Tag Archives: UK

Brexit, Banking, and Bonfires

November 5th has come and gone- so too the bonfire-bashing stories of Guy Fawkes that go along with that date. But one date remains before us, where playing with fire is about to burn the hand that reached out. That date is March 29, 2019. The Brexit negotiations where a sham: Britain was never going to get a fair deal, as politicians were involved; the EU was never motivated to help anyone other than themselves. In the US we call that, America First and get pilloried for it. Frances Macron let the cat out of the bag when he said that the backstop would be leveraged to get advantages over Britain.

The terms of the deal are a travesty. Britain is neither in or out of the EU and there is no clear plan how it ever will be. A clean break with fair trade rules was never possible. Many politicians avoid rational arguments; they seek advantage for their own position, not fairness. Fair trade and zero tariffs without freedom of movement, though logical and reasonable, was never possible: The French want to protect their farmers; Italy their factory workers, and Spain its fisheries. Competition and openness has been corrupted for years. Why is the EU anything different? See The Crisis of Good Intentions in this week’s US print edition of the Wall Street Journal.

Elsewhere in that newspaper is another article that highlights how the politicians in Brussels are close to ignoring a fire for which they have little awareness. ‘Finance Area Must Make Key Brexit Choices Now’ explains how certain financial transaction take three months to complete. The March 29 date when Britain leaves the EU is nearly 3 months away, yet the methods to assure safe passage for such derivative transactions remain in limbo.

Most of will never use or know what these $66 trillion of swaps and futures transactions actually do. Financiers do and will soon be in the front page of finance rags when they have to explain to their masters why costs are ballooning and finances settlements grinds to a halt. London is still an important central hub for a range of these transactions that are specialized; and aspects of global trade market operations. The EU, in their political stubbornness, are about to uncork a bottle of pandora; or they will light a fuse that will burn and brightly, very soon.

For the love of Pete, can Britain just get out from under the manifolds of madness and can we work an honest days effort without political oversight?


Economic Bullies Are Fattening Up: Where are the Monitors?

When at middle school, some few years ago now, monitors would troll the break-rooms, corridors and playgrounds. If a bully or bully-like behavior was observed, a faithful monitor (sometimes of a more diminutive size) would wade in to neutralize the issue. In industry, economic bullies are getting larger and more powerful and the monitors are missing in action.

What we knew was happening in America is now clearly happening in the UK. In this week’s Economist there is an article titled, “More money, more problems” in the business section. The article reports on new research that suggests industry concentration is well established and getting more pronounced; large, dominant firms are getting larger and more dominant. As a result, a greater proportion of economic profits are being hovered up by the bullies and the rest of each industry is sucking on less and less.

If the market was operating efficiently and freely, the opportunity for start-ups to innovate and create the ‘next big thing’ would help foster creative destruction. But public policy has played a key part in (over?) regulating how business start and operate; and lobbying is running rampant such that, more clearly in America, firms with deeper chests can invest in lobbyists to ensure their masters’ interests are protected; putting more pressure in the smaller guys. The monitors have become the employees of the bullies.

There are implications a-many, some reported in the Economist article, touching innovation and its diffusion (or lack thereof), wage rates, productivity and employment. Larger firms tend to achieve higher degrees of economy of scale; this is a large playground where automation can help drive productivity thus helping the bullies get stronger. Other data from the OECD and other sources suggest that diffusion of knowledge and ideas, needed to help firms share in productivity-inducing work, is slowing down between innovators and followers; in other words between those who already have, and those that already don’t. This reinforces industry concentration or the barriers around the OECD’s ‘frontier firms’.

Employment opportunities and where we collectively go to work changes; and who is able to pay a higher wage becomes self evident. So all in all the controlled environment we live in is a far cry from the free market that was operating 20 or more years ago.

