Was Brexit Fear a Giant Hoax Or Is This the Calm Before the Next Storm?

2016-07-03 07:59:48

(MENAFN- ProactiveInvestors - UK) Fuller Treacy Money, Fri

Was Brexit Fear a Giant Hoax Or Is This the Calm Before the Next Storm?
Here is a latter portion of this informative article by Ambrose Evans-Pritchard of The Telegraph:

Yet it should be dawning on European politicians by now that the economic fates of the UK and the eurozone are entwined, that if we go over a cliff, so do they and just as hard, and therefore that their bargaining position is not as strong as they think. They cannot dictate terms.
Few seem to grasp this, much like the wishful thinking in September 2008 when so many supposed that Lehman posed little danger to them. Britain has "collapsed politically, monetarily, constitutionally and economically,'' said Dutch premier Mark Rutte, almost seeming to enjoy the flourish of his own words. Our great ally William the Silent would not have been so frivolous.
Morgan Stanley says they need to wake up. It warns that the eurozone will suffer almost as much damage as Britain in a ''high stress scenario'', and so do others. Danske Bank says the UK and the eurozone will both crash into recession later this year.
If so - and that is not yet clear - it is hard to see how the eurozone could withstand such a shock, given the levels of unemployment and the debt-deflation dynamics of southern Europe, and given the intesity of political revolt in Italy and France.
Contrary to the supposition of Mr Rutte, the fall in sterling is a blessing for the British economy, and a headache for the eurozone. The exchange rate is acting as a shock-absorber, just as it did in 1931, 1992, and 2008, all bigger falls, and all benign.
Devaluation strikes no fear in a chronic deflationary world where almost every major country is trying to push down its currency to break out of the trap, and largely failing to do so. It would facetious to suggest that Britain has pulled off this trick. Crumbling investor confidence is never a good thing. But the UK has stolen a march of sorts, carrying out a beggar-thy-neighbour devaluation by accident.
The pound needs to fall further. It is still too strong for a country with a current account deficit running consistently above 5pc of GDP. The International Monetary Fund said just before Brexit that sterling was 12pc to 18pc overvalued, and may have to fall more than this to force a lasting realignment of the British economy.
This cure has hardly begun. As of today, sterling is 5pc below its trading range for the last month against the euro and the Chinese yuan. It is weaker against the US dollar but the dollar is on steroids, much to the horror of the US Treasury.
The more sterling falls, the greater the net stimulus for the British economy. The reverse holds for the eurozone. It is a further deflationary shock at a time when Europe is already in deflation, when inflation expectations are in free-fall and bond yields are collapsing below zero, and when the ECB is running out of options.
There are two dangers for the world economy. One is that China is exporting deflation with alarming intensity. Morgan Stanley estimates that China''s trade-weighted devaluation is running at an annual rate of 11pc, and factory gate deflation adds another 2pc. This is a tsunami coming from the epicentre of global overcapacity.
The other danger is that British and European politicians fail to understand what is coming straight at them from Asia. Britain''s Brexiteers must come up with a coherent policy on trade very fast, and the EU must come off their ideological high-horse and face the reality that they have absolutely no margin for economic error.
US Secretary of State John Kerry warned in stark terms on his post-Brexit swoop into Europe that nobody should lose their head, or go off half-cocked, or "start ginning up scatter-brained or revengeful premises."
Nobody seemed to heed his words at the EU''s imperial summit in Brussels, an exercise in righteous anger but not much else. The markets may yet speak in harsher language.

