Theresa May finally confirmed that the UK will pursue a hard BREXIT and that it will leave the European single market. Following the announcement there was a sense of relief that the UK had taken the plunge and admitted the inevitable, that the UK could not have its cake and eat it, there could be no single market access without free movement of people, one of the Prime Minister's stated red lines. The debate over the wisdom of this choice is not now one of importance. The key question is what will the impact be on UK trade now that it has decided to withdraw from the world's largest free-trade area, a bloc with over 500 million people.

The UK will now have to negotiate access to the European customs union while at the same time negotiating its exit from the single market. Commentators have described this as unprecedented and have highlighted the fact that it will require a legion of trade negotiators that the UK simply does not have. At the same time the UK will also out of complete necessity need to negotiate other trade deals simultaneously with countries all over the world. As a member of the EU the UK benefits from dozens of trade agreements that the EU has negotiated with countries around the world. These agreement are the product of decades of negotiating.

The UK prime minsters opening gambit in the coming negotiations on the customs union has been to threaten to walk away if a fast tracked deal can not be secured. The EU has previously stated that no negotiations can occur before the UK's exit is complete and the UK's attempt to play tough, as opposed to nice, on this point has raised many eyeballs. The UK is not necessarily in a weak position when it comes to negotiating access to the customs union. Whereas the expectation that the EU would negotiate on its 4 founding principles to keep the UK as part of the single market was asinine it would actually be a case of cutting ones nose of to spite ones face for the EU not to allow full and fluid UK access to the customs union. By finally announcing a hard BREXIT the UK has shown that it is now getting serious about leaving the EU and this was welcomed by European leaders. However, to follow this up with threats including that of creating a super massive EU offshore tax haven seems incredibly unwise. EU exports to the UK as a share of national income are a lot smaller than trade in the opposite direction. At the same time the European business community will be on the UK's side preferring as little disruption as possible so the emphasis should now be on playing nice with European political leaders.

The markets have responded reasonably calmly to the news appreciating the removal of uncertainty that had been clouding the landscape. However, a lot of questions still remain, such as London's potential exclusion from European passporting rules and it is these questions that this blog will seek to provide some clarity over during the coming weeks.

Questions over customs union: Europe now decides what our trading terms are

The Federal Reserve increased interest rates yesterday for the second time since 2008 while giving forward guidance for rates possibly increasing to 1.50% by the end of 2017. This is despite inflation continuing to to come in under the Fed target of 2%. While the US is considered to be close to full employment the economy does not look even close to overheating.

The Fed faces a basic tradeoff between growth and inflation. When it cuts interest rates more cash flows into the economy and business tends to perform stronger. On the flip side when the Fed raises interest rates less money flows into the economy. That leads to slower economic growth.

The reasoning behind the increase is hard to fathom in purely economic terms. Inflation is not a threat, wages have been stagnant for sometime and it seems that average living standards are going to fall post the repeal of Obamacare and the removal from the table of minimum wage increases. Rising rates would only add to the misery of the average worker. Perhaps a different game is afoot and one that is fairly obvious. Central banks are now political players and in the face of rising populism and economic nationalism they may feel that they have to tow a political line in order to maintain independence. We have seen the UK government make specific comments querying this cherished independence and in the US Donal Trump has made no secret of how much he disdains Fed monetary policy.

Touching on a theme brought up in yesterdays post, while inflation is nowhere to be seen in a classical sense, economic nationalism, essentially a reversal of the trend of increasing globalisation with protectionist policies, is itself highly inflationary. An 'America first' policy with penalties for companies that manufacture abroad will be inflationary. The expelling of millions of undocumented migrants will remove a vast source of ultra cheap labour and is inflationary. The dismantling of Obamacare to a pure market based system will push up premiums which is inflationary. The list continues. What this represents is a paradigm shift in how we see the economy and how it will behave. Old assumptions need to reevaluated and fast.

Inflation is always and everywhere a political phenomenon

Inflation rose to its highest level in more than two years, climbing by 1.2% compared to a year earlier. Perhaps more importantly with annual rates of producer price inflation rising at the fastest pace in more than four years, many analysts are now estimating the inflation will rise to 3% before the end of 2017. With matching wage increases highly unlikely, associated living standards are going to take a real hit. Some are forecasting that wage growth may fall into negative territory during the same period as the benefits of a weaker pound are being overstated.

