UK and Europe Face Mutual Assured Destruction if They Botch Brexit
Date
6/26/2016 8:01:58 AM
(MENAFN- ProactiveInvestors - UK) Fuller Treacy Money, Thu
UK and Europe Face Mutual Assured Destruction if They Botch Brexit
Here is the opening of another excellent column by Ambrose Evans-Pritchard for The Telegraph:
Whatever the result of Britain''s referendum on the EU we can be sure of one thing: there will not be a global financial crisis the next day.
Nothing dreadful will suddenly happen. The US Federal Reserve, the European Central Bank, the Bank of Japan, and the Olympian fraternity of money printers will stand with the Bank of England,ready to flood the international system with liquidity.
The central banks have had months to prepare, and they have prepared. Currency swap facilities are in place to cover the dollar funding needs of UK-based banks, and many of these are well-insulated branches of American, European, Asian, and Mid-East banks in any case.
The circumstances are nothing like the collapse of Lehman Brothers in September 2008, a Black Swan event that caught the world off guard and metastasized only because the US authorities unwisely choose to make an example of the hapless bank and let the debacle occur. Nobody will fret piously about moral hazard this time.
Central banks have learned the lessons of Lehman and of Europe''s debt crisis: that events can spin out of control if they fail to an act as a lender-of-last resort in moments of extreme stress.
Yes, we must heed the warnings of experts, so long as they are acting in their expert capacity, and this is where the British government and its allies in the global nomenklatura have badly muddied the waters. The Treasury''s claims of a 3.6pc to 6pc crash in output are patent propaganda - intended to frighten people - since they start from the political premise that Britain''s authorities will entirely abdicate their fiscal and monetary responsibilities.
More worthwhile are comments from George Soros, the speculator turned philanthropist, and a man I admire for his humanitarian campaigns, as well as for his heroic role in liberating Britain from Europe''s Exchange Rate Mechanism in 1992.
Mr Soros tells us that Brexit will not be as benign as 1992 when the Bank of England was able to slash interest rates, end recession, and head off a collapse of the housing market. This time we will suffer all the pain of devaluation - 15pc, or 20pc, or more - without the cuts in rates. And we have enemies.
"Today, there are speculative forces in the markets that are much bigger and more powerful. They will be eager to exploit any miscalculations by the British government or British voters," he said.
This cannot pass. We are not in recession, and we do not need rate cuts. If sterling really fell by 20pc, it would be painful for eurozone exporters but a net economic stimulus for Britain in strict macro-economic terms.
David Fuller''s view
I certainly respect George Soros but I do not think Sterling would fall anything like 20% in the event of a majority Brexit vote, which neither the betting shops nor the markets are indicating on the eve of this historic referendum.
However, if I am wrong and the Remain vote is defeated on Thursday, I think an exaggerated plunge by sterling would be a matter of now-you-see-it-now-you-don''t, due to thin volume (unusual for reserve currency markets) and the aggressive speculators which he mentions. In fact, I think whatever the outcome of the referendum, volume on Friday will be dominated by high-frequency trading programmes. We have previously seen how easily and quickly they can generate momentum in either direction and many markets will be in play.
This item continues in the Subscriber''s Area where there is also a PDF of AE-P''s column and another article.
Email of the day
On Russell Napier''s interview in Barron''s and tomorrow''s Brexit vote:
Hi David, I thought this was interesting although somewhat gloomy and your comments will be appreciated.
Best wishes
David Fuller''s view
Many thanks. I remember Russell Napier from his CLSA days, although I do not think we ever actually met. He is a thoughtful, academic man, and yes, inclined to be bearish. This is perhaps not surprising given all the problems and uncertainties over many years, although the money flows have been positive more often than not. Here is the opening of his interview with Barron''s:
Barron''s: Britain will vote on June 23 on whether to leave the European Union. How do you expect the so-called Brexit vote to go?
Napier: It is too tight to call. The most important thing is that the move to a federal Europe is a massive constitutional change, which at some stage will need to be endorsed by the people of each sovereign state, usually by referendum. It is silly to believe this issue is just a United Kingdom thing. Look at polls all over Europe. People are voting for anybody who, whether on the extreme left or right, wants to maintain the sovereignty of that particular state within the European Union. That is completely contrary to the ability to have a functioning euro.
This is round one. The most important referendums will be those in the euro countries. I expect referendums in places like Finland, the Netherlands, and even Italy. European legislation is forcing Italy into a form of bank recapitalization, which won''t work and is bad for the Italian economy. Italy will move up the agenda quickly.
