Blain’s Morning Porridge – April 2nd 2019

Blain’s Morning Porridge  – April 2nd  2019

“Please… make it stop…  ”

In the headlines this morning:

In the news this morning we’ve got a raft of stories to wake up and think about. Yesterday’s hotly anticipated US and China data was benign and won’t roil markets. Rolls Royce engines on B-787 Dreamliners are still not functioning properly – 2 have been grounded suffering from “premature blade deterioration”. Its bad news for operators as further checks are mandated. Lyft’s successful IPO soared from $72 to $88.60, but this morning its tumbled to $69 – what does that tell us about valuations? (And, let’s not mention the lack of earnings or its massive borrowings because these don’t matter: companies not making any money don’t pay taxes… and that’s a good thing…?)

I was a bit disappointed by my failure to catch many readers with yesterday’s April Fool’s story. My imaginary tale of an IDIET Withholding Tax on German Securities to drive European growth only netted a solitary chap working for a German fund who asked if this meant assets would be transferred back to London. Nope.. I made it all up.

Most readers spotted the obvious clues like the imposition date of June 31st. A couple got it on Shane Longman – the fictional brokerage from the 1980s series Capital City. No one seemed to get Autoclytus Strada; a reference to the first ever Eurobond launched by Autostrada in 1963 following the imposition of the US interest equalisation tax which triggered the offshore dollar market – the Euromarket, which is why we are all here today. I remember it well… (And incidentally; Autoclytus, the grandfather of the wily Odysseus and the King of Thieves, sums up the way the Euromarkets used to behave when it was all still fun!)

However, many readers did comment the idea of directing savings and consumption from Germany into the rest of Europe is the key to restoring normal growth across the EU… and reckoned my imaginary IDIET tax was a way to kick start it. It’s a ridiculous notion that Germany would ever support anything that reeked of German savers and taxpayers paying for the rest of Europe. And that’s the problem.

This years April 1 joke was based on the core problem at the centre of the Euro zone: how to make 19 imbalanced economies function under the same currency. Thus far, the Euro has produced one winner (Germany) and 18 losers. The result is imbalance and one-way target 2 distortions because one economy is so strong. For the single currency to work, the Euro requires not only closer fiscal homogeneity from economies closely aligned with each other – spawning the need for closer union across taxation, banking and business, but ultimately closer political union. It’s just not happening. In fact, its reversing and we’re likely to see that proved in the May EU elections.

The likely failure of Europe diverse states to achieve a stable sustainable currency through union is a risk. It appears political union in Europe isn’t working – witness populism, the breakdown of banking union initiativess, ets. While the Euro shows extraordinary resilience, maybe its best the UK stays out the way and lets Europe try to solve its problems without our tedious interference and lack of commitment to the Brussels project?

Time to buy Sterling?

I’m a bit surprised by a Bloomberg report that Goldman’s head of FX and EM says: “We’re coming to a big finish here”on Brexit. The chap, Zach Pandl, says “we think we’re making progress despite these failed votes”. He might be right. Much as I hate to agree with the Vampyre Squid (Goldman for younger readers), Pandl’s comments do make a curious kind of sense. The sense of profound despair across Parliament – with MPs resigning and the country generally losing the will to continue makes it increasingly likely there will be a final scrabble to secure a deal, any deal!, before the final deadline.

It’s likely that any last minute compromise will be a soft-Brexit. It’s likely to lesser deal than what May was proposing. Personally, I see little point in exiting if its only a half exit. We may as well stay in and continue to fight from within for reform, the scaling back of the Euro-proto-state, the undoing of further banking and political union, and focus on trade with our partners. It would not be an ideal outcome.. but we could live with it.

If Europe doesn’t reform, we can still walk out down the line – this time with a plan and firm leadership. Stepping back from Brexit now will be embarrassing, will trigger unrest and cause a wave of ennui to envelop and hold back the economy as our spirits are dampened.  I would have been happy with the May deal – taking the view we’d quietly undo the backstop and get on with “stuff”.

Although I do support exit, what we’re seeing in the UK is extraordinary and deeply disconcerting. 10 days to go till the second deadline and there is still nothing even approaching an agreement. Cabinet will meet, pontificate, argue, posture and preen later today. All the while, the Right-Wing ERG group will try to play down the clock to a no-deal Brexit.

We are all aware it’s been a thoroughly botched process which boils down to leadership failure, careerists willing to exploit weakness as opportunity, and ignorance. There has been failure from the top down; the absence of any plan, leadership, political skills, or understanding of the political processes required from the top down has been extraordinary. Parliamentary disciple has broken down across the board.

Perhaps the only functional team are the Hard Brexit ERG – because they had a plan. Even though their represent a tiny minority in Parliament and in their own party, they have successfully exploited May’s parliamentary minority to break her. Had May retained a majority of 30 votes going into Brexit, we’d still be regarding Jacob Rees Mogg as a rather quaint and irrelevant pedant with a fondness for the detail in legal documents, Latin and the 18th Century. Today? He might be on the cusp of leading a successful parliamentary coup.

On that unhappy thought, back to the day job…

Bill Blain

Shard Capital