Magna Carta, English Civil War, Y2K…….Brexit.

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We finally really did it…You Maniacs! You blew it up! Ah, damn You! God damn you all to hell!” Cry the Bremain supporters, EU politicians and FX and equity capital markets.

The departing and presumptive British PMs suggests a period of calm negotiations before any change occurs. EU politicians and administrators continue their disregard for democracy and demand immediate panic, liberal elite demand disenfranchisement of over half the British public, and investors, employers and capital markets bemoan uncertainty.

The benefits of free trade remain: purchasing of goods from the cheapest source allowing allocation of remaining resources to the most relative productive activity.

In the coming re-negotiations Britain approach from a position of strength, it accepts net services and goods from the EU and the rest of the world, any threat to allowing British goods and services into Europe (as long as they meet EU regulatory standards) could be met with even harsher reprisal. Of course as the UK is smaller than the EU the relative effect would hurt the UK more. But both Switzerland & Norway with massive net exports have access to the EU free market for which they pay, on this basis the UK could maintain access and receive a net receipt.

Under free movement of labour Britain again receives net migration from the EU. Britain could limit EU immigration, on a one-to-one basis, to the highest quality and demanded resources without jeopardising British nationals working or living in their homes in the EU.

Britain is also a net contributor to the subsidies and grants of the EU, for that benefit it is allowed access to the decision and law making processes that is shared with 27 other nations. Whilst the direction of political EU and UK may now differ, the UK would be free to adopt any of the best in-class practises from the EU without having to contribute to the EU treasury.

For trade with the rest of the world any existing EU agreements with the rest of the world could also be adopted by the UK and the non-EU blocks until if necessary renegotiation take place.

A call for calm rational negotiations by British leaders and the head of the other successful economy in the EU (and provider of the British royal family, maintained after the Magna Carta, reinstalled after the English Civil War as a constitutional monarchy and, possible model for UK’s continued membership of the EU) would lead to a beneficial outcome for both sides (and a similar non event to the Y2K). The rash hysterical shrill for punitive action from the world liberal elite provides the reasoning for British exit, but also evokes uncertainty for the UK, EU and rest of the world.

What’s going on – Are we heading for another Great Recession?

We are now eight years on from the global catastrophe of the “Great Recession”, but with the US stock market (SPY, DIA, QQQ) banging up against all time highs and global stock market indices (ACWI) recovering to all time peaks reached twelve months ago, can one assume all is swell the global economy?

Unemployment levels in the US are fast approaching levels pre Recession and in Europe it is finally showing meaningful reduction from the peaks of 2013 a story repeated in many of the worlds largest economies.

The policies to get us here have been a mixture of both traditional and extreme. From the US we’ve had traditional government spending unmet by tax collection together with interest rate cuts, to the extreme with the Central Bank purchasing the government debt with conjured money. Europe has avoided expanding government spending but have gone to the far side of extreme with negative interest rates. Japan is using all of the above and China has gone the way of massive relaxation of lending restrictions to the private sector that comically sloshes around.

If all was well with the world it would be time to stop these policies, and indeed the US stopped magically producing money several months ago and have even had an interest rate increase.

However the information content of the developed world government bond markets (BWX) are signalling something very sinister, most are providing a yield around the current inflation rate or, expectations of no inflation usually caused by coming slow growth or recession. This indicates that we are again in the era of potential policy mistakes.

In an appraisal of the policies that have already been installed, US government debt relatively reaching WWII leaves very little room for further support unless in desire of a centrally planned economy. The EU have been late to the party on cutting interest rates and conjuring money but should be applauded for government austerity in the face of a reducing tax base. Japan has morphed into a basket case but China continues to grow at an envious rate for the time being. Unfortunately negative interest rates for retail and corporate banks have not made them lend more but punished pension plans, mainly due to increased financial regulation.

Even more comical than which quarterly bubble private lending is funding in China, is that they have embarked on empowering the private sector, where as the US is empowering the government and the previously failed establishment. It is in fact a shame that the US information technology revolution of the last forty years have passed their rulers and central bankers by. Today “community” platforms (LC, TREE) are enabling borrowing from highest quality risk takers, to increase productivity and create growth, with enviable interest rates and data collection to the lender. Central bankers, however, continue to support their former work alumni and ignore calling for mandates to fund “community” platforms.

In support of the old school at the US Federal Reserve, they correctly watched the stock market or as they call it “data” to help determine when to make their first interest rate rise, but now is the time to start waiting for yields in their unsupported bond market (TLT) to recover. Although employment is at high levels, US central bankers can be relaxed with their inflation mandate, as corporate profitability is very tight, lay-offs are preferable to reduced margins.

There is little room for error but a policy mistake can take us back to the last decade including a stock-market crash.

Economic Outlook March 2016

Regional Analysis (March 30th, 2016)

USA

At the December 2015 meeting the Federal Reserve increased interest rates to 0.375%. At the March 2016 meeting they expect them to be at 0.9% by the end of 2016. The members also further reduced growth, unemployment and inflation expectations.

Eurozone

At the March meeting, the ECB further lowered deposit interest rates to -0.4%, with expectations for it to remain at the present or lower levels for an extended period of time. Monthly asset purchases were expanded to €80bn/month, permitted purchases from individual organisations and banks issues were expanded to 50%, and
non-bank corporations are now included. Further a new long term lending facility to banks commenced. The growth expectations were reduced with risks to the downside.

