What is Boris’s Plan for Brexit?

We are three weeks away from Brexit Day, and yet there is no clarity. This is starting to look eerily familiar!

Boris; buffoon or battler?

We have a PM who is trapped in office, but with no majority he is completely powerless. Meanwhile, the opposition is scared of an election, and is rather enjoying the discomfort of Boris.

It seems that the key date will be 19 October, a week on Saturday, the day when Boris is legally ordered by Parliament to write the letter asking for an extension.

Leo Varadker, Irish Taoiseach

Will he do it? We think not. Since the Benn Act (aka the Surrender Act) was rushed through, Boris has been at pains not to retreat from his ‘do or die’ message about 31 October. We can see why he would do that as background to his negotiations. If EU actually thought he could push through No Deal, then they would be much more keen to negotiate. This has to be true of Leo Varadker, Irish Taoiseach, who has most to lose from a No Deal. Clearly, they have not bought into that idea though.

 

How can these facts co-exist;-

  1. Boris claims we will leave on 31 October, deal or no deal,

  2. The Benn Act says he must ask for an extension in the event of no deal

  3. The Conservatives have stated that they will not break the law

  4. A deal looks extremely unlikely

  5. The EU will agree to any extension request

  6. Parliament will not let BoJo call a quick election?

It seems Boris must believe that there is a mechanism to spring free from the trap. Here is what we think could happen (yep, “could” implies our low level of confidence in our prediction).

The Queen’s Speech next week will essentially be the Conservative manifesto for an autumn election. It will get voted down, but still the opposition will not allow an election.

The big day will be 19 October, in the special Saturday Parliamentary session called by the Government. We see the following votes;-

  1. A vote to lift the Benn Act and allow a No Deal to happen. This will be designed and phrased in terms of progressing or overturning the referendum result, to try to make the opposition look like it is ignoring the plebiscite. Narrowly, we think this will be voted down.

  2. A vote to call a General Election. This will be designed to make the opposition look like it is scared of facing the electorate, especially given that they have earlier voted to “ignore the referendum”.

  3. This is when Boris Johnson resigns as Prime Minister, and where he states that he will not do the usual caretaking role until a new one is appointed. We feel that BoJo has too much political capital tied up to write that letter. It would be interesting if Parliament voted to make him personally write a letter in which he does not  believe. If he does not resign, I see him taking a jail sentence as less politically damaging than writing a letter.

  4. If we have no Prime Minister – and hence no Government – then there will inevitably be a court case as to who can write the letter.

  5. Then there is 14 days for a new Government to be formed. We do not think Mr Corbyn could attract enough support, as the LibDems will see little advantage of positioning themselves as Labour’s poodle.

  6. A government of “National Unity”, which even the media have Christened “National Remainers” also seems unlikely, given how the various factions of the remainers struggle to agree on anything.

  7. Another Conservative would be the natural choice, as they have the largest party…. could that be dragged out for the remaining 12 days?

  8. So we drift towards 31 October……. no Prime Minister, no Government, political chaos.

  9. Away from Westminster, the negative respect for the political classes plumbs new depths.

When the referendum result was declared, the best outcome would have been a clear, firm date three years (or even five years) ahead, for which everyone could plan and prepare, leading to the most seamless transition possible. Instead of which the political classes in London, Brussels and Dublin have screwed it up right royally. By their constant bickering and game-playing, we are now in the worst possible situation. It is no wonder that the general public is coming to despise politicians.

 

Oh, and as for the details of Boris’s Plan, we don’t know.  We’re not even sure that he knows……

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FTSE Weak Until Christmas – Then Rebounds in the New Year

It’s that time of the month when we take out our crystal ball and forecast where FTSE 100 will be in 6 months time, February 2020.

Stock Prices green for up, but we think down

Before giving away too many of our thoughts, gut-feels and sheer guesses, let’s look at where we are now. Six months ago, in February this year, we thought FTSE would continue the upward trajectory sine the start of 2019, Brexit would have been and gone, and FTSE would be just over 8000. What’s actually happened is that Brexit was postponed and so the UK economy has been left dithering over the summer. Last night it closed at 7148. So we got the direction right. At the end of last month, when it was at 7700, we could have forgiven ourselves a little smugness.

FTSE 100 with date of forecast shown

For the last three months, as the implications of the Brexit delay became apparent, we have been forecasting FTSE up to 7500 in July, and then a retreat to 7200 by November. Well, we got to 7500 in July, but back down to 7200 a little early. Our suggestion last month that the market was riding high but vulnerable to bad news was brought to life by President Trump’s step up of the tariff war with China.

