Wednesday, 31 May 2017
Monday, 29 May 2017
Why ‘Brexit’ Will Make Britain’s Mediocre Economy Worse
Britain’s economic performance relative to the other big economies in Western Europe — including France, Germany, Italy and Spain — does not stand out as impressive, at least once the different prices of goods and services across these countries are factored in. As the chart below shows, British economic growth between 2000 and 2015 lagged behind Spain and Germany. » | Simon Tilford | Monday, May 29, 2017
Saturday, 27 May 2017
Friday, 26 May 2017
Großbritannien: Theresa May schwächelt - Pfund fällt
Die Frau in der Londoner Downing Street wankt und macht damit die Devisenhändler im Bankenviertel der britischen Hauptstadt nervös. Knapp zwei Wochen vor den Parlamentswahlen auf der Insel zeichnet sich ein sehr viel knapperer Wahlausgang ab als noch vor kurzem angenommen – was wiederum die bevorstehenden Brexit-Verhandlungen zwischen London und Brüssel erschweren könnte. Analysten der japanischen Großbank Nomura spekulierten am Freitag sogar über die Möglichkeit, dass die britische Premierministerin Theresa May bei dem Urnengang am 8. Juni abgewählt werden könnte, was bisher als ziemlich ausgeschlossen galt. » | Marcus Theurer, London | Freitag, 26. Mai 2017
OPEC’s Next Mistake
Why? OPEC has underestimated the reaction of new technologies and independent producers. The cut by OPEC has been the biggest gift to shale in a long time. The US achieved a production growth that has surprised the most optimistic, and the country is closer to energy independence. That the US imports less and stores more, affects oil prices in several ways. On the one hand, US producers have done their homework and increased their efficiency and reduced costs by more than 40%, which has allowed them to be competitive at $45 a barrel. This makes the price of oil lose strength in the face of evidence that the market is better supplied and more diversified than expected.
There is another very important effect. The “oil weapon” mentioned by Chavez years ago has run out of gunpowder. With the drastic reduction of US oil imports, the geopolitical premium historically added to the price of oil due to the US dependence on politically unstable countries, disappears.
Evidence from recent years shows us that the success of the American energy revolution, carried out without any support from the Obama Administration, is twofold. The dream of energy independence of the world’s largest energy consumer is ever closer, and the combination of shale, renewables, coal and natural gas, has been an essential factor in competitiveness, growth, employment and has destroyed the power of OPEC to manipulate the price of oil.
The big mistake
With this meeting, the cartel shows that its control over the price of the barrel in the medium term is non-existent. Worse, if they continue with this policy, the response of alternative technologies will accelerate. The great error of OPEC has been to think that lowering prices would displace alternative technologies and the inexorable advance of efficiency, but the suicidal movement puts at risk OPEC’s role as the most reliable, competitive and flexible supplier. Throwing themselves into unnecessary cuts, they sent a dangerous message to their customers: it was worthwhile to continue to advance with disruptive technologies.
None of the OPEC countries is losing money with the current prices. The production and development cost of all members is massively below the current oil price (average total costs $20 a barrel), but member states had become accustomed to financing unproductive subsidies and political spending, to squander their oil revenues. So, despite having costs well below $20 a barrel on average, almost no OPEC country balances its budget at these prices. Between $20 and the $100 some would like to see, there are hundreds of billions of dollars in political spending and subsidies.
I am sorry, because I have had the honor of attending several OPEC meetings and I value the principles that have always informed its policy: to defend an adequate supply and a price that is good for consumers and producers, to be a reliable and safe supplier. We mentioned it in the book The Energy World Is Flat (Wiley), the decision to manipulate the market will only make the market respond more quickly.
Today, OPEC is faced with the devil’s alternative. If it continues to limit production, the response of efficient operators in different technologies will accelerate, and if it recovers production levels prior to the cuts, it will not be able to finance the excessive expenditure to which the member countries have become accustomed.
OPEC’s response should only be one. Demonstrate that they are the most efficient and reliable operators and that their governments can stop irresponsible spending. Only in this way will these countries, full of wonderful opportunities, remain relevant and prosperous.
“Low” oil prices are a blessing in disguise to producers, even if they do not believe it. It is the shock they need to wake up from the nightmare of the petrostate, that wastes billions of oil revenues and thinks it will go on eternally. Disruptive technologies are here to stay and have only one future: brilliant. | Daniel Lacalle | Friday, May 26, 2017
© Daniel Lacalle
All Rights Reserved
Daniel Lacalle has a PhD in Economics and is author of “Escape from the Central Bank Trap”, “Life In The Financial Markets” and “The Energy World Is Flat” (Wiley)
You can comment on this article at Dr Daniel Lacalle’s website here
Thursday, 25 May 2017
Trump Plan to Cut Trillions of Dollars from Social Programmes Defended
He says President Donald Trump's proposals are morally justified and will increase economic growth.
The US government plans to boost spending on the military, but will impose significant cuts in other areas, including food stamps, medical care and education.
Al Jazeera's Alan Fisher reports from Washington, DC.
First Amazon Store Opens in New York City
Bitcoin Explained and Made Simple | Guardian Animations
Wednesday, 24 May 2017
George Halvorson Interview with Cenk Uygur on The Young Turks
Press Conference on Trump's Budget
Economist Joseph Stiglitz: Trump's Budget Takes a Sledgehammer to What Remains of the American Dream
Monday, 22 May 2017
Lord Heseltine on Brexit Day: 'We've Lost Power and Influence' – BBC Newsnight
Heseltine on Brexit: 'The British People Have Been Sold a Deceitful Pup' - BBC Newsnight (June 2016)
Trump will Hilfe für arme Amerikaner radikal kürzen
US-Präsident Donald Trump verordnet dem amerikanischen Staat eine radikale Rosskur bei Sozialausgaben - zu Gunsten der Verteidigungsausgaben: Er plant Einschnitte bei der staatlichen Krankenversicherung für Arme und Behinderte. Für das entsprechende Programm Medicaid seien Kürzungen vorgesehen, berichtete die "Washington Post" am Sonntag. Das Präsidialamt äußerte sich zunächst nicht zu dem Bericht. Trumps Haushaltsvorschläge sollen am Dienstag vorgestellt werden. » | APA/dpa/Reuters | Montag, 22. Mai 2017
Brexit: Will UK Banks Move Abroad? - BBC Newsnight
Sunday, 21 May 2017
Baroness Shirley Williams: The Consequences of Brexit, Trump and the Eurocrisis (February 7, 2017)
Friday, 19 May 2017
Why Solar Bankruptcies Soar Despite Growth and Subsidies
Bankruptcies in the solar sector already surpass all those of inefficient coal and fracking companies combined. The interesting thing is that this domino of bankruptcies, which accumulates more than 120 corpses of large companies around the world, is self-inflicted.
It is not due of lack of growth. Solar installations soared by 50% in 2016, with annual growth at 76 GW. Do you know the famous curse that says “if you run you hurt, if you walk, it hurts you more and if you stop, you die”? That, dear friends, is what happens to much of the solar sector.
It’s ironic: A sector that brags of how much it has lowered costs and how competitive it is, and at the same time blames its bankruptcy domino on low prices. A huge drop generated by excess capacity – over 40% despite exponential growth – and, with it, the need for operators to generate any cash and sell at lower and lower prices. The curse of the sector has been its own growth:
Death by working capital. Huge expansion plans and new capacity to meet a demand that has grown exponentially, but not enough to cover the pace of productive capacity growth. Cheap money and juicy subsidies justified a business model that was far from being an energy model, but closer to a builder-developer one: Over-indebted, dependent on subsidies and unable to absorb overcapacity and compete with its own price cuts.
