Brexit as a Warning for America

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Now there is Odu, the all in one fully integrated platform that might actually help you get it all done Thousands of businesses have made the switch, so why not you? tryry Odoo for free at odoo. com. That's odoo. com We all do it You have a night for yourself but don't like the sound of the silence, so you turn on the TV just for the ambiance This's a little trick that helps you feel like you've got company and aren't alone And other insurers, well, they may make you feel alone But when you switch to GaICo, you've got clas reps available around the clock So whenever you need, you'll have people around to help And let's turn on the washing machine, just for good measure Isn't that soothing? It feels good to have support. It feels good to Gaico Money markets mas. If money is evil, then that building is held. S E was was so sad Welcome to Property Markets. I'm Ed Elison. It is june twenty third. Let's check in on yesterday's market vitals The S and B five hundred and the NSDAQ fell as tech giants declined. Google shares fell five percent after two top AI researchers left the company for rivals, meananwhile, SpaceX stock dropped sixteen percent for its third straight day of losses dropping to its lowest price since it's IPO day. Meanwhile the Dao rose on hopes for negotiations with Iran The Rusle two thousand closed above three thousand for the first time ever Oil fell and finally treasury yields climbed Okay. What else is happening The UK is about to get a new prime Mister. Kir Starmer announced he will step down after losing the confidence of his own party. Andy Burnham, former mayor of Manchester, has emerged as his most likely successor and could assume the post by mid July Prime Minister Stama's resignation comes almost ten years after Britain's vote to leave the EU A decade on the promise of faster growth has yet to materialize, and the UK economy continues to struggle with sluggish productivity and a cost of living crisis So what exactly went wrong for the UK economy? And how is it that the country is on its seventh prrime mininister in the span of ten years Joining us to discuss this, we're speaking with Paul Johnson, economist and provrovost of the Queen's College at Oxford Paul, thank you so much for joining us on Profperty Markets, just to refresh our memories here It was roughly two years ago that Kirstama The leader of the Labour Party won this election to become Prime Minister and he won in a landslide against, of course, the backdrop of many, many years of conservative leadership and now He's stepping down it feels like almost yesterday that we talked about him getting the position. So I guess the first question that I'd love to know the answer to, what has gone wrong The Labour Party won an enormous majority, having been out of office for fourteen years and actually in twenty nineteen, looking like they might be out of office for another. fourteen years. It was an amazing turnaround. It was a big, big victory. couple of years ago, But the Prime Minister lost Kistama lost popularity very quickly. Partly because the manifesto on which he ran didn't really reflect the decisions he was going to take as soon as he got into office. they started doing Some of us would argue quite sensible things like small reductions in some of the benefits that pensioners people over the state pension age received. There are some very big tax rises that were introduced, despite the fact his manifesto said that he wouldn't introduce B exerises And then there have been a series of missteps around personnel. Peter Mandelson turned out to have unhealthily close connections with Jeffrey Epstein There have been a series of other issues with the Prime Minister's judgment, but he's become incredibly unpopular Proably more unpopular than it's easy to explain, he's a decent, hard working, honorable man, but has really failed to connect with the electorate Just looking at previous Prime ministers I mean, we saw that when Rishi Sunak was coming to the end of his time, he was pretty unpopular too, or at least the Conservative partarty was very unpopular. You had Liz Truss, which was obviously something as close to a disaster as you could get At least I think that is sort of how she is remembered at this point. you had a lot of resentment towards Boris Johnson, especially coming out of COVID and all of his anntics there. I mean, when I look at the UK And I live in the US now and I have done for some time. It seems as though every single leader is botching it in some way. And I start to wonder if this is becausecause these leaders are actually unqualified or not doing the right job or if it's something more systemic And coming off of the ten year anniversary of Brexit, I wonder if theseese issues that are ailing the country maybe can't be solved in onene term from a prrime Minister You're right. I it's been a combination of the two, I think. We've not had the world's greatest leaders, I think it would be fair to say over the last ten years. But they've also inherited a really, really difficult situation. The first couple trips up over Brexit and how to actually achieve that, then we had absolute chaos, as you say Liz Truss. Part of the problem here is that the between elections, the leaders of the prime ministers are effectively elected by very small number of people in their own political party and we