David Fuller''s view
Markets are now assuming that Brexit negotiations will be stretched out over at least two years. Moreover, that Britain and Europe may be able to form a new agreement which gives the UK financial community ''passporting'' rights and also control of its own ''Australian style'' immigration policy. Britain will always allow in plenty of immigrants but select them on the basis of what is best for the country, selected not only from the EU but also from the other 93% of the global population.
Meanwhile, plenty of uncertainty remains. Policy agreements which gave the UK much more autonomy in terms of governance within the EU would largely satisfy both the Remain and Brexit sides of this decisive debate. Of course there is no certainty that the EU would agree to this, and it would lead to similar demands from many other of the 28 countries, but this would be democracy in action. It could also save the EU from a catastrophic breakup.
Uncertainty within Europe is unlikely to go away anytime soon. Nevertheless, devolution of real powers to EU countries would have a favourable outcome.

Three Hours That Turned Boris Johnson From Winner to Also-Ran
Here is a section from this topical article from Bloomberg:

Gove had lost patience with Johnson in the days after the shock Brexit vote, according to a person familiar with the justice secretary''s thinking, speaking on condition of anonymity. Efforts to get him to win over other key players in the Tory Party failed, leading to a much wider field than expected. Energy Minister Andrea Leadsom was among those that Gove had hoped Johnson could win to his team. After meeting Johnson, she decided to run against him.
''We were striving and struggling not just for a dream ticket, but a dream team,'' Raab told the BBC. ''Putting together a really strong unifying team was an absolute condition. When that fell away, I think that Michael felt things had changed.''
Gove''s announcement came just as Home Secretary Theresa May was preparing her own 9:30 a.m. launch. It could not have been timed better for her. While the former allies were knifing each other, unable to say what leaving the EU was going to look like, May appeared to announce, in the words of Johnson''s biographer Andrew Gimson, that here was ''the grown-up candidate.''
May, who supported Cameron''s campaign to stay in the EU, had a plan. Her speech showed commitment to follow the vox populi. She said that there would be no second referendum, no early election, and she sounded like she meant it. She made serious points at Johnson''s expense, saying the country needed ''strong leadership and a clear sense of direction,'' and she made jokes at Johnson''s expense: ''The last time he did a negotiation with the Germans, he came back with three nearly new water cannon.'' Weighty, firm, funny -- the many male Tory lawmakers in the room could have been forgiven for thinking of a previous Conservative leader, Margaret Thatcher.

David Fuller''s view
There are plenty of surprises in this Brexit drama of rapidly changing events. I thought Boris Johnson could have won but as the leader of Brexit he might have had a difficult time healing the Conservative rift. Politics within the Party can be ruthless but I take the many candidates for PM as a healthy sign.
Theresa May is the current frontrunner and a likely unifier, so there would be no need for an early general election.

Email of the day 1
On Israel & Turkey, the UK & EU, from Israel:
Dear David, Yesterday [27th] Israel and Turkey signed an agreement to end their 6 year confrontation and diplomatic rupture. During that period trade between the two countries has tripled from 2 billion dollars a year to 6 billion. This shows that the UK, or what remains of it after Brexit, can continue to trade in a mutually beneficial way with the rest of the EU after last week''s referendum vote.

David Fuller''s view
That is an interesting perspective. I do not know the details of Israel''s trade with Turkey but if you produce useful products and services, especially in the high-tech field as Israel certainly does, many countries will want to trade with you.
I hope you are right about the UK and EU but I think negotiations will be difficult, with lots of brinkmanship. EU negotiators from Germany and France may feel spurned and wish to hurt the UK and help themselves by syphoning away lucrative financial business from the City. Therefore ''passporting'', important for the UK financial industry, may be difficult to gain. However, I think the EU faces more regional fires, metaphorically speaking, so the ticking clock may actually strengthen the UK''s hand.

Email of the day 2
On Europeans contributing to research projects at Cambridge University:
For your information, message on Brexit from the Vice Chancellor at Cambridge University.
Let''s wait and see,
You will be aware of the referendum result in favour of leaving the European Union, and I appreciate that this is likely to be of concern to many within the University.
Many staff and students will have specific questions about how this affects them and their work. It is, at the moment, too early to say, and the implications of a withdrawal from the European Union are likely to take several years to work through.
The University will monitor developments closely, and maintain strong dialogue with the Government. It will consider and handle key issues, and provide guidance to different groups as soon as possible.
Further information will come from the Pro-Vice-Chancellors for Research, Institutional and International Relations, and Education, and will also be posted to prominent sections of the University website.
In the meantime we will continue to work together in our EU partnerships, and find the best way ahead so that our globally important research continues to tackle the issues we face today and in the future.
As details become available we will continue to update you and let you know where you can find further information.

