Brexit not discussed in the press.

Britain is today a sizable advanced economy, globally connected financially (legacy, thanks to the pound being a past reserve currency), economically (due to being heavily reliant on trade), and politically (due in part to the export and use of the English language, common and business law and democratic practices). However some of the trappings of its empire led to some unique positions around the world. In 1920 Britain was allied with Japan, with stronger naval ties than with the US. This was partly as a defense mechanism from the UK perspective; post WWI the UK had lost its financial ability to project itself globally and was increasingly reliant on the benefit of others (e.g. US) and less so on its own asses. This was also partly a reflection of Japanese goals; it was seeking to emulate the success of the British Empire, founded on naval power, and was keen to learn from its erstwhile far-away neighbor the art of modern empire building. The alliance gave Japan credibility politically and militarily. The Washington Naval treaty of 1921 put paid to this alliance as the US forced Britain to relinquish the Anglo-Sino alliance in order to buy the support for the curtailment of expensive navel construction, at a time when no nation could really afford anyway.

But as it stands today the UK plays a key spoiling role in global politics, with a heavily nuanced and balanced position. The FT article highlights how Japan fears that with the British gone from EU diplomatic and political debate, the moderating position the UK too will fall away and views less acceptable to Japan, such as the EU selling arms to China, might now be in the ascendancy. This is a most interesting side-show that may have longer term security repercussions. Britain’s ties with China are improving, and its relations with Japan are long and very positive. Britain is again in a unique position.

If you wanted to read more about the UK-Japan connection, read Leo Lewis’s Short View for July 5. In his column he explains how the Nikkie 225 average is being hit for six by Brexit, perhaps more so than any other stock market index. He explores the relationship Japan has with the U.K. and why that leads the Japanese market to its painful conclusions.

But the reality is that no one knows what’s going to happen. Hence confidence and talking the economy up is critical right now. Astute confidence will help drive the pound up and hence reduce the losses experienced with the ‘leave’ vote.  As I said before, with Brexit re are no real winners.  But the UK has a great opportunity here…