Brexit remains the right choice for Britain

On the 21st of February 2016 I publicly advocated for the UK electorate to vote leave in the UK’s referendum on continued membership of the European Union. Between that time and the night of the referendum, I campaigned constantly for the campaign to leave the European Union, with my final public plea published on the 21st of June 2016. On the 23rd of June 2016, 17.4 million UK nationals voted to leave the European Union; a majority of 52%.

Since that time friends and acquaintances have often asked me if I made a mistake. More importantly, many of those who listened to my views during the Brexit campaign, and who voted Leave subsequently, asked me if they have made a mistake. It is for those who listened to me and who followed my guidance that I say this clearly: Brexit remains the right choice for Britain.

Brexit myths:

I want to start by dispelling some Brexit myths that have built up since the referendum.

Firstly, I want to dispel you of the notion that the UK government is doing nothing, has developed no plans, no ideas or serious proposals for how to implement Brexit. The UK has issued extensive strategies, contingencies and proposals to work alongside the EU that cover atomic energy, a new EU trade deal, EU citizens’ rights, Northern Ireland, existing judicial proceedings, law & securityscience and innovation, Data protection for UK & EU citizens, advice for UK citizens living in the EU, advice for EU citizens living in the UKguidance on trucking, on aviation, and so on. The UK has also guaranteed UK organisations all funding they would have received from the EU until 2020 (when the EU budget was due to end anyway). When people read in the papers that the UK has done nothing and has no plan, you need to understand that this is a tactic not a description of reality.

It suits the EU negotiators to refuse to engage with the UK, to run down the clock and ignore proposals. This includes the use of technology on Northern Ireland’s border, which the EU’s own investigation showed was a feasible and practical solution. Smart and sensible ideas are being ignored by EU negotiators as part of the EU’s negotiating tactics. These tactics are brilliantly described by Yanis Varoufakis in his book on how the EU ignored extremely detailed, expertly modelled and internationally supported Greek proposals during their debt renegotiation with the EU in 2015.  In short, ignoring sensible suggestions to force an ultimatum is a tried and tested EU tactic, along with leaking and selectively quoting private conversations. This is normal and should be expected. Importantly, it should be understood that the EU is trying to create a narrative that the UK is unprepared, but this is only a cleverly fabricated narrative. It is not grounded in facts.

Secondly, I want to emphasise that the existential challenges at the heart of the European Union, namely its democratic deficit, its growing illiberal tendencies, and the failure of the EU principle of solidarity, remain unresolved. As the famous pro-European, Hungarian philosopher Ivan Krastev recently noted, the EU’s continued failure to resolve the bloc’s divisions on immigration is straining the solidarity of members and even their adherence to the EU’s Human Rights Act. The rejection of drowning refugees by Italy is one recent example of this, and Hungary’s recent anti-migrant act is another. Moreover, despite the best efforts of strongly pro-European individuals, such as Guy Verhofstadt and Emmanuel Macron, to warn of Europe’s need for reform, the only concession that has been granted to these voices has been the creation of a small EU budget (separate from the EU commission budget). However, even this proposal is less progressive than it seems, because of a German-imposed requirement for funds to be linked to acceptance of migrants, thus immediately reducing funding to countries in Eastern Europe and increasing Germany’s receipts of EU funds.

Thirdly, while it has been popular for commentators to accuse people who voted Brexit of being racist and suggesting that the country wishes to revert to a little England mentality, the facts do not support their narrative. While Austria, Hungary, Italy and Poland discuss plans for an “anti-migrant Axis”, recent polling data from June 2018, shows that UK public attitudes towards immigration in the UK were more positive than at any time since 2011, a stunning rebuke to the initial rise in hate crime that immediately followed Brexit[1].

Brexit migrants FT

Brexit migrants eurobarometer 1Brexit migrants eurobarometer 2

It is also important to dispel another Brexit myth that if the referendum were to be held again today the result would be different. The data proves otherwise. As of December 2017, polling from YouGov showed that 55% of the UK public thought that Brexit should happen, regardless of their original view on the referendum. Recent data all indicates a similar result. None of which is to say the current British government is doing a great job. It is plain for the British public to see that they are not.

Building a better Britain:

Rebuffing growing misinformation is vital, but the backbone of my belief in Brexit is distinct from these arguments. I believe in Brexit for the following reasons:

I believe Brexit remains the right choice for Britain because I believe it allows us to build a trade policy that is fairer to the British people, delivering better economic outcomes. While the US, Chinese and Indian economies boom, the UK is locked into a customs union with the slowest growing economic area on earth. As of 2017, 15 out of Britain’s top 25 trading export partners are from outside the EU, and 11 of those (including US, India, China, Australia, Japan and Canada) accounted for 36.4% of all UK exports. These trading relationships relied on the dreaded WTO rules. Amusingly, Canada has confirmed that the UK could have enhanced free trade access from the first day of Brexit. They will not be alone[2].

