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Brexit from across the pond

Published 6.28.2016
This is the second in what will be an open-ended series for LWRAS regarding Britain's exit from Europe. This time the notes are made from US news sources. Before beginning, a brief summary analysis, based on readings from both sides of the pond.

  • Brexit will happen. There are sore feelings on both sides of the Channel, but there is no going back.
  • Nigel Farage is a pill, and the Brits will get what they deserve if they ever vote hm into any position of real power.
  • Brexit lead for weeks in the polls and had both huge tabloids (Sun and Mail) supporting it. Those who claim that Brexit support was "hidden" from the elites and so portends the same kind of hidden Trump support are delusional. The polls in Britain did misread the strength of the late "Remain" surge after Jo Cross was killed, but overall polling correctly showed Brexit for months.
  • Frexit, Nexit, etc are not a given after the vote. In fact, if anything the recent results in Spain (which voted after Brexit) suggests that calamity that followed Brexit might convince many voters that the status quo is safer. Even if that status quo isn't great.

US coverage of Brexit

The coverage in the US almost uniformly Brexit will occur, the only question is how.

Investors have begun and are expected to continue pulling their money out of England— but of course, others will see an opportunity and move in. And markets… tend to fluctuate. Drawing firm conclusions from market movement is a fool’s game.

A weaker pound will make it harder for Brits to travel, and imports will cost more, and as a small island, Brits import a lot. Mostly from Europe… but they need Europe at least as much as Europeans need them. This is the reality. But the pound may well recover. Especially if people come to think that Brexit might not actually happen.

The real issue for Britain is that it was the financial services capital for the EU. And that won’t hold. The EU will want their banking done within the Union, not without. Without a firm assurance about the form of future British participation, the financial services are likely migrate out. All that means is that jobs (and tax receipts) will migrate to other EU cities. Frankfurt and Dublin are most often mentioned.

That prospect is particularly troubling for London, an international financial center that trades on its close connections with markets around the world. In a report in April, consultancy PWC estimated that Brexit could lead to the loss of up to 100,000 additional jobs in country’s financial services sector by 2020. This is likely one reason why a greater proportion of Londoners opposed Brexit than people in other parts of England.


Pro-Brexit people say that lower regulation will make Britain a better place to do business— but that’s not guaranteed AND if they want to sell in Europe they will still have to meet EU standards— not British. The Tory Prima Minister (PM), assuming he is pro-Brexit, will face a hostile Parliament, which voted 75% for Remain.

Wall Street was "Bremain" because its banks have built huge presence in London, and now much of that will have to move.

From London, Wall Street has been able to sell its services across 28 nations without the headache of having to get regulatory approval from each individual country. The prospect of a more complex, and potentially costly, regulatory structure has some banking officials worried, analysts said. U.S. banks could move more than 10,000 employees out of London after Britain completes its exit from the European Union, according to Keefe, Bruyette & Woods, a boutique investment bank.


This explains why banking stocks got slaughtered on Friday. Goldman and JP Morgan in particular are going to feel the pinch — Citigroup too. The banks are already drawing up plans to move. Of course, the Brits could negotiate a way to keep its status, but that’s doubtful. London is a huge hub, that won’t change overnight. Brexit will take two years, and a lot of the details will take much longer. Two years from when Article 50 is invoked.

Jamie Dimon said the bank would stay in England and maintain a presence, but that some positions would need to move.

Dimon said earlier this month that Brexit could force the bank to relocate thousands of employees. "After a Brexit we cannot do it all here, and we will have to start planning for that. I don't know if it means a thousand jobs, 2,000 jobs. It could be as many as 4,000," he said from Bournemouth on the southern coast of England, according to the BBC.


Many have tried to apply Brexit “lessons” to the US election and Trump. Brexit was mostly about anti-immigrant sentiment. Yes, regulations are annoying, but absent the anti-immigrant sentiment, Brexit doesn’t pass. Basically, the message is don’t discount how angry people are. Feelings trump facts (pun intended).

The Labor Party is in open revolt, and Scotland’s First Minister is looking to push her Nationalistic vision for Scotland. The sense is that Britain has neither a functioning government nor opposition party at the moment. People have begun to say that the UK needs time to figure this out. Apparently there was not real plan for a Brexit.

Not all coverage is negative of course, some thinks that Brexit will be good for the auto industry. But the UK as the Mexico of Europe? Not sure that's what the workers voting for Brexit were hoping.

Other coverage in brief:


  • Brexit screws British youth.
  • The US economy will survive the Brexit.

    The British decision is expected to hit the U.S. economy in at least three key ways: It will strengthen the dollar, weigh on business confidence and tighten financial conditions. All of that will saddle American businesses and investors, particularly those with a strong presence abroad. American households, on the other hand, could see some benefit from cheaper imports and gas prices.

