England in Double Dutch

Mark Rutte, the Netherland’s prime minister, for reasons known only to, oh let me see now, just about every bit of media that I read, says the UK has collapsed “politically, monetarily, constitutionally and economically.”

Let’s have a look at this terrible collapse that we’re all reading about.

Allow me to be old-fashioned, in this post-factual democracy, by observing some of the monetary and economic facts as they stand at the end of June:

  • Equities are up.  FTSE-100, the index covering 85% of our public markets, is up at almost 6400. Markets took barely a day or two to adjust, and are now at almost a 9 month high. FTSE-100 stands 15% above the low that occurred in February, many moons before the referendum. It is within 10% off its all-time high. Compare and contrast with the Euro-350 equity index, which is down almost 20% in a year.
  • UK unemployment is down.  It stands at 5.4%, lower than the US (5.5%) and well below Holland’s 7.0% level and only half the rate of France. Even Germany, that supposed economic powerhouse, stands at 5% – but allowing for the UK’s higher rate of labor force participation the UK’s picture is better than theirs.
  • The pound has been fixed.  Sterling has moved to correct the UK’s major imbalances.  While the UK was securely in the EU, the major monetary concern was the giant sucking sound that represented our gigantic current account deficit at £32bn per quarter / 7% of GDP.  £2,500m, net, was leaving the country every week – never to be spent on the NHS. This clearly indicated the pound was at the wrong level, with our imports being too cheap and our exports being too pricey.  This problem has at last been corrected with the pound falling around 10%.
  • UK exports are set to boom.  With the slight edge having come off the pound, provoked by unwarranted media hysteria that is certainly boosting major site’s page views, investors are flocking to our exporters.  Our world-beating champions like ARM, BATS, DGE and RR are all up 10%+ in the last week alone. And tourism is on the up.
  • Interest rates are set to stay low.  Since the referendum yields have fallen – so whatever the rating agencies may say – the UK is paying less for its borrowing than it was in the run up to the referendum.  Investing in this country has never been cheaper.  Even the Bank of England is getting in on the act, with £250bn being earmarked for almost anything except the NHS.
  • House price pressure is reduced.  If the share prices of housing-related stocks (PSN, TW, CWD, ZPLA etc) is any guide, the housing market is heading for a slump.  Given the acute difficulties London’s stratospheric house prices are causing, presumably this is a good omen. Anything that hurts Foxtons must be good.  Though whether we can look forward to as beneficial a collapse as the Dutch experienced after 2008 won’t be clear for some time, but doubtless Mark Rutte will keep us updated.

Surveying the monetary and economic landscape the UK picture, I am sure readers will agree if they can tear themselves away from all other media, looks unprecedentedly sunny.

Politically and constitutionally, the picture is a little more mixed.  To the extent that we are not completely keeping calm and carrying on, I agree that improvements can be made, but again there is much to be cheerful about.

  • The mother of all democracies has been leading from the front, again.  Uniquely among European countries, the UK actively seeks the democratic support for its key EU decisions. The only reason France hasn’t Frexited is because France is too nervous to ask its people’s views.  And France’s president has the support of one in seven of his countrymen.  The EU-27 might not like the UK’s democracy but it is, as ever, the least bad alternative.
  • The UK is actively involving its disgruntled victims of globalisation with the levers of power.  The gulf between the embittered working classes and the establishment is widening in every developed economy.  But the UK is actively bridging it.  Signing the country up to an economic death warrant like a single currency managed 1000s of miles away could never happen here; yet it has happened all over Europe.
  • The machinery of government remains firmly in place.  In some countries, notably America, the executive would have left the building.  In the UK the actual heavy lifting is done by the professional civil service is, as it always has been, politically impartial and objective. This puts it in excellent stead to find the best way to upgrade our trading, legal, administrative and financial systems to exploit the newfound freedoms secured by Leave last week.
  • The final solution for Scotland is getting closer.  With oil prices destined to remain low, the Scottish economy is going to suck cash out of England for the foreseeable.  It also messes up our general elections by ensuring a two party duopoly (with the Tories) and inhibiting old fashioned centrist political competition. While it isn’t clear what form the future holds here, it looks increasingly likely that us English can look forward to being rid of their troublesome Scottish priests.
  • But, sadly, the two main political parties are in a small spot of bother.  But in this regard they are simply joining their rivals UKIP and the Lib Dems whose spots of bother are only one or two years ago.  For the country as a whole this is an irrelevance, albeit an exciting one.
  • Two of the most prominent Leavers’ jobs have collapsed.  Nigel Farage and Dan Hannan, as MEPs, will soon be out of their Brussells gravy-train-fuelled jobs.  An ironic reward for all their hard work. But one collapse we can all be cheerful about, surely? STOP PRESS and the other prominent Leaver, BoJo, has just confirmed he won’t be getting the job he wanted either.  More reasons to be cheerful.


