Authored by Michael Every via Rabobank,
Listen carefully. That is the sound of going rogue – and bond yields further through the floor.
Yesterday UK PM Boris Johnson announced he is going to prorogue–or close–Parliament, meaning that when MPs come back to sit next week they will only do so briefly, and will then not return until 14 October, when there will be a new Queen’s Speech to launch BoJo’s slate of legislation as the new PM. So far, so technical. Yet what this effectively means is that there will be a very narrow window next week, and then a slightly larger one in the final two weeks of October, for Parliament to act to prevent Hard Brexit on Halloween.
This is explosive and unprecedented stuff, politically. The British constitution is largely unwritten and so allows wiggle room, and the government insists they have checked the legality of all they are proposing; nonetheless, as the press and opposition note, it smells awful. This is clearly a case of Erskine May (the ‘parliamentary bible’ that looks and sounds like it belongs in a Harry Potter tale) turning into Erskine Maybe or Erskine Might.
Indeed, BoJo is being accused of a “coup”, a “constitutional outrage”, an “abomination”, and of being a “tinpot dictator”, though this being the UK, perhaps that should be “teapot”; but there is not just tea but a genuinely revolutionary atmosphere brewing. Bob Kerslake, former head of the civil service, is quoted in the Guardian as stating:
“We are reaching the point where the civil service must consider putting its stewardship of the country ahead of service to the government of the day.”
A Guardian op-ed advocates the current head of the civil service should follow the advice. Even the British royal family, already facing one scandal, risks getting sucked into this given some had expected the Queen might not accept the privy council’s advice to prorogue at all.
Of course, this all comes just after Bill Dudley publicly suggested the US Fed has a duty not to help ameliorate a Trump trade war via cutting rates and to instead hold fast to ensure he isn’t re-elected. As such, what we are seeing transcends Brexit, though I will return to it in a moment. Rather, this is the broad warning from my 2016 ‘Thin Ice’ report:
…the global neoliberal architecture collapsing, and perhaps taking some liberal-democratic architecture with it.
If you think that is hyperbole, consider this benchmark – how would we be reacting if the armed forces in any country were saying what Kerslake and Dudley just suggested?
This is not going to change for the better until we get a global new paradigm emerging – and that is a long way off. (Yes, Italy might cobble together a Europhile-PD/Europhobe-5 Star government, but how sustainable is that going to be, and will 5 Star’s party members support it?)
None of this is to take a stance on what any particular executive or legislature is doing on any particular policy front. Rather, it is an analytical view of how bitterly, deeply divided many countries are between a status quo ante, with its neat technocratic rules and regulations, and a populist backlash from those who feel these no longer provide a path to what they used to have and still want. One can argue “executive vs. legislature” or “executive vs. gate-keepers”; yet when the executive speaks of the “will of the people” as its justification it gets very Hannah Arendt very fast. Equally, however, what if the legislature and gate-keepers really are refusing to recognise the need for wrenching populist change, no matter how painful short term? One can argue it left and right and back and forth – but ultimately we will need to see a winner. And that is what markets need to focus on: not who is ‘right’, but who wins and what that means.
So back to the practicalities of Brexit. Parliament has only a few options: sit in another location and call themselves Parliament regardless of the prorogue – is that legitimate or also a dangerous precedent?; pass a law which would cancel the proroguing, which ironically would have to be signed by the Queen who just signed off on the prorogue; call for judicial review of the proroguing, which is on shaky ground according to government lawyers; pass a law to repeal Article 50, which would trigger an inverse political crisis as large as what BoJo is doing; or call a vote of no confidence in BoJo…at which point figures close to him have stated he will wait the allotted 14 days and then dissolve Parliament for new elections…AFTER the Brexit deadline of 31 October. In short, this is all likely to come to a neo-Cromwellian head next week, and Hard Brexit odds are right up there with an election leading us back to the same Revoke vs Hard Brexit binary.
What was the market reaction to the UK heading into such deep, dark waters? GBP initially sold off and then recovered to hold around 1.22. Hardly an emerging market seeing meltdown; by contrast, look at what happened to the Argentinean Peso yesterday, which is currently around 58 when it started the year at below 38. Likewise, Gilt yields declined 2bp at the short end and 6bp at 10s and 5bp at 30s. That is hardly the reaction to a country about to implode and default. Then again, it is hardly a ringing endorsement of the economic outlook either…which, together with US 10s at 1.46% and German 10s at -0.72% explains why we are crashing through our self-made Thin Ice in the first place.
That and the fact that China continues to slow due to its vast self-made problems, according to the Bloomberg Economics gauge. On which final note, today’s CNY fixing was 7.0858, again slightly lower than the previous day, but again much stronger than where the fix was implied (7.1085) and where the market currently is at 7.1652. That’s another piece of neoliberal convention going rogue – the PBOC is saying something, markets are saying otherwise,…and nothing is happening to them as a result.