Not priced into these forecasts is the prospect of steeply rising oil prices. On Monday oil prices rose by as much as 6.5 percent to an 18-month high after OPEC members and some of their rivals reached a first deal since 2001 to jointly reduce output to try to tackle global oversupply and boost prices.

In the face of potential rampant inflation the question is what does the Bank of England do? There are some voices who have been warning about large scale inflation for decades (or more). Then there are others who started warning about it just as dramatically from 2009 (QE interventions) onwards. The appropriate course of action being to jack up interest rates to double digits. However, with falling living standards and demand this would result in economic catastrophe.

The mantra that Inflation is always and everywhere a monetary phenomenon has been debunked, it could be argued, by the events of the last 8 years. The massive increase in the money supply through global QE policies not only did inflation not happen, it was deflation that became the critical problem.

In the case of the UK the cause of this spike in inflation is the vote for BREXIT. It is not because of an increase in the money supply. There is not too much demand for two few goods. There is no bottleneck in the supply chain.

It is imperative that if we are going to see a marked change in inflationary expectations we need to understand it probably has very little to do with the money supply and that increasing interest rates will only exacerbate the problem.

In a post earlier this year titled 'London Not Calling' we spoke about the fact that London's "future as a financial centre is increasingly in jeopardy" due to the potential loss of 'Passporting' once the UK invokes article 50. Passporting is the ability under EU rules for any financial firm to serve the whole region from a single base, cutting costs and red tape.

Recently, there has been a lot of concern around the threat of the UK losing passporting rights, especially if the UK goes for a hard BREXIT not agreeing to allow free movement of citizens from EU nations. The head of the German Bundesbank, Jens Weidmann, warned that the UK won't get a special deal from the EU on the passports. "passporting rights are tied to the single market and would automatically cease to apply if Great Britain is no longer at least part of the European Economic Area."

More than 5,000 financial services firms are "at risk” if Britain leaves the Single Market after Brexit, a senior Conservative MP, Andrew Tyrie, has warned. The removal of passporting would lead to many financial firms in the UK seeking to move to Frankfurt, Paris or Dublin.

Mr Tyrie was an ardent Remainer and has noted his surprise that the UK government is not taking this threat more seriously. With Theresa May now admitting that Europe will seek to punish the UK to make an example to other countries that may consider following the UK's example by holding a referendum on EU membership the prospect of the UK losing passporting is very real.

Firms hold multiple passports for different business activities and different member states, bringing the total number of passports held by UK firms to 336,421.

states, bringing the total number of passports held by UK firms to 336,421.

According to Italy's Europe minister Britain's vote to leave the European Union has started the bloc’s “disintegration” following the countries vote this weekend to reject a planned constitutional reform. While the referendum itself was not about EU membership the vote against the reform is largely considered another example of the populist uprising sweeping Western Democracies. Furthermore, the opposition to the reform was made up a variety of populist movements from both the left and the right whose singular commonality is opposition to the EU.

As a result of losing the referendum, the Italian Prime Minister, Matteo Renzi, resigned following which opposition calls for new elections have intensified. It is uncertain whether the ruling coalition will be able to continue and it is also uncertain if elections are called the populist opposition parties would be able to win an election. Yet given what we have seen over the last year with BREXIT and the election of Donald Trump, it would be unwise to bet against a anti EU coalition taking power. Irrespective of the subject of the referendum, the result very much endangers Italy's EU membership. Furthermore the result heightens anxieties over upcoming French Presidential election in January.

For the past 6 months the UK has been tearing itself apart over the BREXIT vote. A lot of the economic fallout from the vote was both predictable and justified. Yet right now BREXIT is probably the least of Europe's concerns. With potential elections in Italy and the election in France, Europe could be facing disintegration within the next 3 months. In our opinion BREXIT would not be the cause of this disintegration but a symptom of the same malaise that has hovered over western economies, and particularly in Europe, for the last 8 years and for which respective governments have been so hopeless in tackling. If this collapse were to occur BREXIT would have simply been the warm up act and much of the resulting tumult in the UK will turn out to have been almost irrelevant.

It is not without reason that sterling has climbed aggressively against the euro over the last few weeks to 1.18 (albeit still heavily down since the BREXIT vote). Right now if you want to bet which way sterling will go then you need to follow the French elections. If polls show Le Pen gaining traction then expect sterling to climb and climb fast. The choice of the much further to the right candidate, Francois Fillon, over Alain Juppe as the republican choice seems to have calmed fears somewhat.

