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Another Perspective

Brexit, Pursued By A Bear Market

In The Winter's Tale, Antigonus is chased offstage to his death.  Shakespeare's stage direction is, "Exit, pursued by a bear."  This instruction is part of a quirky drama that begins in tragedy but ends with joy and redemption, a story chock full of surprises.  Its boggled principals apparently feel the way Britons, Europeans, and indeed the rest of us do in the wake of Brexit, the indication that Britain's voters want to leave the European Union.

A Bear
In Elizabethan England, captive as well as wild bears were well known as dangers,
as bear markets are in modern times

Brexit rattled the world's financial markets.  Most investors had not expected the turkeys to vote for Thanksgiving.

A fortnight after Brexit, the initial sharp declines in key market indices, such as the Dow Jones Industrial Average, Nasdaq Composite, Britain's FTSE 100, Germany's DAX Index, and others, had been reversed.  By contrast, the British pound had fallen to lows not seen in more than 30 years, its value below $1.30.  Some gloomy commentators said the decline could worsen, making the worth of a pound similar to that of a U.S.  dollar, but nobody really knows what will happen.  The published pound bears have not made public their actual positions, so observers cannot say whether they have put their money where their mouths are.

William Shakespeare
His later plays, including The Winter's Tale,
are more nuanced and complex than his earlier work

Forecasts in the media may be of little value in this matter.  However, some important indications of business sentiment will soon be made public.  A slew of quarterly results is about to be published, and with these reports of the past three months there inevitably will be newly updated projections for the rest of the year and possibly beyond.  The predictions will include educated guesses about the pace of commerce for the rest of 2016 and also updated estimates of the impact currency fluctuations will have on reported revenue and income.  Companies reporting in dollars will tell their shareholders what they think will happen as they consolidate results initially obtain in British pounds, euros, yen, and other currencies affected by Brexit.

Global giants, such as IBM, will disclose their situations and describe the currency hedges and other mechanisms they have employed in their quests for balance.  They will compare their newly refined projections with previously disclosed expectations.  In addition to information about the figures in their financial reports, companies with significant public interest and social obligations may also talk about plans that affect their workforces in various areas.  These days IBM is reluctant to offer details of its plans to shed employees or to transfer work from one region to another, but it is obliged in some cases to provide information regardless of its preferences.

The various predictions carried by business media and elsewhere differ in many ways, but there seems to be general agreement about one thing: Uncertainty isn't very helpful.  And there is another complication that seems to be adding to the consternation of investors and business leaders: Central banks and governments that might want to ameliorate some of the undesirable consequences as they appear may be unable to offset the negative shocks instigated by Brexit.

For quite some time, monetary policy in the Western economies has been very accommodative.  Central banks' interest rates are very low, in some cases actually negative.  So the central banks' monetary policies may be pretty much at their limits.  Fiscal policies have not been very helpful, particularly in the United States but also elsewhere.  The reason is politics.  Generally speaking, implementing stimulative fiscal policies, such as the use of borrowed money to fund big infrastructure projects, is a political hot potato.  In the United States, Congress is unwilling or unable to support the kind of stimulus that in the past has boosted economic growth in tough times.  This fiscal constipation has been about as helpful as the British public's vote for Brexit.  American voters, then, having elected a do-nothing legislature, are as foolish as British voters seem to be.

The Unumployed
Most people may no longer remember when times were as hard
as they were in the 1930s, but Brits may soon take a refresher course

The Americans whose frustration at the outcome of their electoral choices seems to lead to anger but not change are likely to soon find they have a lot in common with the Brexiteers in the United Kingdom.  Both groups want to recapture a past in which conditions were better.  Americans might want a return to bygone days when the USA was gigantic in manufacturing, vastly powerful in agriculture, preeminent in science and engineering, and capable of finding leaders who were generally decent and effective.  Brits might harken back to the era of their great empire on which the sun never set and which had a formidable navy, factories famed for the quality and quantity of their output, all supported by a thriving culture of invention and ingenuity and capped by a government of strength and integrity.  Both sets of reveries have at least a partial basis in history and fact, but apart from the many ways the collective consciousness distorts its memories, making a return to the imagined past absolutely impossible, one key point remains: That was then, this is now.

The notion of a past that shapes the present and casts a deep shadow on the future lies at the heart of The Winter's Tale.  Basically, a king, through foolishness, madness, or ordinary flaws of character spurns his wife and daughter, producing a lousy outcome for himself and those near him.  Some sixteen years after the triggering events in this tale the daughter, now grown into a young woman, who has found her true love, will end up known, once again, to her errant and finally remorseful father.  The spurned wife, believed dead, will reappear, having only gone missing.  And pretty much everyone, not including Antigonus, the minor character done in by a bear, will end up happier and wiser.  These fictional characters seem likely to enjoy their reshaped destinies far more than the Brexiteers who right now seem likely to get the punishment they asked for.

