Nancy Bush is a veteran bankanalyst. The following does not constitute investment advice, and the views andopinions expressed in this piece are those of the author and do not necessarilyrepresent the views of S&P Global Market Intelligence.
Well,everybody told them so. Many, many experts (economic, political, social, etc.)had warned the people of the U.K. that Brexit might not be all that is wascracked up to be. Being the great-great granddaughter of Confederate soldierson both sides of my family, I can personally attest that not all insurrectionsturn out exactly how the revolutionaries imagine (or hope) that they will.While they may begin with the noblest of intentions — usually to overthrow theyoke of some distant and overbearing master (King George III, the government inWashington, the EU in Brussels), they tend to be born more of emotion and lessof logic and hard-headed rational processes. That's why they're romantic, that'swhy they have books written about them, and that's why they keep happening —and very often, why they fail.
Well,how ya feeling now, Boris Johnson, given that you have flubbed it completelyand your political future has gone down in flames? The reason that the AmericanRevolution succeeded where many other popular uprisings have failed is that themen behind the Revolution were at their core men of logic and diplomacy, aswell as being political revolutionaries. While Thomas Jefferson may have beenthe philosophical father of the Revolution, he was a lousy businessman andgenerally inept with numbers. (He obsessively wrote down everything he spentbut failed to ever add up the sums.) Not so for Benjamin Franklin, who knewboth where the bodies were buried and where to get the money to finance thewhole shebang. The American Revolution had thinkers — but it also had doers.
Brexitseems to be a bit short on the latter. Barely a peep was heard from eitherMichael Gove or Boris Johnson — the two most prominent front-men of the Leavecampaign — until they responded to their prospects for election for PrimeMinister. That silence came in the face of global markets that were in turmoil,a pound sterling that was plunging in value, and Conservative and Labourparties that were coming apart at the seams. The EU leadership has sharplyrebuked the British politicians and has demanded that talks on separation beginimmediately, rather than awaiting the promised resignation of Prime MinisterCameron in autumn. And even some of those who voted to leave the EU seem to behaving a serious case of buyers' remorse, with a petition to negate the outcomeof the referendum gaining millions of signatures.
Thereobviously needed to be a Plan B to be implemented immediately as the Brexitvote became known, and neither side had one. Into the breach stepped Scottishleader Nicola Sturgeon, to put forth her idea of holding yet another referendumto allow Scotland to leave the U.K. and thus keep its alliance with the EU.(Remember, the Scots have many French antecedents and have long had a contrary viewof the world to that of England.) I would suggest that Ms. Sturgeon herselfhave a plan for the day after Scottish independence, because $50 per barrel oiland single malt scotch whiskey do not a robust economy make. As one former chairmanof the Federal Reserve (who shall remain nameless) said, the Scots seem to havelittle idea of how much of their economic well-being comes from Whitehall, andBrussels is unlikely to fill that yawning financial gap.
Andon our side of the pond, cluelessness continues as a political strategy, andone wonders whether Donald Trump is not taking his cues from the Brexiteers.His appearance on one of his Scottish golf courses in the wake of the Brexitvote seemed to mark some new personal high in vacuity and willful ignorance, ashe praised the outcome in a country that voted overwhelmingly in favor ofremaining in the EU. He then went on to say what a great thing the weakenedpound would be for his golf courses — due ostensibly to increased tourism, Iguess — but I suspect that is cold comfort to the millions of Britons whosuddenly find themselves with materially lessened purchasing power. Asjournalist EJ Dionne (with whom I agree on almost nothing) said on BloombergSurveillance radio recently, it's tough to keep using the term "narcissist"with regard to Mr. Trump, as the term has almost lost its meaning — we needanother, more potent word to describe him. (How about "sociopath?")And Mr. Trump should take seriously the one overwhelming reality about hislikely opponent in November — whatever else one may say about Hillary Clinton,that woman most definitely has a plan.
It'sa good thing that Bank of England head Mark Carney has a plan, which he putforth in detail in a wide-ranging news conference on July 5. First, let me saythat I am overwhelmingly in favor of amending the Constitution to allowCanadians to become President of the U.S., and Mark Carney would be my firstchoice. (Ted Cruz — not so much.) Mr. Carney reviewed the health of the bankingsector in the U.K., pointed out that funding costs for the banks there had notincreased materially in the wake of Brexit, and put forth his directive thatthe U.K. banks should pause in building capital and liquidity buffers and allowthat capital to be put to work in the British economy to defray the possibledamage that may occur as Brexit negotiations begin.
Mr.Carney also did not waver in his assessments of the many impacts of Brexit,saying that while the British markets had weathered the storm thus far, thereremained the likelihood of a "material slowing" in economicconditions in the months ahead. There was no "data dependent" drivel,no waffling about the prospects, and no attempt to let the political class offthe hook for the mess that they have wrought — just a clear delineation of whatthe BoE could and would do to try to soften the blow and lessen the inevitableuncertainty and volatility that will occur as Article 50 is triggered and therough-and-tumble of Continental politics begins.
Itwas a refreshing look at a central banker who is in control of his message andof his numbers — and one who is fully cognizant of the limits of a central bank'spowers. Perhaps Chair Yellen and Vice Chairman Fischer should study Carney'spress conference (closely) for clues about what to do should a similarearthquake strike the U.S. economy. What would be Yellen's words if — for oneexample — Donald Trump should be elected president and she had to deal with themorning-after fallout from that seismic event? What moves should the Board ofGovernors have in their playbook to try to offset the global concerns about aU.S.-China trade war, the costs to the U.S. of building a wall on the Mexicanborder, the $10-trillion revenue hole from Mr. Trump's proposed tax cuts, etc.?There's not much room for rate cuts — this Fed's weapon of choice for the lastmany years — so what's left in that bag of tricks, and is the size and depth ofthat bag being carefully gauged at present?
Asone wise friend of mine skillfully phrased it, the vote for Brexit in the U.K.was a vote against the economic self-interest of the British people at the sametime that it was a vote against the "administrative state." I don'tyet know fully what that means, but I suspect that I will learn much more asthe Brexit process advances and more of both parties' cards are laid on thetable. In the meantime, I must say that I am very happy that this year'sDFAST and exercises turned out tohave such a positive result, as it does give at least some confidence in theability of our largest banks to step in and provide support should the Americanscene become even more wobbly. In the meantime, I would ask those who designthe test's "severely adverse" scenario — is there some way that wecan stress the banks for a scenario in which the world has become insane?