It is a statement of the obvious but nevertheless worth making, politics is the driver of the markets. If you have a political science degree then perhaps it would be a wise move to get into the investment game.

The full economic impact of BREXIT has been laid out in the chancellors autumn statement. In total BREXIT is forecast to cost the UK £122 billion over the next 5 years in slower growth and lower tax receipts. Naturally one would assume that in the face of such awful news sterling would have collapsed on the international markets. Surprisingly Sterling was up against the euro on the day. The City is welcoming Hammond’s new spending plans with £25 billion going on new infrastructure projects. Part of the reason is that while £25 billion is half of what was hoped for it should mean that growth is not as weak as was feared. At the same time the government has eased austerity and quietly binned the target of a balanced budget by the end of the current parliament.

Yields on sovereign debt climbed slightly yet mainly due to the expectation of new issues of government debt to pay for the fiscal stimulus. Nevertheless, like with sterling one would expect that news of a £122 billion hole in public finances would lead to a collapse in government debt prices. Not so. Similarly if we look across the atlantic to the US the prospect of $1 trillion in new infrastructure spending (making American great again) sent markets surging.

Central banks around the world have long complained that monetary policy alone could not be expected to keep economies growing. With interest rates at 0, wages stagnant, productivity rates falling something had to give. In many ways the lack of fiscal spending can be attributed as part of the reason we have seen populist movements gain in strength. Political pressure has been the barrier to the type of direct spending we are now starting see, the irony being that those now in power were the most aggressive in opposing it.

What is even more interesting is that the common assumption that the markets are primarily concerned about debt levels is gradually being shown to be a fallacy.

While BREXIT may indeed mean BREXIT there are two commonly described forms that BREXIT may take; hard or soft. For the UK government and much of the press BREIXT is seen as a non-zero-sum game and there is much exasperation with regard to the Europeans failing to appreciate this. However, European governments do not see BREXIT this way. For Europe BREXIT is not a non-zero-sum game or even a zero-sum game. It is a game where there is no single optimum solution and where gains on one side may lead to disproportional losses on the other.

On the one side we have the UK that would prefer a soft BREXIT where it is able to enter into a bilateral agreement with compromise on free movement of people. In exchange access to the single market would be maintained, albeit on more restrictive terms.

And on the other side we have the EU who post the election of Donald Trump and with the prospect of a Le Pen victory in the French Presidential elections have finally cottoned onto the populist wave sweeping established democracies. The result of which is propelling the EU to a 27-nation consensus that a “hard BREXIT” is likely to be the only way to see off populist insurgencies. By granting the UK a soft BREXIT the price on the EU side could end up leading to the break-up of the EU.

What leaders of the EU are saying is that allowing Britain favourable exit terms is an existential danger to the EU, since it would encourage similar demands from other countries with surging Eurosceptic movements. What this means for the UK, and apologies if it seems a tad overwrought, is that the UK can not just be allowed to leave, even if it is without single market access. The UK has to be seen to be punished and to suffer.

The direct result of this is that we believe the current stability seen in sterling is not likely to last and that we should see the Euro climb again. Political pressures in the UK may also rise to intolerable levels.

Over human history a habit of mass destruction, generally self imposed to some extent or another, is displayed at regular intervals. We have had World Wars, Soviet Famines, The collapse of the Roman Empire, Black Death, the Spanish Inquisition, Thirty Years War, War of the Roses, English Civil War etc etc. At the local level people of the time think things are fine, whereupon things rapidly spiral out of control until they become unstoppable, and we bring massive destruction on ourselves. For the people living in the midst of crises it is hard to see it happening and hard to understand why. The election of Donald Trump, just like BREXIT, is that moment where we realise that things have been spiralling out of control for some time. The question is, is the spiral now unstoppable, have we awoken just in time?

What BREXIT and the election of Donald Trump have shown is that certain people feel there is a system in place that works against them, one which they have no conceivable notion of how to fight. It is a sense of hopelessness that causes sections of society to scapegoat, to toss a grenade into the fire, to burn things down. What we are seeing is a new wave of populism spreading before our eyes across the world.

How to deal with this threat is a vastly difficult question. While it may often appear that the the common ideology that joins those who voted for the UK to leave the EU or those who voted for a megalomaniacal business man is racism, this is far too shallow and simple an explanation. There is no one ideology that defines the populism we see. These populists can be the working class, impoverished students, middle class or the upper class. Similarly what these people are fighting against cannot be simply defined. We often hear that the battle is against an out of touch elite, whoever the elite may be for it seemingly encompasses everything that has any notion of authority. Just think of Gove's statement that "people have had enough of experts".

