Economics

I wrote at the beginning of the month that Boris Johnson was going to maximise his chances of winning an election and I have to hand to him and his team – he has done it with some skill.

He has done what most English people I know think was necessary – tell the DUP that he can do without them if they are not going to offer any flexibility. That has allowed him to cut a deal and the fact that to do it, he made modest concessions will not do him any harm as most people are now just longing for the end of the process. The Europeans seem happy with it too.

He can put it to Parliament not really caring if they reject it – a rejection will now be seen by the majority of the British public and the right wing press as churlish and the EU heads of state will give up on the British democratic process.

If the deal is passed (which I think is the lesser probability without a big block of Labour MPs disobeying their Whips), then all well and good and although the path ahead is not easy, at least everyone at lasts knows that they can make a start.

If the deal is not passed, the PM will write a letter requesting an extension, but the EU will refuse it, in my judgment and I think in the minds of his advisers. I think the Tory stategists have always seen this as the ultimate scenario.

They (EU representatives of all sorts) have pretty much said that much in advance. If the only reason this hard fought deal does not go through is Parliament, then in their view no deal will ever go through so what would be the point of yet another extension.

I fear the short term consequences of a No Deal Brexit, but only because of the lack of a transition period. Most elements of the withdrawal agreement will have to be negotiated in other ways in any case. Planes must fly, people must travel, food and medicines must move. These are not optional. It is the likely chaos of sorting things out quickly that is a concern.

Leaving with a deal and a transition period will I think see a decent bounce in the price of UK and European shares. Leaving with no deal will have effects I really can’t predict, but I would be pessimistic.

Whatever happens, Boris will look to be the man who tried hard, Parliament will look at best foolish and at worst in need of wholesale changes. I think that will mean an election will see return of a Tory government with a big majority. I hope it is one that is really as ‘one nation’ as Boris claims he is.

Note that this an attempt at an objective assessment, not my personal approval of what has happened! As an investor, one has to put one’s own politics to one side and for the most part live with the politics of the markets.

If you stand on a level crossing and you think you can hear a train coming, you might move off. If you can actually see a train coming, you would be a fool not to move off. If you see trains coming from both directions, you need to get moving immediately.

This idea came to me as I read back through my posts of the last 16 months, since the site went live. 2 themes come up again and again: Brexit (of course) and the US President’s enthusiasm for trade tariffs. These are the 2 trains heading inexorably towards our portfolio valuations. For once we might have a market setback with 2 co-incidental causes. Two political choices that may seem pretty dumb with hindsight.

Reader’s know where we are with Brexit. So this time I am passing on that topic. It keeps my blood pressure down.

This post is intended to draw your attention to the now noted heavy down valuation of the the Chinese currency (renminbi/yuan) against the US dollar. This is the not altogether unexpected way in which they have dealt with US tariffs. They naturally get less dollars for their goods but as they own plenty of US Treasuries (now worth more in local currency) there is at least for them some sure fire hedging.

What this means is that US consumers may not have seen much of a price rise but are just paying more tax (not that they will understand that, I fear). Chinese imports to the US have not fallen, but US exports to China have (now more expensive by a double hit, currency and retaliatory tariffs) and I have read of some severe stress in parts of the US agriculture sector.

That means President Trump may lose votes rather than gain them, but that is not my concern.

This situation has some similarities with the 1997/98 Asian Tiger crash that spread to impact the global economy. In 1994, China devalued heavily to undercut prices in the economies of its Pacific neighbours and that was the key factor in destroying their fragile economies, whose debt was linked to the US dollar. Once their currencies (starting with the Thai Baht) devalued away from the greenback, almighty recessions followed.

There are not exact parallels, but the impact of Chinese goods becoming cheaper will not only be felt in the USA – something I pointed out a long time ago. And more than that – competeing with the Chinese will be more difficult for everyone. That is a parallel.

So, I hear the 2 rumbles that have been building over the last 18 months getting louder. Time to take evasive action? I am.