Friday Reads: Return of the Dark NightPosted: June 24, 2016
I’ve spent the better part of last evening and this morning trying to figure out where the bottom might be on this petit mal of a global financial crisis caused by British Politicians opening up a public referendum to something that never should have been put to a public vote. I’m rather hoping the Queen nixes the entire thing but even though it’s possible, it’s unlikely.
A few things from my gut. I do believe we’re going to see the UK break up over the BREXIT vote. Scotland and Northern Ireland will go for independence and unification with Ireland, respectively. They both overwhelmingly voted “remain”.
I’ve been watching the market for the Sterling try to find a bottom. Even U.S. equities have not been spared which means a lot of Americans woke up appreciably poorer today and farther from retirement. Be prepared for a lot less spending on items deemed luxuries like vacations, meals out, and all forms of entertainment. This basically means prepare for a downturn. It may or may not become a recession. It is causing a financial crisis so we’ll get to see how resilient the financial markets and banks have become since 8 years ago.
I could write a book on this and–indeed –I need to hit the World Bank up for some currency data shortly to update my work on parity as prices, wages, and exchange rates bounce around for awhile. I will be out there in the vast reaches of 2nd and 3rd derivatives looking for some sign of inflection points. Suffice it to say, I’m happy to not be invested any where but bank accounts and U.S. real estate. This is not going to be pretty for any of us.
Let me get started on a few stylistic details. The UK kept the pound sterling instead of joining the currency union so some of the issues surrounding Greece are not in this situation. The UK also has a fairly solid base of assets including businesses and real estate so it’s had a AAA rating on bonds. It’s likely to lose that but it’s not without real wealth. The deal is that by disturbing set trade arrangements we will see wages, prices, and interest rates adjust to find some level of market comfort. (This is the parity concept I just mentioned above.)
Market disorientation is likely to create some really bad effects for some time on all major trade partners of the UK. This means the EU, US and the commonwealth as all the details start being sorted out by industry, country, and market. We’re likely to head to a recession along with Europe but it’s not a certainty at this point. Business confusion usually means putting ends to the easy things to get rid of which means labor and inventory orders go along side with households that won’t be buying anything but essentials. The economy will slow down. The question is by how much and how long? This will be compounded by the Scots and Northern Irish looking to bail and stay in the EU. I’m not sure about Gibraltar or Wales to be honest. I don’t know about their specific arrangements in terms of how they are legally bound to the UK arrangement.
Needless to say, London would like to go back to City State status because this will hurt them most of all. London–after New York and along with Tokyo–is a global financial center. I doubt the pound sterling will regain its status.
My strongest sentiment is that this should’ve never gone to public vote. NEVER. In a parliamentary system you get crazy stuff like this. It’s this kind of thing that makes me very glad we’re a Republic with stodgy checks and balances. I’d definitely put this under the heading of tyranny by a slight majority. It seems many of them were making protest votes and are now shocked to see what happened.
This should be a lesson to our voters.This was crude nationalism, populism, xenophobia, and the kind of provincialism that one finds in backwaters in our country.
Older Brits may hate the Germans still and dealing with their remains of the empire, but the same folks that voted for it are likely the ones that will be hit hardest. They will be the first on unemployment lines and the first with pension cuts. This also eliminates opportunity for young people.
First, let me say that the happiest about this are right wing nationalists. They are likely partying like it’s 1939.
Europe’s far-right parties have rejoiced at the UK’s vote to leave the European Union, hailing it as a victory for their own anti-immigration and anti-EU stances and vowing to push for similar referendums in countries such as France, the Netherlands and Denmark.
France’s Front National (FN) hailed Brexit as a clear boost for Marine Le Pen’s presidential bid next spring, as well as a move that gave momentum to the party’s anti-Europe and anti-immigration line.
“Victory for Freedom! As I have been asking for years, we must now have the same referendum in France and EU countries,” Le Pen wrote on Twitter.
The markets reacted immediately with the first blow felt in Tokyo. I’ve been doing stuff in finance and banking since 1980 and I’ve never seen anything like this.
It’s certainly possible that markets will calm down overnight and throughout the weekend — no one can promise to offer an accurate forecast — but immediate signs from across the world were alarming.
Here are five glaring alarm signs:
1. The Bloomberg terminal screen perhaps offers the world’s first broadest reaction to the news, and it was flashing red all over with headlines early Friday morning. The screen noted heavy losses across Asian stock markets, while also noting that foreign currencies were strengthening against the British pound. Yields on U.S. Treasuries were falling, a sign of a flight to safety among investors.