With the BREXIT campaign what we saw was practically the entire economic, legal and financial establishment join together to present the facts regarding what the reality a vote to leave would look like (and a pretty dire picture it was that was painted for which the actual reality has shown enormous fidelity). 52% of people, most of whom would not offer any disagreement to those facts, voted to leave anyway. In the case of the US voting for Trump the easy answer would be to agree with Hillary that half the country is a basket of deplorable's. You know, if the basket fits.......(obviously Trump's outrageous and egregious comments on the campaign trail make it far easier to be dismissive in this way). Yet, many of the people who voted for Trump previously voted for Obama, especially in the Rust Belt states.

Often in this blog we have spoken scornfully and pithily about post truth politics and the supremacy of feelings over facts. But considering the above, why should facts take primacy over feelings? Accusing someone of succumbing to their feelings also neatly avoids having to discuss the reasons that they actually feel that way. Perhaps this is the major failing by the 'elite'. This disregard for the feelings of people who faced with this dizzying, infinitely complicated beast called globalisation cannot articulately describe what they feel so angry about, is perhaps problem. So much so that they would end up voting against their own self interest, which one should not suppose they are unaware of (especially in the case of BREXIT). If were going down we are taking you with us!

What we are now seeing with BREXIT is the wheels very much coming off. While it is debatable whether facts should take primacy over feelings, this does not therefore mean that facts are not facts. What was warned about prior to the BREXIT vote has come to pass - plummeting sterling, steep rise in inflation, declining living standards, massive political instability, collapse in economic forecasts and the list goes on. Whether this situation is redeemable is a question for another post. The importance of highlighting this is to offer some perspective on what happens next following Trump's victory. Simply, all that despair and panic is absolutely justified, the dire warnings are correct and the world is very much going to hell in a hand basket full of deplorable's.

Following the High Court ruling against the government that it had the right to bypass Parliament when triggering Britain’s exit from the European Union we have seen a large segment of the press come out vociferously against the judiciary. The charge being that it was a rigged system, much like the charge of Trump and Trumpsters against anything and everything that is perceived to be against them.

We have spoken before about feelings replacing facts in shaping our reality and the blunt anti-establishment rage that seems to infect so many at present times. The attacks against the judges who ruled against the government as being 'enemies of the people' should send a shiver down ones spine. We should be wary of those who, like Trump, seek to channel that indiscriminate anger against society itself. Trump's accusation of a rigged system is no different from the rigged system that is being alleged by some in the UK.

In many ways BREXIT and Trump are the product of an extraordinary period of economic pain, demographic anxiety, and elite backlash. History is full of crowd pleasers who have used the anger of the populace to seize power. As the US goes to the polls our hope is that American voters will not make the mistake that the UK made when voting for BREXIT.

The early nineteenth century is generally considered to be the apogee in power and reach of the British Empire. Many think that BREXIT is a result of post colonial melancholia, a sort of symbolic pick me up. Given the economic impact of BREXIT you could say that it is at the same time an embrace and repudiation of the country's imperial past. For these colonial nostalgics who wanted to "take the country back" the BREXIT vote was a deliriously cathartic moment after a century long wait, something fans of the Chicago Cubs will understand very well. However, unlike the World Series, BREXIT may now be taken away.......

Yesterday we spoke about post-truth politics where feelings took precedence over facts in shaping our reality. In trying to understand this further we will try analyse the why, what is this feeling and why is it seemingly leading us to economic catastrophe?

Regarding the BREXIT vote, what is abundantly clear is that the abstract concepts invoked as justification were not at well matched to the realities that would follow as a consequence of the decision being made. 'Take our country back', 'regain sovereignty' but sovereignty over what exactly? Clearly this is something all concerned on the BREXIT side are still trying to figure out. The sense is that the feeling is matched to a nostalgia to a past that know one can quite define. One could argue it is a nostalgia for isolationism combined with difference and superiority, a sort of Millwall FC 'NO ONE LIKES US WE DON'T CARE' attitude, where every economic blow landed further reinforces and solidifies this feeling.

