Notes From Underground: Brexit, Two Years Is A Long Time

The biggest news in a very slow week of news is the beginning of the Brexit plan as Prime Minister May sent a six-page memo to Brussels as Article 50 begins and the two-year time period allotted for extrication from the EU starts the clock ticking in a very formal fashion. I SAY THIS TO ALL MY READERS: Two years is a very long time. There are many political and economic events (unforeseen by the static minds of entrenched power elites) that can dynamically change currently perceived outcomes. The fragility of global politics can wreak havoc with the certainties laid down by the likes of Jean Claude Juncker. The current position of the Brussels bureaucrats is the desire to punish Britain for the temerity of its citizens to vote to exit the “UTOPIAN” construct of the European Union.

Currently, he mainstream media is promoting the threats from Brussels in an effort to keep other EU nations from leaving. The EUR62 billion exit fee being hurdled at the Brits is an empty threat. If the Brits believe that the economic threats being put forward have any credibility why would Parliament approve a transfer to a belligerent entity? Also, if things were to unravel in Greece, Portugal, Italy or elsewhere, the negotiating position for Britain will become much stronger.

The French election will properly maintain the status quo as the French electoral system heavily favors the established elite. Remember in 2012 that sitting President Sarkozy was eliminated in the first round and Marine Le Pen ran against the second-highest vote receiver, Socialist Francois Hollande, who was able to garner the support of conservatives to keep Le Pen out of Elyseé Palace. It is a difficult path for Le Pen but not impossible. If there was an upheaval in French politics the desire to assuage the Brits would increase.

The most interesting election will take place in the fall as the Germans will vote in national elections. Chancellor Merkel is strengthening her position after the recent regional victory of the CDU in SAARLAND. But after the French elections the focus in Germany is going to be the economic impact of the ECB on the German economy. The Alternative for Deutschland party has been losing support but the negative interest rates have been very damaging for German savers. The SPD is striving to replace Angela Merkel but they will need the AfD to garner a larger vote from the more conservative German voters.

After Germany votes, the focus will return to the financial conditions plaguing Greece, Italy, Spain as they still have massive unemployment and a large debt overhang. So the fabric of the EU economy is still fragile. Two years of high anxiety keeps the entire Brexit resolution difficult to forecast. And in my opinion the greatest uncertainty is the ECB’s balance sheet, which will increase by another 540 billion euros through the end of the year. The question of what/who guarantees the ECB is an issue of great concern for the entire EU project and the resolution cannot be solely in the printing of more EUROS.

Yesterday, during a Financial Repression Authority podcast (link to come) with noted Swiss economist ULI KORTSCH, we both agreed that the ECB’s efforts to save the euro has been a backdoor approach to create a EUROPEAN BOND. If you accept that premise, then the question is who is the bond’s guarantor? Without a harmonized fiscal authority the liability will fall to the single strongest creditor. The good Bavarian Burghers are the ultimate guarantor of the entire EU project, courtesy of President Mario Draghi. The point remains: Two years is a long time to predict the outcome for the U.K. in regards to the enactment of Article 50.

***In the Financial Times on Wednesday there was an article titled, “Watchdog Accuses ECB of Political Activity in Eurozone Crisis.” It said the ECB overstepped its mandate in dealing with individual countries and acting with the Troika to bail out Greece. Transparency International found, “the ECB’s accountability framework is not appropriate for the far-reaching political decisions taken by the governing council.” T.I. found that the bank’s “sacrosanct independence had afforded the ECB an extraordinary degree of latitude” and Draghi has certainly abused his power and created a dictatorship of the printing press.

The spotlight on Draghi has also been flashed on his role in the G-30. The European Ombudsman Office is investigating any ethical breaches by Draghi’s participation in the private group of hedge funds and global banks meeting with some of the world’s top central bankers in a non-official capacity. Paul Krugman and Tim Geithner are also participants and they are paid by private groups. There are plenty of reasons to be concerned about President Draghi and his role as European dictator. Was the idea of building a massive ECB balance sheet promoted by G-30 members who wished to put pressure on the synthetic creation of a EU bond?

***Beware: Tomorrow is month-end, quarter-end (and Japanese fiscal year-end)when large fund managers have a tendency to dress profitable positions to enhance quarterly performance. Be cautious in any trades you make as window dressing can be a painful process to fade.






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6 Responses to “Notes From Underground: Brexit, Two Years Is A Long Time”

  1. Al13 Says:

    Le Pen did not make the runoff in 2012, but her father did back in 2002 against Chirac.

    The real chaos scenario is Melenchon/Hamon making it to the second round against Le Pen. Melenchon and Hamon who are running on two virtually indistinguishable programs, seem too pig-headed to join forces but if they did, expect volatility on Europe to go through the roof.

    • yra Says:

      Al 13—thank you as you are absolutely correct–it was 2002 and it was her father.And I agree with you that the real chaos would be Le Pen versus the far “left”–that would create great market turmoil because Le Pen becomes a much more likely winner in that regard–excellent post and thanks for the correction

  2. Chicken Says:

    Central banks have no moral compass, it should be clear by now they’re being paid by special interest groups to thwart price discovery mechanisms.

    Good point on window dressing, not sure there were many gains this quarter.

  3. Mike Temple Says:

    From my perspective, the European Establishment/”powers that be” exist solely to preserve this ephemeral EU project without truly asking/consulting the national electorates if they still wish to be a part of this “dream”.

    Brexit and the Election of Trump clearly demonstrated the angst and seething feeling of the “deplorables” in the UK and US. Meanwhile, the state/condition of the same “deplorables” in Spain, Portugal, Greece, and Italy and France is, to me, worse than it is in the two Anglo-Saxon countries that overthrew the Establishment.

    As you rightly said, two years is an ETERNITY while Britain negotiates its exit from the EU.

    A fundamental law of physics is that a system or chain is only as strong as its weakest link. Six years after the fact, Greece still lies in tatters. As you pointed out, conditions in Portugal and Spain remain desperate.

    I don’t understand how and why markets continue to be so complacent about the fate of the Euro. Yes, perhaps the French electoral system favors a defeat for Le Pen. But, it does not eliminate the feelings of a significant number of Frenchmen who have soured on the EU. You need look no further in history than to De GAulle to see that France has previously spurned “Europe”.

    Besides, I think you are right. The “crackup” could emanate from Italy, or perhaps, unthinkably, from Germany.

    Whatever, the Euro seems fated to have another date with an existential crisis. Brexit and Trump HAPPENED. It can happen in Europe, too.

  4. the bigman Says:

    Yra I have just listened to your interview on FPA and my head is about to explode. Let me see if I got this right- the SNB creates Swiss Francs out of thin air, then buys dollars euros yen, etc to keep the SF weak It then takes these other currencies and buys real assets. The best part is that half the owners are private investors. The SNB profit in 2016 was CHF 24.5 billion:

    So private investors can participate in creating SF made of whole electrons (not even cloth) and buy real assets. Who said alchemy is dead? Can you tell from the SNB balance sheet how leveraged this hedge fund is and what would be the effect of a 20-30% drop in the value of their equities? It is traded on the Swiss stock exchange and is up 60% the past 12 months.

  5. frank c. Says:

    Here is the wild card in the French election. Leftist Jean Luc Melenchon is surging in polls. Melenchon is also against France being in the EU and advocates for a referendum on the EU.

    What if the runoff is between Le Pen and Melenchon?

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