Japan

Three main policies were decided at the January Bank of Japan Monetary Policy Meeting to achieve the price stability target of 2%. The introduction of a minus 0.1%% interest rates for bank deposits. An annual increase in the monetary base of 80 tr yen. Together with, annual purchases of: 80 tr yen of Japanese government bonds, 3 tr of exchange traded funds, 90 bn yen of real estate investment trusts, 2.2 tr yen of commercial paper and 3.2 tr yen of corporate bonds. Immigration controls need to be drastically relaxed to aid growth so taxes can reduce Government borrowing.

China

The People’s Bank of China sees economic downward pressure in the face of restructuring, they are attempting to moderate the expansion of aggregate demand, while supply-side structural reforms accelerate.. They continue to reduce loan and deposit rates and the reserve requirement ratio together with other policies, whilst foreign exchange balances are reduced. They also aim to eventually allow the market to decide the exchange rate, whilst also managing this transition.

UK

The Bank of England maintained the Bank Rate at 0.5% and the stock of reserve financed purchased assets at £375bn. Drops in energy and food prices, global inflation and, domestic costs anchored domestic inflation below the 2% target. Private domestic demand, the labour market and productivity are all supportive of UK growth. The referendum on the UK membership of the EU was seen as an uncertainty for growth and financial stability.

Capital Markets Outlook March 2016

Asset Class                        March 30th, 2016

  • USA
  • Equities –               Chinese growth concerns and Fed Fund speculation provide short term buying opportunities.  
  • Govt Bonds –         Mild fall in bond prices, but supported by yields.      

 

  • UK
  • Equities –               Pressure from referendum on EU membership.  
  • Govt Bonds –        Low yields offer no incentive to hold.
  • Currency –             Only gradual increase in interest rates to a low level permits currency downside.

 

  • Eurozone
  • Equities –               Struggling from strength of Euro.
  • Govt Bonds –         QE and deflation maintain support.
  • Currency –              Move to monetary easing aid currency’s to fall to fair value, in longer term

 

  • Japan
  • Equities –               Struggling from strength of Yen.
  • Govt Bonds –         Declared inflation target scares marginal government bond traders, negative interest rates support.
  • Currency –              Loose money, low growth and debt downgrades maintain pressure, in the longer term.

 

  • Rest of the World
  • Equities –                Potential to recover on internal rate cuts.
  • Commodities –      Difficult to make significant headway if US dollar appreciation, awaiting reduction in oil production investment.


Uncertainties

  •        Chinese military developments.
  •        Russia/Ukraine.
  •        Regulation of financial institutions and products.
  •        Religious extremism.

 

Economic Outlook December 2015

Regional Analysis (December 29th, 2015)

USA

At the December Meeting the Federal Reserve increased interest rates to 0.375% and expect them to be at 1.4%  by the end of 2016. The members increased growth but reduced unemployment and inflation expectations.

Eurozone

At the December Meeting, the ECB lowered deposit interest rates to -0.3% extended full allotment fixed tender till the end  of 2017, extended asset purchases till beyond March 2017 include euro regional and local government debt and  reinvest principal payments. They slightly lowered inflation expectations.

Japan

Members of the Bank of Japan monetary policy by a reduced majority extended the maturity of Government Bond  purchases to 7-12 years, they also noted that exports and investment in physical and human capital have been picking up, although business sentiment and inflation expectations have been slowing. Immigration controls need
to be drastically relaxed to aid growth so taxes can reduce Government borrowing.

China

The People’s Bank of China sees mass entrepreneurship and innovation and the supply of public goods and  services forming the engine for economic growth, although downward pressures remained high. They continue to  reduce loan and deposit rates and the reserve requirement ratio. The central parity of the currency against the  dollar was reduced by 1.6%.

UK

The Bank of England expects inflation to stay below 1% for at least the next six months but exceed the 2% target  after two years with no further action. The Governments Autumn Statement means a lower pace of deficit reduction, but still impacting growth. Nominal pay growth appears to have flattened. The Monetary Policy  Committee expects rates to rise gradually and to a lower level than in recent cycles.

Capital Market Outlook December 2015

Asset Class                        December 29th, 2015

  • USA
  • Equities –               Chinese growth concerns and Fed Fund speculation provide short term buying opportunities.  
  • Govt Bonds –         Mild fall in bond prices, but supported by yields.      

 

  • UK
  • Equities –               As per  USA.      
  • Govt Bonds –        Low yields offer no incentive to hold.
  • Currency –             Only gradual increase in interest rates to a low level permits currency downside.

 

  • Eurozone
  • Equities –               Currency fall and QE to aid short term recovery.
  • Govt Bonds –         QE and deflation maintain support.
  • Currency –              Move to monetary easing aid currency’s to fall to fair value.

 

  • Japan
  • Equities –               AS per USA.
  • Govt Bonds –         Declared inflation target scares marginal government bond traders.
  • Currency –              Loose money, low growth and debt downgrades maintain pressure.

 

  • Rest of the World
  • Equities –                Potential to recover on internal rate cuts.
  • Commodities –      Difficult to make headway on US dollar appreciation, awaiting reduction in oil production investment.


Uncertainties

  •        Chinese military developments.
  •        Russia/Ukraine.
  •        Regulation of financial institutions and products.
  •        Religious extremism.