Friday, June 24, 2016

I woke up…it was a Brexit morning


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

 

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