It seems the pundits feel that we need more competition. Can we legislate for more competition or can we undo the constraints that put us where we are today? I think that what is needed is:

  • Less regulation overall and particularly on small and medium business, spanning financials, hiring practices, IP development, and so on
  • Increase investment in primary R&D
  • Increase vocational collaboration with education and industry
  • If you want more regulation, point it at the lobbyists: reduce their spend and power
  • Tinker with the tax code to help motivate investment in smaller firms and Tomory for it, tax larger firms more.

But these items are not even popular topics in politics today. It’s much more likely we will talk about fake news and Russians and Facebook, than economics, growth and hard work. Oh well.

The EU – Creaking at 60

The title of this blog is the title of the Economist Special Report last week. The title refers, of course, to the 60th anniversary of the Treaty of Rome, the founding of the EU at its source, being celebrated by EU members, less the U.K., last week. Oddly the U.K. is still a member but since she wants out, political correctness prevents Albion from upstaging proceedings.

The Economist special report is really good. It is well balanced and actually concludes that Europe needs a multi-speed system to respect all the differing political and economic challenges across the EU. What is irksome though is that while a two-speed or multi-speed approach has been proposed before, why is it now that the Economist has finally woken up to reporting it and making it the basis of its views regarding the success of the EU?

It is as if the Economist has woken up just in time to see the final deck chair arrangement on the titanic. Correctly the special report calls out the weakness and fallacy of the EU’s monetary policies for all members and now current monetary union is flawed. We all knew this a while ago. If this had been addressed perhaps the U.K. vote for Brexit might never have happened!

But ignoring my cryptic criticism, the article is very up to date and very down to earth. It’s just a shame that it took Brexit and the near break up of the EU, and continuing mess in Greece and Italy to come to the conclusion we needed four years ago.

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?

Britain to Lead Second-Tier EU?

I suggested some weeks ago (see Brexit: Mainly the Right Decision for Mostly the Wrong Reasons?) during the Brexit campaign, rather tongue in cheek, that Britain should take the opportunity to lead the formation of an EU II. The idea was simple: develop another EU commitment but one that resolves the issues that dog the current EU. These issues stem from an unelected body that writes laws and a need for statist and deeper integration. Well I am pleased to report that the idea is not all that crazy.

In Tuesday’s US print edition of the Financial Times there is a Comment piece by Foreign Affairs correspondent Gideon Rachman. The title of the article is, “A two-tier model to revive Europe“. In a nutshell his suggestion is for Britain and a number of other counties to form a tier of the EU that supports those parts of the EU model that don’t require unelected (or elected) officials to write laws from superstate or ever closer integration. This second-tier EU might be more liberal, free-trade oriented, and so enjoy single market but avoid the politically challenging work related to political and financial integration.

It’s a great suggestion. However Rachman highlights how some in Europe seek to penalize the UK for seeking to leave. This is the craziest and nuttiest thing going. As my late father would say, this is an example of, “cutting their nose off to spite their face”. Any penalty to the UK will first hurt the UK economy then the EU’s economy. Why would such politicians do this? Such politicians should be forced to resign and retire due to negligence.  But the chances of a two-tier Europe is interesting; but will those countries focused on the inner-tier really let others enjoy the benefit of free trade without the penalty of deeper integration?   Maybe…

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…

Brexit: Mainly the Right Decision for Mostly the Wrong Reasons?

The title of this blog captures how I would summarize Brexit, the U.K. Referendum to leave the European Union. After watching the story unfold intently from afar, the visiting and immersing myself in local dialog over the last three weeks, the tittle of this blog captures the essence of the situation.

The reality is much worse, again for the wrong reasons. Let’s first look at the decision.

  • Technically the process and the method by which the UK will leave the EU has not even started and won’t until October.
  • How the divorce will shape up will be subject to protracted negotiation. Clause 50 has never been tested. Also the UK is a large economy, with several advantages, namely its own currency and exchange rate (to buffer any risks) and the city of London financial center.
  • There are numerous related dominoes that make scenario planning more useful than predicting one single outcome. This includes the foolish attempt by the leader of the SNP who wants to turn Brexit, a UK referendum, into something about Scotland.  

