Clueless is what clueless does… Financial markets and their pollsters got it
completely wrong. The ‘Out’ vote was
largely about immigration and dissatisfaction with it and the ‘remain’ faction
never ‘got’ that nor tried to combat it. Their tactic was to threaten financial
and economic chaos and now they will have to go eyeball to the eyeball with
those dire warning statements- which are probably greatly exaggerated. There is
message here beyond just the UK…
What’s good for the goose is good for the gander
But what goes around comes around. The U.K. is the
United Kingdom not the magic kingdom. And with this vote the U.K, may be posed
to get smaller as Scotland is now likely to take a second go at leaving the
U.K. What is good for the goose is good for the gander. U.K. claims to
Gibraltar are being challenged by Spain, now that the U.K. will be politically
OUT of EU. The stage is reset for all sorts of new arrangements to be put in
play.
EU to E-MOO or are they cowed?
The EU is telling the U.K. to leave quickly to dispel
the air of uncertainty quickly (i.e. don’t let the door hit you in the butt on
the way out). And while they will not want to treat the U.K. too well they will
not want to treat it too shabbily either. The U.K. is an important trading partner
with the rest of Europe and everyone will want to keep that connection. But if
the EU makes it too easy and without consequences to leave there could be
others to take that route. The U.K. and Denmark got opt out clauses to join the
EU and not EMU. For everyone else EU membership is supposed to be the stepping
stone to EMU. So how will that work in the future? Can EU set as a membership
condition the aspiration to EMU? Does EMU still look that attractive?
Geo-P
As for geopolitics all European nations went their
own way politically although there was also an EU position. The UK will get its
full voice back in the international area and they have been a strong U.S.
ally. That is a good thing. An ‘independent’ U.K. does not weaken Europe as
much as it gives it another independent voice and one-less opinion to bargain
with inside EU to craft a single position.
EU and EMU: now more than ever the Deutsche Zone
The U.K. leaving EU raises the risk that someone
else will leave EU…or even EMU. It shifts the balance of power between EU
non-EMU members and EMU members who are also EU members. With the U.K. out, the
EMU has a huge weight in the EU. The Germans have acted in a way to make EMU membership
as unpleasant as possible for everyone else. If there ever was a question about
whose culture would prevail in EMU there is no question anymore. Other member
countries cannot afford to be out of step with most competitive country in EMU.
Germany controls EMU. And Germany’s response to membership has been to run a
fiscal budget surplus and run and even lower than 2% inflation rate –stepping
up pressure on fellow members in EMU to follow Germany or to slip further
behind it. Germany also has enforced
selectively the rules governing the ECB so as to bring maximum pressure on its
fellow members. What this does is to make the EMU rule of 2% inflation an upper
bound for everyone else particularly after their poor policies in the early days
of EMU. Clearly Germany has been a deflationary force in EMU although everyone
talks of joining EMU as being growth-enhancing. How about that?
But…
NO LEHMAN MOMENT
In the wake of Brexit. No one is bankrupt. It is not
like Lehman bros. Although sterling has fallen sharply there is no new FX deal
to cut. The BOE is independent. There is no need to extract it from the ECB. There
are no bailouts to be done. There is no central bank or treasury propping up of
anything. In short the U.K’s flexible exchange rate will buffer the economy. A
lower sterling will stimulate UK growth. U.K. industry groups have been quick
to call for new deal to keep trade flowing Vis a Vis Europe. Europe will be
reeling and wonder about further consequences.
The potential Zombie opts out
Questions about London as a financial center may
continue for some time. But the EU was flirting with a transactions tax that
might have killed London as a financial center anyway had it stayed in. London
has bought its freedom form that but at an unknown price.
Markets gyrate
There are knee jerk reactions in Fx markets and in
stock market. But on balance it is in everyone’s interest not to cut off their
nose to spite their face. It would make sense that Europe and UK would try to
keep commercial ties more or less intact.
It’s delightful...it’s de-lovely… its decoupling?
The risk here is that there could be more
de-coupling. And the act of de-coupling per se is risky. Scotland may leave the
U.K. making the U.K a smaller economy and there could be other more painful
disassociations in Europe as well. But leaving EMU would be much more painful
making that knock-on effect a more remote possibility. Still the U.K. leaving
is a shock to the system and it STOPS a move to persistent, mindless, knee-jerk
integration.
The globalization hobgoblin
I think a stronger subliminal message here is
dissatisfaction with the pressures of various sorts from globalization. For the
U.K. immigration was the big risk. But even today commentators are talking about
the potential impact on trade and trade-reducing deals.
Broader concerns
LET ME MAKE THIS PERFECTLY CLEAR. Free trade is the best
of all worlds. But we don’t live there any more than we live on Mars. This vote
is also is a wake-up call to bureaucrats who think they can scare us with flawed
analysis and threats. This is a boost to unconventional candidates and to the
candidacy of Donald Trump in the U.S. This is another nail in the coffin of
analysis by polling. How did that work?
I do not look to SLOW international trade but to
reconfigure it. And I believe this vote takes us a step closer to that.
How we got here…
China and the rest of Asia grew through a strategy
of export-led growth. That meant they were set to tap into demand in the
developing economies and ride piggyback to stronger growth. But as China grew
into ‘Baby Huey’ its piggyback ride became piggish. The burden of China’s ride
has disrupted growth in the West. China has been able to produce and not consume
and there is nothing in economics about having specialized production and consumption
countries that leads to a stable result.
Asia has co-opted the FREE TRADE model in favor of
an export-led growth model and that must be changed. But TOO MANY OPINION
LEADERS have simply drunk the Kool Aide of any trade instead of
insisting on Free Trade. Asia needs
to change to grow (mostly) on the back of tis (own) demand. U.S. corporations have to invest in the U.S.
not just in their offices abroad. And this suggests to me that there is a lot of
exchange rate re-alignment that is needed. But China is against it as are a number
of Asian and Latin American economies and as are a lot of U.S. corporations who
have investments in Asia and intend to benefit from exporting back to the US
using cheap Chinese (et al) labor. Like Brexit this will be hard to do and
expect the ‘experts’ to be against it.’ It may take an outsider to do it.
Our intelligentsia has done us wrong. And now people
may be much less likely to believe its leaders and experts. The way may no
longer be shut..
I am not so negative on Brexit. EMU and EU were
becoming a straightjacket, run by bureaucrats. What Brexit tells us is that
trends can change. Brexit is a breath of fresh air. The U.K. may pay a greater
price for it they thought: but at what price freedom? How can the price be too
high?
Brexit
morning…
I woke up, it was a Brexit morning
and the first thing that I saw
was the pound falling like a rock
and David Cameron’s fall
news flowed in like butterscotch
and smothered all my senses
pessimism came, it stayed for the day
and it knocked the markets senseless
…
Now the curtain opens on a portrait of the next day
And the street is paved with passers by
Commerce flies, bureaucrats cry,
But freedom’s come to stay
Won’t you wake up!
It’s a Brexit morning