Brexit economies

I believe Brexit will also make Britain’s immigration policy fairer. For immigration it remains fundamentally unjust that a doctor, engineer or an experienced entrepreneur will find it harder to work in the UK if they come from the USA, Canada, Chile, Japan or Colombia than an 18-year-old from France, Estonia, Portugal or Austria. Moreover, despite having a free-movement area with the EU, data from the UN overwhelmingly shows that British citizens would rather live in Australia, Canada and the USA than any country in Europe[3]. UN data shows that more Brits have chosen to live in Australia than all of Western Europe combined.

UK immigrants

Brexit allows the UK to correct these imbalances and create an immigration system based on reciprocity that allows British citizens to live and work where they actually are trying to go, whilst building trade bridges with nations that are growing. Dynamic ideas to addressing these opportunities of new immigration systems and free trade deals include the potential of the UK joining regional free trade groupings such as NAFTA and the TPP, while others have also floated the idea of a new Australia, Canada, New Zealand UK free trade zone (CANZUK). I would suggest that the UK should explore new trade and visa options with dynamic regional markets such as the Pacific Alliance in Latin America too.

Lastly, I believe in Brexit because of the phenomenal role it has played in restoring British democracy. While the traditional major political parties in France, Germany, Italy, Austria, Greece, Spain and the Netherlands have almost all collapsed, or seen their share of the vote significantly cut, the British main parties have rebounded to their highest combined share of the vote in almost 30 years. It is not hard to see why. In the 2000’s Europe grew up with a political obsession for “middle-way” politics, a convenient euphemism for technocratic governance and offering voters no real choice. It was common to hear the refrain “they are all the same”, and why bother voting? The electorate didn’t see the point in voting, and UK voter turnout fell below 70% for the first time since the advent of universal franchise. It appears that if people are not offered a chance to vote for what matters to them, they turn to parties that will offer them that choice. Across Europe the radical left and fascist right-wing parties have surged. Many of them are now in government. Brexit has stopped all of this. The far-right is almost entirely annihilated in polling (with the only revival recently due to the risk of a soft Brexit), the Labour party is the largest political movement in Europe and the UK’s election turnout is at its highest in over 20 years.

Closing Comments:

Before I finish, I also want to address the recent news surrounding Brexit. It is clear that the Conservative cabinet is deeply divided by it, but reassuringly so is the nation and so are the Labour party. It can seem concerning to see bickering at a public level from the Cabinet, but the very fact that there are disagreements and strongly held views attests to the fact that the current UK government is reflecting a broader sway of stakeholder interests than it is credited with. The current UK white paper is a demonstration of this. While ensuring the UK leaves the Single Market and the Customs Union, it also ensures that the UK regulatory framework is aligned on goods with the EU so that businesses do not face disruption. Clearly this deal does not suit all parties, but this is the point of compromise.

The resignations of Boris Johnson and David Davis are less controversial than the press would like them to be. The fact that they were staggered suggests an attempt to avoid triggering a crisis of confidence and a leadership challenge, as has been affirmed by David Davis. Secondly, it leaves Theresa May free to pursue a plan she believes in without cabinet members who do not endorse that plan. The greater risk does not come from the resignations but rather any further attempts by naïve and reckless cabinet members like Phillip Hammond to pretend that the Conservatives can repeal Brexit and escape without being destroyed and permanently dividing the nation. As the FT recently put it, the Conservative party is the party of Brexit.

It is easy to become disheartened by Brexit when the headlines often seem full of gloom, but it is important to take a step back. For every well-timed fear story like the Airbus threat to leave the UK, there are stories like Boeing committing to further UK spending and Australia awarding BAE UK massive defence export contracts. For every threat of jobs leaving London, like the 5,000 threatened finance roles, there are new commitments by companies like Facebook to employ up to 800 new staff, with office space for 6,000. The news will always try to showcase a clickbait headline, but if you can, try and ignore the noise.

Lastly we should not be afraid of a “no-deal Brexit”. Such an event would cost the EU over £100 billion, creating a continent wide recession, with the most severe impact being felt in Ireland and Germany. Given the growing anger and division in Europe over the increased EU contributions required by the EU’s wealthier states (Germany’s contribution will increase 16%) and how the shortfall in funding should be addressed, combined with the on-going battles over asylum, immigration and law & order, the EU would be suicidal to refuse to offer concessions in the face of a ‘no deal’. The path has been challenging and we are not out of the woods yet, so one should steel one’s nerves and prepare to witness continued anti-Brexit campaigning right until the eleventh hour. Just remember – Brexit is the best choice for the future of Britain.

