Friday, 24 June 2016

Eight days ago, seven before the Brexit vote I made the following prediction as a response to an article ‘Budget threat ‘ends Osborne’s hopes to be PM’’ by Francis Elliot, the Political Editor of the Times (15 June 2016)  
 This prediction was based upon my study of turning points and the lead indicators of a sudden and locally irreversible collapse in the economy if there was a vote to leave the EU.
 I quote directly:
 Here to be specific is what I think will happen:
1.  There will be an immediate run on the pound with parity against the Euro within the next three months.
2.  The stock market will decline to below 5500 rapidly.
3.  The UK will enter negative growth by Spring of next year for two quarters i.e., a recession will commence.
4.  The government will be forced to remedy an expansion of the deficit by either tax increases and or spending cuts.
That will do for a start - I haven't touched unemployment, capital flight, inward investment and the current account deficit but you can guess what my views might be. 
 My views were roundly rubbished by Brexiteer’s and by one commenter who believed that any form of modelling in the social sciences was nonsense, particularly when it used models that worked in the hard sciences and engineering.  My view was nonsense:  all systems – physical and social, that have drivers forcing them to equilibrium where there are two or more control variables in play will exhibit instability.  My forecast of a catastrophic realignment of the economy was not given with any gleeful anticipation that it might come to pass.   I hope I am wrong but I doubt it.

Saturday, 11 June 2016

Brexit and the precautionary principle.

As the campaign has gathered pace towards Britain's referendum on membership of the European Union, I have begun to reflect more and more on the horrid lack of any post-Brexit plan.    I know the Bank of England and the Treasury have been hard at work with their contingency planning and that liquidity will start flowing into the banking sector from 14 June in case, following a leave vote, capital outflows start in earnest. What bothers me, is that those two towering  members of the intellectual right – Boris  Johnson and Michael Gove -  have not come up with a convincing strategy, never mind a plan  for what follows.   Given the absence of either,  two inexorable laws are almost certain to follow: sod's law and  the law of unintended consequences.

Sod's law states  that your bread always falls but aside down or, if something can go wrong it will. Many, on the exit side, are pinning their hopes on the fact that given balance of trade in favour of the EU that Brussels will be gagging to do a deal with us and to let us have all of the benefits of membership of the single market with none of what we might perceive to be costs.    Angela might be wildly excited by Boris  but could she persuade her own legislature to do a deal on such favourable terms? Indeed, all the members of the European Council be confident likewise? I doubt it very much no matter what pressure VW and BMW bring to bear on their political leaders.    The lack of any coherent strategy or plan for taking the British economy forward in the post-Brexit era  convinces me that the law of unintended consequences is just waiting to make its mighty presence felt. People might call me a pessimist but I have discovered over many years that absence of forethought exposes you to getting stuffed in ways that you never expected!

Ten Possible Reasons for Staying in the EU

(i)  It gives us access to that very British invention - the Single Market - with 500m consumers, no tariffs, no border checks - in other words a complete freedom of movement of goods and services.
(ii)  It allows anyone to travel anywhere, buy a home, set up business freely and without fear.
(iii)  Its educational and training policies, combined with free movement allows huge numbers of EU young people to travel here and to study contributing £15bn to the UK economy.
(iv)  It sets minimum standards for treating employees eg: working hours, health and safety, educational awards etc.
(v)  It uses its bargaining power to engage in free trade agreements across the world on terms no single country - even the UK - would be able to achieve.
(vi)  The willingness of many young EU nationals to leave their homes and come and work here has helped up fill the demographic time bomb caused by an expanding pensioner population and a very low reproduction rate in the UK (1.89 compared with the 2.1 needed).
(vii) It diverts a proportion of its budget each year to the support of science on a scale that no single country could afford and we are huge beneficiaries of that.
(viii) It is an information exchange whereby member countries and their agencies can share ideas and expertise from security through to space exploration.
(ix)  It and the EEC has been the primary force for the rebuilding of Europe following WW2 and, it has opened its doors to the states of Eastern Europe helping them achieve their potential.
(x)  Unlike the UK it tries to run itself through consensus and agreement rather than through the adversarial, yah-booh politics that we find so appealing.  It's about inclusion rather than exclusion.

Do we live in la-la land?

The German Finance Minister Wolfgang Schauble has made a very simple point.  If we leave the EU we are out of the Single Market.  The response of the press has been at its typical worst  How dare that foreigner interfere?  But, are we children in that we cannot bear to hear unpleasant news from anyone including our parents and our friends?  Must our response always be to clap our hands over our ears and go la-la-la?  The message here is plain and very simple, it's a message that the leaders of the Brexit campaign know very well.  if we are out, we are out - we cannot be like the grand old Duke of York and be half way out.  If we are willing to accept all of the single market rules then a semi-detached version of membership of the EU would be negotiable.  But that is what it would be.  We would have to accept the same rules as all the other members of the EFTA ( and that includes free movement of people.

