Scala Private: Brexit!
[Published for clients 28th January)
31st January is Brexit day! After 47 years, the EU membership of the UK has ended and it is the first country leaving a German dominated European Union.
The transition will start 1 March and will end in December 2020 (extendable to December 2022).
While I am not an expert on the UK economy, the terrible forecast about the UK economy are excessive and I am confident that the UK will thrive.
The UK survived the German onslaught in World War 2 (and until 1942 they looked like losing) and will survive this as the benchmark is Europe, not the US. Actually a realignment with the US could be more advantageous then being part of the EU.
There are numerous countries that are looking at the UK as a lead example. Italy, if PM Salvini wins the next election is one. But also a few Eastern European countries are watching. And definitely the one to watch are the French Presidential elections in April 2022.
Brexit could well be the start of the end of the EU – after 20 years of no growth (apart Germany) many European citizens are ready to make themselves heard.
Trade Wars
Phase 1 agreement has been done and now everyone agrees that there is a trade truce. The second part will be discussed after the US Presidential elections. The market took it strangely well. It is one of those periods where bad news is good news and good news is good news. The Greed factor is the highest over the last 10 years. Be careful. The trade war US versus China is a war of empires. Not just a trade war.
USA
While the impeachment saga goes on forever, the US economy is still the best of the world so far. There are less taxes and less red tape than anywhere in the world and it shows in the data. Logically the US has a lot of issues and a great rich/poor divide – but the same can be said in many countries.
US election
The Iowa Democrat caucus is close (3rd February) and now Sanders and Biden are neck to neck. Sanders recovered greatly. It could be a danger for the market as he is an “extreme left” candidate like Warren that, if in power, will cripple the US internet giants. It is also a problem for the Democrats as for most centrist he is unelectable.
The Polls speak quite clearly as Biden was at 34% in October and now 24%, while Sanders was 16% and now 27%.
This is what I call the “Corbyn effect”. Nobody wanted Johnson as UK Prime Minister, but Corbyn was too left. A Sanders vs Trump I think will play in the hand of President Trump as Sanders is too left for many. While the polls for the campaign leaders are at about 20%, Sen Warren is at 12% and Bloomberg at 9%.
As foretold in my October/September newsletter, the impeachment was a gamble of President Trump (who self-impeached to eliminate Biden) and is working. The person responsible for this strategy is none other than Sen Mitch McConnell, US Senate Majority Leader – the real Republican policy puppeteer. He has been in politics since 1975 and aptly wrote a book “The Long Game”.
Europe
Europe can be seen recovering. In Germany, the Greens (second party) started to criticize heavily Chancellor Merkel and her “fetish” of balanced budget and to follow the lead of President Trump.
Sweden’s central bank abandoned the negative rate experiment – another rebuke to the European Central bank dominated by the Germans.
France is still caught in fiery tensions with the Yellow Vest movement that amazingly keeps the government in check for over a year.
On the 26th of January, the Italian regional elections stalled the advance of The League – a victory for the government and the markets. Still from 2014, the majority held from the government decreased by 10% and the M5Star (the comedian founded one) almost got wiped out.
Middle East/ Central Asia
While the current scare between USA and Iran seems reduced (during the weekend three projectiles hit very close to the US embassy), do not be fooled. There is a war between the US and Iran – neither of them wants an “open warfare scenario”, but there is a war.
Iran is the foremost expert in asymmetric warfare, and we will see continuous attacks – but not large enough to make the US declare war. It is a tricky balance. It shows in fact that the Iranians alerted the US to the strike. Notwithstanding the alert and the US bases in full alert with Patriot missiles, several Iranian missiles hit the target.
This is quite scary for the US as it shows their ships in the Gulf are exposed.
For the Iranians, the downing of the Ukrainian jetliner highlights also an issue. It is very hard to believe it was an error and moreover Tehran declared that the anti-aircraft battery thought it was a cruise missile. This is a message or error aimed at someone. Cruise missiles fly between 5 and 200 meters of altitude. So, it was a lie. Many in Tehran protested, and this also shows how economically fragile Iran is and why it cannot afford a war with the US.
Turkey sent military aid to Libya. Again, similar to Syria the reality is all about gas pipelines. The reader of this newsletter will remember that the main reason for the war in Syria was two conflicting gas pipelines (Iran/Iraq/Lebanon vs Qatar/Saudi/Turkey). Now there is a new pipeline (different) Egypt/Israel/Cyprus/Greece. In order to stop this from happening, Turkey has just approved a Libya/Turkey gas pipeline. So, Libya is the new battleground. So much so that there are pictures of ex Syrian Free Army soldiers boarding Turkish airplanes to go and fight in Libya.
