David Fuller and Eoin Treacy's Comment of the Day
Category - General

    We Are More Likely to Get a Better Brexit If we Do Not Ask

    Here is the opening and a further section of this informative column by Matthew Lynn for The Telegraph:

    Our access to Europe’s markets will come to an end. Our powerful finance industry will lose the passport that enables it to sell its services across the Continent. Immigration will comes to a sudden stop, leaving fruit rotting on the trees, and, even more seriously, double mocha lattes unwhipped at Prêt, as companies struggle to find the staff to do the jobs that need doing.

    With the Prime Minister, Theresa May, preparing to finally trigger Article 50, and start the process of leaving the European Union, we can expect to hear a lot of warnings about a cliff-edge Brexit, with the looming threat that no deal will lead to a car crash for the British economy.

    Understandably, companies are going to feel nervous about that. Sterling is going to wobble on the currency markets – it is already down this week. The FTSE 100 is going to get hit if a deal seems to be falling apart. At many points over the next two years, the British negotiators are going to threaten to walk away with nothing, and every time, there will be a collapse in confidence.

    In fact, however, much of that will be nonsense. Paradoxically, the less we ask for from the EU, and the closer we get to walking away from the table empty-handed, the more we are likely to get a good deal in the end. Why? Because sometimes asking for nothing is the best negotiating position. The markets are going to be jittery, but investors and traders should keep in mind that the final outcome is likely to be a lot better than it looks right now.

    Don’t ask economists for any insights, however. The views of just about anyone (dentists, say, or actuaries, or, come to think of it, children’s party entertainers) would be more useful that a group of so-called professionals who disgraced themselves with absurdly over-the-top scaremongering in the run-up to the referendum, and even more hysterical predictions of imminent collapse in its immediate aftermath.


    Then imagine a different scenario. Our negotiators sit down and say, actually there is nothing we want from the EU. We are happy to operate under World Trade Organisation rules, we will make sure our market is completely open to European companies, and we have no plans to impose any tariffs of any sort. And, er, that’s it. The Brits then start looking at their watches, and asking if the team on the other side of the table knows anywhere good for lunch.

    At that point, the EU side will have to start thinking about all the things they want from Britain.

    The importance of these should not be dismissed. The UK makes a total contribution to the EU budget of £13bn. It gets £4.5bn back, so the net contribution is around £8.5bn. The UK, with Germany, is one of only two major net contributors, although countries such as France now also chip in a little as well. The expenditure of the EU is £123bn, so that £13bn is about 10pc of the total, and the net figure is about 7pc of the total. Once we have left, that money will have to come from somewhere. Several countries will have to become net contributors for the first time; plenty more will have to step up from trivial contributions to major ones. That will be neither easy, nor popular.

    We also have a massive trade deficit with the EU. Britain is the largest market for German cars, which also happens to be that country’s largest industry. It is a huge export market for the Netherlands, Belgium, and most of all Ireland (36pc of Irish exports by volume go the UK). Tariffs hurt everyone. But they hurt the surplus country more than the deficit country. The EU is going to want access to our market. If it loses that, or if we impose tariffs, then it will hit jobs and investment across the Continent.

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    The Real Problem Is We Are All Over-Taxed

    Here is the latter part of an excellent, common sense column by Allister Heath for The Telegraph.

    The great economist Ronald Coase taught us that corporations are only the best vehicle for economic activity when the transaction costs of working in a hierarchical, closely managed organisation is lower than the costs involved in getting freelancers or independent agents to cooperate. But tech means that the economics have tilted at least a little away from the corporation, and more towards smaller firms, contractors and freelancers advertising their wares via platforms, and this is panicking our social-democratic establishment, who fear losing the last levers they still retain over our society and economy.

    So they have enrolled the Government – including Philip Hammond, the Chancellor – in their quest to slow down change. Their strategy has been to point out the inconsistencies in current rules. Take the jobs market: some people are obviously employees, and others are pure self-employed freelancers.

    But what of workers who rely primarily for their income on a platform like Uber? The drivers own their own cars, pay for their own operating expenses and choose their own hours; almost all of them are happy. But are they really, fully self-employed, or are they part of some third way which isn’t (yet) recognised in law and in the tax code?

    It is obviously true that the present classification makes little sense. But sometimes it’s best not to change a broken system, for fear of making it even worse, and that is exactly what Hammond should have realised before he decided to raid the self-employed. The problem isn’t that the self-employed are “under-taxed” to the tune of £5.1bn a year, as many establishment economists have been saying. The problem is that employees are over-taxed to the tune of many more billions – overtaxed in the sense that a much lower overall tax rate, accompanied by a much smaller state, is, in my view, the only way Britain will prosper and thrive as an independent, free trading economy in the 21st century.