 

 

[1] For further great information and graphics on how the UK is considerably more tolerant towards immigration than the majority of EU members, check out the Eurobarometer scores from April 2018: https://ec.europa.eu/home-affairs/news/results-special-eurobarometer-integration-immigrants-european-union_en

[2] There has been a significant effort by the EU to scare Britons about the challenges of trading from outside the single market and relying on WTO rules. Lets put this in context: The EU’s average tariff rate for countries like the US, Canada, etc, was 2.3% on goods as of 2013 (spoiler: it has not increased since), while for cars the EU recently proposed reducing global car tariffs to zero. While many organisations have highlighted the importance of non-tariff barriers, i.e. different product rules & standards, it is worth noting that batteries (for electric vehicles), micro-chips for phone, computers and tablets, as well as basic raw materials, all enter the EU from non-EU members. In short it may increase some short term costs, but accessing a broader array of markets will make UK goods more competitive as further free trade deals are signed.

[3] To put this into context, as of 2017 the UN estimated that there were 3.8 million UK expats across the world. The largest EU locations for British nationals were Spain (308,872), Ireland (278,000 people), France (188,000), Germany (103,700) and Italy (72,000). Many of which are retired and not of working age. In the Anglosphere the largest locations were Australia (1,351,846), USA (748,206), Canada (624,411) and New Zealand (272,071).

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Bread and Circuses – The Football World Cup

From the 14th June (tomorrow at the time of this writing) the world will witness its 21st World Cup tournament, this time hosted in Russia. Football is an odd game to have conquered the worlds hearts. A sport popularised by the sons of aristocrats running around the wet and cold fields of England’s leading 19th century public schools, is now actively played by over 270mn FIFA registered players globally while the World Cup is the World’s most watched event, with 3.5bn people reached in the 2014 tournament.

But while the talents of the worlds leading male football players will fill the papers for the next few weeks, it is also worth taking some time to consider the impact that the World Cup has on national politics.

The World Cup can exert a powerful affect on national moods, not only on the host nations but also on those who participate. In 2006 as Germany hosted the World Cup, the nation witnessed the first large scale public displays of German flags and German nationalism, or as one German friend remarked to me “It was the first time in my life I felt it was ok to be proud of being German”. By contrast spare a thought for Brazil, who after financing the World Cup and the Olympics, crashed out of the World Cup against Germany in a 7-1 in what the BBC called one of the “Great World Cup moments”. Not only did the tournament torpedo the reputation of Brazil, it also destroyed the popularity of the national government, and when the full details of the lavo jato or “Operation car wash” scandal first started to appear in 2014, it was a matter of time before the acting President Dilma Rouseff was impeached and the Workers Party (PD) removed from party. Incidentally, Argentina’s subsequent loss to Germany in the final also helped sour Argentine national mood and along with Brail the country removed President Cristina Fernández de Kirchner in 2015.

So, what is there to consider at this World Cup? Well firstly its hosts are not exactly in the international good books. Following large-scale arrests and investigations, it is widely believed that the Russian hosts bribed their way into securing the World Cup tournament this year.  If that wasn’t bad enough, the country remains under heavy international sanctions for its illegal annexation of Crimea, alongside its involvement in the deaths of Dutch nationals in Ukraine and its complicity in Assad’s war crimes in Syria. Given this backdrop, President Putin sees an opportunity to distract the world (and his citizens) with well-executed games. If Russia performs well, the visitors are happy and the matches are exciting, the country will be given a strong platform to re-engage with Europe on sanctions whilst also undermining domestic political opposition. However, a loss in the group stage, followed by further corruption details and stories about Russian football hooligans would further undermine both domestic and international support for Russia.

But Russia is not the only country looking to the World Cup for a reputation boost. Both Iran and Saudi Arabia would benefit from stronger than expected performances, and while the chances of any Middle Eastern Team winning the cup are reasonably low, an advance to the semi or quarter finals would still provide a large positive PR boost to these middle eastern nations.

