Monday, June 27, 2016

As the political vacuum in the UK continues, the markets are filling the gap

The UK fiasco has continued unabated. Neither the Conservatives nor the Labour party have any effective leader. It is quite clear that the victorious Leave camp is totally divided as to what should happen next, and there is no clear plan as to what level of engagement or disengagement the UK will have with the European Union.

The market collapse that is taking place is the responsibility of the utterly irresponsible leaders of the Leave campaign. So, it could well be that having wielded the knife against David Cameron, Boris Johnson may yet go the way of a previous Tory challenger: Michael Heseltine. Perhaps Theresa May as leader could provide some reassurance, but in the face of economic meltdown, the calls for an early general election -which under the circumstances is clearly necessary- may create an untenable situation for any party. The fractious and divided body politic of the UK is on the brink of collapse. The cowardly, but sullen and determined Jeremy Corbyn is facing the total breakdown of his leadership, but there are few amongst the Labour leading lights who can inspire in the face of the national catastrophe that we now have to face.

Into this chaos the markets are injecting their own commentary. Despite the brief reemergence of the Prime Minister and his Chancellor, the market collapse is now assuming a very dangerous shape. Some are suggesting that the cable (USD/GBP) rate is now headed to parity, which implies a fall of one third from Thursday night's close. The implications are startling. The UK will fall from the fifth largest nominal economy to eighth, just above Italy. The recession that this implies is into double figures. It implies the implosion of the UK property market, it implies cuts in the government budget of the order of 10-15% across the board- a level of austerity that could seriously test the social order of the country. All of the gains made since the early 1990s will have gone over the course of a few weeks. UK bank stocks are now in deep decline- over a third of the value of the UK banking sector has gone in two trading days. The rout is expanding into construction, property and any business that relies on imports, which in the UK is pretty much all of them. The Brexit shock could push inflation very sharply higher. The scale of the meltdown is mind boggling and since there is still no clear plan emerging in London, there is no bottom on the market.

Nor have other European markets been immune- there remains considerable uncertainty as to how the impact of the UK exit can be contained. Wisely, Mrs. Merkel has shown a cool head, suggesting that there was no immediate hurry and that it would be counter-productive to seek to punish the UK for this disaster. She is, of course, right: the punishment being meted onto the UK already is severe enough. However within a few days London must set out a timetable for what is going to happen next- and there is no such timetable. It is not even clear if any new Prime Minister would be able to enact an article 50 notice without a new general election. Paradoxically this chaos may stabilize the European Union itself, as other nationalist movements see what could happen to them, if they push things too far. 

Yet even if the UK general election chose a solidly remain government and the referendum was indeed rescinded, the damage and humiliation being visited on the UK will not go away. Even though Scottish separation in the immediate future would be an economic neutron bomb if it was done too soon, there are hot headed calls for an immediate rerun of the independence vote: and the only leadership in the UK at the moment is coming from those who want to destroy it. 

Personally I think that a lot of people now want to the Conservatives destroyed- they and their UKIP cronies are responsible for this catastrophe. Yet the pathetic response from Labour reminds us that politics as usual is not an option. Any election, however necessary, could throw up a Parliament that can not form a government of any kind.

The fact is that we may still not have reached any understanding of where the bottom of this crisis is going to be, and for as long as that remains the case, the markets will be in turmoil. 

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