These are astute comments. Many people all over Europe are dissatisfied with the EU, which is currently a burning barn in terms of economic underperformance. This has resulted in widespread dissatisfaction, compounded by undemocratic policies and the EU''s privileged, political oligarchy.
I hope Russell Napier is right about future referendums in Euro countries. That would be democracy in action but I fear this will be resisted by governments on behalf of the EU bureaucracy.
India Loses Its Vital Central Banker
Here is the opening of this informative editorial from Bloomberg:
In few countries would a central banker''s decision to step down at the end of his term be cause for national and even global anxiety. Raghuram Rajan is no ordinary central banker, however, and his just-announced departure demands an extraordinary response from India''s government.
The government has the right to choose the head of the Reserve Bank of India, and no individual -- not even an international financial superstar such as Rajan, who said he plans to return to academia when his term ends in September -- is bigger than the bank itself. At the same time, the circumstances of Rajan''s departure have left global investors with a few unfortunate impressions. It''s important for the government to dispel these as quickly as possible in order to shore up its credibility and the bank''s.
The first is the ugly implication that Rajan was eased out because he wasn''t ''fully Indian,'' in the words of Subramanian Swamy, an upper-house legislator from the ruling Bharatiya Janata Party. Rajan, of course, despite spending most of his career at the University of Chicago, is an Indian citizen; his real sin appears to have been to criticize the government obliquely in a widely publicized speech decrying rising intolerance.
The government has already signaled that this criticism is invalid -- the shortlist of replacements for Rajan reportedly includes at least one economist who''s spent much of his career in the U.S. More important, the government should make clear that whoever gets the nod will have the freedom to speak critically and pursue an autonomous RBI policy, unbound by political considerations.
David Fuller''s view
India previously benefitted from the generally high regard in which Narendra Modi and Raghuram Rajan were held. The Prime Minister will have to move quickly in appointing another highly qualified central bank governor, who needs to be seen as independent. Modi should also confirm that controlling India''s inflation remains a priority, while also endorsing Rajan''s policies regarding India''s banks, also mentioned in the editorial above and in Bloomberg''s additional article below.
Rajan Says India Should Finish Banking Cleanup in Policy Defense
Here is the opening of this article from Bloomberg:
Indian central bank Governor Raghuram Rajan said government-run banks were to blame for a slowdown in credit growth, not high interest rates.
Rajan, who announced on Saturday that he would step down in September, called for improved governance and more capital injections into state-run banks. It was his second speech this week defending his policies after he called on Monday for his successor to keep up his fight against inflation.
''To the question of what comes first, clean up or growth, I think the answer is unambiguously ''Clean up!''" Rajan said in Bengaluru, according to a text of his remarks. ''Indeed, this is the lesson from every other country that has faced financial stress. It is important, therefore, that the clean-up proceeds to its conclusion, without any resort to regulatory forbearance once again."
To read more on Rajan''s efforts to clean up the banking system, click here.
Rajan''s exit has spurred concerns that his successor may abandon his March 2017 deadline for banks to clean up more than $100 billion of stressed assets on their balance sheets. With bad loans at a 15-year high, the project is a crucial step toward reviving credit growth and bolstering India''s $2 trillion economy.
David Fuller''s view
Surely Rajan''s programme of requiring the banking sector to be cleaned up through a combination of write-offs, mergers and closures before pursuing stronger GDP growth is correct. The US economy benefitted from doing this following 2008/9, while the EU did not, resulting in a banking sector which is still relatively weak today.
The Markets Now
Monday 11th July at the East India Club, 16 St James''s Square, London SW1Y 4LH
David Fuller''s view
Here is the Brochure. There are only a few seats left in the Seminar room.
Could we have a more interesting markets background to discuss on 11th July? I doubt it and am looking forward to discussing market opportunities with subscribers and their friends at this post-Brexit seminar, held in the comfort of the East India Club. David Brown will provide new material of considerable interest to long-term investors. Iain Little will also have some new material, in addition to his review of interesting investment trusts.
California''s Last Nuclear Plant Is Closing, Edged Out by Renewables
This article by Jim Polson and Jonathan Crawford for Bloomberg may be of interest to subscribers. Here is a section:
Economics have achieved what environmentalists have sought for years: the shutdown of California''s nuclear power plants.
PG & E Corp. is proposing to close two reactors at Diablo Canyon in a decade that would end up costing more to keep alive as California expands its use of renewable energy, Chief Executive Officer Tony Earley said Tuesday. They won''t be needed after 2025 as wind and solar costs decline and electricity from the reactors becomes increasingly expensive, he said.
