Tuesday, 25 October 2016
EU Trade Singularity.
The financial markets are preparing themselves for the US election. I know this not because of direct feedback from fund managers, but because I have had calls from various trading entities advising me that margins on my trades are about to go up through the roof over the period of the US election. Which makes a change from blaming Brexit for the price of everything else going up through the roof.
Inflation is coming to the UK. But it’s only Japanese inflation. The type that comes with FX moves rather than wage cost increases and as such is transitory but nonetheless unpleasant. I have already been out and bought everything I could possibly need for the rest of my life and stashed it away in a big barn. Of course I haven’t, but hoovering up car parts for the fleet of old German badged cars on my drive may not be so silly. I may even be able to renegotiate another 5 years of storage space in the garage from my wife for the BMW 328i auto gearbox I have had in her way there for the past 5 years. As I used to say "Well, you just don’t know, dear, when there will be a shock referendum resulting in the UK leaving the EU thus driving up used German car spares by upwards of 20%”. That showed her.
But global inflation is a different beast and though there are signs that it is on the turn it does need to be global and for it to be anything other than just FX driven. It needs to be linked to global wages. China is already pushing prices higher but I am still confident that the world has enough cheap labour to see substitution production occur before the big one kicks in. Unless, of course, we go 'protectionist', which is so de rigueur these days.
If there was a Nobel Prize for ‘Greatest contribution to protectionism’ it would currently have to go to a small region of Belgium that has somehow managed to upset the whole of the Canadian / EU trade deal. I was scratching my head over this until, whilst watching my new favourite Netflix series “A Very Secret Service ”, I realised that it was, of course, because the EU don’t actually want a trade deal at all. It is such a French thing to do. Set up such a complex set of rules that you know there will always be one small one standing in the way of any change. If you want the change to occur you ignore the small thing stopping it and if you don’t want it to happen you blame the small thing stopping it. Finally, if you change your mind, you pillory the small thing that was stopping it and laud oneself for such direct positive action. Sound familiar to the management actions over the LIBOR and FX fix cases?
So either the EU had no intention of getting a trade deal done, which just shows where the protectionism really lies in the world (lets add German blocks on Chinese M+A), or this is a prelude to annexing Wallonia properly into France as ‘punishment’ for preventing the Canadians from speaking French in a more French way, or whatever was in the deal. I do wonder if the UK were staying in the EU, Cornwall could have pulled the same stunt citing lobster competition. I doubt it somehow.
At this rate trade in Europe is going to be solely limited to within Europe and the place is going to vanish into its own trade singularity crushed under the gravitational pull of its own regulation to the point that any negotiation falling beyond the EU event horizon will never be seen again. But the EU singularity is not completely black. Hawking radiation will occur at the event horizon, otherwise called Brexit radiation. Here paired virtual particles pop into existence with the pro-EU one falling into the singularity and the anti-EU particle being radiated out into space before it can be captured. As Canada has found out, approach too close and the huge gravitational tidal forces can rip any deal apart long before it actually becomes absorbed into the EU singularity.
The fate of these singularities is complex. Some theories suggest that they last forever getting larger and larger, whilst some say that they just fizzle away as they continue to radiate away mass through Brexit radiation. Yet a recent theory suggests that they can, due to quantum gravity, explode into white holes, which are the exact opposite of black holes and spew all the mass they have trapped back into the universe. Well, that would be an interesting outcome for the EU if it flipped into a deregulated, open, free trade organisation based on independent countries bonded by common ideals. Wow, Supernova!