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591: Trump, Brexit and European Integration


01-21-2017

Trump, Brexit and European Integration

 

PropertyInvesting.net team

 

We have given some frank and open analysis of what Brexit and Trump mean – this is not so say in any way shape of form we agree with either, but we thought it is important for our readers to have a clear view on what both mean – to assist in property investment decisions.

 

Brexit Crash? There are plenty of negative headlines out there that are willing property prices to drop or even crash. The main one is Brexit – we are all supposed to be in fear of the European ruling elite – and their negotiating tactics against the UK. Most people seem to think the UK has shot itself in the foot and there will be a lasting long depression and house price crash because of Brexit with massive export tariffs. It’s worth giving these assumptions some analysis.

 

 

Currency: Firstly Sterling has declined about 20% compared to just before the referendum. However, one could easily argue given the UK’s economic fundamentals that the currency was 20% over valued anyway – particularly when you consider the UK’s debts levels and balance of payments deficits. Many foreign investors were treating the UK and in particular Prime London property – as the safest of safe havens. Rather ridiculous when you consider the amount of UK private and public debt compared to GDP and our big balance of payments deficit. There is also still a significant chance SNP might call for another Scottish Independence Referendum, then there is political uncertainty in Northern Ireland that could again spill over into sectarianism. One could also argue that it was only a question of time before Sterling would decline against the dollar and Euro anyway – and Brexit has merely accelerated this process.

 

 

House Price Collapse? All the doom merchant professional economists, ruling liberal elites and media outlets like the liberal-socialist BBC predicted a house price collapse – or at least a 20% decline, but instead house prices have risen 3-5% in most areas since the Referendum. On an annualized basis prices are climbing 6-7% on a fairly consistent trend. It’s only Prime London property that has seen a decline of 5-7% since the Referendum – but a lot of that was caused by the increase in stamp duty on expensive homes, increase on stamp duty on second homes, and the fact that London prices have doubled in the last six years – so they were probably due some sort of correction anyway – this trend set in six months before the Referendum. It’s hardly a collapse in confidence because Prime London property prices have risen about 150% in the last ten years – dropping 5% is a mere dent. The ripple effect from London still looks to be fanning out across the country and continuing – despite threats of reducing EU and government funding in deprived regional areas. Yes, the bankers and some international investors have got cautious but its hardly a collapse in confidence. 

 

 

UK Business: The drop in Sterling of course makes imports more expensive and exports cheaper – so this should help re-balance the economy and give a boost to manufacturing. The fact Nissan has decided to build two new cars in Sunderland is a definite plus point and the UK hopes other manufacturers will follow suit. Considering the UK's abysmal manufacturing and worker productivity gains over the last 10 years – almost non-existent - this certainly does not support a strong Sterling. Just on this topic – we firmly believe the lack of productivity improvement has been caused by low priced (competitive) European labour entering the country – which offsets the benefits of investing in plant-machinery and leads to a more labour intensive economy – which has led to lowering unemployment and rapidly increasing employment. This is one of the reasons why successive governments have done nothing to control inward migration – it increases employment and the number of tax payers – whilst contributing to overall GDP growth. The UK has not seen the stagnation encountered in countries like Italy and Greece whose population is stagnant, aging and immigration levels have been far lower.

 

 

USA and Trump: Donald Trump was inaugurated as President of the United States on 20 January. A few things that seem obvious regarding his policies that will affect global economics and political alliances:

 

 

End of Obamacare – Trump and the Republicans think this ventures has been a monumental waste of US money and resources driving inefficiencies and escalating costs – he will tackle this head-on and end subsidies for the poor whilst making it more efficient as far as health care for the dollar is concerned. Pharma companies have been raking it in at the expense of the paying US citizens, many operating abroad.

 

 

Russia:  Initially a new alliance will be fostered with Russia – a summit is likely to be held early 2017 in Iceland to discuss global military – nuclear power and conventional power - including plan to defeat ISIS. His relationship with Putin is likely to be one of mutual admiration – they are both autocratic, patriotic and nationalistic – and foster oil-gas developments. They both want to be seen on the world stage as strong leaders – that smaller countries fear.

