Endless string of consequences from Brexit

Outlook:

Today in the US we get import prices and initial jobless claims, har dly mar ket movers. Tomorrow it's PPI and retail sales, of far greater interest. Also tomorrow, Yellen speaks at a Boston Fed conference.

What should we be thinking about? Well, The Nobel prize committee just awarded the prize for literature to Bob Dylan for "creating new poetic expressions within the great American song tradition." The unbearably arrogant Wells Fargo CEO Stumpf was ousted (and the stock rose 2% immediately), a victory for Senator Warren and the Dems generally, if only a small punch in the emerging theme that the big banks should be broken up.

In the absence of other interesting data, China's trade figures are a bit scary. For one thing, they reinforce the idea of a slumping economy both globally and domestically, exactly as the IMF has warned. Secondly, the fallout has a narrow reach so far (the Australian dollar) but can widen out to other economies, like the UK. Britain hopes to maximize exports to China but it's a hollow hope if Chinese demand is slumping. And what about the renminbi? The FT reports it is already down 3.6% year-to-date and at "Rmb6.7291, the lowest since 2010, the same year the People's Bank of China abandoned its hard peg of about Rmb6.83 to the dollar." Most analysts think there is more to come. Devaluation is always the remedy. The Hang Seng has already responded by falling 1.61% overnight.

Then there is an endless string of consequences from Brexit. The FT estimates that it may cost the British taxpayer some £20 billion to exit as over €300 billion of shared payment liabilities gets sorted out. "The sheer size of the upper estimate, which some EU-27 officials reckon is too low, threatens to poison the politics of the break-up and derail a Brexit transition and trade deal, according to several senior European figures involved in the process. The €20bn upper estimate covers Britain's share of continuing multiyear liabilities, including unpaid budget appropriations of €241bn, pensions liabilities of €63.8bn and future contractual and other spending commitments totalling about €32bn. British Eurosceptic MPs are likely to react badly to the news that UK taxpayers might have to pay billions of pounds to Europe as the price of Brexit. One minister said: ‘It will have to be explained very carefully, to explain what we are getting in return for market access.'" Remember that Brexiteers promised £350 million per week in savings— not a giant bill at the end.

Moreover, "Brexit blows a hole in the EU's budget, with potentially far-reaching political consequences. It confronts Germany, Italy, France and other net contributors with the dilemma of filling any gap or scrapping programmes that Brussels and eastern and central European countries see as legally binding promises." The EU budget chief told the FT "The UK can pull out of the EU but it cannot escape its obligations under international law, especially if it wishes to become a ‘global leader' in trade. This is a matter of credibility. Brexit is not a poker table." So far, PM May has indicated Britain will pay all its bills, existing and contingent.

Off on the side, Russia is up to something. Putin is moving troops closer to Poland and the Baltic States, selling missiles to Iran, hacking the Dems for emails that may or may not be doctored, and doing heaven-only-knows in Syria. UK Foreign Secretary Boris Johnson says not to worry, Russia is nowhere near as big a threat as the old Soviet Union during the cold war. This may be true but it's not useful. The Russian threat is still a huge threat. Our theory is that Russia traditionally rattles the saber when it needs to distract the public from worsening economic conditions, and conditions are about to become worse on an oil output freeze.

Back in the FX world, we always get very nervous when the dollar is strong. Dollar rallies have a sad history of fizzling. Longs are all too willing to take the smallest bit of data the wrong way and sell their heads off. Meanwhile, the smallest bit of good data in the eurozone is met with gold stars and heavy buying. As for the yen, risk aversions seems to be the ruling sentiment, still. One lousy trade report from China and money flows to the safe-haven yen. And as the Brexit saga suggests, temporarily decent economic data is no match for the institutional mess thrown up by Brexit. It's a constitutional crisis, a crisis of authority, and a financial crisis, all rolled into one. We may say the yen will continue to firm and the pound will continue to slide, which leaves us hanging when it comes to the "benchmark" euro/dollar.

If the interest rate outlook is the key, we have to see the Fed as only reluctantly moving toward the first hike in a year. But developments are not likely to provide the fuel for additional hikes in 2017, especially the outlook for inflation expectations. We accept that an OPEC output freeze, assuming we get one at all, will be small and weak. Even if it succeeds in lifting the price to $60, that just means the US will ramp up production again, as noted yesterday. The result will be a cap on oil, whether $60 or $70, and thus a cap on inflation and inflation expectations. It's not hard to imagine 2017 will just be a replay of 2016—the Fed talking about hikes all year but not delivering until close to year-end. This is not the environment that supports a rising dollar.