Considering that Libya is extremely close to Italy, it is almost certain that some of them will end up entering Europe.
China and Hong Kong
China is slowing down and it is only natural. 70% of the large cities have lowered their contribution targets to the GDP that will decrease at least from 6.1% growth to 6% growth in 2020.
The biggest issue is the Coronavirus sickness that hit China and already travelled overseas including Australia. While initially the Chinese government admitted 47 cases and almost 1,000 people now (25th January) we are at over 200 deaths and over 100,000 under observations. This comes at the worst time as it is the Lunar New Year – a time of travels and meetings. The latest SARS outbreak in 2003 killed 800 people. The Chinese state has been much more proactive than 2003. In 2003, it took 2 months before WHO (World Health Organization) was alerted. The issue remains that the region does not exactly follow promptly the orders. On the 8th of December, there was the first case and only on 14th January screening measures started on a city with a population of 11.8 million. Wuhan is a hub. If only 1% of this population travelled around, we are talking about 118,000 – if just 0.1% of these people were infected over 1,000 people got infected. Currently, the cities under effective martial law - with all travel in, around, and out halted - are Wuhan, Huanggang, Zhijiang, Ezhou, Qianjiang, Chibi, Xiantao for a total of 90 million people. South China Morning Post said the virus could wipe between 0.5 and 1% of Chinese GDP growth 2020. The reality is the GDP will decrease by over 1% bring the official GDP growth to 5% (by reference the real non-altered GDP growth as per London School of Economics studies will be under 3%. Slower than the US real GDP growth!). The world is a very different place than 2003 (SARS virus scare year). As an example, Chinese are travelling much more and while China in 2003 was importing 30% of the global iron output, now it stands at 70%. Companies like Apples, Tesla will have production delays and sales consequences as the factories will not reopen the 9th February.
Australia
The start of the new year did not start well for Australia. Between bushfires and storms there has been great devastation. Aside the natural disaster and climate issues, I think the government is downplaying the effect on the economy and GDP growth these natural events create. Aside reconstruction, there is also the lack of tourism spending. The market ignored everything following the US lead. On top of this the virus literally stopped the Chinese business and tourism on their track.
A better and more truthful vision of what is happening is in the hard statistics. Since the new year, a total of 169 retail shops closures have been announced. Fashion retailer JeansWest went into administration. This is on top of 13 major retailer chains gone bust in 2018 (Toy R US, GAP, Avon, Maggie T between others).
Apart being a retail apocalypse, this situation brings pressure on the Government tax intake and on the listed shopping centres. This situation is epitomised by Kaufland. The world’s second largest hypermarket operator decided to pull the plug on Australia even after having bought 20 locations. Officially, the decision is due to better opportunities in Europe. This is a further sign that there is a retail and consumer recession masked by commodities and infrastructure spend.
I would be surprised if in the May budget the government does not back track and start a fiscal stimulus even with the bushfires reconstruction spending.
Still for our government there is no climate change issues nor economic crisis in Australia. The next elections will be interesting.
While there were some amazing donations for the bushfire appeal from actors, singers, businessmen and sportsmen, it does not look like there were any personal donations from any politicians.
Charities
We all donated money to the Bushfire appeal. A documentary from Channel 9 is showing that all the large charities (Red Cross, Salvos) keeps the money for future use. Red Cross, Saint Vincent’s and Salvation Army are only giving a small part. Red Cross is giving just 1/3 of AUD 95 million (Font: Andrew Constance, Member for Bega). Some money are logically delayed – but most large charities plan over 3 years and use these events to replenish their coffers. Disgraceful.
Coronavirus hit several persons as of now in Australia – but the biggest issue is that after the bushfire hit (estimated in AUD2 billion), we will have a coronavirus hit on tourism, universities and exports for an estimated AUD2.3 billion dollars and 20,000 full time jobs (Font PWC Research). The government will have to forego the dream of reaching the Budget surplus. An Australian recession is not outside forecast. Real estate will be hit as the Chinese buyers will have other issues to contend with.
I wrote about the Green Swan in this newsletter just at the start of January and it is already a reality with the Corona virus outbreak.
