Impact of MP shooting on Brexit

Will the shooting of MP Jo Cox while shouting “Britain first” impact the Brexit vote?  Think about all sides and form your own opinion before you read mine.

No.  Brexit is already leading by 6%.  No sane person would risk a negative reaction while their side was ahead.  Therefore the shooter is either insane, or engaged in some Machiavellian intrigue.  It is unlikely the cool-headed Brits will be influenced either way.  Violence there may be rare these days, but it’s not like they never saw it.

I predict Britain will leave the EU.  If not now, soon.  It will keep coming up.  It is a part of a mega-trend, in case you haven’t noticed, a reaction to the failed economic visions of the 2nd half of the 20th century.  Britain cannot accommodate the economic equalization of Spain, Greece and Italy through free and open migration of displaced workers.  This chain continues as workers from Moldova, Ukraine, Syria etc. have entered Greece, Italy, etc.  It is like the sea peoples that ended the Bronze Age.

There was a news article on Yahoo Finance today making fun of a survey showing the public expects investing returns of 10-11%.  But consider, there was later a segment on Marketplace about pension funds and university endowments backing unscrupulous hedge funds because of exactly that expectation!  An expectation formed by 70 years of exactly that kind of return, ending exactly at the end of the century in 2000.  All of the new starts and trade since 2000 is/are predicated on cannibalizing jobs, decreasing the size of the market into which corporations are selling goods, in other words: anti-growth.  And the EU has the lowest growth and is the most failed of any civilized group of nations.  (Is Nigeria civilized?  Unclear.)

Mega-trends do not start spontaneously.  There is not simply a “reaction” of nationalists to the modern global society.  Rather, it is a fact that the global society has for many decades been destroying more jobs than it creates while seeking short term profits, and this is now catching up with groups from OPEC to China, from Nigeria to Syria, from the US to the EU.

I am not opposed to “shareholder value” in fact, there can be no shareholder value unless there is a market for a company’s products.  That market consists mostly of the employees of other corporations.  If corporations collectively attempt to produce and sell goods and services fundamentally without employing people, they will have no market and no value.  It is a simple matter of short vs. long term thinking, and of stupidity vs. intelligence.  Read what a former CEO says about shareholder value.

Two things with similar effects have caused the post-2000 no-growth era:

  1. Trade with countries that have broken or corrupt economies so that the benefits of trade do not fully flow down to the citizens and their currency is not allowed to equalize.  The remain low cost labor sources, transforming good jobs into bad jobs that never get better, until finally the country completely breaks and the citizens who now have poor expectations, political habits and work habits spread the malaise to other countries.  This is why Brexit will eventually exit the EU, because the pressure will keep building if they don’t.
  2. Emphasis on increasing productivity and decreasing labor when there is a lack of demand for labor.  If there is unemployment, or if employment is not satisfactory (people working two jobs because each pays half as much as before), then there is no business case for marketing productivity methods and tools.  Yet this is just about the only concept US business startups have had since the late 1990s.

The global society, for all of recorded history and likely before, has reacted to one way to such situations, whether it was the organized productivity of the Bronze Age, the Roman Empire, the Industrial Revolution, the Colonial Powers, or what have you.  It engages in worldwide migration, chaos and war until trade and productivity are both destroyed.

Then full employment becomes necessary for reconstruction.  Wages rise and expectations rise and a boom follows.  Finally someone complains about plumbers having nice houses and the decline starts all over again.

The US will follow Britain in rebelling against destructive globalism and mindless robotic productivity.  When, I do not know.  Frankly, there is an opportunity now to elect someone who is hated by Republicans, but whom they are likely to vote for, and who embraces Democratic notions on LBGTs and gun control.  If we wait, then we will find it is not just old white guys who are out of work.  It will be black guys, black women, Hispanics, everyone.  Such an extreme could elect a true tyrant.

Watch out when the proponents of something start threatening.  Extortion is a sign of a position that has no merit, and everyone from EU leaders to President Obama is “threatening” Britain with dire consequences if they leave the EU (Obama said they’d go to be back of the queue on trade negotiations).  Extortion is what people resort to when they have no good argument.  It only works if you have a secret police to make the opposition “disappear.”  People do not like to be extorted, recognize it easily, and mostly will vote against it.  I think Brits are in that category.