With costs falling, many companies are economically unviable and if the price decline were reversed, they would be unviable as well. If the prices of the panels went up to stop bankruptcies, the mantra that solar is competitive with other energies would disappear in one minute. Any of the companies mentioned in the first paragraph of this article would have needed price increases in their products of more than 50% only to stop burning cash, let alone make money. Born from a bubble, dead by a bubble.
The reality is simple. If a technology is viable, it does not need subsidies. If it is unviable, no subsidy will change it.
The efficient companies will survive and absorb the weak, but let us not blame the collapse on a lack of environmental commitment or support, when it is an evident case of massive leverage and fraud, hiding debt off-balance-sheet and giving overly optimistic estimates to “inflate” share prices.
The problem is that an important part of the solar sector still thinks that the problem is that they are not “supported” enough or that governments have to subsidize more their business for a “greater good” at any cost to the consumer. A proof that it is not a problem of support or growth, is that the list of bankruptcies has risen after debt restructurings, capital increases, interest rate cuts, massive liquidity injections, and spectacular growth.
If a solar -or any- company goes bankrupt in an environment of huge subsidies, spectacular growth, low-interest rates and high liquidity, it is not a case of a mistake, it was a bomb about to explode.
That is why we may see more bankruptcies in the face of greater growth. Because the wrong model of overcapacity, high debt, dependence on subsidies and inefficiency is being perpetuated. And that is not attacking a technology. Do not mistake technology and environmental commitment with indebted and inefficient businesses.While the wind sector works with an industrial energy model, in the solar subsector the constructor-promoter model still exists, and this will not be solved by a climate summit or 50GW more in annual installations.
Some solar companies have learned to manage a realistic model, partly thanks to venture capital funds and outside companies who have bought what was left of the disaster created by engineers who ignored working capital and debt.
Finally, sanity is starting to prevail with real industrial energy models, less or no debt and managing inventories as entrepreneurs. But the problem is the same, if costs continue to fall due to competition, inefficient firms will continue to fall, and if costs rise, the technology will not be competitive. The devil’s curse.
Disruptive technologies cannot be based on inflationary models, because their own development attacks price inflation – in electricity prices, in asset valuations – and therefore companies cannot be leveraged as if they were regulated utilities.
A disruptive technology can only succeed if it understands its function, which is to reduce costs and energy intensity (in this case). If the solar sector is based on an over-indebted constructor-developer model, it loses its role of innovation and competitiveness to become rent-seekers, precisely what they criticize of the incumbents.
There is life in solar energy. If companies die, no one will be to blame but themselves. | Daniel Lacalle | Friday, May, 19, 2017
© Daniel Lacalle
All Rights Reserved
Daniel Lacalle has a PhD in Economics and is author of “Escape from the Central Bank Trap”, “Life In The Financial Markets” and “The Energy World Is Flat” (Wiley)
You can comment on this article at Dr Daniel Lacalle’s website here
Thursday, 18 May 2017
Can We Have Our Brexit Cake and Eat It? - BBC Newsnight
Wednesday, 17 May 2017
Tuesday, 16 May 2017
Reviving the 'Silk Road' - Inside Story
Related »
What Will Emmanuel Macron Do as French President? – BBC Newsnight
Could France Become the Dominant Partner in the Franco-German Partnership?
China’s New Silk Road Is Just Old White Elephants
Proponents of the mega stimulus plans ignore the importance of real profitability in favor of “sustaining GDP” in any possible way. A study by Deepak Lal, UCLA professor of international development, discusses the devastating impact on potential growth and debt of stimulus plans in China, and Edward Glaeser’s ”If You Build” analysis destroys the myth repeated by many of the multiplier effects of public infrastructure. Advocates of infrastructure spending at any cost ignore the most basic cost-benefit analysis, underestimating the cost and magnifying the estimated benefit through science-fiction-multipliers.
Professors Ansar and Flyvbjerg have also devoted a great deal of effort to analyzing the negative effect of large “stimulus” plans from hydraulic megaprojects to the organization of the Olympic Games.
Deepak Lal’s study citing Professors Ansar and Flyvbjerg shows that the actual cost-benefit analysis compared to the “estimated returns” when projects are approved, proves to be disastrous. Fifty-five percent of the analyzed projects generated a profit-to-cost ratio of less than one, that is, they created real losses. But, of the rest, only six projects of those analyzed showed positive returns. The rest, nothing. The country does not grow more, it makes the economy weaker.
This week, China has hit the accelerator with its project of new routes connecting with the rest of the world called “new silk road”. The media has immediately praised the $124 billion additional funds to relaunch communications with the world. Direct freight trains to more than twenty European cities such as Madrid, London, Warsaw or Rotterdam, a pan-Asian rail network, railway connections between African cities where China has invested hundreds of billions in oil and mining projects, and ports in Pakistan and other countries.
For China, it is an ambitious project that seeks three objectives: to redouble its bet, evacuating its enormous overcapacity, already close to 60%, to enhance collaboration with countries around the world so that they see China as an opportunity, not a risk, and finally, to reduce its huge indebtedness by encouraging growth.
The analysis looks positive, including savings in the sea routes, and the expected trade multiplier effect, but there are several elements of risk that we must not forget.
On the one hand, the estimated cost is simply too optimistic. The talk of huge projects ignores difficulties of all kinds, which, in some continents, includes military risks. It would not be difficult to see final figures that doubled those that are currently discussed.
On the other hand, China aims to place many more products in countries whose domestic demand is at least questionable and saturated, and ignores the risk that many countries will take the same measures that China implements, to “protect” their local industries.
Of course, the Chinese government presents itself to the world as the champion of globalization and a connection that benefits us all, but any dispassionate analysis shows that the new silk road is disproportionately more beneficial for China. Some think that China will adopt stricter rules of trade and working conditions. Given that the big beneficiaries of this mega-global-corridor are Chinese state-owned enterprises, many question that “change” in regulation.
Finally, these huge projects, with all their benefits, assume growth estimates that are, at the very least, optimistic, to cover the cost. What a good friend calls “the self-bail-out of Chinese overcapacity.” In this week’s presentations at the New Silk Road Forum, there were talks of multiplier effects for global economies that have neither occurred in the past nor can be considered realistic (including doubling estimated growth).
I fear the same old errors of optimism about growth and cost control that, as history shows, do not occur.
And no one has spoken of the deflationary effect. No one. While 27 central banks around the world and their governments are persistent in creating inflation by decree, does anyone think that huge access to cheap products from the Chinese giant will not create a greater risk of deflation? It’s amazing.
I’m not worried about that price-disinflation effect. It has positive consequences for consumers, but very negative consequences for the rent-seeking crony sectors that governments want to protect at all costs (China, too) because they are “strategic”. This new silk road is a time bomb for subsidized low productivity companies and for the inflationary aspirations of the indebted countries.
What about technology? These huge estimates of consumption and transportation of commodities used in the New Silk Road forum ignore the erosion of demand generated by efficiency and technology. In fact, the new silk road is a monument to the old economy, to inflate GDP via spending, and to transfer the surplus capacity of rent-seeking sectors from one country to another.
In 1992, only two G20 countries had China as one of their top five export destinations, now there are fifteen. However, in 1992 China had a productive capacity deficit, now it has 60% overcapacity, and – as it can not destroy that excess in a centralized planned economy – it intends to export it.
Let us take all that is good, but let us not doubt that there will be excesses. Let us not ignore that the new silk road is intended to alleviate Chinese overcapacity by evacuating it to other countries. It is not a project of globalization, but a bail-out of a Chinese model that starts to sink.