  • Brexit is Maggie Thatcher's fault?
  • China wins from Brexit because a unified Europe can’t even compete with China— the fractured Europe will be even less able to. And the Brits? A small island nation that might over time become even smaller if/when Scotland bolts. Of course, Unified Europe never really worked as planned because of Nationalism in each country. Working as a unit meant giving up some sovereignty, and nothing is more of an anathema to a nationalist than that. But the fact that Europe never truly was a unit (each country continued to compete against each other is partly why the Brits never completely joined, and now have left. The lack of common policy towards China never let Europe have the leverage it wanted… but Brexit only makes that worse— UNLESS the Brits were the impediment. In any event, Britain is now just a singular relatively small market. Yes they imported tons from the Europe so the tariffs can’f be too high, but I think its status as #5 economy in the world is going to slide.
  • Nobody in Britain seems very happy. It’s seems that “project fear” wasn’t really, the Bremain side was closer to the reality than the Brexit side. Lehman Brothers is invoked, but then dismissed.

    This CEO and other senior bankers on Friday spent hours explaining to clients and their own employees why it isn’t. This is a political crisis, not a financial one, they promised. Capital markets are functioning just fine. Banks, as the U.S. Federal Reserve documented on Thursday, are much better funded than they were in 2008. There is no crashing mortgage market or subprime security trapdoor waiting to spring open and swallow the world. When you put Friday’s selling in context, it ranks very low on the list of worst days ever.

  • Brexiteers are back peddling from their lies.

    Perhaps no promise was more audacious — and mendacious, critics say — than the £350-million-a-week claim. Boris Johnson, the former mayor of London who was the frontman of the Brexit campaign, toured Britain in a bus emblazoned with the slogan: “We send the E.U. £350 million a week, let’s fund our N.H.S. instead,” a reference to the country’s widely revered National Health Service.

    Hours after proclaiming “independence day” for Britain, Nigel Farage, the leader of the fiercely anti-European U.K. Independence Party, conceded that the £350 million figure was a “mistake.” Asked by the BBC on Sunday about the spending pledge, Iain Duncan Smith, a former Conservative Party leader who campaigned for Brexit, said the Leave side had merely promised “to spend the lion’s share of that money” on the health service.

  • India’s economy will be affected too.

    Indian information technology companies like Infosys and Tata Consultancy Services -- which rely on Europe for perhaps 30 percent of their export revenue -- might now have to set up dual headquarters, in Britain and in Europe. For the kind of low-margin projects they typically take on, this sort of increase in costs is a serious problem. Existing contracts denominated in British pounds might have to be reworked in order to stay profitable, according to Indian IT industry lobby Nasscom.

    Brexit could force India to look beyond the UK for its focus. India is the 3rd largest source of foreign investment in the UK— India invests more there than in all the rest of Europe combined. On the other hand, Brexit could allow India to get better terms with the UK. European standards are higher— which is part of why Brexit became a thing.
  • Rupert Murdoch’s Sun tabloid helped tip the balance to leave.
  • Immigration was a driver, There is also anger at the top % who is doing so well when others are not, but absent immigration "Leave" capitalizing on people’s fear and prejudice to gain political advantage, Brexit fails.
  • Germany doesn’t want to delay. Merkel agrees it should wait until the new PM is in place, but no longer. The Irish are hoping for a rethink, as Brexit threatens the Good Friday peace because hard borders will go up again.

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Brexiting to the future or back to the past?

Published 6.27.2016
LWRAS cannot claim any particular expertise in British politics, nor in the economics of the European Union (EU), excepts at a superficial level. That being admitted, the so-called "Brexit" or the Britain exiting the EU will clearly play a role in the economic conditions and forecasts for the future. Prior to the vote, The Economist published a reasonable take on both sides, thought the Economist itself was in the "Bremain" camp.

In past forecasts, (written as work for hire for third parties and thus not published on this site) the assumption has been that the EU and by extension the Euro currency will survive despite the continual predictions from certain quarters that it would not. The successful Brexit vote causes reconsideration of that position, for obvious reasons.

Pre-vote, the bias here was for remain with the thinking that the idea of a United Europe was a good one for all the countries of Europe. Reducing the friction between so many small countries and creating a larger market was overall positive for the region. The single currency (Euro ) push and its effects are more complicated. That might have been the step too far. However, there are benefits to that as well. It would be as though there were 50 currencies throughout the US. Read the rest.


Nat Gas killed Coal, not Regulation

Published 6.22.2016
Barry Ritholz discusses the reason for coal's decline, which happens to agree with LWRAS' view that the problem in the coal industry is not the result of regulation. Rather, coal has been displaced by lower cost fuel— principally natural gas.