David Fuller''s view
Thanks for forwarding this and I understand the concern.
Brexit was about regaining the UK''s sovereign rights. It was certainly not about preventing European students from attend Cambridge University, or impeding European researchers and scientists from participating in vibrant corporate start-ups such as you represent.
I am delighted to hear that ''the University will monitor developments closely, and maintain strong dialogue with the Government.'' I am sure the Conservative Government will only have encouragement and reassurances for Cambridge University''s ecosystem which is supporting accelerating entrepreneurship and innovation.

Email of the day 3
On Wednesday''s Audio and salsa dancing:
Hi David
So nice to hear your honeyed tones on the airwaves again. No matter how good Eoin is, we miss you!
I presume that your absence is because you have decided to retire from that part of the job, and are doing it now because Eoin is on holiday? If so, what can I say but that it comes to us all. I can''t remember your age, but quite a bit younger than mine I seem to remember. And it''s a very long time since you first tried to get somebody else to do the chart seminar instead of you. I remember a woman who only stayed a short while, then you took it over again.
Yes we all get on. I''m 77 and have been taking it easy for many years now. But we''re all so different. When I see a 74 year old Bernie Sanders trying to run for President, with all the workload that involves, it just staggers me. And what staggers me even more is that so many Americans were happy to let him be president until he is 79. Crazy in my view. Yes I know popes keep on forever, but do they do a good job when they''re so old?
Anyway I do hope that you are in good health and will be able to enjoy life for many more years. I certainly intend to. I''m out dancing salsa 3-4 times a week and spent 2-3 months each winter travelling. No sense in staying home and watching TV!
Good luck and thanks for the continued brilliant service you and Eoin provide.

David Fuller''s view
Thank you for this delightful email.
Re Audios and many other tasks, I think one can become stale and too predictable in a job. Eoin will do most of the Audios but I enjoyed recording my thoughts on Wednesday evening. As for the Chart Seminar, mine had a theatrical element, which was fun, but I was becoming a caricature of myself.
Re age, I am a little older than Bernie Sanders and he obviously thrives on the performance. You only have one life so why hold back. The salsa sounds fun and is obviously good for you.
I am in good health, touch wood. After all our adult years in cities, Mrs Fuller and I are planning more outdoor activities, from wild swims to kayaking and plenty of walks in the fresh air.

In Gold we Trust 2016
Thanks to a subscriber for this edition of Ronald Peter Stoeferle and Mark Valek''s comprehensive 144-page report on gold for Incrementum AG. Here is a section:
Gold is back! With the strongest quarterly performance in 30 years, the precious metal in Q1 2016 emerged from the bear market that had been in force since 2013. A decisive factor in this comeback is growing uncertainty over the recovery of the post-Lehman economy. After years of administering high doses of monetary painkillers, will the Fed succeed in discontinuing the practice? Or is the entire therapy about to be fundamentally challenged?

Generating growth and inflation remains the imperative of monetary policy. The systematic credit expansion required for this just doesn''t want to get going. Even the ECB, which initially acted with restraint after the financial crisis, is nowadays stuck in a perennial loop of monetary improvisation and stimulus. General uncertainty has now increased even further after the surprise outcome of the Brexit referendum.

After years of pursuing low interest rate policies, central banks have maneuvered themselves into a lose-lose situation: Both continuing and ending the low interest rate regime harbors considerable risks. In an attempt to finally achieve the desired boost to growth, a monetary Rubicon has been crossed in several currency areas with the imposition of negative interest rates. Gold is increasingly attractive in this environment. It used to be said that gold doesn''t pay interest, now it can be said that it doesn''t cost interest.