 

UK: Expect Trump to want to foster a strong relationship with Teresa May who he regards as a centre-right wing ally - and he will admire the UK for wanting to drive Brexit through. He admires Reagan, Nixon and Thatcher - and will initially see his relationship with May as similar to the Reagan-Thatcher relationship. Trump is a descendant of the UK, claims to be a Christian-Protestant. He will probably do a trade deal quickly with the UK to economically help it detach from the EU. We expect the US banks to be watching his brief with regard to London as a financial centre. Trump likes to be unpredictable, he claims the neo-liberal ruling elites are far too predictable. Expect a good deal of unpredictability to his behaviours generally and also towards his friends in the UK.  

 

Trade: There will be new tariffs and trade barriers put up against China and Mexico in particularly to foster new jobs in the US “Rust Belt” the states that helped Trump get elected at Hillary Clinton and the Democrats expense. Trump will want to renegotiate all the trade agreements – let’s face it, he’s a deal maker, a negotiator and he loves doing lots of new deals – tough deals that are good for the USA to roll back what he considers to be the sloppy bad deals of the Obama years.

 

Environment: Trump does not believe in “Climate Change/Global Warming”, he claims China made it up to win business from the USA. Environment will disappear from the US government's vocabulary. Trump will want to open-up the coal mines and coal burning electricity power stations to generate jobs and low cost energy for manufacturing – the global environmentalists will be outraged – he does not care about the environment, he cares about business, building and jobs. If renewable energy creates jobs without wasting money and putting oil-gas-coal people out of work, he will concede that it is a good thing. With Trump taking over from Obama, the environment just went from top to bottom of the US agenda. Regrettably, anyone that thinks differently is probably in denial.

 

Property: Remember Trump is a property investor – a property developer. He will be mad keen to build new roads, airports, skyscrapers, housing estates, factories, pipelines, infra-structure and create growth and jobs. This is very different to Obama – who was more interested in protecting the environment, putting regulations in place, climate change and closing dirty power stations and dirty manufacturing plants – he exported the pollution to China (manufacturing) and Germany (coal). Expect a building boom using borrowed money.

 

Interest Rates: Its uncertain which direction these will go in. If people get behind a Trump boom – interest rates may rise to keep inflation under control. Bond prices will probably come under threat – there could even be a bond price crash if people lose confidence in the dollar. That said, any military incursions could actually help the dollar because the dollar is seen as the global safe haven currency. Furthermore the gigantic new oil and gas reserves in shale in the USA will underpin the dollar strength albeit the US debt pile will put pressure on it. It's tough to say which direction the dollar and interest rates will go. Reagan put up interest rates to kill inflation, but there is little inflation according to official figures, so this might not be a policy Trump enacts. A dollar crash would raise rates though, as would a massive inflation busting building boom and ultra-low unemployment levels.

 

South China Sea: Trump will want China to stop developing the Spratly Islands and sand banks in the South China Sea – he will demand they “stop” and “reverse course”. China will refuse. They will "not" want to loose face over this critical opportunity for them - they are very patriotic about the South China Sea. There will be much posturing and eventually some sort of military operation that could lead to war between the USA and China – note that we don’t say this lightly, we firmly believe this is the direction things are heading in. Rex Tillerman the new Secretary of State will be at the fore-front. This territorial issue is centred around the principles of maritime law, with the USA rightly claiming China is illegally occupying and developing the South China Sea islands. This gigantic tract of ocean and islands is about the biggest shipping corridor in the world, the area concerned is  has billions of barrels of oil and gas resources along with fishing rights and other resources. The area about five times bigger than the gigantic island of Borneo. The US and China Navy will both want control of this area in part because it is a conduit for around 15 million barrels of oil a day – that’s 15 giant supertankers. Any blockade will be disaster for the Chinese, Vietnamese, Thai and Japanese economies that are so reliant around 11 million barrels of oil imports from the Middle East. The South China Sea in our view is most likely to be the number one focus area for US tensions in the next two years. Then there is North Korea that the US accuses China of supporting – against the interests of South Korea. Tillerman is an ex-Exxon oil man – and he will use this knowledge to set up a stage for severe tensions if not open conflict in this area. Trump believes Obama and Clinton sat back idly and watched this unfolding mess develop – a crisis unfolding and ignored - the Chinese were never challenged by the USA and they are now emboldened to tackle China head-on – they accuse China of stealing jobs, intellectual property and importing unemployment in the USA and will we believe confront China as a rival superpower head on over the South China Sea.

 

North Korea: Trump will want to end any anti-US rhetoric coming from this country and also their nuclear ambitions – how Tillman and Trump will achieve this no-one yet knows.