got some a slightly strange outcome. I think it's fair to say with Liz Trust. But I think the overall story here is Prime mininister are unpopular because people are not feeling well off. We've had now actually nearly two decades of really, really poor economic growth average earnings today re much the same as they were twenty years ago. Now that is really unparalleled in British history for probably two hundred years. And that's why people now talk about a cost of living crisis. Inflation in the UK has been higher than it's been in most other developed economies for quite a long time And the result is, essentially their lecture is really pretty fll up Now with a fed up electorate, we're getting fairly chaotic politics. but of course chaotic politics makes it difficult to produce the stable policies and the growth get you out of that spiral. so you get You get a fed up electorate, you get chaotic politics, you get less growth and you get an even more fed up electorate. And I think that's the horrible spiral we're in at the moment What would you say are the biggest problems ailing the UK's economy at this point? For one sense, it is that lack of growth. We've had very little in the way of productivity growth for a very long Now the question is why that? Well, partly, we were particularly badly affected by the financial crisis Weve got a very big financial sector, particularly in London. partartly Brexit and the uncertainty that happened after twenty sixteen. I think there's a general acceptance of that. cut a few percentage points off. growth But I think a combination of that with some pretty poor policy choices. We've got a very difficult planning system. It's very hard to build stuff here. There are certainly elements of our education system that could be better. We an incredibly complicated tax system, which is definitely creating problems for growth. I mean It's worth saying many European countries are struggling We're just struggling more than most of the rest Just looking ahead, it appears that the next Prime Minister, if he isn int challenge, will be Andy Burnham odds of him being appointed as Prime Minister before july eighteenth they are up to fifty five percent on Kalchreet. eighty four percent before August. What do we know about this guy, Andy Burnham And what are perhaps his plans or what might he try to do in order to get the country out of what appears to be something of an economic mess. The straightforward answer is we don't know and it's quite remarkable that it looks like I he's almost definitely going to become Prime Minister very quickly because labour politicians are essentially, it looks like they're all going to back him But they're backing him off the back of a sort of a general sense, I think that he's a better politician than Kir Stahmer and a general sense that he might be a little bit more left wing because the Labour Party is probably a little bit to the left of what arm has being doing What he would actually do, he said very little. I there's a bit of a joke to be honest over here, which is that he's changed his views a lot over the last ty years He's been in politics for a long time and he's sort of moved from sort of the Blairite sort of new labour, sort of quite moderate labor of the two thousands, he went quite a long way left in the twenty ten s, he's painted himself picture as you know an independent mayor up in Manchester he calls it a form of business friendly socialism How that is likely to play out on the national stage. We don't know. he's toyed with greater public control of some industries, but we don't know what that means I don't likeage to be full scale nationalization. He's gone back and forwards on what he thinks he might want to do to higher levels of taxes and so on and also back and forwards a bit on whether he's going to orr more. So the only honest answer I can give you is I don't know what his economic policy is going to be, except that I think his instincts somewhere to the left of the current government Is there any consensus at this point on what the policy should be going forward? I mean you mentioned that he is more left leaning. Maybe that would mean more government spending, although we know that the debt levels in the UK have on kind of crazy in recent years Or maybe there's a shift in the other direction. I mean, what is the economic path ahead for the UK, does anyone agree? It depends on consensus among whom. I think there's a little bit of a consensus among technocrats But we technocrats tend to have solutions that politicians find rather difficult to implement. So tax reform is quite difficult when peopleople aren't getting better off because that will make some people are left worse off by reforming the tax system making it much easier to build things quite unpopular with people who live near the places the roads or have you are going to get built. Spending more on investment if that means spending less on welfare, for example, is also unpopular in the in the short term. So I think there among technocrats, there are some pretty well worn ideas about what you need to get growth. Politicians for a long time have shied away from doing those things because they appear to be electorally unpopular All right, Paul Johnson is an economist and provroost of the Queen's College at Oxford, Paul. We really appreciate your time. Thank you. Thank you. After the break. The Strait of Hormuz remains under pressure And for even more markets insights, you can subscribe to my weekly newsletter simimply putut at simply putut. profgmediaot com Support for the show comes from Gusto. Right now, everyone is trying to have tighter budgets with smaller teams while still keeping their high expectations. The last thing you should be wasting your time on is manual payroll or chasing down an HR form. Gusto is how small business owners get time back when every hour counts. Gusto is online payroll and benefit software built for small businesses. 