Blain's Morning Porridge - Feb 22nd. Fed Minutes and a Wake Up Call to Government on Brexit! DO
Blain’s Morning Porridge – February 22nd 2018
“Wake Duncan with thy knocking! I would thou couldst..”
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Janet Yellen’s parting gift to markets: Fed Minutes of her last meeting gave a hawkish assessment of US “further” economic upside, stronger growth and “notably faster” inflation. She spooked the markets from the afterlife – leaving them fearful the Fed will over-react and most foully murder recovery. Stocks reversed earlier gains, 10-year bonds hit 2.95% at one point, and a March hike is nailed on. How many more? 4? Story on BBerg says maybe 5 hikes.
Meanwhile… In a galaxy far far away..
Somewhere in darkest deepest Hampshire, one of my best friends will be reading this and calling me an idiot. Again. He is a passionate Remainer. I am an agnostic pragmatic Brexiteer. I like Europe and Europeans. I have no problem with multiculturalism – although Spanish students clogging up the Tube attract my ire. I am disturbed by the Euro and the ECB. I don’t worry much about sovereignty or Europe setting laws, but I certainly don’t agree with the possibility of a single European superstate encompassing unwilling members. I’ve probably read too much history, and Europeans who believe in some United States of Europe concept will be better off without us. Let’s all stay friends. It’s not them, it’s us..
My advice to the UK government – meeting today to gabble and pontificate on Brexit - is to stop the angst and get on with it. In the past Muddling-Through has been the British way of doing things – we successfully bumbled through 500 years of European wars with absolutely everyone (except the Portuguese!). We’ve faced repeated crisis – and got away with it largely due to the English Channel.
But, this time it’s serious. We are gambling with our economic futures. Some of the nonsense is embarrassing. This is not 1940. For our Foreign Secretary to admit its all a bit of a mess to his German counterparts, isn’t funny… The UK Government has to stop the passion and be pragmatic. Get on with Brexit before its too late. Identify the key issues and solve them. Stop talking and do something!
To kickstart this morning’s rant, let’s start with some rather worrying numbers collated by my colleague Martin Malone, our Macro Economist. He’s looked at IMF growth predictions for 55 countries to work out where you should be putting your money over the next 5 years. His paper – which is shocking in some respects. (Email me for a copy bblain@mintpartners.com). He concludes:
39 countries representing 2.5 billion people will outperform with 6% annualised growth. Whoopee!
16 countries representing 720mm people will underperform with 3% growth.
You don’t need Sherlock to tell you to invest in growth. Can you guess where the UK might be?
No prizes for guessing. Close to the bottom with 2.3% predicted annual growth. Brexit, Brexit, Brexit…. While the EU soars higher at 4.5%, the UK is set to wither – so say the IMF models. We will see the economy grow a mere 11% these next 5 years, wages barely rise, and living standards continue to deteriorate in relative terms. Ireland will have a net Capita GDP about double ours. And, it’s not just the IMF saying it’s going to be bad – the government’s own EU Exit Analysis (recently leaked) was even worse!
Pro Brexit economists argue the Government has got it absolutely wrong – well they would, wouldn’t they. However, they have valid points to make. Using exactly the same models the government officials used, they get much stronger results. The numbers are still challenging, and would require considerable Government action to shift the UK into the 4-5% growth zone the rest of Europe finds itself in.
It can be done. Economists like Martin have shown how Japan has reversed its long-term stagnation/decline by aggressively doing “stuff” – like going out to close and sign trade agreements (including a massive one with Europe), and boosting business through policy! Japan isn’t a winner either, but its raised growth by more than double after years of sub 1% stagnation. Policy works!
What is happening here in the UK a year ahead of Exit? Project Fear still sets the agenda. Our state mandarins in their Whitehall palaces, sitting on their fat feather-bedded government pensions, don’t look particularly motivated. Why should they do hard work on trade agreements? Brussels did that. And if Brussels ain’t doing it.. why should they? Much easier to produce numbers so atrociously shocking and scary that politicians will abandon the whole idea. That way our civil service can continue to bankrupt us all on via their pensions (currently sucking up the bulk of your taxes) without actually doing very much. Check our Niskannen’s Theory of Bureaucracy or umpteen studies on how bureaucrats operate to the detriment of anything they run or regulate, and then please prove me wrong…
The crisis with Brexit is not the divorce from Brussels. That is going to happen.
The crisis is preparing for the future. Perfect preparation prevents p*ss poor performance is an old yacht racing mantra, but applies perfectly to today; lots of stuff needs prepared today or we will miss the proverbial boat. The government needs to set ambitious plans for the UK after Brexit.
Trade agreements to open up the UK to the fastest growing economies are critical. While a sane and rational trade agreement to sell UK goods and services to 400mm Europeans (our closest and largest market) is clearly critical, its as important to sell them to Mexico, to China, to India, Latin and Central America, Asia and the US. And even in Europe, it’s the 350mm 6% growth Eastern Europeans rather than just the core EU members who we should be targeting!
The prime minister might think flying the flag to the Middle East is a great way to drum up business – nope. It’s not. Much better idea would be to spend time with counties in the fast growth set. And do it well – her last trip to China was “disappointing”. The next will be even worse as the UK tumbles down the “economically” relevant list. See the list above. Middle East is irrelevant and a rounding error.
We also need to work out and invest in the business that make the country work – which includes Financial Services, but also look at the many and varied areas where the UK has successfully innovated technology. Our strengths range from gaming (where Dundee* is a world centre of this burgeoning sector), aviation, tech, renewable energy, phara/healthcare, and others including the autosector. And let’s not forget Malt Whisky – a massive earner!
In reference to yesterday’s harsh but fair comments on Curling – at least we make proper curling stones, but the Ailsa Craig won’t last forever.
And then, there is the appalling state of the UK’s infrastructure – which needs massive reform and investment. Can they please start with the Southampton-Waterloo line?
Does the government have any real plans – aside from noise – about how to enact, grow and support the UK through the Post Brexit environment? I’m not sure – I’m not seeing any evidence of it. Infrastructure and Industrial policy seems to be things other nations do…
Out of time…
(BTW: *Dundee is the ancestral seat of the Blains. My Grandfather would have been delighted to see the City of “Jam, Jute and Journalism” become a global centre for Computer Gaming. He worked for DC Thompson, and was the editor of comics like the Dandy and Beano in the 1930s, going on to launch the Victor, Hotspur, and Bunty. If you’re anywhere close to my generation, you’ll never forget Dennis the Menace, The Bash Street Kids, Beryl the Peril, Desperate Dan, Braddock VC, and Alf Tupper - the legendary Tough of the Track.. If Alf was still around today, he’d have turned up at the Winter Olympics, repaired the UK’s sabotaged BobSliegh, beaten up the public school oik behind it, tried and won langlauf on his first attempt, and won the snowboarding before washing it down with a nice cup of sugary tea with fish’n’chips )
Bill Blain