Wednesday, October 12, 2016

The Markets verdict on Brexit is coming & it will be ugly

80% of the British press is under the control of off-shore domiciled billionaires. These shadowy figures: the pornographer Richard Desmond, the sinister Barclay Brothers, the oafish Harmsworth, and the borderline criminal Rupert Murdoch have established a hard right-wing agenda. The press, especially titles owned by the creepy and boorish Mr. Murdoch, have a well merited reputation for powerful lobbying in support of an extreme right-wing agenda. Since the referendum, their shrill support for the ending of all ties to the European Union- the so-called hard Brexit- has pushed the Conservative government to ever more hardline positions.

However, despite the propaganda and the contempt that these newspapers have directed towards the near majority that preferred to stay in the EU, reality is- finally- beginning to bite.  The extreme position adopted by the May government has a price, and it is one that very few people on any side of the referendum debate would have been prepared to pay. The fact is that there are many fundamental reasons why a "hard Brexit" would cause significant economic damage, and the problem is that even the large-scale devaluation of Sterling that has taken place since the referendum debacle will not much ease the crisis to come.

The conventional wisdom is that the fall in Sterling will reduce costs and make exports competitive, but this is to misunderstand the huge changes in the global supply chain over the past few years. British exports in manufacturing are largely made from components that are imported, therefore the conventional wisdom that a devaluation makes the UK a more competitive exporter no longer truly holds. All that is going to happen is that the country will reignite a level of inflation that will erode the currency still further, without any improvement in the UK current account. In the quest for greater productivity there will be a need to shed jobs, while the government sector now faces a double whammy of a lower tax take, a higher social security bill, and rising gilt yields, and confidence in the UK continues to fall. 

Hard Brexit is a vicious circle. The expulsion from the single market that  Mrs May now says could happen in January 2019 is going to cause a rout in several critical sectors of the UK economy. Confidence is being eroded to the point that Credit ratings are coming under critical review and the negative outlook is being priced in. As long as Hard Brexit is the policy, there is no technical support for Sterling in the medium term above about 95 Euro cents, and if the Market continues to take a dim view of the competence of the May government, we could even see Dollar Parity in the short/medium term. The currency rout now taking place is already beginning to see the beginning of a rout in gilts- a 5% yield may be surprisingly close, and as we know this could in turn lead to the overstretched mortgage market also being pushed to breaking point, with a breakdown in property prices quick to follow and a major banking crisis the inevitable coda. Meanwhile the lackeys of the right wing press, like Ambrose Evans-Pritchard, suggest that the prospect of this major discontinuity is a good thing. According to their world view- backed up by whatever bat-squeek of hope they try to find in the gathering gloom- the UK was over indebted and living high on the hog, so that a collapse was inevitable. Yet the fact is that the market is delivering a verdict on the politics. Any sign that Brexit may be soft rather than hard and Sterling recovers a smidgeon. 

Yet Mrs. May made her case: "If you are a citizen of the World, you are a citizen of nowhere" is a phrase that will haunt the rest of her premiership. Business hates it. Universities loath it. It is a contemptible manifesto of Little Englander provincialism, and it will ultimately fail. The price, however, will be the prosperity and the stability of the the UK.  On June 23rd the British people did not vote to make themselves £66 billion poorer- and the absurd lies published by the verminous Mail, Express et al does not change the fact that the consequences of the vote will be deeply unpopular.

Mrs May currently has a Parliamentary majority of 12. Over twenty seats are currently the subject of Police investigations as to the legality of the Conservative expenses claims. That is not something the right wing press wishes to discuss.

As the chill winds of the Brexit Autumn turn into the bitter frost of Winter, one wonders how far the Tories can push the Bond Market before it bites back. Then the posturing fools of the billionaires' supporters club can face the wrath of the rest of us.

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