16 days to get it right. I cannot emphasize the importance of the UK’s General Elections on the 7th May. Having stared down the abyss, the UK economy has come back stronger. No words can describe how important it is for the economy to stay on track. As the saying goes, if it ain’t broke don’t fix it. I am afraid to say and the people in the know have said it, any change to the current rebuild will derail everything the Conservatives have achieved and fixed over the past 5 years. This is no longer about which leader you want in power or even which party. In fact what it comes down to is simply which party will achieve the growth numbers that will make the UK an economic powerhouse globally. It is now a proven fact that the only party that will and can achieve this is the Conservatives. Sir John Major will enter the election campaign with a speech saying a Labour-SNP government will lead to “mayhem” and more importantly to economic chaos. You do not need an IQ of Einstein to understand these comments. Over 150 business leaders (15% of the FTSE 100 firms) have openly stated the same thing that anything but a Conservative government will surely lead to economic chaos, a fall in growth, job losses, a fall in property prices, and most importantly emigration OUT of the UK. People are worried. Unemployment is falling, wages are rising, people are better off. Don’t change it. Not to mention the need to keep the UK safe from outside threats and thus the importance of Trident (consider the jobs and wealth it creates). What i am saying above will have a major impact on the GBP and UK stocks/Gilts. We saw over the past 48 hours the GBP rising vs the USD (stable vs the EUR). The GBP has since come off from 1.5054 to trade at 1.4875 as I write this. This could be explained by the fact that the USD has begun rallying again and the polls continue to suggest Labour-SNP government. One thing I can almost assure you of, anything other than a Conservative government you can “kiss the GBP goodbye”. The City and global traders have all said the same thing. The warning shots have been fired.
Overnight the head of the NY FED acknowledged that the FED has a special duty of care for the whole world. He noted “The normalisation of US monetary policy could create significant challenges for those emerging market economies that have been the recipients of large capital inflows in recent years,” he said. We at the FED take the potential international implications of our policies seriously. In part, this is out of simple self-interest, since the international effects of FED policies can spill back onto the US economy and financial markets. In part, too, it reflects a sense of special responsibility we have given the dollar’s role as the international reserve currency.” Only recently the IMF warned of a “cascade of disruptions” for the global financial system if the US rates jump suddenly and there is a further surge in the USD. Jose Vinals, the IMF’s head of capital markets, said last week that the world is entering uncharted waters as Fed prepares to pull the trigger, warning of a “super taper tantrum” that could inflict even more damage than the original Fed-induced taper tantrum in May 2013. That event set off an exodus of capital from countries with big current account deficits, notably the “Fragile Five” of India, Indonesia, Brazil, Turkey and South Africa. Mr Dudley said interest rates in the US should be around 3.5pc once inflation returns to 2%. This is a warning shot that will send shivers down a great many spines. Borrowing in USD’s outside the US has surged from $2 trillion to $9 trillion over the past 15 years. Half of this is now concentrated in emerging markets, including $630bn to Russian companies and state entities, and roughly $350bn to Brazilian firms. It also includes at least $1.1 trillion of loans to Chinese companies, much of it through Hong Kong intended to circumvent China’s internal credit curbs. As we have noted several times in this commentary the FED will act wisely and patiently knowing that too much too soon will create a ripple effect that could damage all the good work the FED has achieved over the past 2.5 years.
The Telegraph reported this morning that the Greek government has ordered a mandatory transfer of cash reserves from state-owned companies to its CB in a desperate bid to gather enough cash to remain solvent. The decree could now help the government meet its monthly €1.7bn wage and pension bill, averting a default on its own citizenry. Greece owes over€1bn to the IMF that is due around the 14th May. The IMF and other creditors are becoming more and more concerned Greece will simply run out of cash. Needless to say the next choice will be default or reform. They cannot have it both ways. It is time to switch off the tap and get people back into jobs and stop retiring on a full pension at 50.
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