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Mrs. May’s Little Britain

Oct 16, 2016
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I have just returned from London after three weeks. Things are not looking so good. The disunited Kingdom, this island is a conglomerate of union of nations, all of which not sure of their own national identities.  Collectively all are international traders, shop keepers and shoppers. The economy is hugely focused on service industries, having decimated the manufacturing sectors, and is thus import dependent. In a global connected world of supply chains, almost nothing, except tables and chairs can be made without imported materials or parts. With the British Pound falling, the price of those imported goods is rising. British consumers will be paying more for their purchases as a result. This means higher domestic inflation. Which in turn means higher interest rates, implying higher mortgage and other borrowing costs. That means lower profits for companies and lower net savings for consumers and less of what money can buy. Which means a worse economic outlook. Painful in the High Street, and painful at home.

There is more tourism, but not sufficient to offset the uncertain future that British Business is facing. More tourism, but more expensive meals and coffee when they arrive. More tourism, but fewer and more expensive holidays for the British people. The fall in Sterling last week has refocused my attention to what is going wrong.

Even before the Brexit vote Mrs. May was indifferent to Europe. She sat on the sidelines as nationalists marginally won the vote and David Cameron’s half-hearted efforts for Britain to remain in Europe came to nothing. The Labor Party’s leadership was in disarray and the Liberals stopped having impact. The UKIP had its glory day. The British on the whole have a mindset that they can do without the rest of the world. It is an arrogance that has its origins in a bygone era. In the new world order, isolationism has cost and loss of influence.

Mrs. May is an opportunist and has been quietly thirsty for the highest office. Now she is in charge and putting her very personal stamp on British politics. What is that stamp?

It is nothing new. There has been a wave of nationalism which has used the seeds of racism as the anchor of their movement, plucked from the misfortunes of the migrants landing on Europe’s shores, driven by the instability, of which Europe was a contributor, and Britain a key player. Britain is not unique in its response to foreigners. Even when the UK economy needed foreign workers, the nurses, the doctors, the bus drivers, the teachers, we have always only begrudgingly accepted them. I say we, because I too am British now. I am not British born and therefore at an advantage, because I can look at my country also as an outsider and see it for what it is.

In Britain, the unemployed and those left behind look for excuses for their own miserable lives and blame the hard working. Lives made miserable by successive governments in part, but also the pitfalls that life brings when one is born into circumstances, in a careless, capitalist society. Britain has always been a society of people from ‘Upstairs and Downstairs’, the Haves and the Have Nots.

White working class boys have the lowest chance to get higher education of any population group in the country, and not because they are inherently dumb. I grew up with some really very intelligent working class kids. It is because their families are not structured and have been unable to pull themselves out of the pit holes that low incomes and addictions to cigarettes, horse racing, football matches and the local pub brings. In Britain, climbing out of poverty requires long term sacrifice or a Lottery win.

The British have neglected their poor and underclasses for generations. But they have given them the vote. Generally, their votes don’t really count. The Brexit vote counts only because it suits the power hungry, Mrs. May as she attempts to claim the center of British Politics. The center vacated by the Labor Party. The center which in Mrs. May’s mind includes the far right UKIP voter. It is a center of convenience. A center that seeks to divide the country along lines of nationalism. Britain is a country divided between the rich and the poor, the old and young, the north and south, the locals and foreign born. Mrs. May is not it appears, color blind. No nationalist is.

Mrs. May’s stamp is a gamble that her mixture of Tory nationalism and racism espoused by UKIP will make her popular. She has taken cue also from the far right movements in Hungry and Poland and rise of Le Pen in France and the AltDeutsche in Germany. She imagines that she too can ride the same wave. Mrs May’s sounding cry is that Britain can go it alone, without its European partners. The loose thought is that will put Britain ahead in the long run. Her dream is that she will place Britain in a better position with the Commonwealth, China and in a more favorable position with the United States, Australia and Canada. All because there is a history and a special friendship. She wants to ditch European laws and put in place something uniquely British. Something uniquely British will keep the workers in their place and reassert the establishment as Britain falls back into its old habits. The long run can be a very long time indeed. The worse wounds in life are those that are self-inflicted. Divorce is one of those wounds.