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There's no worse feeling than making a major investment in something only to realize it didn't exactly live up to the hype, such as buying a nice piece of tech that ends up in storage collecting dust, or Taking a business workshop where your main takeaway was little more than a few motivational words If you work in marketing, this can happen with ads. You optimize for the numbers, that look great, impressions, reach and reactions But when they don't show revenue, well, that can turn into an unfunund conversation with the CFO. LinkedIn has a word for that, buull spend Reach the right buyers with LinkedIn ads and invest in what looks good to your CFO According to the twenty six Dream Data benchmark repeport, LinkedIn ads generated the highest ROaz of all major ad networks. It's one hundred and twenty one percent. You can target by company, industry, job title, and more It's time to cut the bll spend. advertise on LinkedIn, the network that works for you. Spend two hundred and fifty dollars in your first campaign on LinkedIn ads and get a two hundred and fifty dollars credit for the next one. Just go to LinkedIn dot com slash Scott That's linkedIn d. com slash Scott. Terms and conditions apply When I got a new car, I thought my insurance premium would increase and empty my bank account. Like if Fatween won the lottery I've invested most of my winnings in chicken tenders because they're bnd. But bro, I bought a house and it's sick, bro I'm thinking the floor is going to be all trampoline bro helelpower on the roof The contractor said it's structurally unsound. They're just big babies. But switching to GeIico saved me hundreds, so my bank account is safe. It feels good to sayve some hard earned cash. It feels good to Geico We're back with prorofty Markets It's now been six days since the US and Iran signed a memorandum of understanding to end the war, but not much has changed. Traffic in the strait is stalled and oil still hasn't left Iran. Representatives from both countries met in Switzerland yesterday to discuss a few key issues Those included a ceasefire between Israel and Lebanon and ship traffic through the Strait of Hormuz. In the meantime The U.S. Treasury Department granted Iran a sixty day license to sell oil in U. S dollars for the first time in over a decade In exchange, JD Vance says Iran has agreed to allow UN nuclear inspectors back into the country Despite these talks, investors still have a lot of questions that are yet to be answered, namely, when will the Strait truly be open to tell us How the market really views this deal Speaking with Brian Kurzmank portfolio manager at GQG Partners. So Brian, thanks for joining us on the show. The U. S and Iran signed this Memorandum of Understanding last week. We all kind of thought maybe the war is over at this point, maybe the straight of Hamuz will open. And then over the weekend, Iran says the strait is actually closed Then the U.S. doesn't really acknowledge that.en there's some confusion. now I guess it's open again, but Really? I mean from your seat What is the status on the strait of Hormuz? Can we say it's open or closed We werere actually fairly constructive on energy even before any of this started. And one of our thoughts were that you we came into this year expecting that there would be a little bit of a supplyut in energy in crude oil specifically It was our view that a lot of the consolidated base of the energy companies globally, especially the swing producers in the US were actually slowing things down in terms of you saw rig counts coming down. You saw people sort of adjusting for that oversupply those was supposed to happen this year into next year. And you had some really high quality operators are going to put up extremely strong earnings, even at a sixty dollar a barrel sort of price tag What you can definitively say is even if the straight magically open tomorrow We did of everything logistically firing back on all cylinders, so to speak Um you're seeing a situation where, you know, it's it's a probably an eighty dollars plus, you know, environment. the glut is gone So even now when you kind of look back at the companies that you're talking about, like in Exon, for example, that even at the price of oil stays at sixty five dollars a barrel They're going to be able to do almost twenty percent total return thirteen percent in terms of EPS growth or in terms of aK grow over the next couple of years. That looks really attractive either way. to getw to your question more directly though in terms of the strape being open or not. I think one of the things that we have seen come out of this is that Iran can talk about the closure of the strait And there's almost this asymmetric impact of having that information Because just the talk about closing the straight back down sends insurance prices through the roof. It talks about the