Blain On Brits, Brussels, & Biden

Authored by Bill Blain via MorningPorridge.com,

This morning it’s a story of three Cities: London, Brussels, and then a trip across the Pond to Washington…

As global stock markets continue their stratospheric surge, more and more pundits agree equities and bonds look overvalued in the face of the ongoing pandemic threat, the economic damage being done across whole sectors of the economy, and that stock multiples are now in chronic danger territory; massively higher than where we’d normally expect a correction. Markets are rising on the back of the vaccine news, ongoing central bank monetary support, and calls for increased govt stimulus. It says it all when the US market rose on the back of a poor Non-Farms payrolls report because it will support greater stimulus efforts! 

So where does that leave the UK?  The first big question this morning: Is it time to go all-in or all-out on UK Inc? It’s really not about fish. 

But it is all about Brexit! (Again…)

Europe and the UK was always an ill-matched love affair.  How happy we all were in these early days when croissants and moules-et-frites were new and exciting.  But eventually, the passion waned as we came to understand what an imperfect relationship it was. Like many I perceived it was time to move on. Late in the day I switched and became a soft Brexiteer. I fully expected the divorce would be messy and sub-optimal – and that speed-bumps would make it painful at times. 

A messy divorce indeed it was as we argued with ourselves. Europe hoped we would reconsider. I did not predict just how destructive the political maelstrom of bluff, buster and bumptiousness that accompanied the process would become. In hindsight, it should have been obvious – since there was never political unity around the subject the process was ill-disciplined.  

Now we have left, and it’s about agreeing on visiting rights and trade. Everyone still says they want the best deal for both sides. If you were trying to craft a Brexit trade agreement between divorcing nations, you would not have started from here. While the Irish argue a deal has to happen because it’s in everyone’s interest, the reality is we live in an imperfect world. Europe is now determined to apply the Hotel California clause: “You can check out anytime you want, but you can never leave.” 

It’s not about how much the German car industry might suffer, how long lorries will queue in Kent, or threats of food shortages, or even how the UK will sell its’ fish to Europe. These will be real issues, but short-term. They will be sorted.

Try to see it from the perspective of the Europeans: For decades the UK has been an unwilling but productive partner in the Grande Project. While the Brits have pontificated about the dangers of the Brussels regulatariat, we are as responsible as anyone for codifying, writing and setting up the enforcement mechanisms necessary to regulate Europe. And now we want to do it all for ourselves? That is genuinely scary for many European nations, who recognise the dangers to their own economies from the potential of a less regulated, more productive and more competitive UK. 

Britain is a potential threat to Europe across the whole economic sphere; as their closest trade partner they are concerned about the spectrum of threats we represent from labour legislation to the regulation of goods and services we could backdoor into Europe if we are given the chance. If we can’t agree to a special trade deal with Europe, then WTO rules it should be, unless we can agree something better. A “No” agreement will be massively sub-optimal short-term for the UK, and a major toothache for some European economies. In the short-term I would be as much worried about Europe which fears competition from the UK exposing their own lack of competitiveness.

Oh dear.. So Goldman Sachs will decamp to Frankfurt. What a loss… (US Readers: deep Sarcasm plus “glad-to-be-shot-of-them” warning.)

Ultimately… we will all recover. 

The immediate effect of a no-deal will be yet another tumble in perceptions towards the UK. On the back of Covid damage, political ineptitude and the threats of breakup, the UK is screaming sell signals to the global market. 

But… I wonder if the Eurocracy actually understand better than our own government is what the UK has achieved by Brexit. The reason they are so nervous is because they see what it means. I’m not trying to be Uber-Brexiteer, but the prospects for the UK look better and better:

• The UK has re-established its grip on monetary sovereignty, (we never actually lost it), meaning we can print as much money as we require to reflate and reconfigure our economy without any threat from Europe. 

• We have fiscal sovereignty meaning we can spend that money however we wish to – on regional and industrial policy and stimulus.

• By exiting Europe, we regain national sovereignty, which boils down to the right to determine exactly how we succeed or fail as a nation. The UK has re-established mastery of its own economic destiny. Brussels has no say.   

Aside from the competitive threat of a new UK, the obvious threats to Europe is how attractive the UK exit option might look to European nations struggling within the monetary and fiscal restrictions of the Euro might look. 

The second point is political. In 18 months the French will be voting. It’s going to be very interesting how that plays out – with the Far Right likely to stand on a roll back the EU platform, stepping back from outright FREXIT, but slowing the progress towards full European monetary and fiscal unification, triggering more faultlines across the European project. Their case will be significantly boosted if the UK is seen to exit well, which is why Macron (a lame duck already) is so anxious to make it hurt. 

The next few months, maybe years, are going to be painful for the UK. But ultimately, regaining full sovereignty should boost UK strengths. Balance these against what Brexit costs in terms of immediate lost trade with Europe, increased administration and trade friction, and the economic shockwave it threatens to create. Painful. A hefty adjustment is on the cards – but ultimately everything is a risk.

Is the risk of a No-Deal worth taking? A bad-deal will mean more internal division and a time wasted to political noise. Time will tell. Which is why I reckon buying the FTSE on a dip might have milage. 

Meanwhile… Across the pond. 

Trump’s ongoing denial of the recent election continues to roil markets. There is now an increased chance the Democrats will gain the 2 Georgia senate seats that go to run-off on Jan 5th. While Trump is lecturing supporters about how the vote was stolen, and his “lawyers” are suggesting any vote will be wasted because the Democrats will steal them, the Dems are spending millions across Georgia on voter registration, realising if they can win both seats they gain a Senate and House majority. 

Would that be a disaster for markets? 

Pre-election the big project fear for the GOP was selling to the markets the picture of a Biden presidency (which, frankly, they could live with), and a Democratic senate – would be a “perceived” disaster for the US on the basis Joe would be a puppet of the extreme left and would institute destructive tax and spend policies. 

However, the real election result (ie the one actually recorded at the ballots rather than the one Trump’s lawyers spin tales about) produced a very clear picture of what American voters wanted: 

1)  The electorate voted against Trump – electing Biden instead.

2)  But they also voted against the Dems – hence they lost seats in the House and failed to win Senate races. What emerged in their post-election caucus and analysis was the unpopularity of leftist policies, especially “defunding” the police. 

The result is a Democrat party that is moving more centrist again, which will make an empowered Democrat administration far less threatening in terms of policy and spending as Biden continues to lead it back to the middle ground and tries to mend the broken political consensus. 

My colleague, Ernst Knacke, our head of research, reckons a Dem controlled 50-50 Senate could be marginally positive:

• Investment into new technologies, alternative energy and R&D will all increase

• A continuation of the Affordable Care Act will be an improvement

• A shift towards “Stakeholder Capitalism” will increase the trend toward ESG and Social Capitalism workplace policies. 

• It will blow out the deficit.

• It should boost growth and fiscal investment, driving bother state and increased private investment. 

The risks are confidence in the democractic process (which Trump continues to undermine) being further eroded making the US and Dollar less attractive relative to China overtaking the US as largest economy in next 4 years. The alternative of a 51 seat GOP senate isn’t that appealing – gridlock and parsimonious stimulus cheques, with the Democrats relying on the Fed trying to boost the economy via monetary policy (which has hardly worked since 2010!).

While it’s still unlikely the Dems will take the Senate via both Georgia seats, it’s an interesting possibility, but not one that should much trouble markets!