THE SHIEL REPORT

BREXIT

Primarily, aside from individual requests for my opinion on Brexit, that is what has me led to write this. I have noticed that people have become quite visceral as opposed to intellectually challenging both sides impartially.  As a trader, I am impartial on a Daily basis. One day I will have a Bullish bias on the DAX and the very next day will be shorting the Index. I do not become emotionally attached to an opinion just because I believe the market should do this or should do that. That is a sure way to financial failure. Over the past few months I have also read many posts, blogs and articles from various different asset managers who are equally impartial on the Brexit debate. Their client’s pensions depend on it, as in most cases the future yield of a pension can be down to stock market performance, therefore it is their fiduciary duty to their clients to remain as impartial as possible.

That impartiality is the ‘Grey’ I refer to in the title. Being able to see both sides of the debate and not get emotionally sucked in as many have.

So, with that, I too have researched both sides of the EU debate and drawn my own conclusions. I am also going to cover some salient points which I believe to be completely missing from various press releases. As a result, the overall read is more in the format of an essay as opposed to an article.

REMAIN

IMMIGRATION

One of the main arguments for the OUT vote is the topic of Immigration. I am sorry to the OUT voters, but immigration is key to Britain’s continued success both economically and culturally. My parents were both immigrants from Ireland coming to England in the 1960’s.  At a time when regrettably they remember signs of ‘No dogs, No Irish’ in some London pubs.  However this Xenophobic sentiment certainly did not dissuade them from making a go of it. A decade later they started their own business and over the course of the next 30 years set up two businesses creating hundreds of jobs in Bristol which did not previously exist.  So it would be very hypocritical of me to say Britain should not welcome immigrants.

PUBLIC SERVICES

The OUT campaign will say, “ok, well what what about the constraint on our public services, namely the NHS?!” Yes, there is no doubting there is a problem. My ex-girlfriend was a Paramedic. When my father had a heart attack back in 2002, the ambulance took about 20 mins to arrive. Almost 15 years later those wait times can now be as long as 2 & 1/2 hours.
Is that the fault of the EU?
No.
It’s the fault of our Government to keep up with increased demand on services through lack of adequate funding. In fact, the reason for increased wait times was due to a combination of factors.  Going from the NHS Direct service to undertrained, understaffed 111 staff handling emergency calls, fewer Paramedics due to low pay and an increase in hypercondriacs claiming a heart attack for instance when in actual fact it was just indigestion. A large number of these hypercondriacs were in fact from outside of the EU, for some reason, particularly one country in Africa, which I will not name for obvious reasons. So to blame the EU is foolhardy.

FISHING

My initial understanding from the OUT campaign was the impact on British Fishers with loose information on quotas and discard.
The Common Fisheries Policy is a set of rules laid out by the European Commission for managing European fishing fleets and for conserving fish stocks. In 2013 the European Commission voted to ban the shameful practice of discarding hundreds of thousands of tonnes of perfectly good fish, either by-catch or target species caught over the allowable quota.
The vote also included a legally binding commitment to fishing at sustainable levels. Also the annual quotas will be underpinned by scientific advice, to achieve healthy fish stocks and a prosperous fishing industry.
I’ll accept maybe being out of Europe would stop foreign boats fishing in British waters, but at what cost? How much would it cost the Marine Management Organisation? Not to mention, fish are fish – they don’t recognise National boundaries!

OUT

ECONOMISTS

I see the REMAIN campaign media stating ‘9 out of 10 economists are touting leaving the EU will be economic suicide.’ Who are these Economists? Where are their numbers to prove so?  9 out of 10 and 90% are often numbers used by various spin doctors to push a campaign. I have seen Donald Trump use it in America.  The public just aimlessly accept these arbitrary ‘statistics’ as fact and repeat it to back up their argument in an almost drone-like unison. Are these the same economists, the same ‘9 out of 10’ who said there is no housing bubble in 2006?!

UNEMPLOYMENT

Another is “Unemployment is at lowest level in our country’s history.” You may initially think, well surely an unemployment rate is an unemployment rate? How can it be anything but that number. Again, the Grey comes into question. How do you arrive at that number is the question you need to ask.
Ask any trader what the biggest day of the trading month is and their reply will be the NFP number (US Nonfarm payrolls). It is somewhat of a global economic bellwether that measures the level of those unemployed in the non farming sectors of America, the largest economy on the planet. Traders drill down into this number. How many of the jobs that were newly created in the month prior were part-time jobs? For instance imagine you are a big company and you move to a small town with 100 people. Let’s say 50 people are unemployed, then the unemployment rate would be 50%. If your company could hire only 25 people at 40 hours per week, then the unemployment rate would come down to 25%. If however your company hired all 50 people at 20 hours per week then the unemployment rate would be 0%. The net outcome for the company would remain the same. But the reduced pay for workers would lead to a poorer quality of life.  So coming back to the U.K. for example, with the 5.1% unemployment rate, how many of these newly created jobs are part-time? 81,000 last year. Or drill down further into zero hour contracts. Those hired on zero hour contracts by the end of 2015 was 801,000 according to the Office of National statistics, an increase of 15% from the year prior. That 801,000 contributes to about 2.5% of the workforce. We need less part-time jobs and more full-time. Don’t get me wrong, an increase in job creation is a move in the right direction, as long as the quality of life follows.

