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.)