If this is true, and certainly it seems as if the government is tapping into this spirit, then we are all in for a rough ride. Last month, and now clearly just a little bitter taster of things to come, the price of Marmite went up over 10% in response to sterlings fall on the international exchange markets. Today The National Institute of Economic and Social Research forecast UK inflation will rise from 0.7 to 4 per cent next year. In an era of low interest rates and low inflation this is huge. What this means is that as a minimum average UK citizens can expect a reduction in living standards of 4%, likely higher.

No doubt post-truth reporting will find the real villains responsible and this will make us feel better, yet without any capacity or willingness to actually do something to fight this dawning economic reality it is easy for one to fall into despair. Those in power that have not yet had their brains eaten by the BREXIT zombie, such as Mark Carney and Phillip Hammond, are under attack. Yesterday Mark Carney announced the he will only serve 2 of his remaining 4 years as governor of the Bank of England. Meanwhile, ahead of his autumn statement Mr Hammond seems to be battling against the odds to create the required fiscal headroom necessarily to react to the BREXIT fallout.

We really are through the looking glass now. Chancellor Phillip Hammond has been warned by his cabinet colleagues not to endorse the dire economic forecasts of his own treasury department that show the British economy crashing next year because they will cause people to 'panic'. According to Liam Fox "We need common sense, not hyperbole and panic. There's no reason to panic."

So Mr Fox seems to be pursuing a bury your head in the sand strategy. The accuracy of the forecasts is not what seems to matter, its just that believing in them is the problem. This is what is called post-truth politics. Facts used to be treasured things but today they are viewed with suspicion. Experts are viewed with even more suspicion or as Michael Gove said, "The British People have had enough of experts", especially if they are armed with facts.

The recent attacks on Mark Carney by many within the conservative government along with the above head burying show that criticism of BREXIT, or even simple statements of the abundantly clear regarding its effects are now almost a thought crime. What is being observed is not criticised, just the acknowledgment of that reality.

What is clear is that today we have a reliance on assertions that 'feel true', that are comforting to our world view. However, feelings are not facts. It does not matter if you think it is the Sun and not the moon that causes tidesnor does it matter if you think that Britain is booming. The reality is that the UK is suffering economically as a result of BREXIT and no amount of fact fighting or head burying can change this.

Data today showed that UK GDP was down by a third, quarter on quarter, which if some commentators are to be believed, is a cause for Joyous celebration. Such has been the cataclysmic talk that the very realisation that the sky has indeed not fallen is prima facie evidence that Brexiters were right all along . Much comment today has been along the lines of 'bitter remainers relentlessly talking Britain down' should now 'pipe down' and get behind the government....and support the building of a new Royal Yacht to go out and get all those lovely new trade deals.

While we take the position that the likely economic impact of BREXIT is extremely negative, we are nevertheless going to indulge in a bit of bothsideserism. In the same way that snow in winter does not mean climate change is not real or vice versa one particular hot summers day, no single piece of economic data proves the arguments in favour of Remainers or Brexiters. The fact is that the UK economy is resilient but at the same time the huge fall in sterling cannot be ignored. What also cannot be ignored is that faced with market panic on the day the result of the vote was announced the BoE did what all sensible central banks do and promised to do whatever it takes to support the UK economy. Backing this up they then reduced interest rates by 50% and launched a huge new round of QE. These measure are enormously stimulative, being the precise tactics employed after the great recession. As an aside this does make you feel quite sorry for Mark Carney who having saved the UK economy to a large extent is now being attacked for doing so. This is a bit like a fire fighter saving someone from a burning house and being attacked for singing their clothes.

So the UK economy is not doing as badly as many Remainers thought it would but it is not doing particularly great either. And when considering todays economic numbers there is one very important thing to consider.......BREXIT HAS NOT HAPPENED YET.

Failed Conservative party leader and famous bald person, William Hague, is one ex politician now columnist worth following. Our suspicion is that Mr Hague's new role is unofficial government mouth piece. We will explain why a little later.

As followers of this blog will note we were somewhat perturbed by language used by Theresa May during her maiden conservative party conference speech over BoE interest rate policy and seemingly its very independence. To us this seemed beyond reckless, especially coming after the BREXIT vote. If the governments purpose was to spread fear and panic, while kicking poor old sterling while it is already on the floor then this move seemed like genius. However, despite our concerns over the composition of the current government cabinet, Mrs May does seem to belong to the more sober wing than the swivel eyed side. Therefore the feeling was that there was another game afoot.

