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

    Email of the day 1

    On wisdom:

    Regarding the recent UK election result. It seems to me the population shows a distinct lack of a very important quality in life which one tends to accumulate with age, namely "wisdom". which can be distilled into just three words, knowledge, experience and judgement. As a result a period of political and perhaps economic turmoil lies ahead for my country.

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    Voters Have Disarmed Our Brexit Negotiators - We Will Get a Worse Deal

    Deal or no deal? On Thursday, Britain took its best options for Brexit off the table. Although the Government said that “no deal is better than a bad deal”, its ultimate goal was to ensure that we never faced that choice.

    The election has, however, made a good deal impossible and so the choice between “no deal” and a “bad deal” now looks inevitable. Unfortunately, the election has also now ensured that the consequences of “no deal” would be immeasurably more damaging.

    Let me explain. Negotiations with the EU were always going to be difficult and nasty. I was cautiously optimistic, however, that shared interests and mutual reasonableness would eventually result in a workable deal, delivering Brexit without a crippling economic cost.

    This option is now gone for the foreseeable future. The reason that is that implementing it requires passing a series of enormous, controversial Bills through Parliament, covering everything from immigration to fisheries. There is little chance that Theresa May, or any Conservative Prime Minister, can steer any such legislation through both Houses. From the most pious of peers to the pro-Remain Scottish Tories, our new Parliament heavily favours the softest of soft-boiled Brexits. The Government will not get the support it needs to implement anything else.

    This will prove deadly to the Brexit negotiations. The British delegation will arrive for talks in Brussels carrying a pile of paper that no one can vouch for. It is like turning up to fight a duel with a dead fish. Britain can huff and puff and make as many demands as it likes. The EU’s negotiators will simply stare at us across the table and think to themselves: “Whom do they speak for? Can they deliver any of this? Will this Prime Minister even be here next week?”

    Confident that our newly elected Parliament would do almost anything to avoid talks collapsing, the EU will have overwhelming incentive to concede nothing. Expect an enormous Brexit bill, EU court authority over its citizens’ rights, continuing regulatory meddling and so on. The deal on offer could be so bad that it would simply be better to stay in the EU single market or European Economic Area for the time being.

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    Email of the day 2

    On a potential difficulty in joining the EEA:

    Dear David, I have read several articles in which it was pointed out that the other members of the European Economic Area might not agree to the UK joining it. Apparently they fear that the UK would become the dominant partner because it is so much bigger than any of the other members. Thus, joining the EEA is not as simple at it might appear to be.

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    Email of the day 3

    On UK shares following the election:

    Being a pessimist by nature, my instinct is to be concerned that this Conservative government will not be able to effectively govern, and that we will end up with another General Election. Unfortunately I think that Jeremy Corbyn will continue to promise the young everything and anything he thinks they want, and on the back of his success this time around, he could easily win the next Election with disastrous results. My question is, should we be positioning our portfolios with that in mind now? And if so, how should we position it?

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    Fed Portfolio Runoff May 'Turn the Rally on Its Head,' RBC Says

    This article by Alexandra Harris for Bloomberg may be of interest to subscribers. Here it is in full:

    Fed balance sheet normalization might cause banks to shorten their asset mix, causing “enough of a portfolio adjustment this summer to turn the rally on its head,” RBC rates strategists Michael Cloherty and Ash Kamat say in note.

    QE created bank deposits and balance-sheet unwind will eliminate them; while “massive 2003-style bank sales” are not predicted, the market “has become extremely sensitive to flows,” and risk of outsized price action is higher during summer months

    Main issue isn’t a funding shortfall, but “how modeling of deposits changes” and when; deposits modeled on recent data show extremely long average life; shortening the expected life of a deposit puts pressure on banks to shorten their assets

    Bank buying of shorter-duration assets should lead to “outperformance of 15yrs and CMOs and a steeper curve”

    RBC expects Fed likely to announce balance-sheet unwind in September, begin in October, with initial caps of $15b for USTs, $10b for MBS; they expect caps to rise by $15b and $10b every quarter and eventually be eliminated


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    Russian hackers breached voting systems in 39 US states

    This article by Cara McGoogan for The Telegraph may be of interest to subscribers. Here is a section:

    Russian tampering with US voting systems ahead of the presidential election last November was more widespread than initially thought with almost double the number of states affected investigators have revealed.