The anti-EU agenda has poisoned British politics for 55 years.   There are a number of reasons:  we are used to adversarial politics and our legal system is based upon it. We cannot cope with systems that try to promote inclusion and consensus.  We have systematically under-invested in our infrastructure and created an unequal society.   Our education and training systems fail to give real life-chances to the urban British poor.  We are a Society that is anxious and in pain - particularly in England and what do we do when we are children and in pain?  We project that anxiety and pain onto anything out there we can:  it's that threatening monster that isn't our friend but is waiting to devour our way of life, take away our freedom to be miserable and even go boo at us in the night.  The problem is that we cannot acknowledge the source of the pain - it is right here. It's not the EU it's us.

Friday, 10 June 2016

The EU Migration Crisis - I have the answer

I have this quite brilliant business model for coping with the squeeze on our working population brought about by not enough old people dropping off their perches as quickly as they used to and the unwillingness of us Brits to breed at the rate we need to.  What we should do is arrange for nice warm countries like Spain, Portugal, Italy but not Greece at the moment (sorry Greece but you have problems of your own) to accept large numbers of our old folk.  Allow them to buy cheap properties over there whilst selling off their properties over here.  It reduces the burden on the NHS and social services and gets rid of that rather tiresome problem of having to worry about them.  Then, we can encourage nice young people from Europe who are prepared to work hard,  pay their taxes and do all the jobs we don't want to do to come over here.   The fact that their own country has educated them and trained them means we don't have to bother - avoiding any burden on our schools and colleges.  It's win-win!  Why hasn't anyone thought of it?  Ehr...or have they?

Thursday, 2 June 2016

In or Out

Those who know me know that I am partial to a joke and one of my favourites was about Mrs Skunk and her two children In and Out.  I will not bear upon your patience by telling it again but thinking of it brings me to a topic which is the issue confronting us today.  First, let me say that I have great faith in the common sense of the British people who consistently manage to outperform their politicians in that regard.   But, we are in a mess and that, I have no doubt, will not induce a wave of sympathy across the world.

In 2010, one of our major political parties manage to squeeze back into power but only in coalition with our third placed party the Liberal Democrats (or the DimLebs as they are affectionately known).  After five years in power they, the Tories, were able to form a majority government in 2015 offering a referendum on EU membership as part of their manifesto.  They did this because of a threat from a trivially minor party to their right called UKIP who were attracting a tiny number of political skinheads who declared where UKIP I KIP.   So we became committed to a referendum on UK membership of the EU and with it the Single Market from which this country has been a primary beneficiary.  So much so that even given being outside the single currency area we still sell 45% of our exports to the EU.   That percentage has declined gently over the last 15 years primarily because of the currency barrier but it has still increased in both volume and value.  I think the economic argument has been absorbed by the population if we are to believe the opinion polls and on that basis, the Remain side appear to be winning the argument.

The problem is that we have become hung up on the 330k or so people who (net) migrated into the UK last year.   Of these just over half were students from both the EU and elsewhere.  If we take them out of count about half the EU migrants were those looking for jobs and half coming here to study.  The 60k coming here to work have flooded our job market driving down wages - or so the story goes.  You see, we have, in Britain, a great ability to spin a few facts into great myths - indeed, this year, we celebrate the 400th anniversary of our greatest myth-maker - William Shakespeare.  The big reason why Britain attracts immigrants is that we have a glaring shortage of skills.  The indigenous, working population is contracting because our fertility rate and has long fallen below the replacement rate of 2.1 to 1.89.  Our retired population, not in work, is expanding and as a result we need more workers just to stand still as an economy.   We need more strawberry pickers, plumbers, engineers, and doctors.  If we don't get them my pension might not be paid so could I have that wave of sympathy please?  If not for the country, for me?

Wednesday, 8 July 2015

A little bit of interesting finance.

Today has been budget day here in the UK.   George Osborne, Ozy for short, has produced his first true blue budget and most early comments is along the lines: 'it's not as bad as it might of been'.   It did, however, manage to nudge the Greeks of the head of the news but not much of interest happening there until their PM presents their proposals for a new bail-out package tomorrow.   But what caught my eye in the budget was the removal of the tax shield attaching to 'buy-to-let' mortgages first for high rate taxpayers from 2017 onwards and, ultimately, I am sure for standard rate tax-payers.  There are two important issues here:  the first is whether this presages the removal of the tax shield on all business loans for the unincorporated self-employed and second, what the unintended consequences might be.  My interest here is the 2nd point, and this is my reading of what will happen.  My observations are based upon the fact that Buy2Let mortgages are significantly more expensive than their equivalent in the personal property market.

I have long suspected that mortgage companies, like trades people working for land-lords. try to 'bump the price'.  They are aware that any expense is tax deductible and trade on the basis that at the margin the land-lord is prepared to pay correspondingly more.  So this is my guess:  as the tax shield comes off, mortgage companies will be under pressure bring their rates down as the distinction between the Buy2Let and conventional mortgage disappears. As a result their margins and their regulatory capital will be squeezed restricting the additional loans they can make.  Make no mistake the tax shield is not much benefit to the land-lord but has, in my view, been a a back-door subsidy to the mortgage companies who have leapt at this rather tasty corner of the mortgage market.  

If the market corrects fully I suspect the effect will be broadly neutral and this is the line of argument that M&M made in rebutting the so called tax-shield effect on the WACC.  OK, the tax shield is a benefit to the borrower - only if the lender lets them have it.  But in a world where lenders have the market power it's significance on the cost of capital is moot to say the least.