 

Iran: Trump will probably put back sanctions on Iran for their part in developing a nuclear capability – he almost certainly believes Obama's weak hand was to blame for emboldening Iran. Practically the last country the Republicans want to see develop nuclear weapons is Iran. They don’t want to help them become a regional superpower that can then start bullying Saudi Arabia and lead Saudi to want to develop their own nuclear capability.

 

Israel: Trump will support the Jews in their lock-down of Israel. The first move made will be to move the US Embassy to Jerusalem - a bold move that will enflame tensions. The Palestinian state will be denied by Trump.  

 

 

ISIS: The USA will want to destroy ISIS as soon as possible. Trump and Putin definitely have one thing in common – they detest and will battle against non-elected terrorists. Trump will work with the Russians to achieve this goal. Expect unified support for Assad in Syria. Trump blames Obama for the disastrous arming of Syrian rebel groups that then lead to the growth of ISIS (ISIS brutally stole the Rebel weapons culminating in a war where Assad, the Rebels, ISIS, Russia/Iran, Turkey and the USA have all been fighting each other with almost a million people getting killed and all fighting entities getting in each other’s way with gigantic destruction of Syria). Let’s face it, a disastrous foreign policy mistake by Clinton/Obama and one reason why Clinton failed to get elected, because of her awful track record as Secretary of State (think Libya, Egypt, Tunisia, Syria, Iraq, Yemen, Iran, North Korea, Russia, Ukraine, Mail, Chad, Afghanistan– all disasters - despite spending $0.5 Trillion a year on incursions and failed battles).  

 

Saudi Arabia: Trump has no good words to say about Saudi Arabia. He distrusts them because of the New York twin towers terrorist attack. Remember Trump is a New Yorker who builds sky-scrapers and was outraged by this terrorist act and thinks Saudi was behind it. He thinks Obama was too soft on Saudi. He is also emboldened because the USA does not need Saudi oil anymore – much of the Saudi crude goes to another Trump foe China- he wants to make the USA totally self-sufficient of any oil imports within 5 years. Trump may ask Saudi for payments for military support/protection against its enemies. The USA also sees a link between Sunni Saudi and Sunni ISIS. Saudi will be a far less safe place to live with Trump in power since they can no longer rely on Trump to step in if they are attacked.

 

What’s more, many Americans are fuming, particularly Republicans, at how Saudi Arabia in Nov 2014 declared economic war on US Shale Oil producers – and Trump will view this as an attack on the US people. Their gamble that they would destroy the US shale oil producers failed miserable (let’s face it, the Fed was probably backing these nearly bankrupt oil companies with easy credit lines, acting in accordance oil companies as national champions). The Saudi Oil Minister even declared victory in the shale oil battle at Davos a few days ago, cheeky – again something that will rile Trump, the Republicans and Texan oil men. Trump will want to get his own back now he is President by rapidly increasing shale oil and gas production then exporting it – flooding the oil market – thence putting pressure on Saudi to reduce their production and/or sending the oil price down and thence reducing the Saudi oil revenues. Regrettably for the Saudi’s – the game they played against the Texan oil men failed miserably – and they are likely to see the wrath of a new leader in Trump breathing down their necks. Its won’t be pretty for the House of Saud. They will rue the day they let Crown Prince Salmon sack Ali Niami the Saudi Oil Minister, then the young Prince refused to cut production and thence scuppered the OPEC agreement Nov 2014 at the 11th hour and then opened the flood gates of oil to try and drive the US Shale Oil producers out of business – creating unemployment in Texas and North Dakota. This also led to a drop in US onshore rig count from 1850 (June 2014) to 450 (June 2016). Importantly US oil production was hardly affected – a mere drop of 10% - in large part (and despite Obama) because of the Texan technological ingenuity leading to efficiency gains the Saudi’s never believed would materialize. This monumental Saudi gamble and blunter back-fired and lost the Saudi’s about $500 billion in oil revenues – leading to a desperate plan to start an IPO of their state oil company national champion Aramco. And they made enemies of the USA, Russia and Iran along with it. We weren’t surprised to see they were ring-leaders in coordinating a U-turn production cut in Nov 2016 that was confirmed once Trump was voted in – we thing they probably go a visit from some of Trump’s advisers to encourage them to cut production -to stop putting US oil workers out of jobs. A Saudi economic war that failed miserably.