Markets
22 January - Wow what an impressive market. As indicators started to be severely stretched, we started to take profit. Not excessively due to transaction costs and CGT. We see a high possibility of a 10% correction - short and brutal. The set-up is quite similar to January-February 2018 where the market lost circa 8% between 29 January and 9 February but recovered almost everything by 27th February on a China scare.
We are preparing for the next move.
I sent client alerts the 10th and 21st January to advise them of potential market issues as any market indicator went to orange. Still the decline should be contained.
Update 28 January – the fall happened, and the culprit was the Chinese Virus. The last time something similar happened (March 2003, SARS outbreak) the market fell 7.6% and had recovered by June. The most hit sectors were transport (airlines, airports, aircraft manufacturers), hotels and oil. The situation is quite different from 2003 as the global economy was much less integrated. Still there is no trace of a recession induced pandemic. If there is a global pandemic, probably the markets will be the last of our worries.
George Orwell
George Orwell (1903-1950) died 70 years ago, 21st January. A visionary. His books encompassing surveillance and the nature of humans (1984 and Animal Farm) foretold our future with impressive accuracy in 1950.
Between him and Philip K. Dick (1928 -1982) author of “Do androids dream of electric sheep?” (book on which the famous movie Blade Runner is based on) that invented the idea of supranational mega corporations, they practically wrote our future.
Chernobyl
Chernobyl is the infamous place where the largest ever nuclear accident ever recorded. It happened in 1986 and just in 2016 some of its most dangerous isotopes reached half-life and will not be safe for humans for at least another 100 years. 53,000 people were evacuated. 4,000 died from cancer and at least another 4,000 from related illnesses.
A positive fact is that Chernobyl, devoid of humans, became the most diverse and prosperous animal life sanctuary in Europe with wolves, elks and all sort of animals. Scientists are baffled, with the current theory being that the natural wild animal life span (7 years) does not allow the radiation to have excessive consequences. So humans suffer worse from nuclear radiation than the wildlife!
Green Swan
The Bank of International Settlement sounded the alarm of the possibility of Green Swans (stock market meltdown generated by a climate agent event). Our Treasurer Josh Frydenberg logically denied the possibility – standard line of our government – notwithstanding fires, storms and hail devastating our country. Even this summer it is so weird that I am thinking (I am not a scientist) that the fires are creating their own micro climate event.
Definitely a green swan is another thing to watch out for.
Coronavirus
The net is ripe with Coronavirus stories. I am not delving into them. Bad stories.
Something is not right anyway. The data given by the Chinese government (Ro – velocity at which the virus spreads) of 2 and mortality of 3% does not match the extreme response of the Chinese government. From China’s own data each year, the common flu has a Ro of 1.2 and a mortality rate of 1.5%. SARS Ro was 1.7%, but mortality 15%.
The authority behaviours is more typical of a more serious pathogen. As some conspiracy theorists say possibly a bioweapon that escaped containment (and yes there is such a laboratory in Wuhan – Wuhan Institute of Virology (Font Washington Times citing Israeli Secret Service fonts, usually accurate).
Xenophobia is rising. As the virus started in China, there are several stories of racism against Chinese – even a French newspaper was accused of xenophobia as the main page was titled ‘Yellow Peril’.
Good news
The Chinese were very fast in distributing the DNA of the virus. Australian doctors already reproduced the virus in a laboratory. A Los Angeles laboratory specialised in DNA sequences designed a vaccine in 3 hours (!!). Logically with testing it will take us to a much later date before it is available. During SARS (2003), it took 1 year just to create a vaccine. This is real tech advances.
For Love
This month we commemorate 75 years from the liberation of Auschwitz. Some media say this because they have to, I don’t. I say it because it is right to remember that the holocaust (and, unfortunately many others) have been provoked by propaganda (eg marketing).
Every action you do, every post you make can be used as a propaganda tool. Even towards our fellow Chinese people with Coronavirus. The hate monster change face, but its dark heart is always the same.
Unfortunately, in this time of Facebook and truth manipulation the times of hate are just a step away. But we can change it. In every single action. Maybe just a smile. Or a post where you don’t agree, but you say it is right to disagree, it is called democracy. Or maybe it is called love. We are all different, we are all beautiful. Never Again.
The information contained in this newsletter is general advice only. It does not take into consideration your personal financial situation, goals or needs. You must consider the appropriateness of the advice prior to acting on this information. Please seek advice from us or your financial adviser and read the Product Disclosure Statement/Financial Services Guide of the product you are considering prior to investing in that product.