The unceremonious booting of George Osbourne from the chancellery seemed to signal at the time that the Government was repudiating austerity. Certainly if there was one obvious culprit for BREXIT it was this. Further comments from the new chancellor seemed to also imply that the government would be looking at infrastructure spending as a way of growing the economy. However, with the the deficit widening, this level of economic support, although widely recommended by most economists and also now by the IMF, would be a hard political sell to conservative voters. Our initial excitement that the Chancellor's Autumn statement would be a bone to the British economy was somewhat tempered.

One week ago we reported on William Hague's blistering attack in the Telegraph on QE and the role of the BoE highlighting our concerns over the implications of this. Following on from todays announcement that the Government was backing Heathrow Expansion, to the tune of £22 billion, Mr Hague had another opinion piece arguing that;

"To soothe Brexit jitters Philip Hammond must go beyond Heathrow – and launch a bold new infrastructure plan."

Assuming that Mrs May and Mr Hague are not actually lunatics, our guess is that they have on the one hand played to their base with a highly populist message on QE and its impact on savers. The aim being to open up the ground for them to push forward with a 'Peoples QE', where instead of buying banking debt, the central bank 'prints' more money to invest directly into the economy. This makes complete economic sense, it is just the politics of it which were a little distracting.

Therefore we expect some very positive announcements to come from the Governments Autumn statements which in turn could be a big boost for sterling.

London's future as a financial centre is increasingly in jeopardy as financial firms start developing their respective exit plans. The cause of this is over the potential loss of passporting for financial firms. Passporting is the ability under EU rules for any financial firm to serve the whole region from a single base, cutting costs and red tape. Immediately after the BREXIT vote most of London banks began the process of drawing up plans, employing accountancy and law firms to make advance preparations so that should negotiations go awry with Europe a simple press of a button would spring plans into action.

Paris and Frankfurt have long eyed London's crown as Europe's financial centre and with the UK deciding upon a hard BREXIT path there is little sympathy and a lot of hostility.

According to the boss of the British Bankers' Association (BBA) 'Their hands are quivering over the relocate button'.

So far Theresa May's government has done little to inspire confidence seeming to be both overconfident (in the face of an utterly intransigent Europe) and incompetent.

Quote of the day comes curtesy of Monsieur Hollande, "I have said it very clearly; Madame Theresa May wants a hard BREXIT, then talks will be hard too."

As European leaders meet for a EU Summit the welcome for Theresa May was decidedly chilly with any notion that preliminary negotiations could start on the BREXIT process quickly dispelled. European Council leader Donald Tusk's welcoming words were a warning to not even attempt any negotiations.

The EU continues to ratchet up the pressure by simultaneously stating that it will take a hardline on negotiations while also refusing to show their hand until article 50 is invoked. With public opinion in the UK starting to turn against BREXIT, so called BREGRET, (according to a Ipsos Mori poll) as the economic effects start to be felt, the EU is inflicting a sort of existential terror. There is both simultaneous dread over the invoking of Article 50 and a intolerable build up of pressure as the wait becomes to much to bear. This is very smart by the the EU and we can already see that the government is starting to splinter. The longer the UK waits to invoke Article 50 (from which seemingly there is no return), and it is clear that the preparations are chaotic, the higher the chance that there is another referendum on UK membership of the EU, especially if the current High Court case over parliamentary consent is successful.

Are traders betting against sterling in danger of a positive surprise? The endless cycle of negative news surrounding BREIXT may create a self reinforcing feedback loop where every news story, every statement from the Government further convinces us that we are doomed and that the pound is going the way of Zimbabwean dollar.

After weeks of doom and gloom our feeling is that we may have reached a bottom, at least for time being, in the price of sterling against the dollar and euro. At this juncture we cannot see how things can appear much worse than they are now. We also are starting to sense that Theresa May might actually be playing that long game all 'Remainers' hoped she was playing when she appointed the 'Three BREXITERS'. Watching, Boris Johnson, David Davies and Liam Fox make fools of themselves while the sober and seemingly wise Phillip Hammond looks on with disdain, the thought occurs that this is stage managed.

The reality today is that the pound is now the de facto official opposition to the government.

Much of the focus this week is going to be the legal challenge being mounted in the High Court arguing that the government must defer to parliament on the matter of the UK leaving the European Union. The case will conclude Tuesday with a verdict in mid November. However, if the claimants arguments look stronger expect confidence in sterling the go up and vice versa.