Diablo Canyon became California''s only operating nuclear power plant after Edison International three years ago shut its San Onofre plant north of San Diego after a leak. Tuesday''s announcement follows decisions this month to retire three other U.S. nuclear plants struggling to make money amid historically low power prices and cheap natural gas.
''It''s going to cost less overall as a total package than if you just continued to operate Diablo Canyon,'' Earley said. ''It''s going to operate less because of the energy policies that are in place.''
Eoin Treacy''s view
Nuclear in North America and Europe suffers from a boy who cried wolf problem. By over promising on cost and production and under delivering, particularly on safety, public ambivalence has grown substantially. That''s an unfortunate development because new nuclear technologies really do hold the potential to fulfil earlier promises, but they are unlikely to be built in either North America or Europe. China is now the primary bastion of support for developing nuclear technology and is already exporting its designs to other countries.
Musk''s Solar Lifestyle Idea Has One Big Flaw
This article by Leonid Bershidsky for Bloomberg may be of interest to subscribers. Here is a section:
The commercial success of Musk''s vertical integration idea hinges -- in terms of turning a profit rather than generating a high market capitalization -- on battery technology that would have mass rather than niche appeal. The assumption upon which Musks'' concept -- and Tesla''s $32.3 billion market capitalization -- is built is that Tesla is betting on the right battery technology and no one will come up with a much better one. That is the big hole in the donut: The assumption is far from safe.
Cheap and reliable energy storage is central to the idea of an off-the-grid, solar-powered household. Such a home needs energy at night, when the sun isn''t shining: It has fridges, air conditioners and other appliances running, and a Tesla charging in the garage. So it needs a good battery, and Tesla''s Powerwall doesn''t necessarily fit the bill -- if only because the cost of the energy it supplies, including amortization, is higher than grid prices. Because of this, and given the high price of Tesla cars, the lifestyle on offer is an expensive statement. In terms of cost and convenience, it''s not competitive with the traditional grid-and-fossil fuel model.
Eoin Treacy''s view
Let''s call Tesla Motor''s acquisition of SolarCity what it is; a bailout. The tide of highly attractive subsidies for solar has turned. NV Energy, Warren Buffett''s Nevada utility, successfully argued that it should not have to bear the full cost of the electrical grid when solar producers get to use it for free and get preferential rates on the electricity they supply. That represented a major upset for SolarCity in particular but also highlighted a deeper challenge for the solar leasing business model which has contributed to increased scepticism among investors about the prospects for related companies. The big question is whether other states, particularly in the sun-belt will announce similar charging structures.
Panama Canal ushers in new era of international trade and megaships
This article from the Panama Perspective may be of interest to subscribers. Here is a section:
More than 100 years ago when the SS Ancon sailed into the history books as the first ship to transit the Panama Canal, the waterway was a display of American ingenuity and the Panama Canal Zone was firmly in U.S. hands.
But the ship making the first official trip through the newly expanded canal next Sunday will be a Chinese megaship. The United States completely withdrew from the canal on Dec. 31, 1999, and there was barely any U.S. participation in the $5.5-billion canal project, which will allow the world''s bigger ships to transit Panama''s ''highway of the sea.''
The United States remains the most important user of the canal and canal officials say it will be for the foreseeable future, but world trade patterns have shifted in the past century and China has become the world''s largest trading nation.
Between 6 a.m. and 7 a.m. on June 26, China COSCO Shipping''s recently renamed 984-foot-long Panama will approach the new Agua Clara locks on the Atlantic side of the 50-mile long canal to begin the first official voyage through the expanded canal. It won the honor in a drawing among the canal''s top customers.
Although the new locks tall as an 11-story building are an engineering marvel and the expansion is expected to double the canal''s capacity, it''s been a long slog. The project is being delivered nearly two years behind schedule and various claims by the Grupo Unidos por El Canal (Group United for the Canal), the international consortium that built the expansion, could push the price for the project even higher. The Panama Canal Authority also has its own counter-claims. Arbitration on the first unresolved claim gets underway in Miami in July.
But now 110-million man hours, 292,000 tons of structural steel, 1.6 million tons of cement and 5 million cubic meters of concrete later the project is finished. Panamanian voters approved it in a 2006 referendum.
Eoin Treacy''s view
The extension to the Panama Canal was approved during the commodities boom when vast quantities of raw materials needed to make their way from Brazil and Venezuela to China. Despite cost overruns and political scandals, (former President Martinelli is still holed up in Miami fighting extradition) the expansion of the canal is a major enabler to trade by reducing both the cost and time on shipping on major routes.
Fuller Treacy Money