Tag Archives: Brexit

Trump Says No Economic Brexit Means No U.S. Trade Deal

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President Trump gave Rupert Murdoch (British U.K. Sun) an interview prior to leaving Washington DC for Brussels and the NATO summit.   Mr. Multinational Murdoch is severely against President Trump’s trade positions and wants to retain control over the global trade structure.   Murdoch personally has billions of dollars dependent on retaining the current globalist multinational trade scheme.

That’s the backdrop to understand the timing and presentation of the interview content.

As to the substance of the interview, President Trump is 100% accurate.  If the U.K. keeps the pre-existing trade pact with the EU, and essentially stays economically attached to the EU through acquiescence to the EU trade bloc, then any bilateral trade deal between the U.S. and the U.K. is essentially impossible.   Duh.

The EU doesn’t allow member nations to conduct their own trade negotiations.  So, any agreement that keeps the U.K attached to the EU economically means any trade deal with the U.K. would be a trade deal with the EU; and the EU trade positions are adverse to the ongoing economic interests of the United States.

This factual reality is the basis for President Trump telling The Sun any trade deal with the U.K. will be impossible under the current ‘Brexit’ terms that Prime Minister Theresa May has consigned herself to accept.   According to the interview President Trump warned Prime Minister May of this likelihood. Mrs. May then screwed herself and her nation’s economic interests by following the path of appeasement with the European Union.  It is not Trump’s fault for calling out the reality of the British economic position.

If President Trump speaking honestly about the economic consequence from PM May’s decision causes consternation, well, so be it.  When the Brits get done gnashing their teeth, the math remains unchanged.  Attach yourself to the EU and no bilateral trade deal with the United States is possible.  No amount of foot-stomping is going to change that.

The Brits can kick out Theresa May and do what they should have done two years ago; withdrawn from the European Union – a ‘hard Brexit’.  Or, if they like the way things are going…. just keep on keeping on.  It’s their decision.

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May looks as if she knows she is screwed;
Mr. May looks like he knows his wife is screwed and he hates everything;
The President looks like Thor;
and Melania looks like a misplaced Goddess, above the fray.
Just a Great photo!

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Source: by Sundance | The Conservative Tree House

London Housing Bubble Melts Down

But don’t just blame Brexit.

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In Central London – the 30 most central postal codes and one of the most ludicrously expensive housing markets in the world – eager home sellers are slashing their asking prices to unload their properties. But even that isn’t working.

In the 12 days after the Brexit vote, cuts to asking prices have soared by 163% compared to the 12 days before the vote, according to the Financial Times. Yet sales have plunged 18% from before the Brexit vote. Sales had already taken a big beating before then and are now down a mind-boggling 43% from where they’d been a year ago!

So Brexit did it?

Um, well, sort of. But it’s more than Brexit. Home prices on a £-per-square-foot basis had peaked in Q2 2014, according to real-estate data provider LonRes. Since then, the market in Central London has been hissing hot air. By Q1 2016, prices for homes above £5 million had dropped 8% from their 2014 peak, and prices for homes from £2 million to £5 million had plunged 10%.

Back in December 2015, we reported that luxury housing in London was getting mauled, based on the LonRes report for the third quarter, released at the time. It pointed the finger at folks who, once “awash with cash, don’t have as much to spend” [read…  It Gets Ugly in the Toniest Parts of London].

Then, in its spring review, LonRes called the prime London housing market “challenging.”

It wasn’t just the Brexit referendum and the new stamp duty – In 2014, a change in the stamp duty made buying high-end homes more costly; and in April this year, an additional duty was imposed on purchases beyond a primary residence. Now there’s a third reason, and it originates deep from the bowels of the UK economy. LonRes:

A third is now making itself known to us as it is not something that the chancellor can bury any more. This is the balance of payments which ran at 5.2% of GDP last year and was the largest annual deficit since records began in 1948.

If measures are not taken to bring this under control, then the mini experiment to deflate the London property bubble will seem small change compared to the £32.7bn deficit that exists.

