Asset Allocation: Brussels fudge and Hong Kong's stale noodles

Why you should underweight Europe and Hong Kong.

1.  Dominoes falling in Europe - where else might follow? Political as well as regulatory secessions.

a.  am not sure at all that political BREXIT will occur: as far as I know, Britain’s departure still must be approved by Parliament in order to render it “constitutional”.  

1. Whatever happens: Britain has set the dominoes falling either in a political or in a regulatory sense.

b.  My general understanding is that Scotland wants to stay in the EU, so expect further political friction here

1. France is beginning to make political secessionist noises under Marine le Pen, and

-      Then there is Italy making regulatory secessionist noises!

2.  Italy's banking crisis: the first instance of REGULATORY secession leading to Brussels fudge

a.  PM Renzi seems determined to bail-out his banks with public, aka tax payers’ funds.

b.  This runs contrary to what the EU, esp. Berlin, wants: creditors,not tax payers, are to fund bank rescues!

1. Renzi’s doggedness has raised alarm among Europe’s regulators, who fear such a brazen intervention would devastate the credibility of the bloc’s newly-implemented banking bail-in rule book during its first real test.

d.  Concerns are building over this month’s bank stress test results and a constitutional referendum in Italy in October, on which Mr Renzi has staked his job. This probably is the single biggest political risk – outside of the UK - on Europe’s political landscape this year.

1. The risk is that any suspension of bail-in rules would spell the end of the banking union as it currently is understood in the EU.

e.  My guess is that yet another helping of Brussels fudge will occur: a little of tax payers’ money and then Rome creates this privately-backed Atlante Fund, which is to underwrite capital increases at Italy's two failing banks.

3.  Could HK's political concerns have an outsize impact on markets and the economy: only LOCAL impacts; we don’t count on the world stage

a.  I don’t think so: HK figures little on the global stage!

1. As a starter, HK’s Economic Time® is bad: we have an excess demand for money and an excess supply of goods

1.  This mirrors China’s Economic Time®

1. But beyond problems with our Economic Clock®, we have plenty of HOME GROWN political issues to deal with.

1.  There is no leadership, no vision; instead, fiefdoms abound like mushrooms in a dark room

a.  E.g. the Medical Council yet again is squealing at the mere thought of allowing more foreign doctors in to our public hospitals, even though there is a patent shortage of them

b.  E.g. the government keeps pumping money into that white elephant, the West Kowloon Cultural Hub – where the over-runs go into the billions. Instead of putting more money into education and health.

2.  Our standard of English is rotting

3.  Landlords are strangling tenants

4.  The income divide is rising alarmingly, inter alia because of an anachronistic educational system

5. Hence, social unrest is on the up.