Boris Johnson's proclamation that we in the UK can "have our cake and eat it" has been challenged by the EU Council President, Donal Tusk. Tusk criticised “the proponents of the cake philosophy” continuing “That was pure illusion, that one can have the EU cake and eat it too. To all who believe in it, I propose a simple experiment. Buy a cake, eat it, and see if it is still there on the plate.”

This afternoon we bought a cake for lunch and can confirm that it is no longer on the plate.

Following a 15% fall in the price of sterling Tesco and Unilever (makers of Marmite) are at loggerheads over who should suffer the impact.

People say that you either love or hate Marmite but as a taste of things to come we we are concerned that the Great British public may gag.

BREXIT. Currently the UK has one of the largest current account deficits in its history, which means day-to-day living is going to get a whole lot more expensive following sterlings plunge.

The dispute between Tesco and Unilever is just the tip of the iceberg. Unilever is one of 10 companies that owns the vast majority of the global grocery industry - as evidenced by this infographic below. If the British public wanted a clearer indication of how they might suffer as a result of BREXIT this should be it.

Brexiters might point to the FTSE’s record rise as a sign of strength post the vote for BREXIT. Yet this is very much a story of sterling weakness boosting foreign earnings – which account for around two-thirds of the FTSE 100 revenues.

At the same time the FTSE is hitting a new all time record (although it is 6% down this year, when priced in US dollars.) attention should be focused on a leaked government papers suggesting that leaving the European single market would cause GDP to fall by up to 9.5% compared with staying in the EU. Compare that to the GDP collapse post the great recession which was just a little of 5% and you get some idea of how damaging civil servants view BREXIT.

Sterling's alarming fall continued today following last weeks flash crash. The crash was blamed on rogue computer trades, possibly an accidental “fat finger" trade. Sterlings weakness can undoubtedly be attributed to the UK deciding to pursue a hard BREXIT strategy. Perhaps what has taken the market by surprise is Europe's hardline response. Hollande said late last week that "Britain must suffer the consequences of leaving the EU in order to save the institution from an existential crisis", some believe that Friday's crash while an error is nevertheless the direct result of the mounting tension over BREXIT.

We have been taken aback by the complacency of many people we speak to over the BREXIT process and the likely attitude that Europe will bring to the negotiations. Europe is not going to enter into negotiations with the UK on free movement of peoples within the Eurozone, no matter the cost, because in Europe's eyes what is at stake here is the future of Europe itself rather than simply the UK's involvement. By moving for a hard BREXIT the UK has little room to compromise on this point which means all rights and access to the European market will be lost. Further to this Europe will seek to punish the UK further so that it can be made an example of to all other members.

Hollande summed up this position by saying Europe “has always lived with crises. But this time, it’s not another crisis. It is the crisis.”

Leading foreign academics have been told they will not be asked to contribute to any government work and analysis on BREXIT because they are not British nationals.

This somewhat strange development leads us to thinking that Mark Carney's days at the BoE are numbered. Were Carney to leave, amicably or otherwise, we expect the markets reaction to be very negative.

Theresa May's attack on QE has caused some consternation yet should we be surprised by this action? Perhaps we should consider the questioning of the program and the role of the Bank of England as a sign that our new Prime Minister knows which way her bread is buttered.... Following on from a week where May confirmed a hard BREXIT, much to the lament of 47% of the electorate, is the above merely further pandering to her base? Many Leavers are still scornful of Mark Carney's interventions before the BREXIT vote. They are also much more likely to be against QE policies, typically being savers.

We will be watching the news with some fascination. Our investment thesis in terms of equity markets has been that they thrive on bad economic news since bad news means more QE. Political intervention into monetary policy will throw this assumption into disarray.

Those record high equity levels are now looking mightily vulnerable all of a sudden!

In Theresa May's maiden speech at the Conservative party conference as Prime Minister we picked up on a line that certainly makes us shudder.

"While monetary policy – with super-low interest rates and quantitative easing – provided the necessary emergency medicine after the financial crash, we have to acknowledge there have been some bad side effects.

"People with assets have got richer. People without them have suffered. People with mortgages have found their debts cheaper. People with savings have found themselves poorer.

"A change has got to come. And we are going to deliver it. Because that’s what a Conservative Government can do."

Either that is simply loose talk or the government is declaring war on the Bank of England which is extraordinary. Central bank independence is sacrosanct even if in practice there is always political pressure. It is for good reason that monetary policy was taken out of the hands of elected officials.