The London residential market has undoubtedly slowed, and this is impacting prices. No one will disagree that London’s prime market needed the steam to be released from it. My guess is that this slower market will be here for some time.

And not just in London…

Last week, the Royal Institution of Chartered Surveyors was spreading gloom with its residential market survey of the UK, conducted after the Brexit vote, that found, as the Telegraph put it, “The number of people wanting to buy a house has fallen to the lowest level since mid-2008 amid post-referendum uncertainty.”

Lucian Cook, head of residential research at Savills, told the Telegraph:

“The current month’s figures suggest countrywide impact on sentiment which is to be expected. However previous months’ results would indicate that a slowdown in London has been on the cards for some time. It looks like the Brexit vote may be the trigger for this to materialize.”

Now all hopes are once again centered on foreigners and their money to bail out the housing bubble before it completely implodes. But this time, it’s different, as they say at the worst possible moment: it’s not the Russians or the Chinese, but people whose investments and incomes are in currencies linked to the US dollar. Over the last 12 months, the pound has lost about 14% against the dollar, most of it since the Brexit vote, which would give these folks an additional discount on UK real estate.

The Financial Times expressed those industry hopes, and its new saviors, citing Anthony Payne, managing director at LonRes:

“We have heard that quite a number of Middle Eastern buyers have been coming back into the market. A lot of them are converting from dollars, and together with any discount they get [plunging prices], the saving in the actual price is quite substantial,” said Mr. Payne. “Some people are concerned by Brexit – others see it as an opportunity.”

London isn’t the only ludicrously overpriced housing market, where prices, once helped along by foreign money, are skidding. And now the industry is hoping for more foreign money to wash ashore, just when the Chinese, by far the largest group of investors in the US housing market, are getting cold feet.

by Wolf Richter | Wolf Street

This Will Devolve Into A No Brexit, Brexit

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Summary

  • The UK voters have been conned, the costs of Brexit are prohibitive.
  • They will either have to vote again (either in a new referendum or a general election) or there will be a ‘Brexit light’.
  • The latter option will make a mockery of the promises to Brexit voters, but it will limit the economic dangers.
  • Still, the saga has increased the risks in the world economy, especially in the EU.

We sold everything on the Friday after Brexit, as we saw little upside, and many festering risks in the world economy. Risks which Brexit would clearly increase, most notably the risks of an economic slowdown in the EU, causing further political turmoil.

But these are by no means the only pressure points in the world economy, as we described in the previous article.

But markets rallied back (we didn’t expect an immediate crash as a result of Brexit), and it slowly dawned upon us that the most logical explanation is that there will be no Brexit.

Why? In essence, it’s fairly simple. The price of the promises made by the Brexit camp, most notably to control immigration, to pay much less to Brussels and to ‘take back control’ cannot really be achieved at anywhere near acceptable cost.

Let’s start with immigration. The UK wasn’t part of Schengen (which abolished internal border controls), but it was bound by the four freedoms of the internal market, most notably the freedom for EU citizens to live anywhere in the EU.

In order to escape that (the UK is a popular destination for East Europeans, most notably Polish) the UK would really have to get out of the single market. But this opens up a Pandora’s box of problems.

First, since the EU is the UK’s most important market, it would have to negotiate access to the single market, and do that within the two years given by Article 50 (the EU has made it clear no negotiations will start before Article 50 is triggered).

Not only that, it would have to deal with negotiating multiple other trade deals, perhaps as many as 50, basically with much of the rest of the world.

 

The UK isn’t equipped to do that (trade has been an EU prerogative), let alone in any amount of acceptable time. The resulting uncertainty isn’t exactly good for business. This will affect inward investment, location decisions, job creation, etc.

That alone is already too high a price to pay. But there are other implications, like (Bloomberg):

Britain has voted to exit the EU and Xi’s being forced to reassess his strategy for the 28-member bloc, China’s second-biggest trading partner, according to data compiled by Bloomberg. The U.K. has been a key advocate for China in Europe, from building trade-and-financial links to supporting initiatives such as the Asian Infrastructure Investment Bank. Beijing’s leaders were counting on the U.K’s backing later this year when the bloc decides whether to grant China market-economy status. “One major reason why China attaches great importance to its relations with the U.K. is to leverage EU policy via the U.K.,” said Xie Tao, a professor of political science at Beijing Foreign Studies University. London’s value as a “bridgehead” to Europe has been lost with Brexit, Xie said, leaving China to turn its focus to Germany.

