Macro Digest: Brexit – the Never Ending Story

Macro

Steen Jakobsen

Chief Economist & CIO

As a public speaker for over 30 years I sort of know most of the questions from an international investment audience ahead of time: The classic is always: “Where is gold headed?” Since 2016 two new ones have appeared: “What do you think about crypto-currencies” and “What is going to happen with Brexit?”

My answers have consistently been: Gold will generally go up, crypto-currencies will ultimately be co-opted by governments to maintain power over the money supply and increased control over tax revenues. But most important for this piece: Brexit. I think Brexit is never really going to happen, it will simply prove a never ending story, with delay upon delay out over the horizon.

This has been my fixed and somewhat disappointing answer for this whole period – now today the UK Parliament is at it again, tabling ‘a riot’ against PM Johnson and his attempt to reserve the No Deal exit option. My answer today to what will happen with Brexit? See above! This will inevitably end up as a lot of noise, resulting in no decision and a kicking of the can via yet another dela, an “outcome” that will leave the UK economy vulnerable and probably move UK very close to recession by Q4-2019 and into 2020.

Nothing will change because the division on Brexit not only cuts the major parties in two, but cuts across age groups as well, across income brackets, across identities and even feelings, and across Britain’s electoral districts. That is to say that there is no decision that satisfies both sides and, leaving any direction or decision impossible. Short of a solution therefore, the whole process will likely lead to a new general election. That election is an enormous risk for the Conservative party, but perhaps the worst risk is that it brings us no close to any decisive outcome on Brexit.

 Meanwhile the UK economy goes from bad to worse – but hang on! Consumer are doing fine! Yes for now, but probably more likely hoarding and front-loading spending ahead of the ever threatened dead-line for hard-Brexit.  

At Saxo Bank Strategy we have few rules and no religions, except….. We firmly believe that it is the net change of credit – the credit impulse – that drives future economic activity with a varying lag. Indeed, the Credit Impulse sits at the center of our research for our long range views on the coming two to four quarters. And the credit impulse for the UK is bad news indeed for the UK economy, as our Head of Macro Strategy Christopher Dembik wrote in late August:

https://www.home.saxo/insights/content-hub/articles/2019/08/12/uk-the-power-of-credit-impulse-at-work:

The UK economy is in its SEVENTH quarter of contraction in credit.

The credit impulse leads the economy by nine to twelve months, so for at least the next year, there is no positive impulse from credit coming to the Islands of Great Britain! This will leave only one tool in the box: A further devaluation of sterling against the US dollar and the Euro. And my travels and discussions with investors in the UK suggests that short sterling is the most under-owned position anywhere. Everyone is positioning for the “GBP comeback once Brexit is out of the way” But the risk for this complacency is – again, that Brexit is a never-ending story and ignores the chief drivers of currency rates: capital flows, net credit and safety.

We have been underweight GBP since Q4 of last year and maintain this underweight with a minimum target of 1.1000 and, if USD funding issues aren’t solved soon by the Fed or by the Trump administration, we could even see GBPUSD at parity. The UK is no longer a safe haven, changed tax laws, Brexit and now also the potential for a twentieth century socialist throwback Corbyn government will scare capital from even considering finding a harbor in the UK – possibly for a generation.

 The Financial Times this weekend had lengthy piece on what a Corbyn government would mean: Jeremy Corbyn’s plan to rewrite the rules of the UK economy – Let me give you a few indications:  

  • “We have to do what Thatcher did in reverse,” says Jon Lansman, founder of the Corbyn support group Momentum. “We have to take decisive steps to both achieve a significant redistribution and create a constituency of an awful lot of people with an obvious stake in a continuing Labour government.
  • At the heart of everything is one word: redistribution. Redistribution of income, assets, ownership and power. The mission is to shift power from capital to labour, wresting control from shareholders, landlords and other vested interests and putting it in the hands of workers, consumers and tenants. “We have to rewrite the rules of our economy,” says Mr McDonnell. “Change is coming.”
  • …..the nationalisation of rail, water, mail and electricity distribution companies; significantly higher taxes on the rich; the enforced transfer of 10 per cent of shares in every big company to workers; sweeping reform of tenant rights; and huge borrowing to fund public investment. 
We are making no projection on whether we get a general election in October or later if there is a Brexit delay, or who wins it, but we do see a huge shift to the left unfolding in the political environment, whether in the UK, in Europe and in the US. As per my Twitter this morning:

If the UK gets this wrong and remains out in the cold, the exodus of capital will see the UK begin to perform like an EM currency. And don’t just take my word for it – already sterling volatility lately has been higher than for the Brazilian real or even the Mexican or Columbian pesos.

Source: Saxo Bank

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