Boris’ Historic Election – Thank You EU

Congratulations to Boris! Now perhaps we can go back to having too much food, too much drink and too much indulgence over the Christmas break, without having politics upsetting us all?

Johnson this morning – photo from BBC

This huge victory will set the direction of politics for the next 10 years. Yes, we predict another term for BoJo starting in 2024. I am indebted to my older contact who has already pointed out that by December 2024, Labour will have only had one election-winning leader in 50 years. FIFTY YEARS!!! Step forward Tony Blair. You achieved the success that eluded Jim Callaghan, Michael Foot, Neil Kinnock, Gordon Brown, Ed Milliband and now Jeremy Corbyn. Oh, and John Smith too…… Did I miss any?

Jim Callaghan – never won
Michael Foot – never won
John Smith – never won (though to be fair he never tried)
Neil Kinnock – never won
Gordon Brown – never won
Ed Milliband – never won
Mr Corbyn – he didn’t win either (twice)
Tony Blair – the only one to win in 50 years – and yet they hate him!

And to what can we allocate this massive swing in the vote for the Tory Party? Why, the EU!! What a change for the European project to be assisting the blues! It was the disdainful response of Frau Merkel to David Cameron’s pleas for moderating change that set the ball rolling towards a leave vote. This was compounded by the EU inaction during the referendum campaign. Where were Messrs Junckers and Tusk during the lead up to the vote? They were not in UK sharing the vision and love were they? Their next mistake was to play hardball too much with Mrs May, forcing her on to the defensive at home. One has to surmise that they thought a Remainer-Parliament was their best hope of keeping the UK on board. But they overplayed their hand, sending Theresa back with too much of a surrender bill. This off-hand treatment was compounded by the humiliation and shunning that Mrs May received from the other EU leaders at Salzburg. So the scene was set for Parliament to respond to the lack of co-operation… which led to Boris becoming leader…. which led to the election. One has to hope that they will work with Boris as an equal!

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Brexit Election Double Bluff Could Avoid No-Deal

Cripes, doesn’t Boris love poking the hornets’ nest with a sharp stick?

Boris – back on the front foot

The reality of his decision to close this Parliamentary session and arrange a Queen’s Speech to initiate a new Parliament is relatively small. Instead of Parliament having a recess for three and a half weeks over the party conference season, the break is five weeks. However, it has acted as a lightning rod for all of the pent up frustration and anger of the Remainers. Suddenly, they can see their case is lost. It was lost before, but now they can no longer pretend to themselves that they still have a chance.

Guy Verhofstadt, with name label to prove it

The greatest endorsement came from Guy Verhofstadt, Chief EU Brexit Negotiator, who branded it a ‘sinister development’. Clearly, many in Brussels have been relying on the Remainers to weaken the UK position. The strength of Boris’s move is reflected in their dislike of it.

The Nuclear Option

So now the Remainers have only one option left – win a vote of No Confidence next week and force an election before the end of October. This would be welcomed by the Boris team, as discussed yesterday, who have developed a suite of policies on which to campaign, and have clearly judged that such a poll would be winnable.

Our view is that;-

  1. The Remainers will not be able to win a vote of No Confidence

  2. It is far from clear that Mr Corbyn will even dare to call one (see 1. above)

  3. The EU will have to sit up and realise that the Remainers will not postpone Brexit

  4. The EU needs to avoid blame for No-Deal, and so see a deal as necessary.

 

Suddenly, to us, a No-Deal Brexit seems less likely than it did 24 hours ago.

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Brexit Election Bluff or Double Bluff

We enjoyed the great mutterings in the press since the weekend about whether the Tories secretly want to have an election BEFORE Brexit day on Halloween.

It appears to have been started by Tim Shipman in the Sunday Times, who suggested that the Government would quite like to have an election on 17 October. However, recognising voter-fatigue, they want Labour to take the hit from the Brenda-of-Bristols who are annoyed at “Not Another One”. The thinking goes that Boris is far ahead in the polls, and so could attend the Euro summit the next day with more power to his elbow, and really give the EU leaders what-for!