The risk that these megaprojects may become white elephants is not small. | Daniel Lacalle | Monday, May 15, 2017
© Daniel Lacalle
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Daniel Lacalle has a PhD in Economics and is author of “Escape from the Central Bank Trap”, “Life In The Financial Markets” and “The Energy World Is Flat” (Wiley)
You can comment on this article at Dr Daniel Lacalle’s website here
Monday, 15 May 2017
Arm trotz Arbeit – so viele Menschen trifft es in der Schweiz
Rund 570'000 Menschen sind im Jahr 2015 in der Schweiz von Einkommensarmut betroffen gewesen. Verglichen mit dem letzten Jahr ist die Armut hierzulande damit leicht angestiegen, vermeldet das Bundesamt für Statistik (BFS). Im europäischen Vergleich steht die Schweiz aber noch gut da.
Von Einkommensarmut betroffen waren 7,0 Prozent der ständigen Wohnbevölkerung in Privathaushalten. Im Jahr zuvor waren es rund 530'000 Menschen oder 6,6 Prozent gewesen. 2015 betrug die Armutsgrenze durchschnittlich 2239 Franken pro Monat für eine Einzelperson und 3984 Franken für zwei Erwachsene mit zwei Kindern. Weiter lesen und einen Beitrag abgeben » | Montag, 15. Mai 2017
Sunday, 14 May 2017
Saturday, 13 May 2017
The ECB Must Stop Its QE Program Now. Here is Why
The European Central Bank launched a fresh defense of its monetary policy, saying that low interest rates and monthly asset purchases of €60bn have helped to stimulate growth and jobs in the eurozone and prevented the bloc from sliding into deflation.
“Our monetary policy was successful. The question is: is it time to exit or time to think about exit or not? This time hasn’t come yet,” he said. I am afraid he is wrong, ignoring financial risk accumulation and perverse incentives in over-indebted governments.
The growth figures of the European economy are good, and manufacturing indices are expanding. But they were already in expansion before QE was launched. The European manufacturing PMI is at six-year highs, the expected growth for 2017 will be 1.7% and 1.8% for 2018, unemployment will fall to 9.4% and 8.9% in 2017 and 2018 respectively, and growth of investment and credit is close to 2.5%. However, inflation by decree has been a failure, rising in energy and food prices and poor in core underlying inflation, a consequence of accumulated overcapacity and poor productivity.
You could say that these good growth figures are because of the ECB policy, but Europe was already expanding and recovering before they bought a single bond. Europe has been improving for five years. But that is not the debate. Even if we assume, for a moment, that the ECB policy has “worked” -despite 1.2 trillion euro of excess liquidity and high-risk bonds at the lowest rates in thirty-five years- the ECB must stop the monetary laughing gas urgently, for several reasons:
It runs out of tools before a cycle change. With zero interest rates, buying in some issues up to 100% of bond issues’ supply, and with new debt financing governments’ current expenditure and low productivity investments, whenever the economic cycle changes – and it does -, the central bank will have run out of its only historical tools.
After 600 rate cuts and buying tens of billions of dollars per month, it would create a boomerang effect that would generate more stagnation, Japanese-style. Anyone who thinks that the central bank can put negative types and increase money supply further and change everything is dreaming. What has not worked from 5 to 0% will not work from 0 to -5%. Financial repression does not lead agents to take more risk and invest, but to be more prudent, to hoard on liquid and safe assets, because monetary policy encourages over-indebtedness and perpetuates imbalances.
The ECB has already gone beyond the Fed. The ECB’s balance sheet already exceeds 36% of the Eurozone’s GDP and controls 10% of corporate bonds, a “nationalization” of the corporate debt market of almost 1% per month. In the case of the US, the Fed is c10 points below. Only the Bank of Japan surpasses the ECB, and we already know the level of debt and stagnation that the country has. The risk of following the path of Japan is not small.
It does more harm to the financial sector than benefits to the real economy. The bankruptcy of the zero-interest-rate policy is unprecedented and jeopardizes the consolidation process. Non-performing loans remain above 900 billion euros, operating margins and solvency ratios have plummeted to the lowest levels in a decade, and since the program was launched, Europe has seen three banking shocks, in Portugal, Italy, and even Germany. The impact on the financial sector is not compensated by the alleged economic improvement (a loss of almost 90 basis points in margins versus a slight increase of 15 in financial sector results, according to Mediobanca).
It does not help SMEs or families. While the ability to repay debt has not improved and cash or credit ratios remain poor, zombification of the refinanced sectors is soaring. High-yield is at the lowest interest rate in at least thirty-five years. Governments have saved more than 1 trillion euros in interest on the debt, of course, but, to my surprise, they have spent it all, and the ability of most European Union governments to adapt to an increase of only one 1% in the cost of debt is extremely low.
This leads to a rising tax burden despite the massive transfer of wealth from savers to governments, and – with it – it is extremely complex for SMEs and families to receive the slightest benefit of this extreme liquidity. Only 1% of SMEs have sought new credit, because their costs, excluding labor, have grown almost ten points more than their revenues, and of the meager 29% who requested a loan, only 69% received the required amount, according to the ECB. Despite extreme liquidity and low rates, demand for solvent credit remains very poor.
Ignoring the risks that monetary policy generates in financial markets is very typical of central banks. It is thought that they can be mitigated, that they are acceptable and that they are not dangerous. And they are. They will be. Getting used to abnormally low rates and excessive liquidity to perpetuate imbalances is a huge risk. Not preparing for winter is suicidal. | Daniel Lacalle | Saturday, May 13, 2017
© Daniel Lacalle
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Daniel Lacalle has a PhD in Economics and is author of “Escape from the Central Bank Trap”, “Life In The Financial Markets” and “The Energy World Is Flat” (Wiley)
You can comment on this article at Dr Daniel Lacalle’s website here
Friday, 12 May 2017
Is the EU Growing or Getting Fat?
To positive macro data, we can add corporate results. In the Eurostoxx 600 we have seen results from 186 companies with a decent sales increase, with a strong double-digit net income improvement. This growth also occurs at the same time as balance sheets have been strengthening.
Is it a direct consequence of the European Central Bank’s policy? Not necessarily. The ECB policy has negatively affected the financial sector earnings and corporate margins remain poor in EU companies’ domestic businesses while deleveraging was much more intense between 2011 and 2013.
There is no denying that Mario Draghi ‘s “stick and carrot” messages have been essential to preventing a new housing bubble fueled by cheap credit, but it is still relevant that almost 30% of the credit granted to the private sector goes to real estate, services and administration. The level of growth is not worrisome, but the increase of investment and credit growth is going to very low productivity sectors.
Investment growth is very poor because low rates and excess liquidity have been essential factors in perpetuating endemic overcapacity (25%) and zombifying sectors of low productivity. But, additionally, almost half of the gross capital formation in the EU’s large economies comes from construction, as Claus Vistesen warns.
Credit growth of 2.4% in March shows that the increase in money supply is still much higher than the growth in leading indicators, and whether this improvement is generated in sectors whose profitability and survival depend on ultra-low rates, can generate an important risk. That is why it is worth analyzing a ratio that analysts tend to be forgotten in Europe, inventory to sales. It has risen steadily in the past months.
The recent accumulation is not worrying in the Eurozone, but we cannot ignore the risk of extreme credit conditions pushing to perpetuate a model of poor added value. When more than 50% of the total credit granted – public and private – goes to current expenditure and areas of low productivity, the brief “placebo” effect of expansive policies may create a boomerang effect afterward.
According to Moody’s the risk is huge when a very significant part of the companies and governments in the EU could not absorb a 1% interest rate increase.