The biggest day of my life

What an incredible feeling.  Waking up on Friday 24 June at dawn to learn that 17m of my fellow countrymen have voted for Brexit.  Never mind my own personal milestones – leaving school, getting married, buying a house etc – history is truly being made today. And it feels terrible.

London has voted over 60% to remain in the EU.  The boroughs of Camden and Islington (not to mention Wandsworth, the City of London etc) have voted 75%.  Oxford and Cambridge – those outposts of London-like life in so many ways – have voted 70%+.  The Scots have voted to remain in.  If you’re educated, you’re in.  If you’re not, you’re dragging us all down with you.

But from an investing perspective, what’s not to like?  My investments have risen in value by a six figure sum overnight.  Provided you measure that sum in pounds, of course. I’d rather not work out my net worth in any other currency right now.

The social media stream predicts FTSE will fall.  I’m not so sure.  What is clear is that if FTSE falls, with the pound itself down ~10%, then it feels like a roaring buy opportunity – especially when so much of FTSE-100 is global business – stretching far beyond even the EU.  Cheaper currency means higher priced assets.  But just in case the panic creates some juicy overreactions I’ve got some limit orders set up.

I have some petrocurrency interest in my old house, which is for sale.  I assume that their budget, in pounds, has just risen by 10% since I went to bed last night.

But if a ‘punishment budget’ is ahead of us then the new chancellor (Gove?  Farage?  The mind boggles) can’t raise much from your average Brexiteer and so us Remainers are likely to be the targets.  If we’re still in the country.

Bagging Brexit bargains

Even before the terrible news of Jo Cox MP’s murder, the Brexit referendum has become nail-biting stuff.  Polls are now suggesting a clear lead for Brexit (47:40), and while bookmakers continue to know something the polls don’t the bookies’ now give Remain only 65% chance of occuring, versus 80%+ only a couple of weeks ago.

This cliffhanger is showing up in the markets as a dip in FTSE, a drop in the pound, a drop in the Euro.  Bonds are remaining fairly stable.

With one week to go I believe we might see the market impact worsen/strengthen.  How best to profit from this turmoil?

My assumptions here include the following:

  • Markets overreact to bad news.  As Warren Buffett says, in the long run they are weighing machines, but in the short run they are voting machines. And voters are humans with humans’ cognitive biases – they overreact to bad news.
  • If anything drops, it’s the pound.  We already have a current account deficit of over 5% – which means money is flowing out of the country at a dramatic rate. The pound is nudging against $1.40:£1, a rate it hasn’t been at for 20 years.  I think a shock Brexit result could see it falling to close to parity to the US dollar – it hit $1.08:£1 in the early 1980s for instance.
  • Consumer sentiment will tumble after a Brexit vote.  Thus consumer spending will tumble.  This will in turn drive the usual cyclical recessionary cutbacks – companies will invoke hiring freezes, or worse cut jobs – new investments will be postponed, and so on.
  • Uncertainty continues.  At some level the result will  provide momentary clarity. But an Out vote will then launch 1001 ‘what now?’ questions which will take months and years to answer.

Which companies are badly affected here, in the short term at least?  The supposed list of victims here includes:

  • Property companies.  In the short term uncertainty will hit housebuilders like Taylor Wimpey and Persimmon.  In the longer term assuming the pound drops then foreign money will prop up demand. I suspect that the impact on the major landlords like Land Securities and British Land will be second order at best – their businesses are denominated in pounds and have pound-based clients on long contracts.
  • Retailers of foreign products.  Supermarkets, for instance, like Tesco, Sainsbury’s, Morrisons.  Clothing retailers like M&S, Next, Arcadia. Electronics retailers like Dixons Carphone. Household goods companies like AO.com. Department stores like House of Fraser, Debenhams.

Which companies are unaffected? Utilities companies, most obviously.  Doubtless Tobacco companies.

Which companies are positively affected?  Exporters (outside the EU, at least!) – which explains James Dyson’s support for Brexit.  And stress counsellors.

What am I doing about this?

Firstly I’m setting up some low Limit Orders to buy the following:

  • Tesco at £1.25/share.
  • Next at £45/share.
  • Persimmon at £16/share.

And secondly if Brexit happens and the pound falls below $1.30:£1, then I will be looking at our major exporters.  Specifically BAe, Rolls Royce, GlaxoSmithKline, maybe Diageo.