So where to now?

As we noted last month, the global economy looks weak, and the UK could be in a technical recession by Christmas. (See our article last week, A Bleak Midwinter Brexit Recession By Christmas) Our central forecast for Brexit is that it will be a soft No-Deal, in that another Withdrawal Agreement will not be reached, but enough accommodations will be made to keep things ticking over. This outcome will scare the market further.  However, FTSE tends to look 6 months ahead, and by February, it should become clear that the UK economy will be okay, and the world economy could be over its wobble.

So we think the worries of a No Deal will send FTSE down to 6800 by November, but that in the 6 month time horizon of our forecast, we think it will be back to 7200 by Friday 14 Feb 2020

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A Bleak-Midwinter Brexit Recession By Christmas

Oo-er, suddenly the UK economy ain’t looking so good!

The news media are full of speculation about Brexit, and not many of the stories are looking forward to how wonderful the country will be once/if Brexit happens. We can expect more of the same for the next twelve weeks until Halloween.

Are we heading for No-Deal?

At the moment, both sides are digging in, trying to create a tough stance for the benefit of their populations (I hesitate to use the word electors when we are discussing the EU, but you know what I mean). Behind the scenes, it can be assumed that the diplomats and civil servants will see themselves as the grown-ups in the room, and thus be at least looking for common ground.

However, it seems unlikely that a comprehensive new Withdrawal Agreement will be crafted by October. But we can expect enough co-operation to keep the world turning.

So what’s the problem?

The problem is that investment is collapsing. The worst thing for businesses in uncertainty. Life has enough risks when it comes to business investment, without an unseeable future being only 12 weeks away. Similarly, house-buying and car buying are likely to miss out on their usual autumn surges this year.

And after Brexit day, will there suddenly be clarity and light? Nope. There will be hysteria in the media for a few weeks as every little shortage and business malady is blamed on you-know-what. And the effect of this – more hand-sitting and less spending.

What else is happening?

Leader of the Free World

The US is starting to suffer from Mr Trump’s tariffs, to the extent that Jerome Powell has cut interest rates despite full employment. Meanwhile, China is suffering a marked slowdown from the trade war. This has now spread to Europe, which is also teetering on the edge of recession.

Conclusion

The UK is heading for recession – and it is difficult to see when it could end. Domestically, we’ll probably pull out next spring…. but that depends on what the rest of the global economy does. If things keep softening elsewhere, it could be a big one!

PS. The slowdown in Q2 announced today was no surprise, given the stockpiling in Q1 for the original Brexit day, and the factory shutdowns brought forward to April in case of Brexit delays.

Theresa the Timid

PPS. The coming recession will be a direct result of Mrs May’s and Parliament’s timidity over Brexit. If they had gone ahead on 29 March, we’d be pulling out of it by now. The delay to October has just increased the uncertainty and halted the economy for 7 months, tipping us into a recession we need never have had.

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Why Are Brexit Tariffs So Bad?

It is accepted wisdom in the chattering classes that trade tariffs are necessarily a bad thing. But why is this so?

David Ricardo – economist

The Principle of Comparative Advantage was published in 1817 by an economist (yayyy), David Ricardo.  This postulates that in international trade, relative advantages in labour costs, productivity and other production factors will enable cheaper consumption – and hence higher living standards – for both the producing and importing nations, than the alternative of home production in each country.

An easy example of this effect, even within the UK, was the impact of the railways. Suddenly, there was no value in each small town having a maker of pots and pans. Such items could be made better and cheaper by a huge factory in Birmingham, and so pan-buyers (Pans-People as they might be termed by grey-haired fans of Top of the Pops) had a better standard of living, having devoted less of their income to obtaining better cooking utensils. The pan-workers presumably had marginally higher wages than elsewhere too.

However, it perhaps wasn’t so good for the country-town pan-makers, who were competed out of a job. And some of the inhabitants of such villages may have mourned the disappearance of their friendly local manufacturer – and all the workers in the previous supply chain. Special orders would be more difficult, with just a few standard designs. So the nett gains, including non-monetary items, weren’t always as large as perhaps thought at first glance.

It is the principle of comparative advantage that postulates that we are all richer as a result of international trade.  And tariffs dent international transfers of goods, hence at the margin impoverishing both exporting and importing nations.

