Blain’s Morning Porridge – April 1st 2019

Blain’s Morning Porridge  – April 1st  2019

“Anything of yours is mine, and what is mine me’s own..”

In the headlines this morning:

What next for this sad benighted isle? The one thing certain is more Brexit uncertainty. It probably gets worse long before it gets better!

As the clock ticks down to the April 12th second deadline, the political maths dictates there is simply no deal to be made. Logic would suggest the two options that came closest in last week’s parliamentary debate: soft Brexit or a second referendum would be likely outcomes, but this is Brexit. Logic be damned. Too many MPs – “sp**ktrumpters” being my favourite description so far – with too much ego…

28 Tory Hard Brexiteers said no last week. Labour MPs will not shift – only a tiny number voted for the deal. The EU is planning, and is apparently reconciled to, a no-deal crash-out Brexit. Soft Brexit looks an unlikely compromise. A crash out-no deal could be avoided, but at the likely cost of an election, (with Europe agreeing that’s grounds for extension), or promises of a fraxious no-deal second referendum. I’m just guessing.

I read the Sunday papers for guidance, and they don’t have a clue. They are full of stories about the self-immolation of the Conservative party – how entryist UKIP rightists have seized control of local constituencies, are deselecting waverers, and have a whole slate of mad-dogs set to unleash on the electorate. Yikes.

We might be worrying about the wrong side of the political spectrum: what are Labour up to? Corbyn wants the election, but where would he take us? Labour’s current poll lead translates to a dozen or so MPs short of a majority – meaning he’d have to pander to the Scot Nats who will demand an Andrex Quilted Brexit so soft it feels just like Remain? Who would want to share power with SNP leader Ian Blackford? That’s one step more insane than dealing with the Norn Iron Taliban, the DUP…

The result is yet more uncertainty, furious and divided voters, and a complete breakdown in trust of the political process… Anywhere else there would be armoured cars on the street, guillotines in the central square, revolution in the air, and lots of folk wearing hi-viz car-safety jackets. (See my notes on “Investing in Social Revolution”: buying shares in Parisian Glaziers and the firm that makes flagstones for Athen’s Stygmata Square.)

Not here – this is Britain.

But things are clearly getting fraught. So fraught that several excitable types have even written “very angry” letters to the Telegraph, which is at least 5 steps above the “how about a nice cup of tea and let’s talk this over” stage of UK constitutional crisis. I’m just worried this could escalate all the way up to someone “losing their temper”.

European Deficit Tax

At least Europe is making an effort at reform! The surprise announcement late on Friday of the new Interest and Deficit Internal Equalisation Tax (IDIET) was lost amid the Brexit noise, but it is intended dramatically correct trade imbalances across the Eurozone. Agreed by the Council of Finance Ministers, IDIET will have a significant impact on holders of European debt and equity.

Under the terms of the new IDIET, Geman and European investors will be encouraged to invest outside of Germany – the aim being to dramatically reduce German’s burgeoning surpluses with the rest of Europe. Holders of German Euro debt and equity – including Bunds, Pfandbrief and German Corporate debt and equity, including all securities listed on German exchanges will now pay a substantial escalating tax on holding German securities. (Ie, initial proposals are German short-term debt will attract a 0.375% IDIET Tax, long-term 30yr bunds attract a 1.5% tax, while equity will be 0.825% across the board.)

This will have the immediate effect of driving Germany’s large investment flows into non-German Europe – designed to drive European growth and job creation. Meanwhile, the ECB is expected to be the major buyer of German securities – it is specifically exempted from the tax. Already a few of the major Investment banks have released analysis suggesting non-European domiciled investors could profit from the expected inflows into European paper, and from loading up on the newly cheaper offshore German securities. Autoclytus Strada, bond analyst at investment banking boutique Shane Longman, wrote last night: “This creates the potential for a massive tax arbitrage shift and switch, and the creation of a new offshore European market.”

While this is expected to cause some major short terms issues when the new Tax is enacted on June 31st, in the long-term, Bundesfinanceministerium official Herman Sturm is quoted in Handelsbloot: “The immediate effect should be to stabilise Euro trade Imbalances, finance European growth, while enabling German investors to contribute to the greater good of Europe.” 

Detractors have suggested the IDIET tax might well just end up with the ECB financing Germany which then finances the whole of Europe giving Germany a controlling position over the EU economy, a point the Finance Ministry dismissed with a curt rebuttal. Key to the plan is the long-term ECB adherence to its debt purchase programs, and its ability to hoover up all German Euro denominated debt while extending its mandate to financing equity.

(A key issue for investors will be knowing whether they are owners of German Euro debt or Euro Euro debt? One clue is that Euro coins that count as German have a microscopic G printed underneath the second star to the right. Italian ones have a small I while the French have no symbol as they actually believed the guff that Europe would have a single fungible functional currency…)

Anyway, today is the start of the second quarter – what next we wonder?

Out of time and back to the day job…

Bill Blain

Shard Capital