2. The Standard & Poor’s 500 index, which has held up in the face of worries about Brexit in recent weeks, appeared primed for deep declines Friday. At half past midnight, S&P futures, which are traded throughout the night, were down 5 percent.
You can follow the link to WAPO to view the rest. It’s very unsettling to see that red screen on the Bloomberg terminal. That’s the alerts of severe market moves. Those things replaced ticker tapes back in my day and this is nothing you ever want to see. The Asian markets melted down immediately and trade was halted on all things UK and many things after that.
This morning, PM David Cameron resigned. He’s been a bit of a trainwreck so that’s mixed news. The problem is that the reins of government may go to the folks most avid about Brexit.
The prime minister’s team were left shocked and distraught by the narrow win for leave, with 52% of the vote, after polls had suggested a move towards a comfortable margin for remain in the final few days of campaigning.
In the statement announcing his intention to step down, Cameron highlighted the key achievements of his premiership, including rebuilding the economy after the financial crisis and legislating to allow gay marriage.
The process of choosing his successor will now begin, with Tory MPs selecting a two-person shortlist, which will then be presented to the party’s members in the country to make a final decision.
Cameron called the referendum as a calculated gamble, aimed at silencing the Eurosceptics in his own party for a generation.
Yet he had underestimated the backing Vote Leave would receive on his own backbenches; and reckoned without the charismatic and popular former mayor of London, Boris Johnson, becoming its figurehead.
Johnson, whose support among the Tory membership shot up after he declared himself for out, is now widely seen as the most likely successor to the prime minister.
The former mayor of London insisted on Friday there was “no need for haste” in negotiating Britain’s exit. Speaking at Vote Leave’s headquarters, Johnson struck a statesmanlike tone, paying tribute to Cameron’s leadership. “This does not mean that the UK will be in any way less united; nor indeed does it mean that it will be any less European,” he said.
A lot of the vote had to do with the mass migration of folks into the UK which is why tanking the EU has always been favored by nationalists through out Europe. It helped the economy a lot but as usual, nervous provincial white folks panic at the sight of diversity and populist politicians use their angst. But this is a double edge sword because younger Brits will not have the opportunities they used to which could take them outside the island itself.
The force that turned Britain away from the European Union was the greatest mass migration since perhaps the Anglo-Saxon invasion. 630,000 foreign nationals settled in Britain in the single year 2015. Britain’s population has grown from 57 million in 1990 to 65 million in 2015, despite a native birth rate that’s now below replacement. On Britain’s present course, the population would top 70 million within another decade, half of that growth immigration-driven.
British population growth is not generally perceived to benefit British-born people. Migration stresses schools, hospitals, and above all, housing. The median house price in London already amounts to 12 times the median local salary. Rich migrants outbid British buyers for the best properties; poor migrants are willing to crowd more densely into a dwelling than British-born people are accustomed to tolerating.
This migration has been driven both by British membership in the European Union and by Britain’s own policy: The flow of immigration to the U.K. is almost exactly evenly divided between EU and non-EU immigration. And more is to come, from both sources: Much of the huge surge of Middle Eastern and North African migrants to continental Europe since 2013 seems certain to arrive in Britain; as Prime Minister David Cameron likes to point out, Britain has created more jobs since 2010 than all the rest of the EU combined.
The June 23 vote represents a huge popular rebellion against a future in which British people feel increasingly crowded within—and even crowded out of—their own country: More than 200,000 British-born people leave the U.K. every year for brighter futures abroad, in Australia above all, the United States in second place.
As Britain awoke on Friday to the news that it had voted in favor of withdrawing from the European Union, voters were introduced to their new reality with a stunning admission from Nigel Farage, the pro-Brexit advocate who leads the U.K. Independence Party. Farage said that the Vote Leave campaign’s signature pledge—that leaving the European Union would allow for £350 million to be spent on the U.K.’s National Health Service—was a “mistake.”Farage’s mea culpa was made during an appearance on Good Morning Britain, where he was asked if he could continue supporting that promise after the campaign to extract the United Kingdom from the European Union had succeeded.“No I can’t, and I would have never made that claim,” Farage said. “It was one of the mistakes I think the ‘leave’ campaign made”
Northern Ireland voted to remain in the EU; Scotland voted overwhelmingly to remain. England drove this result, andspecifically Little England—the older, whiter areas outside the big cities. The Leave campaign might have paid superficial lip service to the idea of a global Britain with more room for Bangladeshi immigrants, but make no mistake: this was a racist campaign that ended up causing both death and disaster.
The world’s bond markets (and, even more, its foreign-exchange markets) tell you everything you need to know about the financial implications of this vote: recession in the UK, quite possibly recession in Europe, and extremely nasty spillover effects in the rest of the world, including the U.S. The small-minded burghers of rural England have managed to destroy trillions of dollars of value globally, including to their own investments, pension plans, and housing values. And things will get worse before they get worse: it’s going to take a while for all the subsequent shoes to drop.
