Eddie Hobbs: Cool heads required as Brexit crash out threatened at worst time since Great Depression

Hell-bent on breaking out of the EU orbit at any price, the Boris Johnson government may find its yellow hammer swallowed in the maw of the next global financial crisis, suggests Eddie Hobbs.

Eddie Hobbs: Cool heads required as Brexit crash out threatened at worst time since Great Depression

Hell-bent on breaking out of the EU orbit at any price, the Boris Johnson government may find its yellow hammer swallowed in the maw of the next global financial crisis, suggests Eddie Hobbs.

Global bond markets are flashing inbound recession which could slide into depression if Central Banks have indeed lost control of the helm.

It looks increasingly like the worst time since the Great Depression to make an attempt to crash out of the world’s deepest free trade area.

Over 30% of the global bond market has gone negative and it is creeping along the curve from short to long, like a dark shadow.

Closer to home the entire bond market for Denmark, Germany, Holland and Finland is negative, Irish bonds are negative out to ten years.

Jyske Bank in Denmark is selling 10yr mortgages at -0.5% pa, where you get paid to borrow money, Nordea is selling 20yr mortgages at zero and at a measly 0.5%pa over 30 years.

In France and Germany average mortgages are at 1% to 1.4% pa less than half the mortgage costs here, thanks to Ireland’s protectionist marketplace which pays close to zero for deposits.

Shortly the ECB will be faced with bringing rates deeper into negative territory, potentially crushing margins for banks already struggling with very ugly valuations and pushing behemoths into financial emergencies.

In a negative world, cash will be attacked by withdrawal restrictions but you will be charged to hold money by your bank and credit union, pension funds will cut pensions in payment or take more risk in a desperate search for positive yields, insurance companies will be forced to drive up premiums, bank branches will close.

Central Banks will react by deploying even more extreme policies like buying up dodgy loan books and issuing helicopter money, a road of monetisation that could lead to runaway inflation which is partially why gold has surged.

There will be no tailwind from China this time which has reached the inflection point where more stimulus adds negatively to its debt-financed expansion.

Even in the US the bond market inversion has happened at a powerful recession indication point where its 10-yr yield fell below the 3-month rate.

It is why Trump’s confidence in a second term is diminishing by the day.

The USA is holding the only top investment grade bonds left in the world that are still trading at positive rates but that may change quickly as its key 10 year bond yield continues to slide.

All that’s left is a shift in perception by US consumers who represent nearly a fifth of the global economy but who still haven’t got the memo and if they do, it’s game over.

This could happen any time soon and will play out first in an equity rout, a US President in retreat and an economic chilling.

The rescue from the Global Financial Crisis, looks like it wasn’t a rescue at all, that all the stimulus did was inflate asset prices, shares and property and put zombie corporations on Central Bank dole by driving down borrowing rates.

It has also added a bubble to Government bonds.

By interfering in the natural destruction and renewal cycle, Central Banks globalisation of Keynes doctrine has alienated workers by acting as a transmission vehicle to the balance sheets of the rich and helped spawn new political forces like Trump, Salvini and Johnson.

Central Bankers will argue that ten years of extreme policies averted a nasty structural recession but unhappily the time it bought was not met by structural reforms.

The bond market is speaking with one voice and it is saying that the world is on the brink of Japanification.

There is no credible evidence that negative interest rates improve credit creation because its upside-down sensation scares consumers into hoarding and saving not borrowing and spending.

A negative world drains liquidity from bond and money markets and makes banks more conservative in lending.

The policy response from Central Banks will be to cut rates and jack up quantitative easing operations, meanwhile, Governments, already carrying high debt, will attempt fiscal stimulus hoping to raise the loot cheaply from bond markets.

In a negative-yielding bond market, creditors will price against losers with weak currencies and poor prospects which brings us to the UK Government plan to crash out of the EU just as all this is kicking off.

The UK will be a risky borrower, desperate for trade agreements but supplicant to the US with its bicameral and bipartisan support for the GFA, at loggerheads with the EU and on collision course with China over Hong Kong.

The UK will be perceived by credit markets as facing a prolonged winter of economic weakness which, set against a global economy entering tepid growth, ought to be the stuff of nightmares for any rational Government.

Whatever the outcome of the domestic political labyrinth that faces our neighbour, the UK, EU and Ireland must find a way to work together. We are not enemies.

Faced with a blazing domestic row next door, the obvious thing to do is to exercise understanding and cool-headedness, sticking to logic and reason even when faced with some unpleasantness.

What hasn’t helped has been a green delirium led by some columnists who have stoked passions in persistent café psychoanalyses of our neighbours.

This has added to an unhelpful atmosphere of bitterness and entrenchment, driving moderates into their bunkers and playing into the game plan of the hardliners.

These columnists sallies are a Johnson weapon, that is the point.

It is not a sign of weakness to compromise from a position of strength, giving the other side a bridge over which to retreat with honour, but it requires imagination.

Other tools are needed, like drawing from the subtle duality of the Good Friday Agreement, linking the ending of the Backstop to a Northern Ireland referendum on staying in the Customs Union while remaining in the UK, a pivot that could create a well-timed economic tailwind and a jobs bonanza for the North with spillover effects for the island, for peace and for friendship.

Eddie Hobbs is a financial adviser and author. www.hobbsfinancial.ie

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