Perhaps even more important is London’s status as a financial center. From Business Insider:

First, international banks are likely to move staff out of London and do less business in the UK. Long before the vote, rival financial centers like Paris began campaigns to woo those bankers. JPMorgan chief Jamie Dimon told an audience of bank employees in Bournemouth, one of many regional financial centers in the UK, that as many as 4,000 jobs may be affected by a Brexit before the vote… It isn’t just a question of whether staff move from London to another financial center, either. New jobs are less likely to be created in London. M&G Investments, the fund arm of insurer Prudential, is looking at expanding its operations in Dublin, according to Reuters. The proposed merger between the London Stock Exchange and Deutsche Borse, which would have seen the combined group based in London, now looks to be on shaky ground. Germany’s financial regulator has also said that London will no longer be the center of euro-denominated trading.

There are myriad other costs and awkward consequences, but this suffices to highlight the fact that it’s not a good idea to actually leave.

Ergo, powers will awake to prevent this and keep the UK in the single market. We can’t see the UK’s economic, financial and political elite shoot themselves in the foot without regrouping and giving this a mighty fight.

It’s fortunate that there is a cooling off period, in which calmer heads can prevail. First the governing Conservative Party has to choose a new leader.

Then they will have to work out a plan and trigger (or not) Article 50, the formal request to leave the EU.

Two outcomes seem likely, either things stay as they are, or the UK opts for membership of the EEA, which guarantees access to the single market. Perhaps they manage some symbolic concessions.

Both of these options amount to betraying the Brexit voters, one could even say they have been conned. It’s obvious if the referendum is simply ignored by Parliament, after all there already is a Parliamentary majority of 350 for remaining in the EU.

But EEA membership, like Norway, would also betray the Brexit voters and we doubt it’s any more attractive than simply remain in the EU. The UK would continue to have access to the single market, but not be a part of setting its rules.

The UK would continue to be bound by the freedom for people to live and work anywhere within the EU, making a mockery of the promise to control immigration.

Even the budgetary consequences aren’t really that much better (Yahoo):

But the fees in Norway, the nearest analog to the UK, are almost as high as what the UK pays to the EU now, and Norway has no say at all in EU decisions.

So either there will be no Brexit (a new referendum or new elections, with the winning side clearly having a mandate for remaining in the EU will be necessary), or it will be a Brexit light (EEA membership), making a mockery of the promises to the Brexit voters.

The economic consequences of the latter are much less damaging, so did we sell in vain? Not necessarily. The whole Brexit saga is still increasing the risks in the world economy, of which there are many, especially in the eurozone.

Stocks are still expensive (especially on a GAAP basis), we see limited upside, and might very well go short when stocks start approaching their all-time highs again. It’s more of a trader’s market, in our opinion.

by Shareholders Unite | Seeking Alpha

ECB Blows €400bn on “Brexit Black Friday” Bank Bailouts

Dealing with a Financial Crisis under cover of Brexit Chaos

Remember TARP, the Troubled Asset Relief Program that the US Congress approved to bail out banks and other companies during the Financial Crisis? $700 billion were authorized, later reduced to $475 billion. The Treasury eventually dispersed $432 billion. I bring this up because the ECB bailed out the European banks with more than TARP, in just one day: on Brexit Black Friday.

The ECB saw what was happening to the shares of the largest banks on that propitious day. It saw a blooming financial crisis:

Top UK Banks:

  • HSBC, the apparent winner in this fiasco, perhaps because of its exposure to Asia, -1.4%
  • Barclays: -17.7%
  • Royal Bank of Scotland: -18.0%
  • Lloyds Banking Group: -21.0%

Top German Banks:

  • Deutsche Bank: -15.9% to €13.25, down 59% from April last year, possibly on the way to zero.
  • Commerzbank: -13.6%, to €6.20. The German government still owns nearly 16% of it as a result of the bailout during the Financial Crisis.
  • The third-largest German bank, KfW, is a state-owned institution, so taxpayers are automatically on the hook.

