Here’s Why Capital Is Fleeing the U.K.

12.10.2016 • The Economy

From Nick O’Connor – Capital –

The Capital & Conflict mailbag is bulging this morning. That’s unsurprising. With the pound on the rocks, “hard” Brexit still on the agenda (and connected to the pound’s slide) and the banking industry turning on itself… there’s a lot to talk about.

So let’s get stuck in!

There are two aspects. The first is “the trend is your friend”. Hedge funds seeing a profit opportunity.

It also seems that Remainers are fighting back whilst Mrs May and her ministers are giving out hard line red lines, not the mention the statements by Junckers and Hollande. The mood music sounds confrontational and unhealthy. Hence a run on the pound. 

However, having read “The rotten heart of Europe” by Bernard Connolly nothing would surprise me. ‘Britain needs punishing’ and what better than a good old Sterling crisis. Juncker must be ecstatic. 

Maybe the run on the pound is a reflection of a perceived incompetence by Government Ministers who seem to be offending their natural allies and alarming the foreign communities at home and worldwide.

The words of Junckers, Hollande and The Tory party are giving out such a bad smell it feels like the run up to a war. Plus the words of doom and gloom from business all add up to an inevitable run on the pound with the only winners being hedge funds and those like the EU establishment who want to destroy “Anglo Saxon” economics.

All good points. One thing that’s become clear is that for the duration of the Brexit negotiations we’re going to see confrontational and highly politicised markets. The pound is in the eye of the storm right now. That’s natural. The currency markets are huge and liquid. And anyone moving out of other UK denominated assets – selling bonds, stocks or property – has to sell pounds as they do so.

That could be what we’re seeing: a wave of capital leaving the UK and selling pounds as it does so.

What are people selling? Certainly not FTSE 100 stocks! The entire stock market has been on a tear since Brexit. Yesterday the FTSE 100 hit a record intra-day high of 7,129, before falling back. The market is up roughly 17% since its post-Brexit slump. No problem there.

Perhaps it’s the bond market we need to look at. If large numbers of people sold gilts, that could be an issue: you’d expect to see our cost of borrowing spike and the pound fall. There’s been a selloff in the bond market in recent weeks, with the cost of government borrowing roughly double what it was a month ago (albeit from a very low base). Yet still the cost of borrowing is less than it was post-Brexit. No crisis there. Yet.

One man who we haven’t mentioned yet is Mark Carney. His QE stimulus program looks more daft by the day, given the fact the economy is humming along fairly nicely. But like a friend who can only cook one meal that no one really likes, printing money is essentially the only thing Carney knows how to do. So that’s what he’s done.

And in one way he’s probably delighted: an unofficial policy of nearly every major central banker is to devalue the currency and make manufacturing more competitive. On that front the pound crash is good news. The Japanese would kill for a currency as weak as ours. Rejoice!

What is depressing though, and what we all have to get used to now, is that the markets are going to be driven by politics and policy for the foreseeable future, rather than the true drivers of capitalism: innovation, ambition, productivity and the like.

Accept that now. Take a deep breath and deal with the fact that the next thing Theresa May, Francois Hollande or Donald Trump says could have more of an impact on the markets than anything else.

Control the system, control your choices, control you

Moving on, here’s another note I found in the mailbag this morning:

Have any other readers noticed that it’s getting really difficult to open a $ account? The Nationwide International account I tried to open in June was closed last month? Are we at the beginning of capital controls?

Seems to me that you only have to look at the £/$ rate timeline to see what is driving £’s fall – the mouths of Brexiteers! I wonder if you can calculate the cost per no. of Brexiteer words? No wonder the PM doesn’t want a running commentary…

I don’t have an American account so it’s hard to answer. Your globe-trotting publisher Dan Denning may know more. He’ll be back tomorrow. Perhaps he’ll have more insight.

But what’s certainly true is that during times of economic and political turmoil the authorities’ first instinct is to lock the system down, reduce people’s choices and control what you can and can’t do. The first step in that process is to make things difficult, then make them legally impossible. So it wouldn’t surprise me.

But freedom to choose where you invest or save your money brings me back to yesterday’s issue. If you missed it, read it here. The idea of nationalising the bank system as the “road to financial serfdom” brought mail. Like this, for instance:

I don’t know Nick, I don’t see how anybody, even if they live down the road can just own peoples or their possessions.

A total stranger can’t own my possessions unless I agreed to sell them to him or her, or they try and take them from me but they can get arrested, only if they catch them.

But then we have insurances, and banks will have to give our money back if we report it to the police.

That’s true in a literal sense. No one can “buy” you in that they have a deed with your name on it. But think about it like this: who owns your house? If you’re mortgage free, you do. If you have a mortgage, who really owns it – you or the bank? If the bank called the mortgage in, could you cover the balance?

And your savings? Who “owns” them? You might think of them as savings, but really they’re a loan to the bank. An unsecured loan. The Cypriot “bail-in” showed us where that can lead to.

The underlying point, of course, is that in both cases the bank has enormous power to inflict damage or loss on your assets and your life. It can also control what you do with your money and when. It may not be ownership in the literal sense. But don’t fool yourself that it’s a benign relationship. In a world where the state nationalises the commercial banking system, you’d be dealing directly with the authorities in every aspect of your financial life.

Ah. I promised myself this issue of Capital & Conflict wouldn’t be overly dour. Let’s do an about turn and talk opportunity!

The California green rush could begin in less than a month

There’s another vote – a potentially highly controversial and partisan one – coming up. It happens on the same day as the presidential election. The people of California will vote on something called “Proposition 64”. It involves the legalisation of cannabis.

I tell you this because just yesterday, Eoin Treacy published the October issue of Frontier Tech Investor,which focused entirely on this issue and how to profit.

Eoin believes Proposition 64 could be the trigger that sets this story off. He recommended a way to invest directly in it.

But wait. Is it even ethical to do so? To invest in something that in most places in the world is an illegal drug?

It’s certainly one to debate. I received this note in my inbox earlier in the week:

There is plenty of evidence of the harm recreational drugs do – including leading into the really nasty stuff.

I would be really proud to say I read MoneyWeek if an editorial briefly announced that after consideration, they have decided not to offer advice on investment opportunities.

Take a stand.

It’s a good point and one worth debating. My view is this: as a publisher of investment research, the single most important ethical consideration is whether we’re proving intelligent, well thought out and credible analysis to our readers. If we do that, and you the reader find it valuable, you’ll keep reading and our business will flourish. If it isn’t, you won’t value it and we’ll go out of business. It’s simple. And there’s a moral code inherent to it.

Part of that moral code is that our readers are grown-ups capable of deciding for themselves if something is valuable, worth reading and worth acting upon. You won’t agree with everything and nor should you. You won’t act on every opportunity and I wouldn’t expect you to. But it’s entirely your choice.

I’m not going to tell you what you should and shouldn’t think is ethically right. But if something is a compelling and well-argued investment opportunity, it’s my duty to share it with you and let you decide for yourself.

So I will take a stand. But not to censor ideas that could help you live a richer, freer life from you because they may challenge or upset you.

This is a great working example of this. If the people of California decide to vote for the legalisation of cannabis, it could kick off a major bull market (look at the kind of returns the breweries made post-Prohibition, which is how the Kennedy family made their fortune).

-Read more at (English)-

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