Mrs. May doesn’t realize that Britain and the world is in a different place compared to the old days of the Raj. India is more confident and can shop around for its fighter jets or Nuclear plants. China won’t sign a trade agreement superior to what we already have via Europe. The Americans care only about domestic politics. Russia and the British are always at odds with each other. Africa need investment, which the weaker Sterling is going to be unable to provide.

Mrs. May has already made a lot of mistakes. Key one is that she doesn’t understand the Europeans. Neither do her cabinet colleagues. In many ways Europe has outgrown the disunited Kingdom. The Europeans are a confident lot and no longer susceptible to the bullying tactics. Diplomacy, rather than threats work much better in Europe. By appointing Boris Johnson as Foreign Secretary and David Davis as the chief negotiator for Brexit, Mrs. May has insulted the very people she needs to negotiate the best exit terms for Britain. Boris Johnson has the capacity to offend a cat. He lacks understanding the basic fact that in a global economy, neither the importers or exporters of goods and services are in relative better positions. What Europe sells to the UK is what Europe produces at the lowest cost or is not produced elsewhere. What UK primarily buys from Europe are manufactured good, which are extremely difficult to replicate and substitute. Services is what UK sells to Europe. Many of those require simple relocation. Boris Johnson argues that if the UK consumer stops buying BMWs, they will inflict a lot of pain on German industry. He doesn’t understand that the UK consumer may not be able to afford a BMW in the first place!

In the area of Financial Services, in a more regulated, lower risk taking, more transparent system there is less need for the CDO Squared opaque world. Financial products can be booked anywhere, even though manufacturing them may continue to be in London. Europeans may end up insisting that fees and thus taxes have to be booked in the country in which the customers reside, i.e. where the income is sourced from. If that is allowed to happen, London will suffer in the same way that Google has to pay more tax if income is recognized in the country where revenues are generated.

Britain is now a very confusing place. The nation is more divided than I have ever experienced. The people who run the country want a change of direction, when in their own parties there is so much disagreement and disharmony.

One imagines that in a great democracy, a few divisive people cannot change the character of a nation. Particularly not if they happen to be clowns. But that is not so. The tragic comedy on display in American politics is shamelessly being replicated in United Kingdom. There are no minimum standards for conduct. No minimum standards to abuse the general public. No one is insulting anyone’s intelligence. Intelligence has become a missing commodity.

Financially, no matter how one looks, the UK is poorer today compared with June 2016. Their buying power has diminished. Unless the tone and texture of the message changes, the spiral downwards can gain its own momentum.

In financial markets, Volatility bequeaths more Volatility.

Nationalists and Politicians in general would do well to take some basic lessons in economics. Tariff Free Trade, Free Movement of Good, Services, Money, Intellectual Property and Labor implies greater wealth for all. Closing down borders or hindering with basic economic rules implies hardship and higher unemployment and loss of influence.

Staying on the current path may mean that it is the English people who will want to emigrate to Australia, Canada, United States and Europe – provided they let them in!

On a positive note. The United Kingdom is the 5th or 6th largest economy in the World. Let us not write this collection of countries off unless the Union breaks down.

In addition, every Central Bank has been actively seeking higher inflation. Savers have been savaged by low interest rates. It maybe about time for us to have normal yield curves and interest rates that are able to pay some income on our Pension Funds and savings. These factors may work in favor of the UK economy. Weaker GBP should lead to higher rates and higher inflation.

The sting is that inflation really hurts the low income and the poor. Inequality may very well get worse.

Britain is positively in a mess at the moment!

GBPUSD at 1.10 next? Possibly, but concerns about the damage a depreciated currecny may lead to action by the BoE and other policy changes, including a less confrontational stance towards the EU i.e a Soft Brexit.

If nor GBPEUR at 1.00 is very possible.

We’ve always said that the United Kingdom needs Europe far more than EU needing the United Kingdom. When we say this, it is not only about money. It is about what had made Britain Great – its cultural diversity – that is not something that flourishes within closed borders.

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