That is why Draghi’s message on the importance of structural reforms is so relevant, reminding that monetary policy is not a free ride to increase imbalances. Unfortunately, the perpetuation of those imbalances and the perverse incentive to increase the weight of low-productivity sectors is enormous. It is quite evident. Who are the sectors and companies whose investment decisions depend on low rates? Those with poor added value, low margin and weak productivity. With all the effort being made by the ECB to avoid perverse incentives, it is impossible to limit them because the greatest perverse incentive is the so-called expansive policy itself.
When that poor growth and productivity effect given by monetary policy ceases to have its placebo effect, it will be said that “it was not enough” and that it is necessary to repeat.
There are positive elements. Eurozone banks paid € 3.6 billion to the European Central Bank for excess liquidity in 2016 which, at the end of this article, remains at 1.27 trillion euros. That shows that they are not giving loans like crazy, and prefer to be penalized than to repeat the mistakes of 2007.
The reader may say that sectors with good margins and high productivity do not need credit, or at least in large amounts. But think of the reasoning. If it is so, then credit growth as a driver of improvement in the economy is a mistake, because it increases leverage to sectors that cannot face a change of cycle with strength.
In reality, the problem of the Eurozone has never been of liquidity – there was already an excess of it in 2013 – or access to credit, but of excess debt, low value added and overcapacity. The solution should not have come from a monetary policy that encourages indebtedness, no matter how much Draghi warns, but to eliminate that excess of unproductive spending and favor the change of growth pattern to technology and value-added sectors.
We are far from a bubble situation, but in Europe, we are perpetuating overcapacity and the weight of rent-seeking and low productivity sectors, those that governments call “strategic”, and increasing debt to sustain current expenditure. And all of this does not make the EU stronger, it makes it fatter. | Daniel Lacalle | Monday, May 1, 2017
© Daniel Lacalle
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Daniel Lacalle is a PhD in Economics, fund manager and author of Escape from the Central Bank Trap (BEP), Life In The Financial Markets, and The Energy World Is Flat (Wiley).
You can comment on this article at Dr Daniel Lacalle’s website here
What the 1% Don't Want You to Know
Thursday, 11 May 2017
How CEOs Can Avoid the Central Bank Trap (CEO World)
We live in strange times. In the past eight years the US has created more money than in the previous fifty years combined, and at the same time interest rates have never been so low. However, total real gross investment in the OECD as a whole only returned to the pre-crisis level by 2014 and remains sluggish at best. In the same period, companies have been increasing cash flow generation and dividends and buy-backs have soared.
Why is this happening?
Welcome to financial repression. Extreme liquidity and zero interest rates policies have come with a nasty addition. Tax burden. Not only price and value of money has been artificially distorted, but the tax burden in the OECD is at all-time highs.
Financial repression is achieving the opposite of what it intends to create. The mainstream economists will tell you that lowering interest rates and massively increasing liquidity will push economic agents to take more risk, consume more and invest long term. But it does not happen as expected. Companies are more prudent in their investment criteria, and families actually save more, increasing their deposits. Economic agents perceive there is something odd in the economy, even if they are not experts, and become more prudent in the face of what is clearly a distorted cost and value of money. The central bank trap, which I discuss in my latest book.
The fact is that financial repression in the past eight years has resulted in one of the largest transfers of wealth from families and businesses into government since the Bretton Woods agreement, $1.5 trillion in new taxes in the US added to $9 trillion of new debt and $4.7 trillion of monetary stimulus. This, in turn, has driven a weak recovery.
A CEO today should be excited.
The opportunities that the central bank trap has generated are enormous.
First, expensive acquisitions made by others lured by the liquidity trap will become the exciting value opportunities for the prudent CEO that has avoided falling into the mirage of cheap debt. In the past two years, takeover targets have sold for a median of 11 times Ebitda, according to Bloomberg, whereas the multiple was only about 7-9 times up until then. Transactions are getting ever-bigger and more expensive, pushing total goodwill to $6.9 trillion. I believe that the sobering factor of tighter monetary policies, added to the reality of challenges in the economy, will generate extremely attractive acquisition opportunities when the bubble bursts. Of course, some CEOs have been very prudent making bolt-on acquisitions while preserving cash and strengthening the balance sheet, and some multiples are justified by realistic growth estimates, but many of the acquisitions that rose in multiples only due to cheap money and low rates will be the write-downs for some, and subsequent opportunities for the prudent manager.
Second, prudent CEOs have been right focusing on total shareholder return via dividends and buybacks in a period of weak growth and increased uncertainty. This has led to a historic high level of cash preservation and a clear mentality of focusing on return on invested capital. For a CEO, correct capital allocation is the main concern, and what better capital allocation than dividends and its own shares if there are no evident growth opportunities elsewhere? This period has seen an unprecedented decline in interest rates, but any CEO knows that perpetuation of overcapacity and large imbalances have also meant that the weighted average cost of capital (WACC) of most industries has not fallen. Instead, WACC has increased globally due to the poor growth and higher risk attached to the equity part of the equation. Therefore, the prudent CEO will not take this rise in WACC as an anomaly, or ignore it, but understand why equity risk premium rises –uncertainty on future estimates, constant downgrades from international agencies of their expectations-. As such, a prudent CEO will analyze capital allocation opportunities with the view of preserving the value of his or her company, while placing investments in areas where conservative estimates allow a comfortable return on invested capital above its WACC. This strategy will help the CEO navigate an uncertain world where economic cycles have become shorter and more abrupt, as I explain in my book. There is no need to stop investing, rather the opposite, just analyze opportunities that enhance value while keeping a firm eye on shareholder return. We are seeing an improvement in growth and inflation estimates globally in 2017, but we need to pay attention as well to the imbalances that come with those expectations: Perpetuation of overcapacity, higher debt and higher taxes.
Third, CEOs should be excited about the opportunities that digitalization and robots offer. We are moving towards an age where there are lower capital requirements to deliver stronger earnings growth and efficiency and productivity will likely soar. Embracing change and leading the process is a critical element for CEOs to succeed. Another important recommendation to escape the central bank trap is to lead this change looking at higher innovation and investment in research and development. The biggest mistake a CEO can make in this environment is to follow the trap and increase spending disproportionately on subsidized areas or rent-seeking businesses. Low interest rates and high liquidity might lure many to poor productivity sectors, but these are the ones that will suffer the most when the tide turns, and it does. However, high value-added, superior productivity, technology differentiated companies with strong brands will not only gain market share and value, but thrive in complex economic cycles.
Most CEOs have behaved impeccably in this zero-interest-rate, massive liquidity environment. They have ignored the dangerous siren call to take excess risk and more debt and have focused on strengthening the value of their companies while reducing imbalances and creating an environment for a better, more sustainable growth model.ost companies did not follow their incentive to overspend and take more debt. But no government or central bank committee has more or better information about where and how to invest than CEOs and their teams. It is easy to “demand” more investment from companies when the person doing so has no skin in the game. Now, the evidence is clear. The majority of CEOs did the right thing.
Now it is time to look at the future forgetting artificial monetary mirages and demand-side policies. The successful and prudent CEO will adapt and lead change focusing on productivity, technology and added value. And will reap the benefits of absorbing those that believed in growth by government decree and the illusion of the monetary laughing gas mirage.
The future belongs to those CEOs that focus on real fundamental trends and ignore the central bank trap. | Daniel Lacalle | Wednesday, April 26, 2017
© Daniel Lacalle
All Rights Reserved
You can comment on this article at Dr Daniel Lacalle’s website here
Daniel Lacalle is the author of “Escape from the Central Bank Trap” (2017, BEP) ,“Life In The Financial Markets” (Wiley, 2014) and “The Energy World Is Flat” (Wiley, 2014, with Diego Parrilla).