While for some the World Cup is a chance to build a positive PR platform, for others it is a welcome distraction from challenging political issues at home. A strong Spanish performance may help to deflect attention from Catalonian politics and the current governments relative weaknesses, while Angela Merkel would also gain from a strong German performance to distract from political in-fighting between the CDU and CSU over immigration policy designed to see off the rise of the AfD. In England, a strong performance would surprise the nation and provided a much-needed distraction to Theresa May during a torid period of Brexit discussions. Given the negative publicity surrounding Poland’s current government and its policies on refugees, judicial reform, coal power plants and running battles with the EU Commission, a strong performance from the country would further boost nationalist sentiment and distract from the countries wider challenges. Lastly in France, the Macron factor could receive a badly need boost, following the weak responses from Germany to France’s new EU reform.

Then of course there is Latin America, the only other rival to Europe is its wide spread fanaticism to the sport and its quality of national teams across the continent. Brazil hungrily eye revenge in this World Cup, and a strong performance (especially a win) could be an immensely powerful psychological boost to a country suffering from a prolonged period of economic malaise. By contrast, Colombia sees the World Cup as a chance to build on its strong performance in 2014 and as a way for the country to continue showing off its transition from a near failed state in 2000, to a vibrant and dynamic society, recently approved to join the OECD and eager to encourage tourism and investment.

Across all of these countries and the host of others I haven’t mentioned, the biggest immediate impact of the World Cup is domestic retail spending. When Italy failed to qualify for the World Cup, Bloomberg estimated the cost at 1 billion euros. As each country advances, or crashes out, the countries bars, restaurants, shops and treasury departments will feel the impact. While this may only be small, a good-will spending mood going into the summer can be a powerful driver of economic momentum.

Lastly spare a thought for young Iceland. As a country of under 400,000 people it has the ability to truly upset the footballing world. Not only would a series of Icelandic victories likely lead to a record number of google searches for “where is Iceland” but more importantly it would drive home the question that many sports fans, players, investors and commentators have long asked: “Is football about money, or about the passion of the team and how they work together?”…….well maybe I am stretching a bit here, as the more likely question will probably be “how the hell did they win when we cant even qualify”? Nonetheless, the symbolism of an underdog succeeding is a powerful image in sport and a powerful tool for domestic identity building.

So while you enjoy the games during this World Cup, spare a thought for what the win or loss may mean for those competing. The consequences may be bigger than you realise.

Europe is focusing on all the wrong issues

Possibly one of the most engaging podcasts of 2017 for me was a show called “Talking Politics”, a Cambridge University show hosted by a historian called David Runciman. While Professor Runciman covers a number of fascinating topics on the show, his most memorable is a recording of a lecture he gave based on his latest book “How Democracy Ends”.  The talk itself excellent and the link is available here. The key takeaway of David’s talk is that democracy as we know it is extremely young and liable to fail, but its cause for failing is unlikely to look familiar to anything we have seen before. In this regard, the comparisons between modern times with the 1930s (See Macron’s recent OECD speech), are at best lazy and at worst dangerous. The risk is not the collapse of democracy we have seen before, but rather the challenges to democracy which we have not even realised are undermining democracy. All of which begs the question: if there are signs that democracy is failing, then are we even looking in the right place? Which in turn brings me to the future of the European Union.

Today politicians, pundits and the press comment tirelessly on Trump, Orban, Erdogan, Putin and a range of other global “strongmen”, whose actions are closely scrutinised under the micros-scope of historical comparative analysis. In this regard, I believe that we are falling into Runciman’s trap of focusing on the wrong challenges to Democracy.  I want to offer a different perspective. The greatest threats to democracy today are not coming from Trump, Brexit, Putin or Xi Jinping. Rather the greatest threat to the Democracy today is that political discourse, institutions and policies are focused on the wrong issues. Nowhere is this trend more apparent to me than in the European Union.

For the EU to survive, thrive and evolve, it needs to stop focusing on how to bully members like Poland and Hungary, impoverish members such as Italy and Greece, punish close allies like the UK and ignore crucial strategic partners like Turkey. An EU that retains its membership by fear of the economic consequences that leaving will entail (see Greece in 2014 and current threats in the Brexit negotiation today), rather than by promising and providing an exciting vision of a better future, is doomed to failure. Democracy in Europe will not end because countries vote to leave the EU or because citizens across the union hold different social values on immigration, human rights and economic opportunities. Rather, democracy will end because the cost of leaving the EU becomes so great that accepting technocratic governments in perpetuity becomes the default position for a public, whose increasing frustration with the inability to affect real change in their country leads to anger, then despair and finally total disengagement with the political process.

The EU needs to reflect on its history, the pillars that made it successful, the flexibility it showed as it grew and the positivism it gave to its citizens. The EU was built by people who believed the nation state could be swept away by a new identity, a “European identity”, which would create a sense of continent wide solidarity between citizens. We see this very approach today in the existence of the Schengen zone, the ERASMUS program, the joint funding of agencies like ESA, Frontex, and new EU national symbols such as a flag, an anthem and a series of diplomatic embassies abroad. But while the idea of a United States of Europe may have been the dream of the bureaucrats who built the EU’s institutions, it has never been the desire of the population of Europe. It is because of this disconnect and the lack of clear accountability between the EU institutions and EU citizens on this issue, that the future survival of the EU is at stake.

