Economics

What!  I hear that reaction as the UK weather simmers away at heat wave levels.

I am referring to the comment I posted on social media in the very early hours of the day when the Brexit referendum vote result was known – “The turkeys have voted for Christmas”.

In religious calendar terms, we are now in Advent and the first window on your calendar reveals the resignation of the entire Brexit department ministry.

What I meant by my comment was that the people who had the strongest grievance with the EU (for example, over open borders and immigration or the Common Agricultural Policy or social rights legislation), are not in fact the editor or owner of the Daily Mail nor Tory MPs who went to Eton, but actually ordinary working people who can’t get to see the doctor in East Anglia, or farmers in Wales or Dorset who don’t understand why the EU “dictates’ how they ought to farm, or Labour party members seeing wages suppressed by the employment of Eastern European workers.   These people would be worse off because of the certain economic consequences of breaking up the Single Market and also in my judgement at risk of being worse off because of the substitution of US style capitalism for the more socially balanced European version.

I think the fact that the ‘turkey farmers’, the big international employers,  are now telling bluntly how difficult it will be to operate out of the UK without a customs union is some evidence that my assessment was correct.  There are other proofs that are beyond the scope of this post.

As I have written before, the long term interests of the UK (or at least England) might just be best served by Brexit (although I would not bet on it).  As J M Keynes said – in the long run we are all dead.

To be clear (I could not resist using Mrs May’s word whisker), I do NOT believe that the EU does not need substantial reform, as do most of the members of the European parliament (except curiously the right wing parties who one assumes are all expecting it to disintegrate completely!).  The Commission is far too powerful, agricultural policy is at times bonkers and the bureaucracy needs trimming.  Unlimited immigration has undesirable social consequences: that is self evident (ask any Italian if you want another viewpoint). But equally the idea of the EU has huge merit in economic, social and peace keeping terms.  So I would personally have preferred a more Maggie Thatcher approach – use British clout to get genuine reform from within.

Since I posted my highly pessimistic reaction to the vote, things have got worse.  Many billions have been withdrawn from UK investment funds.  The Conservative party looks to be heading towards the disintegration that John Major staved off with difficulty (ultimately assisted by one A Blair!) and which David Cameron naively tried to fix with the referendum proposal.  Instead of UKIP, we now have the UKIP wing of the Tory party.

This represents political risk at the highest level for investors because this time the consequences of the politics are hard wired to the economics and the business effects.  Boris may want to abuse business, but big business runs the capitalist world – not him.   His ignoring business suggests to me he may be descended from King Knut.

I am not entirely pessimistic for investments in the UK in that what I am expecting is disruption, some specific negative consequences but then a rebalancing of the flows of business capital.  Jobs will leave the UK for Eastern Europe (I can already see that from where I sit now) and that will reduce immigration from the more developed places like Poland, Czech Republic, Hungary and the Baltic States as the better educated citizens of those countries get jobs at home.  Possibly some deals will be done with the US that might not have been done before, but I would expect that to be a matter of the UK buying more stuff from the US, not better jobs for UK workers – anyone who has worked on employee benefits for US owned businesses knows well that they screw every ounce of value from their employees.

Very close attention needs to be paid to portfolio composition and stock selection.  Places like Japan and India that have large internal markets and are not hugely impacted by UK and US politics might be safer investment havens than would commonly be the case!

I will no doubt return to this subject over the coming weeks.

Confession

This piece is one of my occasional rants.  My ambition is to show readers that what gets quoted in the media (print or electronic) as ‘expert’ opinion is often out of context or plain stupid!  My ex-colleagues told me I was prone to ranting – my response is a rant is a proportional non-violent reaction to utter tosh being promoted as rational expertise.  It happens a lot in finance and economics!

Background

You may have read that the Halifax House Price Index reported a sharp fall in prices this month.  I used to work with the economist who created the original index, but no doubt is has developed since the 1980s.  Some suggest this was a ‘freak’ data item but I doubt that.   The on-line article then quoted the chief economist of an economic research business as saying something to the effect that ‘as long as interest rates don’t rise sharply and people don’t need to sell their houses because they can’t afford their mortgages, prices are not likely to fall’.  My hands were then moving to my head looking for a few remaining hairs to pull out!

Analysis and a bit more realism

Of course, repossessed houses coming on to the market in quantity would probably cause prices to fall very sharply, as they did in past recessions.  That is because of an increase in supply combining with a decrease in demand for owner occupation (partly mitigated by an increase in the demand for houses to rent).  That is just basic beginner’s economics.

However, what our chief economist friend seemed not to want to say (I am sure he thought about this) is that a more general reduction in demand alone, which we are actually seeing in London already, will also cause a fall in prices and a sharp reduction in demand will in time cause a sharp fall in prices.

For example, there are Brexit effects that are not much discussed.  Significant blocks of housing in the East Midlands especially are owned by or occupied on multi-tenant lets by Eastern Europeans.  I know this first hand – I live in Eastern Europe and have friends who have been to the UK to work, some returning home, some not yet, and my parents and sister live in the East Midlands.   That source of demand is already reducing as is evidenced by the shortage of labourers in some industries.

As Britain now appears to outsiders to be a more hostile place for foreigners (it is  – I was recently personally racially abused on a bus in Yorkshire on the apparent assumption that I was an Albanian), people with lots of money (eg Russian, Chinese and  Indian nationals) will not buy in London, which will turn off the main source of liquidity that has been driving prices in the South East too .  If net immigration falls as well, it is certain that demand side of the UK housing market equation will ease off.  That combined effect and possibly rising interest rates as well could mean a long down slope for house prices in those areas that have seen the biggest gains.  Maybe not a bad thing in economic terms, being just the turn of the cycle but falling house prices and recessions often come along together.