Wednesday, 10 May 2017
OPEC Strategy Has Backfired. And It Could Get Worse
If anyone would have told Saudi Arabia that the deal would push the price of oil to its lowest level in six months, increase its main rival’s market share, and strengthen the fracking industry in the US, they would not have believed it. And that is exactly what has happened. No one can say I did not warn them.
Iran expects to increase production capacity by 3 million barrels a day according to the Shana news agency and official sources. Iraq remains at record levels, exporting 3.2 million barrels per day.
In the United States, shale alone has boosted production to 5.2 million barrels a day in May, 700,000 more than at the end of 2016. Between the increase in output of Iran, Iraq and the United States, they cover almost all of the cut agreed.
Iranian and Iraqi barrels are of the highest quality and very low cost, while US production costs have been brutally reduced. BP, in its earnings presentation, commented that its production in deep waters in the Gulf of Mexico can compete without problems with a shale production that already has a break-even price of c$45 a barrel. Thanks to efficiency and cost reduction, production in the Gulf of Mexico has also skyrocketed, bringing total US production to 9.3 million barrels per day, the highest level since 2015.
The OPEC cut has been the biggest gift to independent producers who have improved efficiency. It has allowed them to generate better returns at low prices, and increase market share.
Meanwhile, Saudi Arabia is the only country that has exceeded its commitment – as always – and delivers the biggest cut of all.
The price of oil is suffering because production is increasingly diversified and, as such, the geopolitical premium we attach to crude prices disappears and the ability to control prices of OPEC diminishes. Not only that, but inventories are at a five-year high, and have increased in the US by 10% since the OPEC cut, 30% above the average of the last five years.
The mistake of inflationists with the price of oil is threefold:
• To think that the reduction of investments will generate a boom in prices in the medium term. Not only is capex growing at an annualized 8%, but they forget that the “reduction” came after a spending bubble in the easy money decade that led to a huge productive overcapacity of close to 30%. Investments in exploration and production multiplied in ten years to more than $1.2 trillion per annum, fueled by inflated commodity prices – in dollars – due to monetary policy and estimates of science fiction-style Chinese growth, with no fundamental justification and based on bubble expectations. Today, those massive investments have become sunk costs and work just to generate cash. What we call “energy broadband” in The Energy World Is Flat (Wiley).
• Ignoring efficiency and technological substitution, which are unstoppable and withdraw each year, according to the IEA, up to 2 million barrels a day of potential demand. Many think that OPEC cuts will work as demand grows. Let us not forget that, as soon as the demand begins to work better -and it is not bad- OPEC will start to “cheat” on those cuts, as it has always done, since there are no individual quotas and, when there are, many ignore them . To give you an idea, the average “cheat” in OPEC cuts since 1980 is between 450 and 800,000 barrels a day.
• The lower the price, the more efficient the system. Global service companies have shown in their results this quarter that they can lower prices by 40-45% and still make money and grow.
OPEC strategy has backfired. But it can get worse. If consumer nations continue to perceive that the cartel is not a reliable, flexible and efficient supplier, and that its aim is to raise prices at any cost, the policies to reduce energy dependence will accelerate, just as solar and wind are becoming more competitive and electric vehicles are a reality. OPEC does not have a cost or profitability problem. All countries are making very positive returns at $45-50 a barrel. Those that are not making money is because they have massive cross-subsidies and political spending, not high production and development costs.
Many will tell you that “in the medium term” the market will balance … And they said the same thing two years ago, a year ago, six months ago… But they ignore that balancing does not necessarily mean price inflation. Because the technology, substitution and diversification revolution is much faster than the interventionist decisions of central planners. | Daniel Lacalle | Tuesday, May 10, 2017
© Daniel Lacalle
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Daniel Lacalle has a PhD in Economics and is author of “Escape from the Central Bank Trap”, “Life In The Financial Markets” and “The Energy World Is Flat” (Wiley)
You can comment on this article at Dr Daniel Lacalle’s website here
Tuesday, 9 May 2017
Brexit-Folge: Weniger Europäer wollen in Britannien arbeiten
Britischen Unternehmen stehen wegen des anstehenden Austritts aus der Europäischen Union offenbar immer weniger Arbeitskräfte aus der EU zur Verfügung. Betroffen seien insbesondere die Lebensmittelbranche und das Gesundheitswesen, teilte der Branchenverband Recruitment and Employment Confederation (REC) an diesem Dienstag mit, der eine entsprechende Erhebung durchgeführt hat.
„Die Pfund-Schwäche und die Unsicherheit über zukünftige Einwanderungsgesetze schreckt einige EU-Bürger davon ab, in Großbritannien Stellen anzunehmen“, erklärte REC-Chef Kevin Green. Allgemein stünden britischen Unternehmen für ihre offenen Stellen so wenige Arbeitskräfte zur Verfügung wie seit 16 Monaten nicht mehr. » | Quelle: ala./Reuters | Dienstag, 9. Mai 2017
Monday, 8 May 2017
Gold Prices Rise Following Worst Week of the Year
Last week was a rough one for gold prices as the market responded to a calmer political mood and reassurance from the U.S. Federal Reserve about the American economy. This week, however, has started strong for bullion after its weak performance.
The yellow metal came in at $1,227 an ounce after it had registered three straight weeks of decline. Since mid-April, gold has been on a downward plunge, hurt by the easing of political tensions across the globe, as well as a U.S. Fed signaling an interest rate hike coming in June. » | Lombardi Letter Editorial Desk | Monday, May 8, 2017
Outlook for the Euro, Oil and Stocks after the French Elections
You can comment on this video on Dr Daniel Lacalle’s website here
Türkei: Erdoğan will Freihandelszone mit Golfstaaten
Die Türkei strebt eine engere Zusammenarbeit mit den Golfstaaten an. Das sagte der türkische Präsident Recep Tayip Erdoğan der amtlichen kuwaitischen Nachrichtenagentur Kuna vor seinem Besuch in Kuwait am Dienstag. Demnach wird es bei Gesprächen mit sechs Mitglieder des sogenannten Golf-Kooperationsrats neben einer verstärkten militärischen Zusammenarbeit auch um die Einrichtung einer gemeinsamen Freihandelszone gehen. Die Türkei und die Golfstaaten seien "Inseln der Stabilität", zitierte TRT Erdoğan. » | Von VBastian Brauns | Montag, 8. Mai 2017
Dette, chômage : Macron hérite d'une France en piteux état
Un pays de déficits. Voici ce dont hérite Emmanuel Macron en accédant à la présidence. En déficit de croissance d'abord. La hausse du PIB n'a en effet pas dépassé 1,2 % en 2015 et 1,1 % en 2016. Alors que la majorité des pays européens a rebondi après la crise, l'Allemagne et le Royaume-Uni croissant autour de 2 % et l'Espagne, au-delà des 3 %, la France est restée à la traîne. Et ce, malgré le même «alignement des planètes» caractérisé par la baisse simultanée des cours du pétrole, de l'euro et des taux d'intérêt. » | Par Cécile Crouzel | dimanche 7 mai 2017
Macron président: sept mesures fortes pour le salarié et l'entreprise
Désormais élu à la tête de l'Etat le dimanche 7 mai avec un peu plus de 66% des voix, Emmanuel Macron devrait mettre rapidement en place un programme qui promet de nombreux bouleversements dans la vie des salariés et des entreprises. Durant sa campagne, il a en effet fait part de sa volonté de légiférer sans tarder. Outre la réforme de l'école primaire et la moralisation de la vie publique, ses chantiers prioritaires sont économiques. » | Par Tiphaine Thuillier | lundi 8 mai 2017
Euro vs US Dollar. Time to Sell?