Now let’s look at the pre-Brexit political, or should I say marketing, spin:

  • Neither those for Remain or Leave debated honestly. They could not even agree common terms of reference; how much money the UK gave to the EU versus how much was given back in terms of subsidies, could not be agreed. 
  • There was significant scaremongering from the Remain campaign, led by the generally liberal or progressive establishment, supported by economic groups including the IMF. Yet a minority of smart investors who have continually beaten the pundits like the IMF identified great opportunity for the UK. One wonders if much of the ‘economic advice’ was more political than practical. No act by the EU to penalize the UK would be countenanced long since a) it penalizes both sides, and b) the very arguments used by the EU for open, friendly, collaboration would be exposed for what they really are- unelected dictatorial bureaucrats.
  • The Leave campaign led their supporters in the belief that immigration would stop with a vote for Brexit, as if humanitarian aid were an EU and not a national or moral concern.  There are significant immigration challenges for all countries; remaining or leaving the EU is not central to the real issue.  

The bottom line is therefore the Brexit vote was more an emotional vote, and nor a rational vote.

Finally let’s look at the post-Brexit situation on the ground. In no particular order:

  • The leader of the Scottish National Party wants to reposition the UK referendum as if it was a Scottish referendum. Since the majority of scots voted ‘remain’, and since the UK voted ‘leave’, surely it means Scotland is being forced against its wishes? Utter rubbish. London also voted to ‘remain’- does London cede from the Union?
  • The Prime Minister, David Cameron, is to step down. This is a great shame as he is a good negotiator and politician. He has fallen in his own sword, a rare political act these days. By comparison, the socialist leader of the Labour Party, equally culpable in losing the ‘remain’ vote, has no idea where his sword is. I am not so sure he has one. But 24 hours later he is being stalked by his own resigning front and back benchers.
  • The pound has taken a beating. This was to be expected. It will recover soon, though it may take time. The recovery against the euro will be dependent on the stability of the euro, not the fragility of the U.K. economy. Spanish and other elections in the next 12-24 months will sort this out.
  • U.K. stocks took a beating but already they are recovering, whereas continental markets are suffering more pressure. This is a leading indicator of sentiment that will again show up in currency values in the next year or so. 

And to top it all off you have to understand the irony of Brexit. In the 1960s France vetoed the UK (twice!) and prevented it from joining the Common Market. And this was only 20 odd years after the close collaboration during the Second World War. De Gaulle felt that the UK’s demands for joining would weaken France’s position, and they would have. The result was that aspects of the Common Market and EEC developed without direct UK input and one could argue therefore that the groundwork of the EU was therefore weakened, and the UK never felt central to the initiative.  This was to haunt the experiment as Britain never really forgave France this veto.

More recently dissatisfaction with ever closer European integration was rejected. Initially countries would vote “no” and reject the the EU Constitution changes. Then those same countries were pressured to re-vote in order to get a “yes”. Finally the Dutch and French rejected the Constitution and it was killed off. However the EU continued. Fifty years after De Gaulle’s unfortunately selfish veto hobbled Europe, it is the UK that triggers what could be the straw that breaks the EU. Fair play, and what irony.

The divorce won’t be clean. There will be much acrimony and hard, complex negotiation. The City of London will be diminished initially, until the cracks in euro fracture and break open.  The U.K. economy will reflect increased short-term uncertainty across the global economy, yet will bounce back towards more positive UK growth within a year. Again, as the euro struggles, so the pound will benefit.  

But in truth no one wins with Brexit. The U.K. will suffer more short term; europe, the EU and euro zone in the longer term.  Everyone will be poorer for Brexit. The reality is that we need a rethink for how Europe wants to live and work together. An unelected bureaucracy is not the answer. We need a new model. The real valuable question is not what happens to the EU now; the visionary question should be “who will document, discuss and lead the ideal EU II framework?”   Let’s demand our moribund politicians work for us and work for a future, not argue over the trappings of an idea that died years ago.