George and I spend many hours discussing the politics and economics of the world, with reference to where and how to most productively employ capital. We try, in doing this, to separate the personal from the strategic, so what I will write is not necessarily my own view on what would be best or honourable but rather an analysis of what we currently see as likely to happen and why.
THE TWO ELEPHANTS IN THE ROOM
Brexit is front and centre as the most important issue for the UK and this will be looked at in detail. Globally though, the very public unveiling over the last year of a new world order; with China and the US as the main protagonists, is of much greater significance.
It is a well understood political imperative that for a country to create unity of purpose, particularly one as diverse but nationalist as the US; an identifiable enemy is needed. This role for (US Presidents) was played by Russia until the mid-1980’s then by drugs, then ‘Terror’ (Bin Laden) and for the foreseeable future it is China.
In every case above, the key phrase to describe the situations in the US includes ‘war’. Cold War, War on Drugs, War on Terror and now Economic War. Listen and you will always hear it said over and over again, the US are at war with…………..something.
Presidents rarely lose re-election campaigns in times of war.
The key positive to the US v China ‘war’ is absolutely no potential for any physical conflict. The fight is purely economic which includes trade but is not the core focus. Far more significant is the battle to become the technologically preeminent power which will define the future paths of both nations far more profoundly than any tariffs on toys. It absolutely suits both countries to frame it as a trade war, it’s simple to understand (they are stealing from US) thus uniting their populations in a struggle against an external foe, but this really isn’t centred around imports and exports.
The US were involved significantly in the Middle East when they perceived a long-term threat to national security from declining oil supplies. They framed interventions as their moral imperative to uphold the rights of populations to enjoy democracy, but it was cobblers. It is certainly arguable that they engineered the second Iraq war because of this fear of peak oil and their wish to establish guaranteed supplies. But its unarguable that as soon as they became energy independent from fracking technologies, they walked away from the region.
They equally plainly now perceive the greatest threat to National Security to be Chinese development of superior technology and AI capabilities. Where the US feels threatened it will fight which is why US v China is set to run and run.
That all being said there is the issue of trade to deal with which is important both materially and perceptually. The reality is that neither party wants a long-term trade war, it’s just bad for business. Trump has now established China as the new ‘Black Hats’ to his constituency (in Westerns the baddies always wore black hats) and he now wants a win to help him with re-election. The Chinese are plainly weighing up what (if anything) they give and when. They can wait it out to see if he is re-elected, on the assumption that dealing with say Joe Biden as President will be easier, but this assumes Trump loses and what if he doesn’t. He’s then in for another 4 years with no need to fight another election. It won’t be lost on the Chinese that they are now set in US public opinion as Public Enemy No 1 and any US administration is going to use this as a political device, so on balance does waiting out the election in November 2020 actually make sense?
The logical assumption is that Trump will take a deal if he can spin it as a win and the Chinese have control over its media so equally they can too. We think therefore that’s likely the pragmatic choice made at some point in the next 6 months …….probably.
I wrote about the potential pathways for Brexit in the end of year review with the conclusion being that the likely outcome was impasse followed, by Mrs May being replaced and a snap election being called as a quasi-second referendum.
All the current post Boris brouhaha really is just noise; the strong likelihood is an election in the next 3 to 4 months, fought fundamentally as a second referendum.
So how does that play out?
- The Conservatives will campaign as the ‘Leave whatever-party’ to stop the Brexit party gaining any traction
- There is going to be a significant shift in voting patterns with a number of factors being different from the last election
- Labour in particular have been damaged by the last two years with their wishy-washy prevarication on Brexit being compounded by the stain of anti-Semitism. Corbyn is no longer seen by many as a conviction politician and a fresh hope for change. Many now wishing for a decisive outcome to Brexit will be attracted to the Liberals if they want to remain or conversely to ‘Bye Bye’ Boris
- We suspect even a proportion of Remain voters will be tempted to vote Conservative because of the fatigue of the last 3 years. Basically, there’s a perfectly sensible group who think, “ok, I don’t agree but let’s just get on with it now”
- Assuming we get a Conservative majority and assuming their MP’s are all pro Brexit because they’ve deselected anyone that isn’t, then we leave probably without a deal and that’s going to be disruptive in the short term
- The leaving will be coupled, one assumes, with major legal and tax changes (reductions) to encourage businesses either to remain in the UK or come to the UK
- The pound will get hit for a time which is positive for foreign currency assets (portfolios are predominantly in foreign currency holdings) but not for going on holiday to France (if they allow us in)
- A positive is that the economic uncertainty will keep interest rates very low which will probably insulate the property market from any major falls outside London and the South East. Even there, once the shock has worn off and if the pound has fallen then foreign buyers will be hunting bargains, so markets will likely not be without activity and support
So, in summation we don’t think a hard Brexit will have a negative effect on overall portfolio performance, in fact the opposite.
We don’t believe the Leavers’ claims that it will be achieved without considerable discomfort for a time. But equally we don’t think the eventual outcome is predictable either. It could be that freed from the sclerotic choke hold of an increasingly moribund Europe, the UK ultimately prospers as the Singapore of the West.
The key to protecting wealth is to diversify assets, which we have consistently employed and is working well!
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Note: This is written in a personal capacity and reflects the view of the author. The post has been checked and approved to ensure that it is both accurate and not misleading. However, this is a blog and the reader should accept that by its very nature many of the points are subjective and opinions of the author. Individuals wishing to buy any product or service as a result of this blog must seek advice or carry out their own research before making any decision, the author will not be held liable for decisions made as a result of this blog (particularly where no advice has been sought). Investors should also note that past performance is not a guide to future performance and investments can fall as well as rise.