Once political news have passed, and focusing exclusively on fundamentals, supply and demand should prevail. There are several challenges:
The global demand for euros decreases. The latest figures from the Bank of International Settlements (BIS) show total cross-border transactions in US dollars of $ 13.9 trillion, increasing by $60 billion in the third quarter of 2016. In turn, transactions in euros fell by $160 billion, to a total $8.1 trillion.
Supply of euros rises. We are in a dangerous time. For the first time in history, central banks are increasing money supply by more than $200 billion a month without any crisis or recession. Of that figure, the European Central Bank is almost a third. At the close of this article, this enormous monetary expansion has already generated 1.2 trillion euros of excessive liquidity.
Confidence in an export model and the trade surplus of the European Union, which makes the reserves of foreign currency of the Eurozone grow steadily, have been the main factors behind the relative strength of the euro. It shows that the European economy is more solid than some inflationists would like it to be.
The evidence that devaluation does not favor exports is clear in the Eurozone. Since the launch of the ECB program, the euro has weakened almost 23% against the US dollar and yet export growth has slowed significantly. In fact, the most sustained increase in exports has been between countries of the euro area itself, that is to say, with no currency effect, while growth in exports to non-euro countries has weakened considerably. However, inflationary alchemists will continue to tell you that devaluing supports exports.
We must not forget the challenge of supply and demand, and of excess liquidity. The European Central Bank is almost 200 bps behind the curve and should be raising rates already. In addition, with such an amount of excess liquidity, which increased by more than €1 trillion since the repurchase program was launched, it is urgent to drain that excess and stop increasing the ECB current balance sheet. There is enough liquidity in the system to continue supporting bond issuances.
It is more than likely that the supply of US dollars will be contained, through the normalization of the US monetary policy, where the Federal Reserve also lags far behind the curve by almost 300 basis points, while global demand of the US currency increases, mainly from emerging countries. While demand for dollars is growing above supply, the reverse is true of demand for euros versus supply.
Therefore, apart from political catalysts, markets are facing a few years in which the euro is more than likely to lose momentum with respect to the US dollar.
We must pay attention to the risk of loss of confidence in the European currency if excessive liquidity continues to rise while money supply is increased. The last thing the EU would wants is to lose the status of the euro as a reserve currency. It must leave alchemist experiments behind and aim to strengthen the demand for euros in global transactions. | Dr Daniel Lacalle | Monday, May 8, 2017
© Daniel Lacalle
All Rights Reserved
Daniel Lacalle has a PhD in Economics and is author of “Escape from the Central Bank Trap”, “Life In The Financial Markets” and “The Energy World Is Flat” (Wiley)
You can comment on this article at Daniel Lacalle’s website here
Sunday, 7 May 2017
Friday, 5 May 2017
The Great Brexit Divide
This was a referendum that should never have been held. At least not the way it was held. History is not going to be kind to David Cameron, the then prime minister, for holding the referendum, because his reasons for holding it were not sound. From the start it was a high-risk referendum. And this wasn’t his first high-risk referendum either. He had already held the Scottish referendum on independence. That could easily have gone wrong for him: It could have led to the break-up of the United Kingdom. On this occasion, it didn’t. But that question has not in any way been resolved. Indeed, the Brexit referendum has made it more complex. So the problem has simply been put on back burner. The question will almost certainly rear its ugly head again sometime in the near future. Then there’s the Irish question. Will Ireland eventually unite and stay in the EU? Brussels has already stated that there is a place for a united Ireland in Europe, since the land border between the north and south is a point of dispute for Brussels. England will look pretty sick if Scotland turns to the EU, and a united Ireland too. That would leave England and Wales looking pretty diminished in power and strength!
The Scots voted to remain in the EU, so they are hardly pleased with the outcome of the Brexit referendum. They feel cheated, because the Scots are far more pro-EU than the English generally are. This can almost certainly be traced back to Scotland’s history; and to the fact that Scotland has done rather well out of its membership of the Union. Further, when the Scots voted to remain in the UK, they had been given assurances that the status quo would hold, i.e. that the UK would remain in the EU. But that hasn’t happened; so very many Scots are very displeased with the outcome of the Brexit referendum for that reason alone. And rightly so!
David Cameron made many mistakes when he held the Brexit referendum. One of the main mistakes was that it was held on the basis of a simple majority. But this was a ‘constitutional’ issue, an issue with far-reaching consequences to our future way of life, which, in my opinion, needed some added stipulations. For example, it should have stipulated that perhaps a 60% majority would have to vote for Brexit for it to take place. This would have been far better for national unity.
The eventual result was roughly 48% of voters voted to remain in the EU; and 52% voted for Brexit. Had this simple majority referendum been held on another day, perhaps two weeks later, the outcome could well have been quite different. Reversed, in fact. So, by not having a clear and large majority in favour of Brexit, the UK has been split almost right down the middle, split into Brexiteers and Remainers. Had there been a 60% stipulation, all the voters would have had to accept the will of the majority. But 52% voting for Brexit is hardly a clear majority! Thus, the country has been divided: Brexiteers are cock-a-hoop with the outcome of the referendum; Remainers, crestfallen.
Moreover, the nature of debate prior to the Brexit referendum was poor. People were not given the clear facts about the costs of remaining or leaving the EU. Debate was based on emotion rather than reason, on gut feeling rather than fact.
There would have been advantages to remaining in the EU; but they were not spelt out clearly and simply. Further, there were many downright lies told about the EU, and many false promises made too. The populists made sure of that. For example, Nigel Farage promised that there would be £350 million per week extra that could be made available for the National Health Service if we left the EU. What a con! Of course, this has since been abandoned. Nobody talks about it now. But that amount of money was bandied about before the referendum as an incentive for people to vote for Brexit. So, in a way, people were deceived. Are you listening, Mr. Farage?
Nigel Farage also promised that migration to the UK would be very much reduced. That’s a total and utter myth. What will happen is that migrants will come to the UK form the Indian subcontinent and other areas in the world instead of coming from Europe. This will change the demographics of the UK. European migrants would not have done so. Europeans share a similar, nay common, culture to the British: They are largely Christian, if only in name. They pose no threat to our way of life; and they will not try and change British culture. That cannot be said for all migrants.
Then Michael Gove, Boris Johnson and Gisela Stuart promised that our economy wouldn’t be affected if we left. Good luck with that, mesdames et messieurs! What planet were they living on?
It was also promised that the Brits would be able to save money on energy bills. Well, as most of our energy is imported, and as the pound sterling has gone into free fall since the Brexit referendum, it is rather difficult to see how energy prices will ever be able to come down as a result of Brexit.
There were other promises too. All of course have been or will be broken. For example, it was stated that funding for science and research would be unaffected if we left the EU. So much for that!
It was also stated that Turkey was close to joining the EU, so there’d be another five million migrants to cope with. Well, things are working out quite differently for Turkey these days. It is highly unlikely that Turkey will join the EU anytime soon. In my opinion, Turkey’s accession to the EU was a silly notion from the start. It was the Brits who seemed to push for Turkey’s accession, much, I believe, to the chagrin of many in the German and French establishment. Nor have the electorates of Germany and France ever been keen on Turkey’s accession to the EU.
The list of false promises and lies goes on. Let that short list suffice. The examples given are illustrative of the parlous state of the debate that took place prior to the referendum.