Not everyone will suffer, of course, and not all the companies that bet on the UK as a member of the EU will be damaged by unfolding events.  Companies that look like they have the size and vitality to power economies, such as the FANG quartet (Facebook, Amazon, Netflix, Google) are very good at shape-shifting.  They can adjust to changing geographic, political, and social opportunities (and to challenges, too) better than older entities tied to vast legacies.

Bank of England
Bank Of England
The Old Lady of Threadneedle street will try
to defend the British economy, but changing monetary policies
without a stimulative fiscal strategy may prove to be inadequate

IBM, for example, may be great at virtualizing computing platforms, but it has failed to virtualize the hundreds of thousands of technicians who fulfill IBM's obligations to services customers.  For the most part, these IBM employees are located in India, where they embody a culture of computing that is the antithesis of the apps computing culture that has put mobile devices at the forefront of information technology.  To deliver more services, IBM and its ilk (such as Tata, Wipro, and Infosys) must add more front line employees and more managers to oversee their work.  Because of the way their businesses are structured, their payrolls grow roughly as fast as their services revenue.  If there are opportunities for these firms to increase revenue and profit faster than their body counts, these opportunities arise from situations in which similar if not identical solutions can be applied to multiple clients.  Developments like Brexit, which are likely to increase differences between business computing in the UK and functionally similar activities across the EU, make it harder to share services technologies in what was formerly a larger region tending toward IT uniformity.

By contrast, app-oriented companies like Facebook, Skype, Netflix, and Amazon, to name a few, must add personnel as they grow, but not nearly as fast as their revenue and profits increase.  Where there are national differences in customer-facing apps, there are only a handful of unique requirements compared to the much greater and more costly differentiation that is inherent in bespoke services code.  The back ends of the apps-based companies provide even more opportunity for the enterprises to simplify and consolidate work that originates within client apps.  These apps have a lot of surface variation but not nearly as much uniqueness on the server-facing side of the client code.

The success of apps-based companies from the FANG giants down to more modest (but still hefty) mobile device oriented players like Uber and Square seems to be based on achieving high transaction volumes that generate small sums for an individual activity but produce very large funds flows in the aggregate.  This living with the classes by serving the masses style of business doesn't seem consistent with the way IBM and other legacy companies are trying to become more FANG-like and modern.

IBM management keeps telling investors that it is different from other outfits seeking fortune via the Internet because it is able to pick very high margin opportunities and bypass other pursuits that it believes would have more modest yield.  By and large, this kind of thinking in the Internet era seems to defy common sense.  Would the complex of activities built on Google's map app be healthier if Google only mapped the homes and businesses of the wealthy while ignoring the rest of the presumably lower-value hoi polloi? Would Amazon be a leader if it only offered goods with high margins or only served delivery postal zones with impressive wealth stats? Similar questions can be asked of a Great Britain that believes it can prosper while showing disdain if not outright antipathy to the more than two dozen nations in the European Union.  In recent decades, the UK has gotten a lot of wealth by virtue (or by vice) of its role as the English-speaking, tax-avoiding European gateway of American banking.  But the gains were not confined to banking circles.  The bankers spent their money on homes and consumer goods and luxury items, spreading the wealth.  Whatever the ultimate outcome of the Brexit brouhaha, it seems overwhelmingly likely that there will be more friction in dealing with the EU for parties based in England than those based in Dublin, Amsterdam, Frankfurt, or Paris, to name four attractive cities that might grow to rival today's London as an outpost of Yankees and their friends.  (And it might turn out that some American jobs now performed overseas will return to their mother country.)

The Brexiteers, like the American Trumpsters, have plenty of valid complaints about world they want to change but their pride has metathesized into hubris that is a nearly certain precursor to a crippling fall.  Businesses, led by the most flexible ones, the banks, will, if they haven't already, begin transplanting personnel from Britain to more conducive locales.  Actually, it isn't the mere movement of bodies that poses a dire threat to the UK.  The greatest danger will come from the movement of influential executives, people who build functional groups, departments, and whole divisions for their employers.  These people are talent magnets.  Where they move, the future moves.  And when they leave a place, their exit will be followed by a bear market, one that could be deadlier than any in living memory.

— Hesh Wiener July 2016

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