The polite word to describe these rumours is bunkum. (The less-polite word also begins with B and has two syllables.) There are two major flaws with the plan. The first is that 18 October is way too close to Brexit day, and so no matter how much power there is at Boris’s elbow (or anywhere else on his anatomy) there just isn’t time for a deal to be pulled together and approved in all the places in which it needs to be passed. Also, two weeks before B-day is just about the worst time to be holding an election – project fear will be in full swing and the media will be full of the impending doom. Boris and his team certainly need to be planning on how to win the peace after B day at that point, but the public may have more pressing matters on their minds.

The Anti-Brexit Forces Are Too Split to Perform

Another week and another proposal from the anti-Brexit brigade. Part of their problem is that they all have agendas so different that they cannot agree on a shared approach.

Mr Corbyn has dreams of No 10

Last week, it was J Corbyn’s dream of rounding up support to propel him into No 10. That wasted another 7 days of precious time. However, putting Mr Corbyn into No 10 was a suitable objective for only Mr Corbyn.

This week, the rebels seem to have dropped the idea of an early no-confidence motion. So perhaps the Sunday papers’ double bluff about the Tories wanting such a thing was successful after all? The latest plan is to take control of Parliament and pass legislation to force Mr Johnson to extend Brexit. The trouble is, all of the people involved are playing politics, working out whether such a step helps their own person ambitions. However, despite Mr Bercow’s self-belief, the Government controls order papers, and can easily string out any arguments about procedure – perhaps reminding Parliament that they are not in the business of dis-obeying instructions from the electorate.

Frau Merkel in better health

Meanwhile, Frau Merkel’s sarcastic comment to Boris suggesting he should try to solve the Irish backstop in 30 days (when it hasn’t been closed down in over 30 months) has held open the prospect of a last minute deal, taking away some fire from the stop-No-deal faction of the anti-Brexit rabble.

 

 

What Will Happen?

In our view – remember, we are almost as clueless as the next person, depending on who that next person happens to be – Boris has got B-day in the bag for 31 October. It feels like there will be too much egg-on-face for the EU to renegotiate, and so a No-deal Brexit seems the most likely outcome. However, this time there has been ample warning, and so trade will keep flowing, people will continue to travel, and most of the strain will happen behind the scenes. This is kind of the inverse of the fig-leaf Brexit we forecast in the spring, when we thought a net-curtain of a deal would happen to save face. Now it looks like both sides will rush towards No-Deal, for the message that will send to their own electorates, but behind the scenes everything will function!

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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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Brave Bold Boris Boosts Britain

Boris’s First Cabinet. (Photo by Aaron Chown – WPA Pool/Getty Images)

What a great start he has made! Mr Johnson has his critics, not to mention his complex private life. But the change of mood since Wednesday has been palpable. It feels like a spring back from the doom, gloom and managed decline of the 1970’s (Mrs May’s dour attitude) to the sunlit uplands of Tony Blair’s Cool Britannia in the 1990’s. For an in-depth review of the new cabinet, we recommend the Politico website.

 

This is what we see Boris as having done well;-

  1. A wholesale new government, with everyone pulling in the same direction. This is quite a change from the try-to-appease everyone approach of the May administration.

  2. Stamping his authority on the cabinet from Day 1 by standing up to Jeremy Hunt

  3. Putting Michael Gove in charge of No Deal preparations and funding him properly. This is a sign to all that the new Government will take No Deal if a better alternative is not forthcoming.

  4. Surrounding himself by a team of advisers who are known to mean business.

  5. Announcing a raft of other policy initiatives – for example putting money into extra police, focussing on the Northern Powerhouse, and spending on defence. Suddenly, it looks like the Tories have spending plans based on conviction rather than just trying to react to Mr Corbyn’s ideas. This is signalling also that if a General Election comes, the Conservatives have a manifesto in waiting.

  6. Keeping Carrie out of the limelight to avoid distracting headlines.

  7. A bravado performance in Parliament, answering questions assuredly for more than two hours. Boris seemed positive, competent and inspiring. We can only imagine his political opponents were downcast, and several of his doubters in the Conservatives were starting to be won over. Nothing improves one’s political fortunes as much as appearing to be a winner!

  8. Making telephone calls to other World Leaders, but travelling first around the UK to ensure his interest in the provinces can be seen.