The Brexit referendum has left people like me disenfranchised. Anyone who is Conservative-leaning, but pro-EU, no longer has a political home. But it is in the Conservative Party that the problem started. The Conservative Party, David Cameron’s party, has always been split between Europhobes (some call them Euroskeptics) and Europhiles. The Europhobes have been largely made up of people who cannot let go of the past, people who hark back to Britain’s glorious past, Britain’s days of the Raj and Empire. In my opinion, these people just cannot let go of the past. We should now be embracing a different future – the future which Europe has offered us. Instead of that, though, we are cutting ourselves adrift, and turning to Trump’s America. And we all know how fickle he is! We are trading the certainty of Europe for an uncertain future as America’s great friend and partner. But that arrangement will only be as good as the president in office. It offers no guarantees.
Now I realize that the EU isn’t perfect. There is much wrong with it. To start with it is too dirigiste and bureaucratic. These criticisms are valid and correct. Indeed, it can be easily argued that economic growth is stifled as a result. But this was reason for the UK to jump in to the EU with its two feet, and demand the changes they wished for. We could have pushed to fashion Europe into our own image. Instead of this, we have triggered Article 50 and thereby thrown the baby out with the bathwater.
It would be interesting to ask one simple question: Would this Brexit referendum have occurred had Margaret Thatcher been prime minister. Obviously, it is difficult to tell for sure, since she is deceased. However, it is true to say that she was no fan of referenda, and considered them to be merely “advisory” if held in a parliamentary democracy, which, of course, the UK is.
She was no real fan of the EU either, at least not the concept of the European superstate. What Margaret Thatcher was a fan of was the concept of the EU as a trading bloc. She wanted the countries of Europe to co-operate and trade with each other for the good of all, and for the barriers to trade to be dismantled, and for prosperity to ensue. She hated the concept of a federal Europe. And she abhorred the idea of the UK being held in a vice, a vice of regulation and unnecessary laws and red tape. And this brings us, I believe, to where we are today, to why the 52% voted to leave the Union.
The British way is to behave in an ad hoc manner. It is not the British way to plan long into the future. This is the EU-way. Brits are reactive in many ways: They react to the need of the moment. This, however, is less true of the Germans.
EU directives have caused much resentment in the UK. British people resent being told what to do by outsiders, especially overpaid, unelected bureaucrats. They see the institutions of the EU as too expensive and unnecessary. With the excessively high salaries Brussels bureaucrats pay themselves, and their enormously high pensions, it is very difficult to argue with their gripes.
There is, of course, a historical dimension to the great British antipathy towards the European Union. The EU is run very much for the benefit of the Germans. Take the euro: It has been a boon for German exports. The old deutschmark was a very high value currency. The less high-value euro has given Germany an advantage for exporting. The euro has given German companies a comparative advantage. Many Brits resent this. They feel that the war was won by Britain, but the peace has been won by Germany.
It is plain to see that even though the euro has been a godsend for Germany, it has been a nightmare for Greece. It has decimated the Greek economy. That country is truly in a vice. But they should never have been allowed into the euro in the first place, because their economy wasn’t strong enough. It has been said that they were helped into the EU by Goldman Sachs cooking their books! Goldman Sachs masked Greece’s true debt to get them into the single currency.
It is difficult to see a way out for Greece, other than to exit the Eurozone. Greece has been lumbered with a currency which is totally out of sync with its economy. To such an extent that great poverty has been caused in Greece as a result of the adoption of the euro. This is the real tragedy.
These catastrophes, and many others, all helped to bring many Brits to conclude that it was time to get out of the EU. But I believe it is true to say that the final nail was hammered into the coffin by Angela Merkel opening the door to a million-plus ‘refugees.’ Why? Because by opening Germany’s doors to them, Merkel was also opening the doors of other countries them too. That was so because of the free movement of labour in the EU, and because of Schengen.
It is my belief, however, for all the faults of the EU as it stands today, it has brought many economic and political advantages.
Perhaps the first and most important advantage it has brought is to peace. It has brought peace to a hitherto warring continent. Since the start of the European project, there has been peace in Europe. The idea of the citizens of Europe––the French, the Germans, the Spaniards, the Italians, the Dutch, etc.––all being brothers and sisters is a fine one. Peace, before the advent of the European project could not be relied upon, as we all know. What will happen when the UK leaves? And France under Le Pen? So much is talked about Frexit these days? The EU could fall like dominoes if one country after the other starts demanding a referendum. Not only in France, but also in The Netherlands there has been talk of an exit from the Union, the so-called Nexit. There has even been talk of an Öxit! Austria’s right-wing populists dream of that! Before we know it, we could be back to the bickering which was so characteristic of European politics of yore.
Then there is the question of the prosperity that the EU has brought to most of us, not least Britain itself. I remember the dreadful state of the British economy when we entered the then Common Market (EEC). And Margaret Thatcher was all for our entrance into that, for it was a trading bloc, and Thatcher was all for trading blocs. She might have been “lukewarm” on many aspects of the EU, but she was certainly not lukewarm on trading blocs. She was for anything that gave prosperity a boost. It is wrong to conclude that Margaret Thatcher was totally anti-European though. Thatcher wasn’t anti-EU, she simply had a different vision for it.
Nothing sets out Thatcher’s views on Europe better that her Bruges Speech, delivered in 1988. It was a classic Thatcher speech. It shows exactly what she thought about the question of Europe. Two quotes from this speech are as follows: "We have not successfully rolled back the frontiers of the state in Britain, only to see them re-imposed at a European level." And the second quotation is this: "Europe will be stronger precisely because it has France as France, Spain as Spain, Britain as Britain, each with its own customs, traditions and identity. It would be folly to try to fit them into some sort of identikit European personality." But she added: “Our destiny lies in Europe.” The Conservatives today have forgotten this. There has been no greater Conservative in my lifetime than Mrs. Thatcher. She was a true Conservative; and knew exactly where our interests lay.
Britons were grateful when we were allowed to enter the EEC. At that time, Britain had been in the grip of socialism. In fact, socialism had brought the UK economy to its knees. Britain had become the “sick man of Europe.” All this has been forgotten; and I fear that it has been forgotten to our own peril. History has got an awful habit of repeating itself. Just because we have a Conservative government at the moment doesn’t mean that socialism could not take hold again. What happened once could happen a second time.
So two very important consequences of the European nations coming together have been the guaranteeing of peace in Europe, and the prosperity that the European project has brought us.
Then there has been the positive advantage of inward-investment in the UK as a direct result of our membership of the EU. The UK has always been attractive for firms to set up here, because of Britain’s membership of the EU, Britain’s proximity to mainland Europe, its favourable tax laws and, of course, its added advantage of the English language itself. For example, it is easier for an American company to set up here for that reason alone. How inward-investment into the UK will be affected by Brexit is anyone’s guess? Not favourably, almost certainly.
But there are so many other benefits to the European Union: some economic, some socio-political. The free movement of labour, for a start, has enabled many people, especially the young, to move to other European countries to search for employment and educational possibilities. Older people can often realize their dreams of buying a retirement home in the sun.
As a result of the EU, the choice of goods and foodstuffs in the shops is unprecedented. When I was young, it was not so easy to get French, Italian or Spanish foodstuffs in the local supermarket. In fact, it was very difficult. Today, you can buy such foodstuffs in almost any supermarket. Before we joined Europe, one would have to travel farther afield to an expensive delicatessen, where the foods would often be available, but at high cost because of tariffs.
Then there is the wonderful chance people have today of using the health services of other European countries either free of charge or at a reduced cost, with the European Health Insurance Card. We will have to give this up in return for Brexit too.
There are so many other disadvantages of leaving the EU for Britain. Those mentioned are but a few of the many. One could go on and on. Even though I do not view the EU through rose-tinted spectacles, I can feel only sorrow when I think of the time when Britain will actually leave the Union. We will lose much, but gain little. They talk of gaining sovereignty, for example. But what does sovereignty mean in a globalized world? How much sovereignty does any nation, either big or small, really have today? As people are not islands, so nations aren’t either.