QUALITY OF LIFE

Unfortunately drilling down into the numbers, into the Grey, the inflation rate is far outstriping wage growth year on year. With inflation, economists use measures such as hedonic regression. Imagine a television that has Full HD technology and is priced at £500 in 2014. The same television is now £400 in 2015. That contributes to a 20% decrease in the overall inflation rate. However, people are buying 4k2k TV’s in 2015 and not Full HD TV’s. So the pricing model now becomes somewhat skewed as it does not accurately reflect consumer demand. Likewise with the basket of products used to measure CPI. If you supplement the pricing used for say Heinz Ketchup with a supermarket own brand which is cheaper, yet people are still buying Heinz Ketchup then again the model becomes flawed. Or shrinkflation whereby a packet of biscuits remains at a similar price but the packet decreases in size. These are all quite sneaky measures used to deliver an inflation rate which is quite frankly bogus. To give you a hard example, my mother bought an expensive kettle from John Lewis which offered a 3 year guarantee. After 3 years and 4 months it broke. We went to John Lewis with her receipt of purchase to see if there was anything that could be done. The exact same kettle was on sale priced 27% higher. That’s a 9% increase each year. Yet wage growth is growing at 2%. Interest rates are at all time lows, much lower than inflation, which means people are losing money on their savings each year.  Hardly the signs of a strong economic climate. Which brings me onto my next point, the British Pound.

STERLING

I have listened to the REMAIN campaign state how detrimental the effects will be on our currency if we leave the EU. Really? First of all the currency will more than likely depreciate in the short term which would lead to a boost in exports. In relation to the cost of our imports from the EU rising, the same guarantee of currency depreciation against the Euro is less so.
Do you know what the Interest Rate is at the European Central Bank? Do you know what actions they have taken over the last 18 months? Do you know what the deposit facility rate is? Do you know what the unemployment levels are in Europe?
The Eurozone is in dire straits.
Italy has an unemployment rate of 11.7%, Spain 20.4% and Greece 24% – that’s almost 5 times more than our own. The overall rate for the Eurozone is 10.3% – twice that of the U.K.
The ECB started printing money to the tune of €60 Billion per month last year buying government bonds. Yes you read that correctly, Billion. This year they have increased the asset purchases to €80 Billion per month – weakening the value of the Euro further. They have decreased interest rates even further to 0%. So inflation is going off the scales whilst the return on people’s savings have been reduced even further. To exacerbate the issue, the ECB has reduced the deposit facility rate to -0.4%. The deposit facility rate is the level at which large financial institutions receive interest on any money they park the ECB. So it’s now costing these institutions to park money there.  So, with rates in negative territory, they then withdraw their money from the ECB and as a result, this goes back into the general economy. It’s like additional money printing, as it adds even more Euros into the Eurozone – cheapening the currency further again. When the US operated similar strategies in 2009 onwards the US stock markets rallied. Meanwhile in Europe, the DAX which is an Index comprised of the Top 30 companies in Germany has fallen over the last year. Yet supposedly Germany is the strongest Economy in Europe.
And Britain is worried about leaving??? If anything the Euro will continue to be under pressure greatly alleviating any concerns stirred up by the REMAIN campaign as to the future cost of British imports with the EU if we leave. I’ll accept that the trading Tariffs imposed by the EU may change, but there is nothing stopping Britain negotiating better terms.

ECONOMIC STRENGTH

Apparently leaving the EU, Britain would ‘go to the back of the queue’ with direct foreign investment. Really? Ireland has the lowest Corporation Tax in the EU at 12.5% (6.25% if certain criteria is met). It’s no surprise then to find the European Headquarters of large multinationals based there, Apple, Facebook, Google, eBay, et al. In the 1990’s Ireland’s per capita GDP was only 78% of the EU average yet by 2005 it was up at 120%, predominantly due to the actions of the then Finance minister Ruairi Quinn phasing in the reduction in Corporation Tax attracting MNCs to what was a relatively agricultural economy into one of the wealthiest in the world.  Those MNCs brought skills, wealth and jobs with them. What is stopping our own Chancellor of the Exchequer, Mr. George Osborne, drastically undercutting the Irish rate, bringing those jobs and companies across the Irish Sea?