shipping slowing down and folks not necessarily wanting to send freighters back into the strait regardless of how many you're getting out at this point in time. So there's a lot of logistical challenges, and I think ostensibly you could talk about supply being constrained for a bit longer than what we're sort of expecting with the market is priceding Yeah, the insurance point is an interesting one and this to me is something that I mean, markets bit have been relatively optimistic about this entire situation. But it seems as though there is now inccreased uncertainty whether or not the straight is is open or closed It might be closed in the future, or that it might be closed tomorrow or the next week, or that there might be a missile that is fired at a vessel nearby. I mean, the level of risk and the level of confusion and uncertainty around the strait seems to me to be now more elevated, which would make me think that the floor on the price of oil has just fundamentally been raised I'd be interested to hear if that is your view. and if so does that mean for asset prices beyond oil. What does that mean potentially for inflation in the US. and how could that affect the markets at large Yeah, what I think is the case at this point is that you probably do have a higher floor. So number, when you took out that supply gl that we were talking about, and then the price of that oil permanently, should be a little bit higher. There should be some level of risk premium, so to speak that you have to sort of compensate for for getting that oil out of the Persian Gulf. A lot of the energy companies, for example, that we talk to when they go to contract ships They're not necessarily sending ships in anytime soon, they're going to wait several months to wait to see if there's more clarity in terms of that MRS themselves talked about not necessarily changing airples and sending ships back in. So there's a delay, there is a lag, and I think it'll be a long time before there is a true return to normalcy So then the next question is, well, why is oil sitting at the price that it is right now And I think that's a really interesting one becausecause with everything that's going on, you would expect you're taking almost a fifth of the world's energy out of capacity, so to speak and locked in the straight. That energy prices should be substantially higher, yet here we are know was sitting in the seventies, you know, almost eighty dollars a barrel in terms of energy And what I think you're seeing is two things. Number one, you've offset a decent amount of that supply or that lack of supply through inventory draw It has been well publicized, but what's interesting is even last week, we had a seventeen million barrel draw off of both US inventories and the SPR So you're getting sort of subsidized barrels, so to speak, that are working their way through the system I was on top of, I believe, it was sixteen million barrels the week before, maybe fifteen the week before that. So you're seeing this consistently coming through this level in magnitude that's offsetting whatever you would have gotten out of the straight in that sense You've also seen China tap the brakes a little bit They have massive oil reserves on their side. so they've slowed down their imports, and they've drawn down their own finished products inventory. So I think that's causing that price to be a little bit lower. That combined with the fact that the shipping cost of going out there and sending this stuff through is so expensive that everybody's just kind of sitting on their hands and they're saying, okay, everybody keeps telling me this thing is going to be over in the next six weeks, next eight weeks, another month or two Um, So I'm going to wait for the price to be a little bit lower so I can go and refill those inventories and I'm just going to wait and draw them down in the meantime kindind of like that transitory argument and or you know, the variable mortgage rate argument that people used to have in the day where I'm going to take the mortgage at the lower price now, even though it's variable because I believe the rate's going to go down later Well, that works unless it happens. So what if the straight actually is prolonged in terms of being closed or being constrained Then you have to start buying these barrels at a higher price. and that's when you start seeing the physical prices coming back up when that inventory sort of hits those bottoms And I think that thing that concerns us a little bit is when you start looking at those data, cushing For example, Cushing, Oklahoma, you're at essentially effective tank bottoms there A about twenty million barrels, you get any lower, you start getting rust and like the sludge and stuff in the bottom of the barrel coming through. So it's not really that usable below that level I think about US gasoline inventories. I think we're at two hundred fourteen million barrels right now From what we've heard and seen, it's about one hundred and ninety five to two hundred and fifteen that you start hitting that operational minimum, meananing that you get any less fuel in the tanks than you start having those gas pumps with the plastic over them. and any sort of disruption causes that to happen. So We're at pretty low levels right now and Trump even said this. He said, we'd be out of energy,d be in a really bad situation in the next four weeks if things didn't clarify themselves. So