Article 50 has been triggered. But Brexit negotiations will take at least two years to complete, and many think it will take a whole lot longer than that by dint of the complexities of the ‘divorce settlement.’
As far as I am concerned, Brexit is a bad idea. In economics, nobody has a crystal ball of course; but one can well-imagine that things will not go as smoothly for the UK economy as the majority of Brexiteers imagine they will. I fear that we are in for a rough ride ahead. The pound sterling might continue its decline in value, too, causing further price inflation.
Brexit has created division in the UK; and it is certainly causing division between the British and continental Europeans. I fear that the cost of Brexit will outweigh any benefits accrued therefrom. One hope that we Remainers can still hold on to, however, is this old adage: It ain’t over till the fat lady sings. | Mark Alexander | Tuesday, May 2, 2017
© Mark Alexander
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Brexit Negotiations. Between Uncertainty and Urgency
Brexit has been launched. Mainstream consensus is going through the typical phases of anger (“this cannot be”), shock (“only uneducated, old, and fascists have voted exit”), denial (“it will be stopped by parliament or the commons”) and now we approach, slowly, to the phase of acceptance.
And there it is: Article 50.
The first thing we must be is intellectually honest and recognize that the estimates of an economic debacle post-referendum have not happened. The consensus estimated negative impacts if Brexit won the referendum that did not appear anywhere. The devaluation of the Pound is nothing more than losing the premium it reached with against the Euro on fears of the Eurozone crisis, and GBP-EUR trades at average levels of ten years. All other indicators, in the EU and UK, have been strengthening. Growth and job creation in the UK have been revised upward by the Bank of England and investment banks.
The UK economy continues to grow, with a 20bps increase over post-referendum estimates, bringing GDP growth for 2017 at 1.6%. In addition to the recent revaluation of the Pound against the Euro, we have seen a similar improvement in estimates for the European Union, where GDP growth expectations have been revised up to 1.6% for 2017 and 1.8% for 2018.
So all is good, is it not?
The truth is that all this happens because there was already a very independent framework in the UK and a dynamic economic environment that makes the risk much lower. But we cannot forget that the arrival in the US of the Trump administration adds an essential support to the UK that mitigates risks.
The fact that these concerns and doom expectations have not yet manifested does not mean that risks do not exist, especially in the face of a tense, long and hard negotiation in which both sides have very different positions. Add to all this the calls for referendums from Scotland and Northern Ireland. In the UK, oddly enough, many see a separate Scotland as a historic opportunity for Labor to disappear from the options of government in England, as Scotland is a stronghold of the left.
It seems that the process of reaching agreement can last between two and three years, a period that will surely be full of aggressive messages in the media.
The European Union will not want to leave a bad example of weak negotiation in order not to generate a domino effect, as it faces the rise of internal Euroscepticism. If the European Union was smart, it would use this opportunity to strengthen as an area of freedom, flexibility, attractive investment and global trade. If it falls into the mistake of using the excuse of Brexit to advance in what some call “more Europe” -which means more bureaucracy and interventionism-, the EU is bound to fail. More Europe should be more investment, better employment, and stronger growth.
More Europe should be more investment, better employment, and stronger growth, fewer taxes and burdens, not more committees, taxes, and subsidies.
Expect a couple of years of uncertainty, but let’s be honest in narrowing expectations, both optimistic and pessimistic ones.
Exports and imports
UK production only reduced 0.4% using official data, in the first months of 2017 , due to a decrease in the pharmaceutical sector of 0.9% due mostly to the uncertainty of the Trump healthcare plan, not from Brexit.
The UK trade deficit has fallen to 4.7 billion pounds in the three months to January. Exports have grown at the fastest pace in ten years in the quarter, reaching a record high, and imports have also skyrocketed. Therefore, the impact on trade that many predicted is nowhere to be seen at the moment. The UK is one of the biggest trading partners of the EU, and it will continue to be.
Who pays?
The United Kingdom is the second largest net contributor, after Germany, to the EU budget. That cost will have to be distributed among the others, and Spain, for example, would have to pay around 1 billion euros more per year.
Immigration
An extremely important topic. Net immigration from Europe to the UK has more than doubled since 2012, according to a report by Capital Economics, reaching 185,000 people. Total net immigration has also skyrocketed, reaching more than 320,000 people, compared with a historical average of 150,000, according to the British government.
The free movement of citizens and the rights of EU workers in the United Kingdom and those of the British in the rest of Europe will likely be the ace card used to accelerate negotiations. The UK does not want to outsource its immigration policy to the European Union, as it does not have a clear one or exercise leadership in the face of geopolitical challenges. Be that as it may, the days of the free movement of workers are over, and a policy similar to that of the United States could be expected.
Trade
Nearly half of UK exports go to the EU, but -disaggregated- of the 28 countries, 26 have huge trade surpluses with the United Kingdom. What does that mean? The EU, country by country, exports more to Britain than it imports. That is important, especially with the country that has the largest surplus with the UK, Germany.
The UK has a high deficit in trade in goods, but a huge surplus in services. All this means that the exit from the single market can have an impact, but that the solution for each other depends on a fast and specific agreement for the United Kingdom.
Financial sector
With the latest data available, the UK exports 19.4 billion pounds per year in financial services to the EU, a surplus close to 0.9% of GDP. This is a big stumbling block. It is not clear if financial institutions will have a passport to operate with the EU or if the finance sector will face limitations. The United Kingdom originates almost 20% of loans for EU infrastructure projects, according to the City report.
Regulation
According to Capital Economics and Open Europe, the cost to the UK of the 100 most expensive rules and regulations of the European Union is 33 billion pounds a year. Excessive bureaucracy and high taxes have limited potential growth and investment in Europe, particularly in the past eight years.
If the European Union does not take the initiative and begins to dismantle the bureaucratic ‘leviathan’ it has built, this cost will be a problem for many countries. But then, we must not miss out on the fact that the UK is already one of the leading countries in ease of doing business. Therefore, eliminating unnecessary regulation and bureaucracy is one of the aces up the sleeve to attract investment to the UK post-Brexit.
Foreign investment
The European Union accounts for almost 46% of foreign investment to the United Kingdom, mainly due to the purchase by multinational companies of other British companies. This flow is not expected to be reduced and, of course, could be easily replaced. European investment has already reduced in recent years and has been more than offset by other countries.
UK investment into the EU will not likely be reduced due to Brexit. If anything, it will increase, given the opportunity to develop activities within the EU and move part of some businesses abroad.
We are approaching a period of maximum uncertainty, but the opportunity is enormous. The European Union can come out of these negotiations strengthened, learning from its mistakes, reducing bureaucracy and attracting investment and capital. It is also an opportunity for the UK to thrive.
I believe Brexit is not going to be a zero-sum game. The challenges presented are only opportunities. If we take them, it is a chance to grow, be more prosperous, and regain leadership. If the bureaucrats see an opportunity to advance in the wrong union project, consumed by interventionism and high taxes, all Europeans will be guilty of our own failure. I believe that the European Union should leave its cave and become a world leader in trade, growth, employment and investment attraction.
Let us not fall into the mistake of thinking that the European Union is marvelous and the British are wrong, that the union must remain a bureaucratic dinosaur. As they say in England, “hope for the best, but prepare for the worst “, because the combination of arrogance and ignorance is very dangerous. | Daniel Lacalle | Originally published on Saturday, April 1, 2017
© Daniel Lacalle
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Daniel Lacalle is a PhD in Economics, fund manager and author of Life In The Financial Markets, The Energy World Is Flat (Wiley) and Escape from the Central Bank Trap (BEP).
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