We agree with the Team Boris analysis that there can only be one of three outcomes over the next 4 months;

  1. No Deal Brexit

  2. The EU blinks and negotiates

  3. A general election.

Opening deep talks with the US at this stage shows a much more determined approach to negotiating with EU. Brussels clearly has disdain for the choice of the British people, but they will not want the UK moving from the EU’s orbit into that of the Americans. So playing off the two powers against each other is a very smart move. Suddenly, No Deal has a geo-political angle rather than just being a punishment for UK.

Summary

Boris has had a great start and now has the political momentum (with a small M!!). He could well prove unstoppable by the time Parliament reconvenes in September if he keeps this going over the summer.

Unlike most of the media, we see Boris’s start as making No Deal less probable, because his strength will more-likely make the EU re-open talks.

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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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What Should An EU Trade Deal Look Like?

One of the major flaws (of many) in Mrs May’s Withdrawal Bill was that it favoured trade in goods rather than in services. And yet the UK runs a deficit in goods with the EU, and a surplus in services. So having an open market in goods, and accepting restrictions in services would be insane for UK. Why would we want no restrictions on the EU selling goods to UK, where they are strongest, but accept restrictions on us selling services, where we are best? Brilliant for EU, terrible for UK. But that is what Mrs May agreed! (Let’s ignore for now the smorgasbord of other problems with that dead deal.)

We believe that there should be a tariff-free trade agreement with EU. Despite their waning importance in global terms, the EU is a large economy and next door to us. Of course we want open access to it – just not at any price.

So what should an EU Trade Agreement look like?

  1. It must not preclude us making agreements with other countries such as Commonwealth countries, US, China, Japan etc. Therefore a customs union is ruled out.

  2. It cannot tie us to EU standards and ECJ ultimate ruling – this would truly be external control of the UK economy

  3. It must give open access for our financial and legal firms to access EU customers from UK. We have sophisticated financial oversight and regulation, and giving EU firms the ability to trade with London is in their interest too. A refusal by the EU to agree this would be cutting off their nose…..

  4. The transport of goods should be as smooth as possible, with the majority of forms completed online, away from borders. Thus lorries could have number-plate recognition and straight-through passage. Only intelligence-led spot-checks are necessary, as now. This is as true for Dover as it is Derry.

  5. Agricultural products with UK origin should be allowed into EU without restriction or tariffs. Our farm standards are among the highest in the world.

  6. Facilities must be included for freight going to and from Eire to travel through UK without hindrance. Failure to permit this would have a devastating blow to our cousins across the Irish Sea.

This may look to be an ambitious list. In essence, we support trade being as unrestricted as possible. But we do have plenty to offer. We are the EU’s largest export market. With the threat of US tariffs, a slowing EU economy and Italian insurrection against Brussels budgetary control, they need the deal as much as we do.

Can this all be achieved before 31 October? Frankly, No. We will lose the next 2 months in selecting a new PM and cabinet. And Europe will be closed in August with new commissioners to be appointed. Only when both sides are in their swanky offices can negotiating teams be appointed and briefed.

We could extend Article 50 for a year to allow Brexit to happen fully all at one time, or we can take WTO for a while. Either way, making a comprehensive, open and balance free-trade agreement with our friends and neighbours must be the second highest priority of the new Government.

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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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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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Ha. Ha. Ha. Ha. Ha. Ha. Ha. Ha. at Parliament

Well the Guardian already has the headline “No. No. No. No. No. No. No. No. With all those “No’s”, it could almost have been a negotiation with the DUP. We are now past despair and into gallows humour at Brexit.

Guardian Front Page captures Parliament’s Historic Choices

So the House of Commons took control – and then didn’t know what to do with it! Laughable isn’t it? But once we have finished smirking at their incompetence, it does leave one small, irritating, nagging point hanging there.

WHAT NOW?

Democratic Unionist Party. The Clue is in the Name!

As we said yesterday, we don’t think that the DUP will fold. If they did, then the May Deal would get through, she would resign in the next few weeks, and we can have the excitement of a leadership election over May and June.

Assuming that Mrs May’s Withdrawal Deal doesn’t get through, then what? A general election seems as unlikely now as it did when we reviewed in January. Whilst the Tory Party has plenty of turkeys, they still won’t vote for Christmas. A long delay still feels like No Brexit, and that won’t get through Parliament either.

Having failed to make any decision for all this time, will the EU put us out of our misery? Someone has to be the grown-up in this relationship – and, humiliatingly, it is not the UK.

Suddenly, No Deal is looking more likely than ever!

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