I think that's why you're seeing the negotiations as hard as you're seeing happening and the concessions that are being made happening within the Iranian situation Yeah, In other words, the price that we're seeing, which is, to be clear, elevated, but not as elevated as you might think, is largely because There are expectations among investors that soon enough, they'll come down. So why would I pay a high price right now because the expectation is that this will be over, which is you know, optimistic. That's a level of expectation, That's a level of optimism that may or may not last depending on what happens in these negotiations over the next few weeks. Just I mean, to play this out Let's say the optimism fades. Let's say people decide, you know what? We haven't made real progress on this deal. We keep on hearing about a deal. This one was supposed to be like the real one. and then if for whatever reason it turns out to not be the real one. I think you can make an argument that it isn't But if for whatever reason that happens, thenen suddenly we're dealing with another issue where the price could go up even higher I'd be curious to get your views on inflation and as a result, interest rates because this seems to be the thing that most investors are divided on. Will interest rates rise? Within the year Or will they not It seems to be a coin flip this point Yeah, so I think one of the things that you can you see already in terms of the higher fuel input costs, energy costs that we've seen up until this point is it is starting to have an impact on things. Now it may be somewhat muted because we've only gone through one earning cycle and you only had a partial impact of this stuff up until this point. But you look at some of the retailers that have come out, the Walmarts, the Costcos, even that you know the dollar stores and things like that, they've all talked about the fact that consumers are facing you know, sharper sort of pricing and they're having to try to, you know, absorb some of that pricing on their behalf. Now they particularly get a benefit because consumers trade down to the quote unquote, inferior goods are going away from the more expensive place to shop and going there instead. So that's helping them, but been in the grand scheme of things that is sort of you know,urting, you know, that purchasing power, so to speak. You hear this with some of the industrial players. They're saying that they're going to have to start incorporating some of these higher transportation costs, diesel costs and things like that on a longer term basis over the next couple of quarters, if this doesn't rectify itself You even talked to like the shipping companies. Merisk, for example, said that shipping spot rates are up forty percent since the start of the Stade of Hermo's closing. I mean, that literally filters into everything that we look at in terms of a global economy So I would argue that that does have upward pressure on inflation. You saw that in the PPI data, which was incredibly strong from a May standpoint, you know talking almost double digits from that standpoint. And that was on goods and services. So it's not just isolated to one spot So I think this is actually starting to come through. And I think what you're hearing from the markets is genererally, people are getting out of this mode of, okay, we need Fed cuts because the economy is maybe struggling. the economy seems to be doing okay despite all of this. But here you are hearing is that, okay, we've missed inflation for so long now. And here was Wars had said more recently, they very singular focus now on price stability He made it very clear in terms of the comments that he had there. So If that's becoming more of a focus, how is that going to impact things? And I think that has large implications, especially on a market that is so one sided and lopsided on tech right now. And tech is generally extremely sensitive interest rates in terms of the longer term valuation trends, but also they're going through massive debt raising at this point in time too. So that's going to be much more expensive for all this capital build though Really, really interesting stuff. It seems like that's going to be sort of the decider twenty twenty six, what happens with interest rates and we'll see Brian Kurzmak is Portfolio manager at GQG Partners. Brian, we really appreciate your time. Thank you. Thanks for watchving me Let's wrap up this episode where we began. Another year another prime M minister for the UK. Britain will soon have its seventh prrime minister in ten years onene of the highest turnover rates in the world and the highest for the nation in nearly two hundred years. And it's fitting that it should happen now. on the ten year anniversary of that fateful vote that led the UK to where it is today. I'm talking, of course about Brexit ten years ago today The people of Britain were faced with a choice either stay in the EU and maintain the free trade relationships that incentivize commerce and productivity or leave making trade more expensive and growth more difficult. In the name of Britannia The UK voted to leave. Sure it would be complicated, but in the eyes of the voters, they were better off on their own how wrong they turned out to be ten years on Almost sixty percent of Britain say they shouldn't have left the EU Meanwhile, GDP per capita is as much as eight percent lower than it would have been without Brexit