    Investigators told Bloomberg that hackers linked to Russia breached the voting systems of as many as 39 states ahead of the election in which Donald Trump became president.

    Cyber attackers accessed voter databases and software used by poll workers, according to Bloomberg. Campaign finance details were accessed in at least one state. And in Illinois the hackers attempted to edit or delete voter information, investigators found.  

    The Obama administration complained to Russia about the intrusions in an unprecedented use of a modern-day "red phone", a secure messaging channel between the countries.  

    The news follows the leak of classified National Security Agency documents to the Intercept, which showed Russia's military intelligence department conducted a cyber-attack against at least one major US voting supplier.


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    Rejection of Theresa May's Little Englander 'Brexit' is Splendid News

    The EEA would in principle allow Britain to preserve open trade with the EU single market and retain passporting rights for the City of London, the goose that lays the golden egg for a very vulnerable British economy.

    “We should use the EEA as a vehicle to lengthen the transition time,” said Lord (David) Owen, one-time Labour foreign secretary and doyen of the EEA camp.

    “Theresa May’s massive mistake has been to allow talk of a hard Brexit to run and run, and to refuse to frame a deal in a way that makes sense for the Europeans. The logic of the EEA is irrefutable,” he said.

    Lord Owen said the EU’s withdrawal clause, ‘Article 50’, is designed as a deterrent to stop any country leaving. It leads to a cliff-edge, facing Britain with a take-it or leave-it choice when the clock stops ticking. “This puts us in a dangerous position,” he said. The EEA is a way to overleap this Article 50 trap.

    Meredith Crowley, a trade expert at Cambridge University, says the great worry is that tariff barriers into the EU will jump to 12pc or 15pc overnight on UK exports of cars, engines, auto parts, and a range of machinery, setting off an exodus of foreign investment. “Joining the EEA would shut that threat down,” she said.

    Critics argue that the Norwegian route is tantamount to remaining in the EU, but on worse terms, with no vote over policy: “While they pay, they don’t have a say,” said David Cameron before the Referendum.

    This is a canard. EEA states are exempt from the EU's farming and fisheries policies, as well as from foreign affairs, defence, and justice. They are free from great swathes of EU dominion established by the Amsterdam, Nice, and Lisbon Treaties.

    Above all, EEA states are not subject to the European Court’s (ECJ) limitless writ over almost all areas of law through elastic invocation of the EU Charter of Fundamental Rights. The ECJ would no longer be able to exploit the Charter - in breach of Britain’s opt-out under Protocol 30 - whenever it feels like it. We would no longer be under an EU supreme court asserting effective sovereignty. These are not small matters. They are elemental.

    Yes, the Norwegian option is a compromise. We would continue paying into the EU budget. This would do much to defuse the escalating showdown over the €100bn bill for EU reparations, poisonous because of the way it is presented. The transfers would become an access fee instead. Norway’s net payments in 2014 were £106 a head. Let us not die in a ditch over such trivia.

    Britain would have to tolerate relatively open flows of migrant workers. But contrary to widespread belief, the EEA does not entail full acceptance of the EU’s “four freedoms” - movement of goods, services, capital, and people. Nor does it give the European Court full sway on these issues.

    The arrangement allows “a lesser degree” of free movement than within the EU. The language covers the issue of residence, an entirely different matter from the rights of EU citizenship created by the Maastricht Treaty. The EEA permits the sort of emergency brake on migrant flows that was denied to Mr Cameron in his last-ditch talks with the EU before the Referendum.

    The point in any case is that the EEA would be a temporary way-station for ten years or so, giving us time to negotiate 80 trade deals with the US, China, Japan, India, Mercorsur, and others without a gun held to our head.

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