Ritholz also points to the large debts the companies were/are carrying. And the fact that coal is a very dirty source of energy. Here is where the regulation effect would be to the extent that there is one, as 29 states have efforts to increase the use of renewable energy sources over fossil fuels. On the other hand, plenty of people want energy from a cleaner source.

However, it's the effect of cheaper natural gas that really killed coal. Because utilities switch en masse to natural gas. Yes, they may have also realized some tax benefit for doing so, but the bottom line is the bottom line. If natural gas was more expensive than coal, the switch would not have been so complete. Read the rest.


An early summer look at the oil market

Published 6.20.2016
Keeping up with the news flow related to the oil industry is not an easy undertaking. However, this is a brief look at recent news in the oil market. There are signs that market is shifting, but it's not clear that those shifts truly reflect market forces.

Shale

Times are still tough in the shale world.

The number of U.S. energy bankruptcies is closing in on the staggering 68 filings seen during the depths of the telecom bust of 2002 and 2003, according to Reuters data, the law firm Haynes & Boone and bankruptcydata.com.


However, maybe the tide is beginning to turn. For the first time in 2016, rig counts increased. Perhaps the bottom has been reached, but no one expects the boom of a few years ago to return— especially not with the Saudis still trying to bury the rest of the market with supply to maintain or gain market share.

Proven reserves are disappearing off company books, as the Securities and Exchange Commission, as well as short sellers, look to identify companies that have exaggerated. Higher proven reserves allow companies to borrow more money, as the reserves (if they are proven) can be used as collateral.

OPEC

OPEC (Organization of Petroleum Exporting Countries) tried again to come to an agreement to limit production, but again failed. Read the rest

Sputter or Evaporate?

Published 6.3.2016
Optical coatings can be applied in a number ways, but two primary ways are evaporation or sputtering. Both are considered to be physical vapor deposition techniques, and both are done under vacuum.

The equipment required to process optical coatings represents a significant capital expense for a company, with significant maintenance costs as well. These facts are a primary reason that so many small coating "job shops" exist. In such shops, coatings are deposited in batches, with the number of pieces in the batch depending on the size of the piece being coated and the size of the vacuum chamber. Very often, the coatings deposited are designed with specific properties for given application, in other words a custom coating.

Coating design is costly, but once a satisfactory coating is achieved, an unlimited number of duplicates can be deposited. Thus the determination a per coating price must be include the initial design costs averaged over the number of coatings to be produced. However, standard coating designs can be deposited via batch process as well, and at a much lower cost as no further design is required. Multi-layered coatings will require multiple batches to deposit. Between batches, the system and the sample holders must be cleaned to minimize the possibility of contamination, all of which adds time and cost to the final product. Read the rest.

Haptics, less than it feels?

Published 5.10.2016
LWRAS has been interested in the haptics market for years, and has been a long term investor in Immersion [Nasdaq: IMMR]. Immersion owns significant intellectual property (IP) in the haptics area, and has enjoyed success in defending against infringement by much larger companies.

In the past, Immersion has received damages and more importantly, licensing fees from a number of much larger companies. But now the company is tangling with Apple and Samsung at the same time. Samsung had licensed Immersion's technology for a number of Galaxy models, but chose not to do so for the Galaxy 7. This almost guarantees that Immersion will be suing Samsung for infringement in the future, though for the moment the two companies are in arbitration. In the nearer term, the two companies may be heading to court with residual licensing fees from sales of older Galaxy models that do have the Immersion technology in them.

The problem is that the amount earned from each cell phone that uses haptics is small and shrinking. Immersion claims to have a seminal position in the industry, and given its past success in court challenges, that assertion is stipulated as true. However, innovation continues and there is no guarantee that future challenges will be successful. Apple, in particular, is aggressive when defending its own IP. Read the rest.

What is LiFi and will it take over the internet?

Published 5.5.2016
The internet is ubiquitous, are are WiFi wireless signals transmitting data to and from devices, be they phones, laptops, or other. WiFi uses radio waves in the infrared (IR) to transmit signals, and signal power is limited for health reasons. There is another way to wirelessly transmit data, and that's with light. So-called LiFi technology uses modulated signals from light emitting diodes (LED) or lasers to transmit data.

The spectrum available in visible light is 1000 times greater than the 300 GHz or radio and microwave, therefore there can be many more channels. The modulation methods are similar to those used for IR signals (such telecom signals, which means the science and technology are well understood).

In a lab speeds of 100 Gbps have been measured. Unlike radio waves though, light doesn’t pass through walls. This means that an LED transceiver would need to be in every room, but since lighting is common— though not in daylight. On the other hand, this could be integrated with the humancentric lighting movement. Indoor spaces could be lit with sunlight level lighting and signals could be transmitted at the same time. This could also be part of the Internet of Things, where everything is connected to everything else wirelessly. Read the rest.

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