Impact of Brexit

Courtesy of Geopolitical Futures:

"Following the 2008 crisis, the integration of eurozone economies showed its vulnerabilities. Taking into account that eurozone consumption has dropped since 2008 while financial and socio-economic distress has increased, eurozone countries prefer to trade with non-eurozone markets with which they have limited integration – and therefore less contagion risk. This makes Germany more interested in the British market than vice versa. While the eurozone has to deal with questions surrounding the future of its common currency, this has never been a concern for the U.K. Still, the hurdles of trading with eurozone members caused British exporters to look for other markets even before the 2008 crisis. This prepared them for the post-2008 drop in continental European consumption. By then, British companies had already increased their exports to non-EU markets and continued to do so. Because of this, it’s likely that Brexit will not have a dramatic impact on the U.K.’s economy."

The Dollar

Another great interview on Real Vision with Luke Gromen.  He covered a lot, but I thought his summary below of Bretton Woods and how other countries are turning their backs on it, and the implications, is very useful.  Not for nothing, but part of the reason to prefer a Trump over Clinton was because of the belief that Clinton was prone to follow path one:

“…look, the deal was-- to be flip, the deal was, you take our jobs. You take our factories. You take our dollars. And then you lend us back the dollars, and we'll buy the stuff from you. And in third quarter '14, with the rollover in FX reserves, the world's saying, we're not taking the dollars anymore. And so I think what's ultimately happening is there's two paths for the US to go with that. Path one is, we'll invade your country and make you take the dollars. And path two is, fine. Deal's off. We'll bring the factories back. We'll bring the jobs back. If you don't want the dollars, you don't get to keep the factories. It's your choice.”

Hangover

One of the interesting data points that I came across post-election is that over the past 100 or so years, following any two-term President, there has always been an economic contraction within the first twelve months afterwards.  In that vein, I saw a really compelling interview with Lacy Hunt on Real Vision that provided the following nuggets:

As it relates to debt:
     -From 1952-1999, it took $1.70 of debt to produce $1 of GDP
     -From 2000-2015, it took $3.30 of debt to produce $1 of GDP
     -In 2016, it took $5.00 of debt to produce a $1 of GDP

That, my friends, is what non-productive investment and debt looks like.  But, there's more...

-The United States is demographically challenged.  The population is the oldest that it has been at any time in the history of the republic.

-As a post-script on those debt and GDP correlations, the last 10 years has only seen an average of 1% per capita income growth, far below historical trends.

-The post-GFC recovery has been the weakest expansion since WW2, and one of the weakest since 1790.

-The industrial capacity use rate has been trending down, which speaks to significant excess capacity.  That represents one of the strongest rebuttals to the idea that the proposed corporate cash repatriation plan will have meaningful impacts on growth.

-Of the $69Tn in outstanding debt in this country, some $20Tn is due in the next two years.  As rates are now 100bps higher than a year ago, that represents some $200Bn in additional debt service payments if all of those liabilities are simply re-financed.  In an economy where GDP only grew by $530Bn last year, more and more capital therefore has to go towards financial/non-productive overhead.

Anyway, all of it is just a roundabout way of saying that things look bleak for the economy prospectively.  And why, despite my disgust with Putin Derangement Syndrome and liberal hypocrisy, I am not a big believer in the Trump rally and related economic confidence.  Even if he does the right things, the bill is still coming due.