In less than ten years, a project that took over seventy years to construct is about to lose its second largest net budget contributor (The UK), it has converted the most pro-EU country into a nation whose governing coalition are explicitly anti-Europe (Italy), it has allowed an autocrat to take control of a key central European economy on an anti-EU ticket (Hungary), meanwhile facilitating the rise of anti-EU parties to become the second and third largest political parties in Europe’s core (France and Germany).

When residents of EU countries are asked if they would like to leave the EU, the majority are solidly against such an idea. But every day political parties and political movements against Europe are getting stronger and stronger and that certainty is fading. The problem is not, as many EU supporters believe, that Russia and/or fox news are spreading fake news and corrupting local politics (though I am sure they’d love to if they could). The problem is that there the EU is unable to articulate a future vision that resonates with the wishes of the EU’s own citizens and provides them with an exciting future to work towards.

If the best future outcome is a United States of Europe, then make the case. Explain the need for a European response to global issues, the merits of fiscal solidarity alongside monetary solidarity and the case for continued subsidies for poorer members, to reduce the pressure of internal migration on richer members. But the EU does not make the case.

If the future is to be a two-speed Europe, with a membership for countries like Turkey, the UK, Norway, Ukraine and potentially even more peripheral members such as Morocco, Israel or Russia, then make the case. Maintain a eurozone core, allow divergence from certain core competencies in the outer core and allow parties to decide which projects and programs they wish to contribute to and engage with. But again the EU does not make this case.

Many Europhiles think these comments are unfair. The issue, they would argue, is not that the EU does not have a clear vision but rather that the national governments of Europe are too afraid of their electorates to promote a United Vision of Europe. There is certainty truth in this. In referendums on an EU treaty, France and the Netherlands voted “No” in 2005, Ireland voted “No” to Lisbon in 2007, The Netherlands voted “No” to allowing greater visa access to Ukraine in 2015 and the UK voted to leave the EU in 2016. All of which brings us back to the question of why is the EU so unpopular today and how can it change it?

I believe that the EU’s existential crisis is a direct result of the systems disconnection from democracy. It is not enough to simply suggest that electing MEPs shows that the EU is a democratic insitution. The EU now controls vital national issues such as migration, citizens’ rights, agriculture, trading relations with other nations, foreign affairs and a slew of other issues. These areas affect EU nationals every day and yet the mechanisms to change these policies are completely beyond the scope of any one nation. To change migration for example, a citizen of France would need every EU national to vote for MEPs in their countries who wanted to change migration, they would then need to get every EU national to vote for national governments who sit on the Council of Europe so they also vote to change migration. They would then need to lobby the EU commission and if a treaty change is needed, they may need a referendum in certain countries. At almost all stages, a lack of unanimity can end the whole process, see the near collapse of thee free trade deal with Canada over less than 100,000 angry Belgian farmers (500mn people almost ignored because of 100,000).

This complete lack of responsiveness to change is at the heart of why the UK is leaving, Italy could potential leave and many other Eurosceptic parties across Europe believe that their own exist from the EU is a matter of time. While the EU focuses on trade deals abroad, beating up US tech companies, punishing the UK for the EU’s own inflexibility and begging Turkey and Libya to avoid more mass migration into Europe, the EU is failing to tackle the real issues. The lack of a vision for the future and the lack of democratic accountability within the EU are the single largest issues facing the Unions survival and they are being ignored. The consequences of the EU’s continued failure on these issues will be dire: The failure of democracy within the EU itself.

Has Facebook gone too far?

It was probably inevitable, but the crisis engulfing Facebook is one of the most embarrassing examples of Silicon valleys hubris in the last two decades.

A company that specialises in connecting people, an exercise that requires people to trust the platform as a place to share content, has managed to simultaneously violate that trust and act totally surprised in doing so. When Facebook was first created it was a place for university students to share stories, an occasional photo and talk to friends when they couldn’t afford to call abroad. Today it is a business platform for multinational corporates, a virtual monopoly in the global social media world (excluding the great digital firewalls of China and Russia), as well as the largest surveillance mechanism ever created by man. If the apocryphal tales that Facebook was created by the CIA ever become more than conspiracy theories, I would take the agents out for a beer. It’s hard to imagine them being more successful in manipulating billions of people to hand over the most intimate details of their life than Facebook.