 

The Dollar: This is the underlying key. Looking back in history, anyone that threatens the dollar is dealt with severely. For instance, if China started dumping the dollar because of a South China Sea threat – then the USA would step in to sort it out in no uncertain terms like they did with Iran (sanctions after they threatened to sell oil in Euros), Libya (bombed), Iraq (invaded) and Russia (sanctions). The mighty dollar strength is the only reason why the US have such a high standard of living – so anyone that threatens to sell oil in Euros or Chinese currency will be sanctioned or have some sort of military threat imposed on them. We believe the CIA, the US Fed and US government are all in cahoots over this. So the last thing on the planet the Saudi’s should be thinking about is selling oil in anything but the might US dollar.  

 

Brexit: Prime Minister Teresa May gave a pretty good speech on 17 January outlining the key principles of what the UK wanted from Brexit – it was realistic and frank. We think the European ruling elite probably stood up, took note - it got them thinking – that they don’t hold all the cards after all. The threat that if the EU punished the UK for Brexit, the UK would have to re-invent itself was smart. What May was saying was – if you clobber us – we will rip up the global tax deals and alliances – then become a gigantic offshore tax haven to stay competitive. This is a real meaningful threat that the EU cannot ignore – it could actually be the best course of action in any case since so much of the UK economy is centred around the financial services of London. It will certainly help get a reasonable deal from the Eurocrats.

 

 

Why The Brexit Outcome: Let’s stand back though from the fine detail of Brexit and look at the fundamentals. What the UK population voted for was control over their borders. In 2004 – instead of capping European migrants at around 30,000 (many countries had this option) – Tony Blair allowed upwards of 330,000 a year to freely enter the UK that set in motion the current issue and Referendum outcome. Many British people – particularly the working class and the far right – felt threatened and think long term that this massive influx would change the fabric of UK society for good as it continued and accelerated with European Integration. They were also sick and tired of being told what to do by the non-elected European socio-liberal elite – people like President Junker and "Prime Minister" Tusk, you may recall how vocal Cameroon was against his “appointment” by Merkel. The back drop is that the British have always been a rather independent people – looking to Westminster for governing – and every time a ridiculous new European law came out – it switched people off – more regulation, more money being wasted in Brussels, more expense abuse and cronyism in Strasberg and Luxembourg – the Germans and French seemed to have carved everything out for themselves. People should acknowledge the above as key issues regardless of how they voted.

 

 

UK Military Might:  You may not be aware but the UK is the fourth biggest military spender in the world – we spend more on our military capability than Russia. Now that Trump is blowing hot and mainly cold over NATO, and Russia is on the border of Poland, Estonia – Germany, France (who interestingly are not part of NATO) will have to learn not to take our military presence for granted. This is one of the biggest - rather hidden – cards the UK has on the Brexit negotiating table. Let’s face it. We have a friendly alliance with Germany, France and the other countries – millions of Brits were killed in World War I and II defending Europe – and it’s looking like they will need our alliances in the next few years with the Russian threat and US wavering on NATO. If they beat us up over exiting the EU – then they might not be able to rely on us if there is an incursion in Estonia by Russia. This is one of the key reasons why we thing the UK will get a reasonable deal from Brexit – the Germans sell huge amounts of cars to the UK and they need the military alliance to be fostered. The UK should be proud about what it has to offer and we should not be bullied and beaten up as we exit the EU, otherwise they will lose not only a great trading partner, purchaser of their goods, but a great military power and partner as well. And let’s face it – Poland and Germany have practically no military to speak of – so they cannot afford to beat us up.  

 

Biggest Global Military Spenders 2016

 

 United States $622bn
 China $191.8bn 
 United Kingdom $53.8bn
 India $50.7bn
 Saudi Arabia $48.7bn
 Russian Federation $48.5bn
 France $44.4bn
 Japan $41.7bn
 Germany $35.8bn
 South Korea $33.5bn

 

Euro Elections: We also think Teresa May is well aware there are elections coming up in Germany, France and The Netherland and any if not all these countries may see a big shift to the right because of immigration and dreadful terrorist incidents that have occurred in the last two years partly related to the Syrian crisis and inward migration from North African countries. It’s quite possible Brexit then Trump were tipping points – and we will start to see the unravelling of the EU as we know it in the next two years in any case. Regrettably there seems to be a resurgence of nationalism by patriots – and this movement is demanding control of borders. Fortunately for the UK it is an island nation and this gives the ability to improve border control. It’s quite possible in five years time the British people will look back on Brexit as the start of a general unravelling – as the Eurocrats got too fat – and the populations unsettled over mass migration – partly related to overpopulation in desert regions – that triggered a change in the political landscape. Teresa May and the British government – smart as they are – are treading lightly through this movement and will try and make it work for the UK, delivering on the concerns of the 52% of people that voted for Brexit, plus some others that may have been wavering before and after the Referendum.

