Blain's Morning Porridge - Aug 30th 2017. What does Europe think about Brexit and why it spells

Blain’s Morning Porridge – August 30th 2017

“Did anyone ever comment on what Obama wore, or what shoes Michelle was wearing?””

For the avoidance of doubt – the Morning Porridge is market commentary, it is not investment advice…

And the September bond rush has started! Traditionally the first week of September heralds the start of the new funding season, but many deals are out already. Billions upon billions of dollars, Euros and GBP will be raised in coming weeks with investors and issuers tumbling over each other to see how can issue the most before the market inevitably snaps shut, is stuffed on mispriced oversupply, a Ukrainian Chicken Farm Moment happens, or something worse is occuring…

What could be worse you ask?

How about the much anticipated Global Bond reversal? Yeah, yeah.. we’ve been havering about it for years and it hasn’t happened.. But, but and but again… We’re seeing bond yields right back down to the lows – the Trump Jump is most definitely over – but for how long can it continue? “Normalisation” is the theme that does not speak its name among central bankers: rate hikes, taper and unwinding balance sheets are on the cards.

Is it any wonder that investors shunned a new bank fixed rate deal in favour of the Floating Rate tranche yesterday?

It’s a holiday in the US on Monday and the new issue deluge will increase next week. I expect the new funding season to face a number of challenges. Not least is the growing perception the dollar is undervalued, and the possibility the political agenda in the US is changing towards actually happening..

And… just what is going on in Europe….?

Apparently there is nothing to worry about in Europe. Finally it’s all going to plan. Even Spain is showing 3% yoy growth (don’t mention Italy..) Now’t to worry about. Nope, I’m reliably informed the problem isn’t Europe… (which in my mind means it very much is..)

Europe sees the problem as the UK.

I was surprised at the volume of comment on Brexit from European clients yesterday responding to y’day’s Porridge about how the EU is likely to play a mean poker hand against the UK through the Brexit talks.

My correspondents include friends across Europe I’ve dealt with and known for many years. I respect their opinions, and consider them broadly representative of “smart” financial thinking. I’m not saying these collectively represent the European polity, but they are worth considering.

If I sound like a “Remoaner” below, please forgive me.

If you want a Remoaner comment, how about what one Anglo-Saxon client wrote me: “It was always hard Brexit, it is Hard Brexit, It will be a Hard Brexit. The teams of negotiators are a rank side show.”

I happen to believe the UK should leave the EU as a favour to Europe. We are a distraction holding back Europe from achieving its very laudable goals of Political and Economic Union. I also happen to reject the economics of the Euro and the ECB. The UK is unlikely to ever be part of the United States of Europe, but I wish them well with the project and I’d like us to remain very close to it.

Yet…

Almost all of my European chums are convinced the UK has utterly underestimated i) the difficulties we’re likely to face leaving the EU and ii) the economic damage we’re doing to ourselves. Their consensus is the UK has created a crisis of our own making. We are likely to face mounting economic and political headwinds in coming months/years that will have an increasingly negative effect on UK asset prices, jobs and growth. They believe these are likely to force a reassessment of our current negotiating position.

All Europe has to do is wait. There is something of the Prodigal Son to their thinking…

We’ve chosen the route we wish to follow. There is little understanding or support for it across Europe, so don’t expect any help from Europe during the Brexit negotiations.

Among my European chums I can detect a clear expectation and hope the UK is going to “repent” of Brexit and undo the damage we’re doing to ourselves by agreeing to remain within Europe. Their view is UK was bounced into an ill-considered Brexit as a result of a very well run negative populist anti-European campaign, while the positive arguments for Remain were extremely badly presented. As a consequence, it’s only natural that we be given time to reconsider the error of our ways, think about our position and agree with the European consensus. (Voting again and again until you get the right answer is a very European solution to political dissent.)

Many Europeans still cling to a hope we will be forced into a second “more sensible” referendum as economic conditions swing against the UK. Unlikely, but doesn’t change the fact many facets of the European polity still don’t think we will go… (Which means they aren’t seeing the obverse of the UK problems – what does Europe look like without the UK, where will the political balance to a Franco/German axis come from, and who then pays the bills?)

In terms of what the EU will offer the UK, the European consensus is pretty bleak. If the UK expects the benefits of membership without being a member, then we must pay and accept our position within the whole. If not, we shall be excluded. This view is hardening – fuelled by the current cyclical uptick across Europe while the UK is now mired in economic downturn. It’s easy to blame declining economic sentiment on Brexit (it’s the favourite pastime of the remoaners) – hence the growing perception the current political slide towards some kind of transition period is a manifestation of Brexit remorse.

Here in the UK we believe the EU is an anti-UK political monolith, while European countries still love us – that Germany, Denmark, Holland et al will see sense and support a pragmatic Brexit. How wrong we are….

Don’t expect European nations to support us. Ill-considered thuggish anti-European sentiment - effectively racism towards our fellow Europeans - has been widely reported across Europe. Whether its Norfolk ‘tato-heads telling Polish nurses to go home, or the Home Office telling a Finnish professor he has 30 days to leave Britain because he doesn’t qualify for residency, the UK looks to be the aggressor. Europe doesn’t see us a “cool Britannia” anymore – we’re perceived by many as a nest of racists.

The economic implications of losing millions of European workers in the UK will be immense: the demographic negatives could turn the UK’s future economic position profoundly negative, while the immediate effects of skill shortages and labour outages will exacerbate immediate economic crisis! The first thing the UK should have said post Brexit is something along the lines of “all Europeans will always be very welcome in the UK and will retain full citizenship rights.” (That would not preclude us shutting our borders if required.)

As for our perception of an Anglophobic EU presidium in Brussels hell-bent on punishing us for our temerity – we might just be right. As former Greek finance minister Yanis Varoufakis said.. “It’s just the Eagles’ Hotel California – you can check out any time you like, but you can never leave”

Oh dear.. the above all sounds profoundly negative.. things are never as easy as you hope or expect.. Having experienced the financial devastation of divorce… the only upside is at least you eventually come out of it..

Out of time and back to the day job..

Bill Blain