Many investors may be surprised that following the announcement that Article 50 would be invoked in March next year stocks continued to soar. Followers of this blog and our reports will certainly not be surprised, we live in an upside down world where, as far as stocks are concerned, good news is bad and bad news is good. Bad news, and the path of Hard BREXIT is a perilously dangerous road, merely increases the likelihood of more QE or other forms of stimulus.

Sterlings fall to a 31 year low on the other hand is the clearest signal that investors remain extremely concerned.

In the last monthly report we said,

"If the UK votes to leave the EU we see significant risks of a full-blown banking crisis and simultaneously a political and constitutional crisis.”

"There are truly serious implications for the UK’s banking industry and our expectation is that banking debt and banking shares will be hit hard.”

Two days since the UK voted for BREXIT the risks that were outlined in the report have already been realised. The prospect of a UK general election by the end of the year is highly likely while yesterday shares in RBS and Barclays were halted because of steep declines. Since Friday Barclays is down 18%, RBS 24% with losses continuing. Later in the report the case was made for Building Societies in a post BREXIT world

“Building Societies have very little FX exposure with almost all their business based in the UK. This

UK centric focus is an immediate advantage over banks and means that they can face any volatility in the housing market from a infinitely stronger starting position.”

Since the result of the vote, price losses in the Building Society debt sector have been capped at around just 1%. Further to the above the simple point was made that in times such as these the safest asset there is, is one that "which brings the tangible benefits of shelter and warmth.” and "On that basis investors looking for safety would be wise to gain exposure to UK’s housing market one way or the other.” That is what this Fund provides through its investments into the debt securities of the UK’s building society sector and will continue to provide as things become more uncertain.

In terms of market outlook, the leading consensus is that the UK is heading for a recession and it is one that is hard to disagree with. In the short term the main source of pain is going to be sterling’s record fall to a 30 year low. Currently the UK has one of the largest current account deficit’s in its history which means day to day living is going to get a whole lot more expensive. Inflation will rise and expenditure will by necessity be cut back, which in turns leads to higher unemployment and lower incomes. In the longer term there may indeed be a benefit for domestic exporters but this requires serious structural change.

In terms of the investment markets, equities will bear the brunt of the pain while there will be a clamouring into UK government debt. Many investors are going to be cut off from the European investment markets meaning that there will be a shortage of assets in which to invest. With inflation rising and interest rates near zero many investors will be forced to take losses on their positions. In such an environment investors will scour the high yield sector looking for investments that combine return with low risk. The building society sector is that sector. With banks in turmoil there is simply nowhere for investors in the debt markets to turn to generate return without substantial risk.

Finally it worth repeating that this Fund started its existence following the turmoil of the 2009 banking crisis. In the last report the point was made that;

"Since 2009 the market has been waiting for another banking crisis, firm in the belief that banks were never fixed despite the efforts of governments. They only thing keeping them operating being the implicit state guarantees.”

With the government in turmoil, the fear now is that with an impending banking crisis there is not the will, or indeed the wherewithal, to take the same measures as was taken in 2009 and that we are heading for something very serious. We believe that our track record can provide investors with confidence that their investment into the Fund is a wise one and one that will weather the storm.

Offshore Hysteria

Ever since interest rates were reduced to 0.5% in 2009, markets have been endlessly forecasting imminent increases bringing with it financial ruin for those invested in bonds...just around the corner, any second now

Increasingly the market is beginning to ask the above question. For too long now it feels that it has been led on a merry dance regarding the timing of the first interest rate rise. The market has been predicting The Fed will start the process of 'nomalising' monetary policy for a very long time now. At its recent meeting Fed chair Janet Yellen dropped the word patient from its interest rate outlook causing a mini frenzy that we were about to witness a rate rise imminently. However, close obervers noted that she also stated that the removal of the word patient did not therefore mean that The Fed would be impatient.

We believe that The Fed has been playing a game of cat and mouse with the market. We suspect that under current circumstances - a record high dollar, falling inflation, weakening global economy - they have no intention of normalising rates. We would not rule out a small one off rate rise to keep everyone honest - even if this would create a lot of damage.

The world is more dollarized than ever before. Global economic functioning depends on dollar liquidty. With the end of US QE and the propsect of interest rate increases, dollars are returning home paralysing emerging markets. An excellent new report from The Bank For International Settlements paints a very scarry picture for the global economy

http://www.bis.org/publ/work483.pdf