As a last resort, even the radical measure of helicopter money is considered these days. As the flood of liquidity has hitherto primarily triggered asset price inflation, newly created money is now supposed to be injected into the economy by circumventing the banking system in order to boost aggregate demand. It seems realistic to expect that such a windfall would indeed ignite the much-coveted price inflation. Whether it will be possible to put the genie back into the bottle once it has escaped is a different question.

An exit from the Fed''s monetary emergency programs has been announced for years in the US. This, together with the perception that the economy was recovering, led to a strengthening US dollar in recent years. Commodities and gold weakened as a result. So far, the actual extent of the normalization of monetary policy consists of the discontinuation of QE 3 and a single rate hike by 25 bps.

Eoin Treacy''s view
A link to the full report is posted in the Subcsriber''s Area.

Brexit has been a big event and just about everyone it still talking about it, but how it has affected the precious metals markets is a little more nuanced than one might expect on first blush. With the German sovereign bond market now trading at negative yields out to maturities in excess of 10 years more than half of all sovereign bonds in the world have a negative yield. That''s an awful lot of money tied up in an investment that is entirely dependent on momentum to generate a profit.

Put simply if anyone who has bought in the last month holds to the maturity of the bond they are guaranteed to lose money. The only way to make a profit will be to sell to someone else willing to take a bigger risk before the bonds mature. It is the epitome of the bigger fool theory. The simply answer to why precious metals, particularly gold and silver, have been rallying is because they cannot simply be printed into existence. Unlike bonds or fiat currency the supply of gold and silver is limited.

Email of the day on oil prices and their effect on commodity prices more generally
David has often referred to the out-performance of commodities in the latter stages of a bull market. You have reinforced that message with regular reference to the consistency of the crude oil chart (see below).To this observer, that chart is looking very tired. Doesn''t the chart, and the threat of the return of supply dominance, suggest that future oil price rises will be limited, even as other commodities are strong?

Eoin Treacy''s view
Thank you for this question which raises a number of relevant points. We have both highlighted how the outperformance of the resources sector following a large decline is generally a confirmation that the medium-term bull market is entering its latter stages which can last for a couple of years. We can expect the resources sector to be among the last to peak and as such is unlikely to be a lead indicator but rather could act as a relative and absolute performer even as leading sectors roll over.

Brexit wins: British stocks will prove winners, too
Thanks to a subscriber for this article by Donald Coxe for Pensions & Investments. Here is a section:
The European Central Bank and the Brussels bureaucrats are in shock. Radical parties in France, Italy, Holland, Poland and Hungary which protest the immigrant tide, the powers of the ECB and the Brussels committees, and cheered for Brexit now call for their own version. The euro might soon move back into the emergency ward, putting more upside pressure on the dollar.

The European Union has been China''s biggest customer. No surprise that Xi Jinping, president of China, toured Europe encouraging a good outcome in the Brexit debate, meaning a ringing defeat of Brexit. This setback comes at a time when the Chinese economy is being buffeted by bad news from so many directions external and internal. Time for distraction: China is stepping up activities in the South China Sea with the West bedeviled by Brexit.

Investors should expect more turmoil in global financial markets, and even more issuance of negative-yield bonds from the ECB and other European authorities. Chances of a global recession increase when there are, in the short term, so many economic losers from the shock of l''Affaire Anglaise, with Europe still in the recovery ward from the crash of 2008.

The Fed''s chance for a rate rise vanished with the voting result.

Eoin Treacy''s view
The number of things to worry about has increased and as a result so has central bank intervention. With news today that the Bank of England expects to lower interest rates and stimulate the economy, the Pound declined but stocks continue to rebound not least because of the improving competitiveness globally oriented companies will derive from these developments.

Fuller Treacy Money