Brexit: Anything Really Changed?

Here are my talking points for a Bloomberg HK TV show of 1st July 2016, 11:10 AM - 12:00 noon

1. Has BREXIT changed a thing in global economics?

NOTHING has changed in the G3’s (US, EU and Japan )Economic Time® – despite Brexit!

1. The global Economic Time® remains characterized by an

• Excess supply of money, and an
• Excess supply of goods

2. This Economic Time® pertains particularly to

• Welfare museum Europe, and
• Reform mortuary Japan

3. America’s Economic Clock® keeps purring-along with an

• Excess demand for money, and an  
• Excess demand for goods.

NOR has anything really changed geopolitically.

1. The Muddle East remains an infernal head ache
2. Russia keeps trying to push the envelope with NATO and China
3. North Korea continues its geopolitical jitterbug, and
4. The Chinese keep buying firms abroad in their quest to integrate vertically, and
5. The Fed’s Dr. Yellen remains at the Diktat of the Democrats not to raise rates until Hillary Clinton has been elected.

So why all of this market nervousness?

•  Banks and funds are desperate to drive profits

BANKS’ margins have compressed massively, not to mention regulatory changes. So they have to drive turnover, aka trading volume.  

FUNDS are desperate to improve their performance, so they are trying to trade their way into profit.

2. Markets are rebounding, are the Brexit worries over?  

1. Absolutely not over, the market’s “worries”, aka their excuse just to trade, won’t go away
2. BREXIT won’t go away at least until 9th September, this being the day that the new Prime Minister  is announced by the Tories
3. But even after the new PM  is announced, the fireworks will continue re. Britain’s exit negotiations – or indeed, her second referendum.
4. Then there is the Scottish reel to think of : what will Scotland do, given that she voted to Remain?

3. Where should investors look into now? Have you changed your strategy?  

1. Thus, I have not changed my strategy of

• Overweight America
• Market neutral  Europe, Japan and India, as well as
• Underweight China/ Hong Kong

 2.Currencies

• Sterling will remain mush
• The dollar will keep strengthening, and
• Thus, Dr Yellen won’t raise rates until Clinton has been elected.

 3.Bonds

• Avoid these over-priced instruments

 4. Stock investment theme

• Play the UK tourism sector. A sustained weak pound will bring plenty of cost-conscious tourists to the UK, so buy counters related to the sector, e.g.

         - travel companies

         - popular hotel chains

5. Next disasters waiting

• CDOs in the car financing market – which is bigger than America’s home mortgage market!
•  Highly-leverage positions in over-priced bonds: bursting this bubble

4. What about Japan -- should they intervene in the forex market?

1. No intervention necessary!
2. Japan has been doing well on the trade front despite strengthening from 400/$ to about yen 100/$ now
3. As I pointed-out in my book on how multinationals influence trade balances, the exchange rate is NOT a driver of trade flows. This is especially true of highly-industrialised nations producing very specialist  machinery
4. SHOULD the Bank of Japan intervene, it would inflate Japan’s liquidity, her excess supply of money, even more.
5. However, that additional monetary stimulus would not boost markets at the margin
6. Thus, no need to intervene

5. Dr Mobius says Asia will benefit from Brexit, do you agree?  

1. I DISAGREE:

• First, Britain has a marginal influence on Asia as well as on Europe. Thus, the reality of it is that BREXIT is market neutral – even if profit – and performance-hungry banks and funds have been keen to trade the story….
• Secondly, a weaker pound would “hurt” Asian exports to the UK, and
• Thirdly, even if the Euro were to weaken, I do not see Chinese exports to Europe falling precipitously: they simply are not that exchange rate sensitive

 2 .In fact, I disagree that BREXIT possibly can influence the global economy: Britain is only the world’s fifth largest economy, and that is considerably behind the US, China, Europe and Japan by way of size.