Dear Friends,
Greetings from the sunny, and oft times funny, isle of Manhattan. Spring is springing, infusing the air with the promise only the changing of the seasons can induce. What a delight to bear witness to the beauty only unique New York can offer — fumes, sirens, blaring horns and all.
Check out our H2 hedge fund letters here.
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For a different sort of nice change, the political scene here is not the world’s focal point. The battle lines being drawn are between Great Britain and the European Union, where hard tacks Brexit negotiations are heating up.
There are but three weeks remaining for the EU and Britain to agree upon the terms of a Brexit transition, scheduled to take place in 2019. But it’s becoming increasingly likely Prime Minister Teresa May and her conservative government won’t even push off the starting block to getting a deal done.
The main sticking point to the EU’s trade proposal involves the status of Northern Ireland in a post-Brexit world. The establishment of a ‘hard border’ with the Republic of Ireland indicates that customs controls and immigration checks would be established. From the economic and political perspectives of parties on both sides of the border, free movement remains tremendously beneficial.
The real issue comes down to sovereignty. Critically, Northern Island would be subject to EU institutions and judges. More broadly, the trade deal is expected to propose the European Court of Justice oversees the final deal which facilitates Britain’s exit from the EU. To be clear, a European authority would have authority to enforce EU law on British sovereign territory.
Exacerbating the tenuous dynamic, Teresa May faces dissension from various factions of the House of Commons and even within her own conservative government. The very un-British drama of it all!
For all its challenges, Britain does have one distinct advantage over all of its developed market peers, that of time, at least in a fiscal sense. The graph below popped onto my Twitter feed yesterday care of Bloomberg’s Lisa Abramowitz. The Deutsche Bank chart tells a simple enough story. The United States wasted a great opportunity to extend the maturity of its sovereign debt while Britain seized upon the lowest borrowing costs in 5,000 years as no other.
In the event you’re chummy with anyone on the Senate Banking Committee, could you please call in a favor and request that they ask Jay Powell what possible explanation there is for Uncle Sam being such a senseless borrower?
With any luck, we would get more of what we’ve now heard twice – forthright answers, just as was previewed in my most recent Bloomberg column, Powell Brings Plain-Spokenness to the Fed.
In the event you missed Powell’s Congressional debut Tuesday, here are my two favorite answers. When asked about the ideal unemployment rate, Powell didn’t begin to get boxed into any sort of target nonsense that plagued his predecessors. He simply said: “If I had to make an estimate I’d say it’s somewhere in the low 4s, but what that really means is it could be 5 and it could be 3.5.”
And then there was my absolute favorite, which needs no introduction: “We don’t manage the stock market,” but “it enters into our thinking. I think the general thing is that the stock market is not the economy.”
Powell did not scream fire in a crowded theater as so many of his premature detractors had hoped. That would have made him the daft one.
I would add one note of caution to Powell’s prediction that the U.S. economy will remain on solid footing for the next two years, and that is the U.S. economy does not function inside a vacuum. As was the case when our financial crisis bled into other economies, it is equally plausible that events beyond our country’s reach can and will bleed into our economy.
As to the closest risk in range, it is not tempestuous Brexit negotiations. As nonplussed as the world is, this Sunday’s Italian elections do have the power to disturb the relative peace that’s prevailed since our own election day. For more on that and other challenges facing our European counterparts, please enjoy this week’s installment, Of Latvian Laundry & Italian Idolatry and Other European Tales from the Crypt.
To our friends in Britain and Italy, and as always, wishing you well,
Danielle
