Notes From Underground: When Britain Was Great

It was rumored that British Prime Minister Benjamin Disraeli opined that there are LIES, DAMNED LIES and STATISTICS. Some claim that it was not Disraeli but others who used various phrases similar to this, but regardless the BREXIT debate brings this concept back into everyday nomenclature. The British Treasury and other pro-REMAIN analysts have through the use of STATIC modeling conjecture that if Britain leaves the EU GDP will be significantly lower by 2030. How the statistic gods reach this conclusion is certainly based on the use of static inputs. If Britain were to LEAVE the EU the English would become far more dynamic in their efforts to secure trade around the world. The Obama view on Brexit is laughable for it was only several months ago that the U.S. President and Treasury Secretary Lew were castigating the BRITS for being first movers in joining the Asian Infrastructure Investment Bank (AIIB) in direct opposition to the desires of the U.S. It seems that the REMAIN IN block was delighted that President Obama suggested that the Brits would go to the back of the QUEUE in any bilateral trade negotiations if the BREXIT vote succeeded. WHAT RUBBISH.

The U.K. is a willing free trader but will wind up locked in an EU that will not be able to approve the Transatlantic Trade and Investment Partnership (TTIP). The French are notorious agents of protectionist policies as the power of the French agricultural will work to slow the implementation of any trade deal. Will Europe move to stop trading with the U.K.? It is doubtful for trade flows in goods favor the EU while trade in services is weighted heavily in the Brits’ favor. There would certainly be some immediate loss to England but it would force a dynamic restructuring of economic incentives for British exporters. More importantly, the British pound will remain free-floating, which is something that Spain, Portugal, Italy and France don’t have. The British suffered less from the 2008 financial crisis partly because of the massive depreciation of the POUND against the EURO and other global currencies. The British pound depreciated more than 25% against its main trading partners as the BOE and British government enacted policies that forced the POUND lower in an effort to recapitalize its decimated financial system. Against the members of the eurozone: Spain 25%; Italy 14%; France 10.5%; Greece?% unemployment.

The jobless numbers in Britain were never that bad and of course employment has recovered in sync with the U.S. Also, if the Brits become fully ensconced in the EU they will inherit the legacy costs of the ECB and the huge debt load of the peripheral nations. The BRITS do have a looming problem of a massive current account DEFICIT. Being in the EU will require the BOE and Exchequer to eventually adhere to the rules of the Maastricht Accord. The issue of BREXIT is far more complicated than the U.K. going to the back of the queue for trade. Every time the REMAIN IN group climbs in the polls the British pond finds support in the markets. For me I hope the “good” news keeps driving the POUND higher  for with its massive current account deficit it will become a TASTY SHORT. I don’t know when but let the markets work.

***Joseph Stiglitz intensely criticizes the FED for relying on flawed models. In a piece published for the Project Syndicate, Professor Stiglitz takes the Fed and other central banks to task for the continued use of interest rates to try and control it modeled determined outcomes for economic performance. He wrote, “Clearly, the idea that large corporations precisely calculate the interest rate at which they are willing to undertake investment–and that they would be willing to undertake  a large number of projects if only interest rates were lowered by another 25 basis points–is absurd.” Stiglitz adds additional criticisms but for the viewpoint of NOTES FROM UNDERGROUND:  FED POLICY, IT AIN’T ROCKET SCIENCE.

So much investment has been dependent on the reliability and credibility of the FED models that financial markets remain in a high level of fragility. The question we ask as traders every day: WHAT IF WE ARE WRONG. I ALWAYS WONDER IF THE CENTRAL BANKS OR ACCESS JOURNALIST EVER BOTHER TO ASK THAT QUESTION. Professor Stiglitz concludes this short essay  with: “The big lesson from all of this is captured, ‘garbage in, garbage out.’ If central banks continue to use the wrong models, they will continue to do the wrong thing.” Maybe all the FOMC voters should be released and monetary policy turned over to IBM’s WATSON. But the outcome is the global financial edifice is erected on questionable policies. Markets will wobble and be highly volatile and that is without the toxicity of politics.