But what do we do about it? Facebook IS the only platform where everyone can find a friend, family member or old classmate from their school days. It also owns Whatsapp, Instagram and nearly brought out Snapchat (before deciding it was cheaper just to copy all of their ideas into Instagram instead). Indeed, the monopoly is alive and very well in the social media space. So much for a dynamic and free market that internet radicals long predicted.

The issue with Facebook is that it has transcended its role as a tech company and become a global public good, much in the way that GPS, SWIFT and Wikipedia have done. This conflict between its corporate needs and Facebooks public nature is at the heart of the conundrum that is threatening Facebooks future role as the global sharing platform.

There may come a time where individuals lose their inhibitions and learn to accept the flawed nature of humanity, such that the embarrassing university photos and awkward Facebook status of our childhood become nothing more than a source of amusement. But we are not there yet.

In the interim the most radical solution may yet be the one true way to ensure the eternal legacy of Zuckerberg’s creation: turn the company into a global charity with an international non-partisan board. Such a solution has long been muted for Twitter, another social media company that serves a clear public good, but unlike Facebook it has lacked the will (some would say ability) to extract the financial gains necessary to ever become commercially viable.

A world where Facebook becomes a utility like Verizon or a charity like Wikipedia is hardly likely to thrill investors and tech entrepreneurs. Then again, few people who change the world ever live to see the real fruits of their efforts.

If Zuckerberg is serious about fixing Facebook he needs to find a way to square the circle between regaining user trust and generating the returns expected by Wall Street.

For a man more concerned about his public appearance than his bank account, Mr Zuckerberg could do worse than consider what Facebook would look like if it became a true global public good rather than a Wall Street darling. The clock is ticking and the users are leaving.

Your move Mr Zuckerberg.

Wham, Bham, thank you Ma’am! – Financial Market chaos in 2018

On the 5th of February 2018, the Dow Jones witnessed its largest one-day point decline in its 120-year history. In total, the 30 largest US listed companies from across the New York Stock Exchange (NYSE) and the National Association of Securities Dealers Automated Quotations (NASDAQ) dropped 4.6%, a percentage decline not seen since the eurozone crisis in August 2011. Nor was the Dow alone.

As investors across the world saw the roaring US stock market come to a violent halt, stock markets in Asia and Europe started to collapse as well.

Why? What went so badly wrong that the world suddenly lost its cool and within a week almost all global indices had fallen by 6%-12%?

Most of the news for 2018 actually looked pretty great.

The IMF had upgraded global growth forecasts for 2017, 2018 and 2019, while claiming that the world was about to witness the “‘broadest’ upsurge in global growth since 2010”. Global Mergers & Acquisition activity was at its highest since the dot.com boom over 17 years ago, the eurozone grew at its fastest rate in a decade and manufacturing growth has exploded across the US, Europe and the UK.

Given these factors, many retail investors and ordinary people reasonably asked the question: “Why did everything collapse and what should I do with my money now”? In an attempt to answer the first part, we have to begin with separating the event itself (the stock market collapse), and the reasons behind the crash (the fundamentals).

There are many different and authoritative views on this issue, including a very easy and concise piece by Bloomberg available here. My take is below:

With interest rates at record lows, the stock-market continuing to grow at breakneck speed and the global economy expanding, people have thrown caution to the wind and invested in the stock markets. In fact, January 2018 witnessed record levels of investment in the stock-market, as confidence took over and people from all walks of life began to invest. This is where the problem started.

Everyone in the stock market had been waiting for a fall. But knowing when it would come had been a significant challenge. If investors left too early, they would be potentially giving up the chance to make more money. If they left too late, they may lose everything. On January 29th and 30th, the first investors lost their calm and pocketed their gains and as January came to a close, the US stock market saw two days of consecutive decline and its largest fall since May 2017 (a small blip in comparison to what would happen later).

But why were the professional investors sceptical of the market? Here again we must return to expectations.

The aim of a professional investor is to generate returns that exceed what could be earned by investing in a risk-free asset. In simple terms “risk free” usually means bank deposits and the bonds of the worlds most financial secure markets (US, UK, Switzerland, German). The reason they are “risk free” is because most bank deposits are covered by insurance and because these governments are considered financially prudent enough to guarantee that any money owed to investors will always be repaid. Naturally this sounds like a great deal for investors. Put your money into a bond and earn a guaranteed amount of interest. What is not to like? Well the problem is that after the financial crisis too many investors thought that this was a good idea and so as the demand for bonds increased, their price increased. To cut a long story short, when the price of a bond increases the interest (read return) gets smaller. This is where the problem started.