    But until the day that the Government can drastically slash taxes at the same time as it radically simplifies the system – the model recommended by the 2020 Tax Commission, which I chaired – it would be better for it to do nothing. It should certainly not seek to undermine or campaign against self-employment, on the spurious grounds that it’s an “inferior” form of employment.

    It should not seek to extend the welfare state’s net ever wider, showering the self-employed with more benefits. And the last thing it should do is plot to whack the likes of Uber with a 13.8pc payroll tax, which would be the logical (but job destroying and price raising) outcome of any system that sought to tax “platform workers” like the employed. This is a Tory government, and it is high time it began behaving like one.

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    Email of the day

    On Sturgeon submersion:

    Dear David,

    Allister Heath has recently written another article in the Telegraph entitled – Why Scotland’s dire economy is falling further behind the UK. It is well worth a read. For Sturgeon to get a motion through the Scottish Parliament to hold a Referendum, she will probably have to invoke the support of the Greens, as was done recently in order for the SNP to get their dire budget through. The point is that if the Green’s manifesto was to be enacted Scotland would be back in the 19th century in short order. I find it difficult to believe that even Sturgeon would stoop so low to get a vote as important as the right to hold a Referendum to drag the country away from its successful resting place of 300 years. I would have thought that was political suicide.

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    India's Nifty Index Rises to Record as Fed Keeps Rate Outlook

    This article by Ameya Karve for Bloomberg may be of interest to subscribers. Here is a section:

    “The U.S. Fed action was in line with market expectations and allayed concerns that the outlook comments might turn hawkish,” Hemant Kanawala, head of equities at Mumbai-based Kotak Mahindra Old Mutual Life Insurance Ltd., said on phone.

    “This is positive for emerging-market flows and overseas inflows to Indian stocks will resume,” he said.

    Resumption of foreign inflows and seven straight months of net purchases by local funds have boosted the valuations of Indian stocks to their highest level in more than six years. The Sensex traded at 17.3 times estimated 12-month earnings, the highest since November 2010.

    Foreign funds have purchased $3.5 billion of local shares so far this year after a record $4.6 billion outflow in the three months through December. Domestic funds have been buyers for seven straight months through February, including a record 138 billion rupees ($2.1 billion) in November.

    “In an environment where earnings haven’t been so exciting the valuations from the price-to-earnings perspective will always look expensive,” Kanawala said. “Price-to-book ratio is a better parameter in such cases.”


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    Hong Kong Stocks Jump to 2015 High as Fed, China Energize Bulls

    This article by Richard Frost for Bloomberg may be of interest to subscribers. Here is a section:

    Hong Kong equities are back at heights unseen since China devalued its currency in August 2015.
    A dovish Federal Reserve, China growth optimism and steady mainland inflows combined to fuel a 2.1 percent rally in the Hang Seng Index on Thursday, the biggest advance in almost 10 months. The gain also pushed the gauge firmly above the 24,000 level -- an effective ceiling for the past seven years. China Unicom Hong Kong Ltd. and Link REIT were among the day’s best performers, while Cathay Pacific Airways Ltd. was one of only two decliners after posting a loss on Wednesday.

    Hong Kong-listed equities are particularly vulnerable to shifts in sentiment toward U.S. monetary policy thanks to a currency peg with the greenback, while the increasing dominance of Chinese companies on the city’s benchmarks means national economic indicators have a powerful pull. With investors relieved the Fed didn’t increase the projected pace of rate hikes and fears of a Chinese hard landing receding, the serially under-performing Hang Seng Index may have room to rally further.


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    Treasuries Surge After Fed Maintains Forecasts for 2017, 2018

    This article by Elizabeth Stanton for Bloomberg may be of interest to subscribers. Here is a section:

    Treasuries surged after the Federal Open Market Committee raised interest rates as expected and maintained forecasts for additional increases for the next two years, dashing expectations it might signal a quicker pace of hikes.

    Yields were lower by five to 10 basis points at 2:45 p.m. in New York, with the five-year lower by 10 basis points at about 2.03 percent. Yields had risen to their highest levels in at least a year in the past week as market-implied expectations for a quarter-point increase in the fed funds rate approached certainty. Market focus was on any new language in FOMC statement, changes to member forecasts for the funds rate, or both. Most economists and strategists saw more risk of an increase to the 2018 median than to the 2017 median.

    Median forecast for 2019 rose to 3% from 2.875%, while 2017 and 2018 medians remained at 1.375% and 2.125%; 5Y yields reacted most sharply, falling as much as 11bp, and the 5s30s curve rebounded from 102bp to 109bp within minutes


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