***The BIS discussion heats up as Germany’s Schaeuble raised concerns about the huge amount of sovereign debt carried on the balance sheets of various domestic banks (i.e. Italian banks purchasing vast amount of ITALIAN DEBT because it carries a zero risk weighting, the consummate free money). Schaeuble raised the issue with the Dutch that there should be a LIMIT to the amount of sovereign debt on the balance sheet of domestic banks, especially if the debt instruments were to continue with a zero risk weight. The Germans are getting concerned that if any of the EU nations were to come under duress and yields of their debt rise dramatically the potential hit to EU banks will be dramatic and  it is the Germans who will be on the hook for massive amounts of financial transfers. This issue is now front and center. Pay close attention and we will discuss further as it drove European yields higher across the board.The ECB still has to buy 20 BILLION euros before month end so expect to see rallies in EU debt sometime this week. (Note: 20 billion is a very raw estimate using stale data.)


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13 Responses to “Notes From Underground: When Britain Was Great”

  1. NA Says:

    Yra — thanks for your insight. Here in Maryland I was one of six people that had the fortune of having dinner with Lord Monckton (former science advisor to Margaret Thatcher). At the time we were trying to develop opposition to the growing ‘climate change’ movement and its non-science. Lord Monckton had been invited to speak at one of our gatherings. At that dinner, I asked him his opinion about the US debt situation and compared it to the problems faced by the UK after their departure from a silver standard (circa 1914-1930). Great Britain had seriously devalued their notes due to WW I. He referred me to a banker in Baltimore that had a strong interest in monetary history. This banker’s revelations to me of what happens to countries that fall from being the world’s monetary reserve was quite an awakening. We discussed the recent fall of Britain, the multiple rises and falls of China, and other empires in the near East. I believe that the US has already made an irrevocable decision to travel the same path.

    • yra Says:

      NA–thanks for the enlightening post—your insights are certainly relevant to where the U.S. goes from here.Have you read the Rotten Heart of Europe,with what you post it will build on your knowledge base in especially what the ECB is attempting to accomplish —

  2. asherz Says:

    Re sovereign debt is considered risk free for ECB bond purchases. Moody’s Fitch and S&P do not consider Portugal investment grade. The Dominion Bond Rating Service is reviewing Portughese credit and at week’s end will issue a statement. A lowering rating could bring on the next crisis as DBRS is one of four rating agencies whose investment grade rating is required by one of them. If they pass this time a thumbs down is lurking out there to bring on the next crisis.

    • yra Says:

      asherz—yes that is correct but the ECB dances to its own beat and though Portugal is a small country GDP wise as is Greece the banks are allowed to meet the requirements with said less quality paper—ten year Portugese notes are 3.30 % while two year debt yields 0.67% nothing broken in this realm

      • asherz Says:

        Yra- You are correct about the ECB has its own beat and can change the rules as easily as the rule makers in Cleveland this July. But just suppose DBRS lowers Portugals ratings. How will this affect the Guarantors in Frankfurt who will ultimately pick up the tab when the charade ends? How will this affect the voters waving the Union Jack? Wasn’t the guy who said every action has a reaction a Limey?

      • yra Says:

        Aherz–yes it was Limey so i await his wisdom but you are of course correct and will this be Janet’s rationale –as the article in the WSJ about UNILEVER doing a bond deal at point0.08%–ha it is insanity

  3. Arthur Says:


  4. david cooper Says:

    would a brexit be bullish for treasuries even though we are seeing growing signs of inflation as reflected by 5 yr swap at 9 month high? fantastic blog a mudt read

    • yra Says:

      David–which ones –duration will begin to be an issue depending on Fed’s decision for the year–the yield curves will start to become volatile also

  5. david cooper Says:

    i was thinking the ten year. will we have volatility?

    • yra Says:

      david I think the answer is yes but of course where the ECB takes european corporate and sovereign bond yields to will certainly add pressure on the treasuries in a relative valued world at negative interest rates

    • yra Says:

      But brexit will create supreme volatility for I have written for many months that brexit will have a much greater impact on europe as the contagion of referenda spreads like a kansas prairie fire–and it only takes a spark to start a prairie fire–

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