Risk free bonds are the benchmark for professional investors. The expectation is to beat the risk free rate and the more risk the investor is asked to take, the bigger the return they expect (over the risk free rate). But if the risk free rate is extremely low, then risky investments can look increasingly attractive if investors cannot reach their target return through traditional investments. Pension funds are an excellent example of this. Prior to 2008 a pension fund would expect to pay 3% of all its funds under management out to its retirees every year. Therefore, as long as the pension fund could earn over 3% the fund would meet its obligations. Conveniently several types of government bond from the UK, USA and across leading economies were paying around 5% prior to 2008, allowing pension funds to make a 2% profit and meet all of their commitments, with minimal risk. But the financial crisis and ultra-low interest rates changed everything.

 As interest rates dropped to nearly 0% (in some cases negative), investors like pension funds, were forced to find other ways to generate their returns and so they piled into property, real assets (gold, oil, etc) and stocks. Accordingly, the stock market exploded. It didn’t matter that a company was now generating 3% return a year (compared to 5%) because its share price had risen. The alternative was a 1% government bond.

So back to 2018, the key question for investors was this: when would interest rates rise sufficiently that large money managers would sell their stocks? After all, if the interest rate rises then the return from the stock must price in tandem at every step. But that cannot happen forever.

So the magic number was 3%. Specifically, investors began to believe that rising wage inflation in the US at the end of January would increase the interest rate on US ten-year debt to 3%. If inflation was high, the US Federal Reserve would increase rates and money managers would sell their stocks. In Germany the same thing happened when the largest German workers union negotiated an inflation busting pay rise in February, leading to significant stock market declines in the US stock market (the 2nd worst performer after the Dow Jones).

What next?

The financial markets have broadly calmed following their collapse at the start of the month, but the truce remains uneasy. It is clear that investors remain extremely uncertain whether the sharp decline in share prices remains the only price “correction” that we shall see for the year, or if it is merely an early warnings tremor before a larger financial earthquake later in the year. On this question, expert opinion is fiercely divided.

However, for people interested in following the stock market closely its worth looking at whether any of the large companies, famously called “Unicorns” choose to finally go public this year. Traditionally private companies go public when they believe that valuations are at record highs, not when they believe that there is space to grow. So if you see AirBnB, Uber or even Spotify go public, then maybe consider putting some more cash in the bank and out of the stock market.

Important disclaimer here: This piece merely reflects the views of the author and should not be considered as financial guidance or advice.

Trump’s exit from the Presidency

Could the Trump presidency end with a faked illness and a presidential pardon? This is the question I have been asking myself recently and increasingly I am convinced that this is the most rational route I can see. So how would that actually look, why would the administration follow this route and how would it play out?

Let’s review where we are.

The current president clearly did not intend to win the election. While it was already widely suspected, the fact that Michael Wolff has audio recordings from the White House and staff confirming this is significant. Moreover, Trump is now at risk of having either his son or his son-in-law impeached by an ongoing FBI investigation.

But before we continue, here is a very brief recap for those who have no idea what is going on:

Since the Trump presidency began a series of scandals and rumours have swirled around whether Trump or his team received political and/or financial support from Russia. These have exploded as an investigation led by the Justice Department’s Special Counsel Robert Mueller have repeatedly detained and charged key members of the Trump team. Thus far three campaign officials have pleaded guilty to various misdemeanors and the question is whether they will reveal even more information on the senior members of Trump’s circle, in return for reduced sentences. If you’d like a far more detailed explanation, Vox and the NYT have two great pieces linked here.

The concern then is that Trump, already embroiled in scandals, now risks losing a very close family member to a story that is intimately tied to his own name and brand – the election of Trump as the President. But why cant he just pardon Jared Kushner or Donald Trump Jnr? Better yet, why not fire Mueller? The answer is the Republican party itself.

The Republican party leadership are distraught. They have held all three branches of government for a year, yet failed to repeal Obamacare and only managed an overhaul of the tax bill by ignoring every Democrat and out of internal desperation for a “win”. Even worse, the Republican President has called several African countries “shitholes” in a congressional meeting on immigration, openly admitted that he can do what he wants with women because he is famous and has defended White Supremacists. To add insult to injury he risks starting a war in North Korea and he has destroyed US credibility on trade. By weakening the WTO through failure to appoint key figures, ending both the TTIP and the TPP treaties, renegotiating NAFTA and imposing unilateral tariffs, Trump is managing to undermine the Republican brand on a core issue – trade and economic prosperity.