 

 

Why Brexit Is A Certainty: The message to all those people that voted Remain is – we really don’t know how this whole things will pan out. There was never going to be vote for a status quo since the Eurocrats wanted far closer integration along with a EU Military, and the British people never signed up to that when they agreed to join the Common Market in 1972. Longer term, if there is a “hard” Brexit which is looking most likely now, then the UK will be “allowed” once more to make its own trade deals, not be bullied by non-elected Eurocrats and become more of a global nation state open for business. Anyone that has any vague hopes of another Referendum and a reversal to Remain– consider this:

 

·        70% of Troy voters voted for Brexit – and Teressa May is the Tory leader representing her electorate

·        Jeremy Corbyn – Leader of Labour – wants to Brexit – it’s just he has not told anyone yet

·        Even if there was another Referendum – the result would be the same – no “buyers remorse” and indeed it could even be a higher vote for Brexit after the Eurocrats said some rather negative things and threats out the UK leaving. The chance of a group of moderates led by people like Tony Blair reversing course is almost zero.

 

 

Remainers don’t get your hopes up. It’s simply not going to happen. The country has to move on from that very closely fought battle that was lost to the Brexiteers and make the best of it. And it’s still quite possible a lot of people will think it’s a blessing in disguise in ten years time. It will be excellent if the UK negotiates a super trade deal with the USA that can be enacted the day we depart from the EU – and we think this is probably what Trump wants because he is not a supporter of the EU and Integration – he prefers individual nation states, probably as a businessman because they have more efficient and effective governments that can be held accountable. The skeptics would say he likes to “divide a conquer” or at least having a bunch of small countries instead of a super state that rivals the USA being more palatable for a far right American like Trump.

 

UK Property:  Finally on property – with the above as a back-drop, UK property may well in future years be seen as an even safer haven. Brexit may threaten up to about 20% of London banking jobs in the next 5 years, but it could also attract banking jobs back long term – particularly if Germany and France are inflicted with more problems after their elections. For the time being, we see Chinese investment into the UK increasing substantially and central London property prices taking a bit of a dip in 2017 with outer London continuing to rise. In the regions, the ripple effect will continue to fan out – our predictions of end Dec 2016 are still what we are working with. There won’t be any big property price crash because employment is if anything strengthening, the currency has declined around 18% since May 2016 and not enough houses are being built. The market is very slow or stagnant partly because of high stamp duty – people are building extensions and upgrading property using their £50,000 for that, rather than giving it to the government in stamp duty. Overall stamp duty collected is likely to drop drastically in 2017 – the law of over-taxation being learned all over again - Osborne's disastrous tax policies leading to lower tax and a greater housing and rental crisis. Buy to let investment has dried up after over taxation and we expect rents to rise, property prices to remain stable and levels of home moving to drop further as building levels also drop because of Brexit (investment) concerns. The house crisis will worsen. Despite all the turmoil, owning property remains a key plank if not the main plank in a quality investment portfolio – at least it can’t easily be seized, you can touch and feel it, its physical (not paper), it cannot be lost or stolen, it generates income and/or capital value in an inflationary world, and it does not go up in smoke during a financial crisis.

 

 

We hope this Newsletter has helped give you insights into the current political environment and that this helps frame your thoughts on the UK property investment landscape in 2017 and moving through to 2018. It really is an uncertain political landscape – our steer is to try and get used to this new unpredictable norm, see the opportunities and don’t worry too much about the threats, many of them made up by the mainstream media and people that cannot easily handle change or uncertainty. Harking tot he past.  Its best to focus on investment opportunities, the future, and make sure you stay healthy and enjoy your family, friends and immediate local environment – rather than worrying too much about things happening “overseas” that you have absolutely no control over. It's best to avoid the mainstream press and focus your time on your properties. If you have any comments, please contact us on  enquiries@propertyinvesting.net   

 

 

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