The more dire predictions you hear, the more certain you can become (in the absence of real reasoning) that it is probably the right thing to do to oppose the fear-mongers.  The world will not fall apart no matter what Britain does … unless someone gets so mad they take it apart themselves, which the Brits won’t do.  So it’s a pretty safe bet the Brits will leave the EU, and after perhaps a little glitch, markets will rise and the world will go on.  Don’t let anyone spook you.

Will more nations leave the EU?

Probably.  We already know the EU is broken because Greece, Italy and Spain cannot realistically share a currency with Germany, the Netherlands, etc.  The southern Europeans need to have a currency devaluation to reduce their debt and lower the cost of their exports, so they can export their way out of trouble.

Another problem is that the EU is essentially an illegal trade preference.  An important tenant of the WTO, which uses trade to try to prevent another global war like WWII, is that member countries must give every other member country “most favored nation” status.  This does not mean they cannot charge tariffs, but that they cannot discriminate in doing so.  But they can discriminate against non-members.  This makes membership in the WTO and dependence on global trade a deterrent to war.  However, trading block agreements – whose legality seems dubious other than by mutual agreement to ignore the rules – undermine the WTO.  The threat of the EU trade block absorbing Russia’s trading partners is effectively what started the war in Ukraine.  Russia had only just joined the WTO, and one could never expect Russia to give up so much sovereignty as to join the EU!  If you are a US citizen, what would you think of us joining the EU?  Heck, we can’t even pass immigration reform among ourselves.  So support Britain’s referendum.  Even if they have it several times.

 

What returns should you expect?

Today Yahoo Finance published the results of a survey holding that Millennials expect a 10.2% return, and the general public even higher at 11%.  The two commentators and the host seemed to think this was absurd.  See article and video.

Later in the day Marketplace ran a segment on how pension and endowment funds are demanding similar profits from hedge funds, because our retirements are based on greater performance than they have obtained in the market since 2000.  During the early 2000s market commentators urged on this sort of expectation.  It is poor form to pretend now that it is unrealistic.  In fact, it was quite realistic from the 1930s until 2000, with returns averaging 7% in capital gains and 3% or so in dividends.

I suspect a flaw in the survey. The respondents probably were answering what the return for a particular investment should be if it is successful, not the portfolio average. It turns out that about 11% is the answer required to generate an average return in the 3% to 5% range since traditional growth ceased in about 2000. This is only a point better than corporate bonds for a much riskier proposition.

If you look at returns of people on the Fortune top 10 list, they range from slightly negative to +30%, with a preponderance at the high end. In the cases where this return has continued for many years, and some it has, then it is a reasonable expectation a professional money manager, subject of course to additional constraints, should be able to attain at least a third of it.

What’s really going on is that the market is over-invested with spurious gimmicky companies being founded to flounder. Successful high flyers can evaporate in a day (e.g. Valeant). Companies base their businesses on eliminating jobs rather than finding ways employees can create value, and this impacts the customer base. That “growth” would dry up in the era of productivity is inevitable. If you look at returns from WWII to 2000, including dividends, in fact they did average around 10-11%. They would still with sound policy.

Millennials have more of their life experience in the post-growth era, so logically their expectations are a little lower.  The commentators did not actually comment on life experience vs. expectations, probably because that undermines their point that the public is unrealistic.  Instead they wanted to blame investment marketing hype.  Frankly I have no use for hype either, but that is not what is causing these expectations.  If you look into the other writings of these commentators, they are a bit on the liberal side, as typical for media wonks outside of a few right wing sites, and it is simply the liberal agenda that investors should expect to be fleeced, either by their corporate officers or by the government.  What happens then is a spiral into deflation caused by poor expectations, a spiral which the planet has been rotating on the brink of since 2008, barely buoyed by negative interest rates and the like.

The problem is self-correcting.  But you may not like the cure.  Conflicts and unstable governments will arise which will destroy production capacity.  For example, the Syrian economy is basically offline, Iraq constantly teeters, and Nigeria’s solution to vanishing income from oil sales is to destroy and shut down their oil industry – not by consensus but by conflict.

Once production is low, and productivity is low, then if and when recovery begins, it will begin will full employment, wage inflation, and rising expectations.