Beef Cattle

A clear, and currently pertinent example is the UK beef industry. It is not cost effective for the custodian of 200 acres of Devon countryside, with hedges, copses and ancient barns to maintain, to compete with a mid-west American farmer with a 640 acre (square mile) of flat, fertile, but featureless maize land. The US beef farmer keeps all his animals in a feed-lot year round and transports in fodder from the prairie or the local grain silos. Cheaper feeding with no overheads – oh, and growth hormones. Does the UK consumer want cheaper beef, or enough profit in UK farming to retain our beautiful countryside? In surveys, they would select the countryside, but I suspect in Morrisons they would choose the cheaper steak! So the UK farming industry will need tariffs to raise food prices or, alternatively, subsidies to maintain the countryside.

Illinois Corn Fields

What do tariffs mean in terms of Brexit? In the case of a No-Deal Brexit, then the EU could choose to treat the UK as a third party country and apply tariffs. (It could drop tariffs on the basis that a withdrawal deal or trade agreement is imminent. It’ll be interesting to see if there is sufficient goodwill for that to happen). Given the 15% fall in sterling, the average 3% cost of tariffs across all goods won’t actually make much difference. However, in cases such as beef and lamb exports to EU, 40% tariffs will hurt. Here, sector support will be essential during any interim period, as the reaction of prices to these tariffs will be only partly a rise in prices in EU, with the rest of the slack taken up by a fall in export incomes received by British farmers.

The second impact of leaving the EU’s customs union will be an increase in paperwork. This is just sand in the machine, benefiting nobody (except perhaps paper-makers and form-fillers).

Work will be required on both sides of the channel to ensure delays don’t become excessive. We have seen figures suggesting that if the processing time per lorry increases from 30 seconds to a minute and a half, then the whole of southern England will somehow face gridlock. This view doesn’t seem credible to those without a pre-decided political position. Both sides of the channel have had plenty of notice about the forthcoming change, and already have capacity to cope with fluctuations in volumes. If each lorry needs three times as long to be processed, then is it not a case for having three times as many booths? Or maybe twice as many with a few changes to reduce the bottle-necks or critical time-paths of each customs inspection?

Finally, there is the Irish economy to consider. The vast majority of their goods travel across England to get to continental Europe. If tariffs are bad for the UK, they will be hugely worse for the Irish. Will they pay a tariff to get their goods into UK and another one to move them into France?  One has to hope that Brussels won’t dump the Irish economy as a side-effect of punishing the UK!

In the very long-term, one has to assume trade deals will be made with both EU and US. There is some prospect that we will have to choose whether to be in the trading orbit of the US or EU, as having one foot in both may be untenable.

Summary

  1. Tariffs (and paperwork) are bad, but not catastrophic.

  2. The already lower pound sterling, and future tax and export-subsidy payments will mitigate the worst impacts.

  3. Brexit is a political choice. Tariffs are a part of that decision, but should only be a small input, not the deciding factor.

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FTSE100 Forecast. Don’t Come Back on St Leger Day

The economy seems to keep motoring along, both here and in the US (which drives so much of the world GDP). And yet….. and yet…… and yet, everyone is fearful because of the politicians.

Will May ever go? Will the Brexit uncertainty ever end? Will Trump’s trade war on China undo last year’s tax boost (which was fading anyway)? And didn’t we just call a peak in the latest tech bubble (as signalled by Uber being over-hyped)?

However, the underlying economics are okay, and we see corporate earnings remaining good. But the fear-factor in the UK market is there.

This forecast covers the period to 15 November, so yet again we find ourselves caught in the Brexit will it/won’t it uncertainty. Our expectation (see tomorrow) is that a hard Brexit on 31 October remains a possibility, and this will cause some turmoil in the stock market. In this case, the word ‘turmoil’ has the additional meaning of ‘buying opportunity’.

FTSE positive so far this year

Today FTSE100 is at 7247. We see slow growth upwards over the summer, but softness in September and October due to the politics. Thus, our forecast for FTSE100 on 15 November is 7200.

The old saw says to go away in May and come back on St Leger Day (14 September). We can’t see much joy in buying into the Brexit uncertainty, so we advise “Go away at the end of July, come back in mid-November”. Doesn’t scan as well does it?

Invest in fun not shares

This is more pessimistic than we have been in a while, (see our previous forecasts) but hey ho, sun’s out, surf’s up, life is good eh?

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[The End of May]2

Oh those happy, naïve, days back in January, where we were asking How Long Can The Brexit Fun Last? We thought 3 or 4 weeks would be the most we could stretch it out. And now, 4 months later, we foresee another 18 months of this disaster. Was there ever a slower car-crash?????