SWITZERLAND

Switzerland on refusing to join the EEA in 1992, which would have led to EU membership, proceeded to set up over 100 bilateral agreements with the EU. These were to comply with trade barriers, scientific research ,free movement of people and the Government still has not yet introduced any restrictions on EU workers.

CONCLUSION 

I am in favour of the EU.
I am in favour of having an integrated Europe.
To bring that even one step further, as some prescient conspiracy theorists claim, a One World Government and One World monetary system.
I have no issue with that.
It would bring more peace around the planet by uniting people.
(In fact a one world currency already exists – it’s called the SDR. The Special Drawing Rights is the currency of the International Monetary Fund created back in 1969. Some asset managers I have been in communication with from Wall St foresee this as coming to prominence in the not too distant future usurping the Dollar’s role as the global reserve currency).

But very regrettably, I have to vote out.
Why?
Trust.
Trust in Leadership.
I have an issue with being in an EU which is fraught with poor decision making and has a track history of lacking integrity.

Three examples of a complete breach of trust and faith in the Leadership of a European Union came from Ireland,Cyprus and Greece:

1. In 2008, Ireland held a referendum whether to vote Yes or No to the 270 page Lisbon Treaty. 53.4% of Ireland voted No. A year later Ireland was made to vote again. This time the result was a yes.

2. When Cyprus needed approximately €18 Billion back in 2013, part of the bailout terms set by the EU was a 6.75% confiscation on accounts under 100k and a whopping 40/60% on accounts over 100k. The Cypriot Govt rejected it, yet a week later the EU struck again and the bail in of citizen bank accounts was agreed upon. I spoke to one man from Cyprus here in Bristol who told me his retired friend had €2.1m in his bank account. He had everything taken bar a few thousand Euros. The Govt promised to pay him back in the ‘future’. He has since moved to London, come out of retirement at age 67, started working as a kitchen porter for £350 per week so he can send money back to his family in Cyprus.

3. In 2015, Greece held a referendum whether to vote Yes or No to accept the bailout conditions predominantly set by the EU with regards to Greece’s ongoing debt crisis. 61% of the country voted No yet days later, the Greek Prime Minister Alexis Tsipras signed in the very measures he had fought against namely Corporate tax and VAT will rise, privatisations will be pursued, public sector pay lowered and early retirement phased out.

So then, is democracy only democracy when the powers that be get the result they want?

I am extremely worried how the strings of EU power are being pulled by a group of individuals which I have not voted for nor know very little about. People whose decisions affect the lives of citizens who think they are free (I highly recommend a three part series Adam Curtis did back in 2007 called ‘The Trap’ which touches on this topic).  People think they live in a democratic, capitalist democracy. In actual fact it is far closer to a Communist plutocracy. In a Capitalist society, there is private gain and private failure. It is in the interest for an individual or group to set up their own enterprise. The risk of failure is potentially quite high but equally, so is the reward, via increased revenue by comparison to working for an Employer. However, if that startup fails, the individual, group or investor loses their investment (Capital). In recent years, investment banks have taken ludicrously high risks on derivative products (Mortgage Backed Securities, Collateralized Debt Obligations, etc) and failed.  However, the financial losses usually shouldered by the ordinary individual in a Capitalist model, in this example the big banks, was surreptitiously placed onto the shoulders of the public by way of banking bailouts and austerity measures as a result.
The mortgage derivative products which brought down most of the global economy back in 2008/2009 was in the region of about $1 Trillion.  The Bank of International Settlements releases a Semiannual report which shows the value of derivatives currently in the Financial system. The last report has a gross notional value of just under $493 Trillion. Now imagine if that $493 Trillion comes tumbling down? These same banks are also funding a large majority of the ‘IN’ campaign.
Do you trust them?

I’m not an economist but I have always endeavoured to keep abreast of the macroeconomic climate as best I can.  I didn’t predict the housing crisis back in 2007 but I certainly questioned the morals of my friend who was working in real estate trying to push a 100% mortgage on me. Which I didn’t sign into.  At the time my gut instinct was telling me something isn’t right.  My gut instinct is telling me the same with the EU. Personally, claims made by the IN campaign that “once we’re out, we’re out” is utter nonsense. Britain is the 5th largest economy globally, and just as a multinational company negotiates trading terms with a supplier, so can Britain with the EU to rejoin.

Until I start to see a track record of the EU standing by the decisions voted for by ordinary citizens, trust to be slowly re-established and for Britain to negotiate better terms which appease both sides of the debate –  then I am more than happy for a integrated Europe.

But very regrettably, I feel that time is not now.