1848?

BTFD or STFR depends on what game you think is really being played out there in markets. The recent bounce in equity prices on the apparent reversal in the Fed’s QT narrative together with an improving narrative on Chinese tariffs and now hopes for a reversal in Brexit, notwithstanding the resounding defeat of Theresa May’s ‘withdrawal agreement in Parliament last night, all suggest markets are betting on a return to ‘normality’. ‘Normality’, in this instance being a return to globalisation and a return to the debt based economic model.  This sangfroid, while commendable, is however, misplaced.  As in 1848, or 1969, this genie won’t so easily be forced back into its bottle, or in this case, shoving the plebs back into their box.

Democracies can only function when they can make electorates believe they have a voice in determining their future. Unfortunately, the pretence of choice constructed around a 100 year old ‘left-right’ narrative and two party system across most western democracies no longer washes with electorates when power has been subverted by globalisation. A representative form of government can only function when electorates believe their representatives actually represent their interest and views, but with globalisation they have always been denied a voice, until Brexit. Brexit however, was an accident. The referendum was permitted to quell a division in the Tory party and loss of votes to UKIP and ultimately because the Remain dominated political elite believed that the electorate could be cowed into supporting the status quo.  Perhaps foolishly, Parliament promised to respect the outcome of this ‘once in a generation’ referendum, both at the time and then again at the following general election in the manifestos of both Conservative and Labour parties. What this has done is to raise a major constitutional crisis over the issue of sovereignty. Many MPs seem to be confused on this issue however, believing Parliament is sovereign when it has only been leased these rights under contract by the ‘people’. These MPs seem to believe that their role as ‘representatives’ make them supreme to revoke any of their previous commitments and defy the people’s mandate.

By approaching the exit negotiations with the EU on the premise that ‘no deal’ was unacceptable, the Remainers have and will continue to ensure that the UK will never effectively restore its sovereignty. This was clearly obvious to the 118 Tory votes against yesterday’s Withdrawal Bill and will be equally obvious to voters as of the hollowness of Jeremy Corbyn’s promises not to exit without a deal. There are therefore only two options open to Parliament; have another referendum to try and legitimise reneging on the first one, or deciding to leave without a deal and leveraging one, once EU panics over its access to UK markets. The stability of UK equities and sterling this morning suggests the former is being discounted by markets. This however ignores both the possibility that another referendum won’t provide the same response, or perhaps the more likely outcome that it irrevocably fractures the current outdated ‘left-right’ two party political system.

As in 1848, Brexit signalled a more fundamental change in the political debate and people’s tolerance of their political masters. In this case, it is the push-back on globalisation and the one-world-order which has overseen falling living standards for the middle class in the West. The EU was a central plank in this process and hence the viciousness with which it is being resisted. The election of Trump in the US, the Italian elections and French Yellow-Vests are all manifestations of this. So also is Trump’s defence of US hegemony and particularly that of the US dollar.  Rising US interest rates funded by tax cuts and tariff increases are part of this process, not just to eliminate the threat of China, while it can, but also of the Euro.  As such, what we are witnessing is perhaps just the beginning of the fightback, rather than just a blip on the road to ‘ever-closer union.  China will not be let off the hook so easily, which probably means more disappointments for those looking for an early resolution on tariffs, IP and the South China sea. Rising real rates and tariffs in the US meanwhile will also continue to cut the ground from under the ECB/EU’s attempts to paper over the failing government financing across most of its southern members and falling exports in the north.

As a short dead dude with a fat cigar once said,  “Now this is not the end. It is not even the beginning of the end. But it is, perhaps, the end of the beginning.”   – STFR

 

Anthony