Top French banks:

The fiasco that happened to the Spanish and Italian banks was so enormous that it sent stock markets into their largest one-day plunges on record, of over 12% [ Brexit Blowback Hits Italian and Spanish Banks].

The Stoxx 600 banking index, which covers the largest European banks, plunged 14.5% on Friday. It’s down 29.3% year-to-date, 42% from its 52-week high, and 76% from its all-time high in May 2007 before the Financial Crisis and the euro debt crisis knocked the hot air out of the banks.

But to keep panic at bay, Brexit and the resulting political crisis are used to cover up the blooming financial crisis.

And what a political crisis it is, not just for the UK, but for the EU. No one knows how this will end up. Businesses need certainty. They need to know what money they’re going to use next year, and what the trade and legal frameworks will be. They like to take those things for granted. But now, in the EU, no one can take anything for granted anymore.

Companies with cross-border operations – this includes all major banks and brokerages – have gigantic headaches, and the UK’s 2.2 million financial-sector employees are fidgeting on the edge of their chairs. It might take a couple of years for the UK to actually exit the EU, if it even happens at all, so there’s a little breathing room.

But where there’s apparently no longer any breathing room is with banks, and the ECB went into panic mode.

With bank stocks collapsing on Brexit Black Friday, the frazzled folks at the ECB decided it was high time to start bailing out the banks – and not dabble at the margins, but pull out the whatever-it-takes money-printing machine, and do so under the cover of Brexit chaos when no one was supposed to pay attention.

On Friday, the ECB pulled a huge magic trick, larger than TARP. Under one of its alphabet-soup programs – long-term refinancing operations (LTRO) – it handed teetering banks $399.3 billion, or $444 billion.

€399.3 billion – like a used car is advertised for €19,999.99 – because €400 billion might have been too much of a sticker shock. So let’s round it to €400 billion.

And as central banks do, it didn’t ask legislators for permission. It just did it. Here’s a screenshot of the ECB’s disclosure, with my annotations:

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Settlement date is Wednesday. This money is going to go somewhere.

Part of it may be mopped up by the liquidity crisis the ECB sees unfolding at the banks.

And part of it might end up in other assets. This sort of thing is supposed to prop stock markets, particularly bank stocks. But since April last year, European stock markets have swooned, despite all the efforts by the ECB. Its flood of liquidity went into bonds, real estate, and into US assets.

This money might pump up prices, perhaps in the most unexpected places, if only briefly. It might even pump up bank stocks. Short sellers should take note.

And the day before Brexit Black Friday, with impeccable timing, the ECB pulled another big one: it leaked to Reuters that it was addressing the nonperforming-loan epidemic among Eurozone banks by sweeping it further under the rug.

The ECB, which regulates 129 Eurozone banks, has estimated that these banks are bogged down in €900 billion ($1 trillion) of bad loans, or 7.1% of all Eurozone bank loans. At some banks, NPLs have reached catastrophic levels: for example, 15% at Italy’s UniCredit.

So instead of forcing the banks to finally take the losses, raise a lot of new capital or topple, the ECB will merely give them “non-binding guidance” by the end of 2016 or early 2017, and some of this “guidance” won’t even be in writing, sources told Reuters with perfect timing the day before Brexit sank these banks.

The ECB doesn’t want to hurt fake earnings. And this leak to Reuters was supposed to have soothed the markets and helped prop up bank stocks.

The thing is, banks that need to raise equity capital must have inflated stock prices or else existing investors get crushed. If Deutsche Bank has to raise €30 billion in capital by issuing shares at €3 a share, existing shareholder will essentially be wiped out, and raising equity capital may no longer be possible. So the name of the game is to manipulate up bank stocks before issuing new shares. But it may be too late.