Here’s why;

  1. Mrs May’s deal is dead in the water. It is more Zombie’d than a Zombie-thing. Even though there is less than the thickness of a fag-paper (which is approx 2 thou’) between the reds and blues, they cannot agree a deal.

    Mrs May
  2. And even if they do agree a deal, it won’t get through Parliament – either it has a customs union, which will lose more Tory support than it gains from Labour, or it doesn’t have a customs deal – in which case Labour won’t back it.

  3. Both lots will receive an even larger drubbing in the European Elections on 23 May than they suffered in the local council elections

  4. So there can be no general election – all those turkeys in Parliament still won’t vote for Christmas. But Mrs May will finally have to admit defeat!

  5. So the only solution is a new Tory leader. On the over-riding need to win the next election, it will be BoJo or Liz Truss………….

    Johnson and Truss in an appropriate setting (photo from Nursery Times)
  6. ………..who will then inform Messrs. Barnier, Juncker and Tusk that they negotiated too tough a deal, and that it will never pass Parliament.

  7. Hence the EU must choose – another 12 months to negotiate a deal that is fair to UK, or No-Deal on 31 October.

  8. The EU will huff and puff, but back down. It doesn’t want to be blamed for No-Deal

 

You heard it here first;-

The End of May by the End of May

Brexit Delayed until 31 October 2020

Now can we all get on with our lives?  Er, no. We have all the drama of the Euro Elections, the Peterborough By-election, a Tory leadership election, and Brexit Delay. The fun clearly has months to run!

PS. Did you like the Quant-joke in the headline?

[The End of May]2 = [The End of May] * [The End of May] = The End of May BY The End of May

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Sterling Currency Forecasts. The World is More Important Than Brexit.

Market Screens are Green

Last month, back in those happy days when we believed Brexit would be sorted by the end of March – Yep, we were writing on 26 March – we made our GBP forecasts on the basis that No Deal would provoke a bit of a dip, whilst No Brexit would have a slight spike, but in either scenario, sterling would end up stronger against USD and EUR.

Jean-Baptist Alphonse Karr looking very Victorian

Jean-Baptiste Alphonse Karr said plus ça change, plus c’est la même chose.

Things have changed over the last 3 weeks – but still they are the same. We continue to not know what is happening with Brexit. We could be heading for a No Deal at the end of October, we could be getting Mrs May’s Deal approved (though it seems unlikely), or we could be having a new Tory PM and a bit of re-negotiation.

Whatever happens, we feel that the UK economy will continue to motor along okay, with investment decisions increasingly being taken anyway. Life goes on eh? The UK data seems to indicate that this is occurring, with strong employment and wages data, and quiet inflation.

US Non-Farm Payrolls were 196,000 in March, which matches our “decent level target” of 200,000. China seems to be stabilising its recent weakness. So it is only Europe skating on the thinnest of economic ice.

So whilst we see GBP strength still, it will not be as robust as we thought – until Brexit is fully resolved. Thus, in 6 months time, we see GBPUSD rising from today’s 1.30 to 1.38 (forecast down from 1.42). However, there is a serious risk of weakness in the EU area, so we still see EUR weaker against GBP. As last month, we expect EURGBP to fall from 0.8680 today down to 0.8200 in 6 months time regardless of the B-mess.

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Brexit Delay Is Too Short……. AND Too Long

How do they do it?  It continues to amaze how the politicians can pull the worst possible deal out of the bag.  I guess that’s what happens when you go begging!

 

TOO SHORT

The delay until 31 October is too short because;-

  1. The new deadline is not far enough into the future that we can all forget about it and go back to investing in businesses, making a living and getting on with out lives without constant uncertainty.  So any rebound in the economy will not happen this summer.
  2. There is insufficient time for the Tories to organise themselves, get a new leader and negotiate a better deal.  So we are stuck with the May Deal, No Deal or No Brexit.  Even an election or a re-run off the referendum don’t really have enough time.
  3. Given the local elections, the European elections, summer recess and the political conference season, there isn’t even much parliamentary time over the next six months.

 

TOO LONG

The delay until the end of the summer is a disaster because;-

  1. All of the stockpiling and emergency plans will have to be maintained – or run down and then rebuilt.  So either a long summer of warehouse costs, or absurd gyrations in the supply lines, with no orders for 3 months as stocks run down, and then double orders for the next quarter as supplies are built back up again.
  2. The Relief Bounce to the economy for which we were all hoping will not happen whilst we continue to have the black Brexit cloud thwarting any enthusiasm.  So another summer of missed growth.
  3. The pressure is now off the politicians to sort a deal – so nothing much will happen for 4 months – then suddenly they’ll realise that we have a deadline coming, and like a rash student before finals, they’ll be up all night arguing and still not agreeing anything.