Tidbit: Mauldin in the (fr ee) "Outside the Box" newsletter r epr ints a piece fr om the wonder ful Stephen Roach, formerly at Morgan Stanley and now at Yale:

"The new unconventional monetary policies in both countries (US and Japan) are obviously missing the disconnect between asset markets and real economic activity. This reflects the aftermath of wrenching balance-sheet recessions, in which aggregate demand, artificially propped up by asset-price bubbles, collapsed when the bubbles burst, leading to chronic impairment of overleveraged, assetdependent consumers (America) and businesses (Japan). Under such circumstances, the lack of response at the zero bound of policy interest rates is hardly surprising. In fact, it is strikingly reminiscent of the so-called liquidity trap of the 1930s, when central banks were also "pushing on a string."

"What is particularly disconcerting is that central bankers remain largely in denial in the face of this painful reality check. As the BOJ's latest actions indicate, the penchant for financial engineering remains unabated. And as the Fed has shown once again, the ever-elusive normalization of policy interest rates continues to be put off for yet another day. Having depleted their traditional arsenal long ago, central bankers remain myopically focused on devising new tools, rather than owning up to the destructive role their old tools played in sparking the crisis.

"While financial markets love any form of monetary accommodation, there can be no mistaking its dark side. Asset prices are being manipulated across the board – stocks and bonds, long- and shortduration assets, as well as currencies. As a result, savers are being punished, the cost of capital is repressed, and reckless risk taking is being encouraged in an income-constrained climate. This is especially treacherous terrain for economies desperately in need of productivity-enhancing investment. And it is not dissimilar to the environment of asset-based excess that incubated the 2008-2009 global financial crisis." Bravo.

Election Tidbit: More women have come for ward to claim Tr ump groped them. This could easily turn into a cascade of accusations, as happened in the Bill Cosby case. Only one in a thousand doubts their stories. The problem is that diehard Trump fans don't care. They are furiously angry at government in general (not noticing that inaction and bad action is due almost entirely to the Republicans). They are also angry at the Establishment (whatever that means) and "the media."

An issue that has been brewing all along is now bursting to the surface—if Trump loses, which less than a month before election days seems a dead-cert, Trump says it will prove the election is rigged. Trump is behaving exactly like a tin-pot dictator—if he wins, throw the opponent in jail and if he loses, the election had to have been rigged. This could have horrible lasting effects. Belief in the US electoral system, warts and all (and boy, does it have warts) is basic to democracy.

The ghost writer of the Trump biography is all over radio and TV pointing out that Trump is a sad little boy who didn't get enough love and attention, hence the childish acting out and refusal to accept responsibility. Trump's "art of the deal" is to huff and puff without ever letting up until the other side gives up in utter weariness. Trump is not going away after he loses. He needs the attention. Bloomberg has an op-ed piece from a foreign affairs expert: "The recent history of demagogic candidates like Trump, in both richer and poorer countries worldwide, indicates they often come back for second and even third attempts to win power. In the meantime, they force political parties to bend to their will, and their authoritarian style has a long-term, corrosive effect on their country's politics.

"Trump is part of a global phenomenon. Around the world, in wealthier nations and developing ones, democratic values and traditions are in decline. A broad swath of "elected autocrats" and candidates with authoritarian tendencies has come to dominate many political systems. Over the past decade, Larry Diamond of Stanford reports, 25 democracies have broken down. Often, these political systems collapsed after elected autocrats won power and then destroyed democracy. In many cases, these politicians launched vicious attacks on institutions even before winning office." Some countries named are Thailand, Italy, Turkey and of course, Venezuela. Here's a scary thought—Trump may start his own cable TV channel. Well, Roger Ailes needs a new job after being ousted from Fox for (you guessed it) sexual harassment in the workplace. How about throwing these two in jail?

		Current	Signal	Signal	Signal
Currency	Spot	Position	Strength	Date	Rate	Gain/Loss
USD/JPY	103.90	LONG USD	WEAK	10/06/16	103.50	0.39%
GBP/USD	1.2188	SHORT GBP	STRONG	09/10/16	1.3041	6.54%
EUR/USD	1.1024	SHORT EUR	STRONG	09/19/16	1.1168	1.29%
EUR/JPY	114.52	LONG EURO	WEAK	10/06/16	115.78	-1.09%
EUR/GBP	0.9042	LONG EURO	WEAK	09/19/16	0.8564	5.58%
USD/CHF	0.9885	LONG USD	STRONG	09/19/16	0.9804	0.83%
USD/CAD	1.3253	LONG USD	STRONG	09/15/16	1.3203	0.38%
NZD/USD	0.7067	SHORT NZD	STRONG	09/19/16	0.7305	3.26%
AUD/USD	0.7542	SHORT AUD	STRONG	09/24/16	0.7618	1.00%
AUD/JPY	78.36	LONG AUD	STRONG	10/06/16	78.48	-0.15%
USD/MXN	18.9902	LONG USD	STRONG	05/06/16	17.9418	5.84%