Make no mistake, the forces set in motion by this vote will not end here. France and Spain will want their own referendums; so will Scotland. Northern Ireland—the only part of the UK which has a land border with another EU country—will request and probably receive a referendum on whether it should just rejoin the Republic of Ireland, and Europe.
Britain has been in many ways the most unambiguous winner of the European project: it received all the advantages of free trade with an enormous economic bloc, while also having a floating currency instead of one which was pegged mercilessly to how things were going in Germany. The British vote will embolden demands across Europe for similar votes, many of which will have the same result. This is, in other words, the beginning of the end of Europe as we know it.
This vote is also the grimmest of reminders of the power still held by the older generation, not only in the UK but around the world. Young Britons—the multicultural generation which grew up in and of Europe, the people who have only ever known European passports—voted overwhelmingly to remain. They’re the generation that just lost its future. Meanwhile, Britons over the age of 65, fed a diet of lies by a sensationalist UK press, voted by a large margin to leave. Most of them did so out of a misplaced belief that doing so might reduce immigration, or make them better off, or save them from meddling bureaucrats. In a couple of decades, most of those voters will be dead. But the consequences of their actions will resonate far beyond the grave.
In calling this vote, David Cameron has opened up a true Pandora’s Box. The forces of narrow-minded nationalism have tasted a major victory; they will want more, much more. The economic malaise that has beset all of Europe for the past decade will work in their favor, as will the growing inequality that can be seen in almost every country worldwide. International institutions like the European Union, born of an idealistic belief in peace and prosperity, have become avatars of unaccountable power, and are much loathed by the suffering European middle classes.
The result is that we are now entering a world in retreat from progress, a world of atavistic nationalisms and mutual distrust, a world in which we demonize foreigners and prefer walls to bridges.
On both sides of the Atlantic, political establishments and the elites have found themselves on the defensive. Rising resentment over the fallout from globalization and the effects of the financial collapse of 2008, which has widened the gap between the rich and everyone else, has divided voters in Britain and the United States.
Added to that are emotional issues of national and cultural identity at a time of growing demographic diversity, highlighted in both countries by often-angry debates over immigration. Both Trump and those pushing for Britain to leave the European Union have found the immigration issue to be their most potent political weapon.
Trump’s slogan, “Make America Great Again,” could easily have been adapted to the messaging of those in the “leave” campaign across the pond. Here, that desire for a return to an earlier time — to make Britain great again — is expressed through the issue of control.
Well, that was pretty awesome – and I mean that in the worst way. A number of people deserve vast condemnation here, from David Cameron, who may go down in history as the man who risked wrecking Europe and his own nation for the sake of a momentary political advantage, to the seriously evil editors of Britain’s tabloids, who fed the public a steady diet of lies.
That said, I’m finding myself less horrified by Brexit than one might have expected – in fact, less than I myself expected. The economic consequences will be bad, but not, I’d argue, as bad as many are claiming. The political consequences might be much more dire; but many of the bad things I fear would probably have happened even if Remain had won.
Start with the economics.
Yes, Brexit will make Britain poorer. It’s hard to put a number on the trade effects of leaving the EU, but it will be substantial. True, normal WTO tariffs (the tariffs members of the World Trade Organization, like Britain, the US, and the EU levy on each others’ exports) are low and other traditional restraints on trade relatively mild. But everything we’ve seen in both Europe and North America suggests that the assurance of market access has a big effect in encouraging long-term investments aimed at selling across borders; revoking that assurance will, over time, erode trade even if there isn’t any kind of trade war. And Britain will become less productive as a result.
But right now all the talk is about financial repercussions – plunging markets, recession in Britain and maybe around the world, and so on. I still don’t see it.
He’s done some pretty horrifying back of the envelop number krunching that you may meditate on for awhile. Just be very glad you don’t have to buy anything in pounds sterling. Europe looks pretty bad, has for some time, and will have ongoing issues. This just kind’ve hastens the problems and yes, Angel Merkel needs to do some penitence. England, however, they just dove into the abyss. For the first time in my life, I am glad I don’t live there.
So, we can discuss this and I can try to answer questions. Frankly, this is all new even to those of of us that study currency unions and trade arrangements. Generally speaking, shutting oneself off from one’s neighbors tends to lead to nasty things. That’s why I can’t decide if I should party likes it’s 1929 or 1939. Let’s watch to see what the Central Banks and the World Bank do. That should give us some clues.
What’s on your reading and blogging list today?