 

WHAT A SHAMBLES. Just when you think our political class couldn’t make things any worse, they go and under-reach our expectations yet again.

Sadly, the most lasting legacy of this whole farce will be a long-lasting contempt for all politicians and for our democratic system.  Whilst the MP’s deserve derision, such strong dissatisfaction with politics is not a good thing.

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Brexit With Only A Short Delay

Sorry, Brexit again today!

Still businesses cannot plan for the second half of the year. Will the EU27 put us out of our misery? Everyone has had enough of Brexit by now surely – except for the media?  I’d love to know how it affects newspaper sales and radio/tv listener and viewer figures.

The betting is on a much longer extension than Mrs May’s proposed 30 June. Given that she has been neutered by Parliament, she will have to accept whatever delay she is given. Of course, the EU leaders will determine what is in their own best interests. They can agree on any date they like, and even demand all sorts of concessions. What will be their drivers?

  1. Nobody wants to take the blame for a No Deal Brexit.

  2. The EU does not want to have endless focus on Brexit when it has plenty of other issues to resolve

  3. They must expect that forcing the UK to hold European elections on 23 May risks a huge vote for the Brexit Party/UKIP – which is not the example they will want to show to their own populist voters.

  4. They can see that the Tory/Labour “talks” are being held for show, and are unlikely to get a Parliament-proof agreement.

  5. Any date beyond 30 June will mean that they have a new UK Prime Minister, who will be keen to make a mark by taking a much tougher approach with negotiations, starting with tearing up the existing Withdrawal Agreement. This is not good news for the EU.

It feels like the best scenario for the EU is to keep those deadlines short and tight, perhaps pushing Parliament to choose between the current May Deal or revoking Article 50 altogether. This could result in a cast-iron, firm leaving date of 22 May – and maybe even as soon as 26 April.

From a business point of view, the uncertainty must cease. Having a year-long postponement just means kicking the can down the road, with nothing being settled for another year. Such an outcome will not play well with the electorate, and could be very damaging to the Conservative Party. But it would give plenty of time for a new leader to be installed and start negotiations anew.

Given the five aspects listed above, it is clear that No-deal could still happen, and to us, a short extension feels most likely, with 30 June as the backstop. (No, not THAT backstop.  Actually, the Ireland Island issue has been quiet recently hasn’t it?). And this time, there really will be No Deal if Parliament doesn’t vote for anything else.

 

Please, just get it over with, and make it as quick and painless as possible.

 

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Party Management is Killing Brexit Negotiations. No Deal is not Zero Probability.

What a bizarre sight. A Remainer is arguing for a harder Brexit, negotiating with a Leaver, who wants to effectively stay in the EU. It’s not easy being a politician is it? Poor old Theresa May doesn’t even believe in Brexit, but is trying to hold together a party which on the whole feels it should deliver it, whilst having a full spectrum from the ERG to Dominic Grieve. Meanwhile, even poorer and even older Jeremy Corbyn does want Brexit, but is trying to lead a party that is happy to oppose it.

Houses of No Decisions
Corbyn just before Brexit started

Clearly, the talks are just about the blame game, with both leaders wanting to avoid any backlash. In reality, the two positions are so close that a skinny fag-paper (which is an official engineering measure by the way) could not get between them. Which puts Jeremy Corbyn in a tough position. Having started the year by committing to oppose any Tory deal, now he needs to be seen to get meaningful changes in the talks. But Mrs May can’t give significant ground at this stage as it will split her party – which is of course the real reason he is there at all.

Corbyn in negotiation mode

And across the channel, where Merkel and Macron are to lose another day of their lives listening to British begging, perhaps it is dawning that imposing an impossible deal on the weak Mrs May could lead to an unpleasant outcome for EU.

Yet again we are begging for an extension, but the only credible justification Mrs May can offer is her own resignation – which will lead to a tougher scenario for the EU, as whoever follows is likely to be more antagonistic.

The City has decided that Brexit is not going to happen. In our view, the risk of the EU refusing a long deal is not negligible. They might give us only a month, just so that all sides can finalise their no-deal preparations. And leaving on Friday, although unlikely, is not impossible.

Given the City’s complacency, there is little upside on being long UK assets and GBP this next few days. A long delay is built into prices. If a quick deal or no-deal happens, expect a sharp move downwards.

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