In short, Republican loyalty to the President is non-existent at the executive level. The only thing holding both Trump and the party together is the electoral base of radical republicans who first elected Trump in the US primaries. But while they may protect Trump from attacks from the establishment Republicans, that doesn’t mean they would attack the establishment if Trump voluntarily left the post.

This leads me to my current hypothesis: Trump wants to leave and save face in the process. Trump also wants the risk of criminal charges to be removed, without him having to make the move himself. Meanwhile the Republican party want a smooth transition of power from Trump to Pence, with an agreement that the radical wing that Trump/Bannon pander too, will support a more moderate Republican platform. In such a scenario, it is perfectly plausible that the administration will wait until inside news reaches them that criminal charges are being drawn up against the closest members of the Trump family. Then the pieces on the chess board move.

In the weeks before charges are brought, Trump will appear in public less frequently and news of medical treatments will be leaked to the press. In the final two weeks, Trump will officially be “treated” for a series of “undisclosed illnesses” and charges will be officially brought against Trump’s circle. Pence will strike a deal with the Republican leadership and the Trump family that he will pardon all involved parties, but for this to work the charges have to be issued. Trump’s inner circle, whether it is Trump Jnr or Jared, will have to take the fall and accept all responsibility for the actions.

With the investigation concluded and charges brought, Trump can now resign on ill health and Pence can pardon the family on the grounds of political inference by Mueller. Besmirching his name may not be accepted by many, but it will placate the Trump base and help them to save face as they leave office. Then we will have a Pence Presidency.

At any rate, this is just a thought. Let me know what you think.

Wrapping up 2017

Given the volume of news in 2017, finding a common theme to make sense of the noise has proven challenging. However, as we start 2018, there is an argument to say that 2017 was defined by the actions of the world’s Central Banks.

After years of unconventional monetary policy, the actions of the Federal Reserve, the Bank of Japan, the Bank of England, and the EBC have begun to deliver results. The spectre of deflation has been defeated and inflation appears to be increasing across the world’s major developed economies. Economic growth has picked up in the Eurozone and Japan, while emerging markets have survived the first few US interest rate hikes without causing a collapse. But just as the achievements of these policies have been recognised, so have the costs.

As central bankers discouraged saving by reducing interest rates close to zero, investors were forced into equities and real assets. This led to a surge in global property prices and record levels of investment in global start-ups, crypto-currencies, and passive indexes. Rising property prices have led to bans on second homes across developed economies from New Zealand to Western Canada, and clamouring calls for a ban in London. In many developed economies, the average property price is now well beyond the 4x annual salary against which banks will provide loans, forcing a greater proportion of people to rent than ever before.

The hunt for yield has also played an essential role in the financing of the new economic giants that dominated news headlines in 2017: the FANGS (Facebook, Amazon, Netflix, Google, and Salesforce) being the most notorious. The perfect combination of ultra-low interest rates, subdued consumer demand and a psychological willingness to believe in the new technological era has encouraged investors to support “revenue over net profit” business models. The FANGS now represent five of the world’s most valuable companies; yet in over ten years only two have recorded net profits in their annual reports. Even more dramatic has been the explosion of Uber, Lyft, and AirBnB, whose valuations now exceed $100bn but who have never generated a profit.

Many of these themes were apparent in 2016, but their significance was not fully appreciated by politicians. As a result, the continuation of these economic distortions in 2017 was essential in highlighting the driving political crisis of the year, that of public outrage over growing economic inequality. As a consequence, 2017 represented a break in the conventional political wisdom that a government which achieves economic growth can offset these incentives against social and domestic challenges.

Even with a raging equities market, record low levels of unemployment, and signs of growing wage inflation, the US welcomed 2017 with the arrival of the most populist President in living memory. Similarly, the Conservative party in the UK ushered in the New Year with one of the strongest economies in the G7, only to lose its majority in Parliament following a snap election in June.  European voters showed that immigration was frequently a more significant issue for voters than headline economic numbers. In Germany, the bed-rock and engine of the Eurozone, the governing grand coalition hit record low polling numbers in the Bundestag elections, as the AfD entered the federal government for the first time. Meanwhile, France closely avoided electing the outwardly racist Front National. Austria elected a far-right party to government for the first time since the 1930s, where the party took the cabinet posts for the Ministry of Interior, Defence and Foreign Affairs.

The marker of success for 2018 will therefore be to generate broadly spread economic growth that benefits all within society. In that vein politicians of the political right are likely to find themselves in need of an alternative narrative. The appeal of socialism across western worlds, whether in the Jeremy Corbyn style, the Bernie Sanders variety or the Mélenchon school, will never be stronger. Finding an alternative slogan to challenge, ‘for the many, not the few’ will be an important starting point.