And this is what happened to Italian and Spanish stock markets, as banks were massacred. Read…  Brexit Blowback Hits Italian and Spanish Banks

by Wolf Richter | WolfStreet


European Banks Get Crushed, Worst 2-Day Plunge Ever, Italian Banks to Get Taxpayer Bailout, Contagion Hits US Banks

European bank stocks just experienced their worst two-day plunge ever in the post-Brexit fallout that rained down on the already blooming European banking crisis.

Healthy big banks would get over Brexit and the political turmoil it is spawning, particularly non-UK banks. But there are no healthy big banks in Europe. And non-UK banks are crashing just as hard, and some harder. This is about a banking crisis morphing into a financial crisis, that has gotten so bad that on Friday, the ECB tried to bail out the banks in its bailiwick with €400 billion – more than the entirety of TARP – in just one day.

These bank stocks got crushed on Friday. And they got crushed again today. Italian banks have been reduced to penny stocks. Spanish banks are getting closer. Commerzbank, Germany’s second largest bank, and still partially owned by the German government as a consequence of the last bailout, is well on the way.

The two-day losses are just breathtaking. This table shows the largest banks by country with their percentage losses for today and for the two-day period:

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Note that the European Stoxx 600 banking index fell 7.6% today for a 21.1% two-day plunge! It isn’t just a few banks whose stocks are collapsing!

Deutsche Bank’s infamous CoCo bonds deserve a special word. These hybrid bonds that are just above equity on the capital totem pole had spiraled down, with the 6% CoCos hitting 70 cents on the euro in February. At that point, they and all other Deutsche Bank bonds were propped up by government verbiage and bank money. The bank ingeniously announced it would buy back its own bonds! Like all these transparent market manipulations, the market ate it up, and even the CoCo bonds jumped to 87 cents on the euro. But that didn’t last long. They have since lost 11.5%, including today’s 3.7% plunge to 77 cents on the euro.

In Italy, the banking crisis that has been growing for years has reduced all major Italian banks to penny stocks. It has triggered bailouts of some banks, including the third largest publicly traded bank, Banca Monte dei Paschi di Siena. Now the taxpayer is going to get shanghaied into bailing them out to put a floor under the collapsing share prices and prevent them from going to zero.

Italian banks are bogged down in a sea of bad debt whose true dimensions are still unknown publicly, and that the ECB publicly estimates to be €360 billion, but every time someone looks at it, it gets larger.

According to “a banking source familiar with the government’s thinking,” as Reuters put it, the Italian government is now fretting about a hedge fund attack on these zombies, following the Brexit turmoil! To counter this attack, the government is trying to figure out how to “protect its banks from a destabilizing sell-off of their shares” that “could tip them into full-blown crisis.”

(I have some news for the Italian government: Your banks have been in full-blown crisis for years!)

The government is thinking about using some kind of taxpayer guarantee and taking a stake in these banks, funded by about €40 billion in new government debt, issued by the second-most indebted government in the Eurozone, after Greece.

According to media reports in Italy, cited by Reuters, the government is already in talks with the European Commission about this sort of bailout. European rules are supposed to end state aid to tottering companies, and collapsing banks are supposed to be wound down involving losses for stock holders and junior bondholders (the bail-ins).

But the government is invoking the exemption in these rules in case of “exceptional events,” which would be the crash of bank stocks, as a consequence of investors figuring out that these Italian banks are toast.

That doesn’t mean that bottom fishers and falling-knife catchers aren’t jostling for position to pick up “bargains” among these European banks, as they have done so many times before, only to see banks stocks, after a brief rally, fall once again to new lows.

Contagion is infecting US banking stocks. As I’m writing this, Goldman Sachs is down -1.1%, Wells Fargo -1.3%, JPMorgan -3.1%, Morgan Stanley -3.1%, Citibank -3.5%, and Bank of American -5.3%.

These wounds among US banks are just cosmetic compared to the bank massacre happening in Europe, where the ECB is now fully engaged in trying to deal with a Financial Crisis under the cover of Brexit Chaos.

by Wolf Richter | WolfStreet