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Ways of the World

Carol Stone, business economist & active Episcopalian, brings you "Ways of the World". Exploring business & consumers & stewardship, we'll discuss everyday issues: kids & finances, gas prices, & some larger issues: what if foreigners start dumping our debt? And so on. We can provide answers & seek out sources for others. We'll talk about current events & perhaps get different perspectives from what the media says. Write to Carol. Let her know what's important to you:

Tuesday, July 12, 2016

A Threesome: Some Prayers, a Prime Minister, and a Parable

Prayers for Police and for Peace
In these tense days of troubles among African-Americans and law enforcement officers, we suggest these prayers from A New Zealand Prayer Book*. 

God of truth and justice;
we ask you to help the men and women
who administer and police our laws;
grant them insight, courage and compassion,
protect them from corruption and arrogance
and grant that we, whom they seek to serve,
may give them the support and affection they need;
so may our people be strengthened more and more in respect and concern for one another.
We make this prayer through Jesus Christ. Amen.

Universal and unchanging God,
we are one, unalterably one,
with all the human race.
Grant that we who share Christ’s blood
may, through your unifying Spirit,
break down the walls that divide us.
This we ask through Christ our Mediator. Amen.

*  1988.  Pages 139 and 637.

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Theresa May To Become U.K. Prime Minister
On July 13, the U.K. will get its second woman Prime Minister when Theresa May, currently Home Secretary, assumes that higher office.  As we wrote last week, David Cameron resigned immediately after the Brexit vote on June 23; he will do that formally July 13 by presenting himself and his letter of resignation to the Queen; he will inform her that Ms. May is available and in his view would be worthy of the appointment.  Later in the day, Ms. May will be presented to the Queen.

We give you this follow-up information for a couple of reasons.  Obviously, it is an important step forward in the U.K.’s new sense of itself.  Ms. May favored remaining in the EU, but she seems always to have understood what people wanted in breaking away and will work carefully on that process.  Comments we saw about her indicate that she is a most conscientious worker in government and concentrates on the substance of matters, rather than the perks and personality points of holding office.  “I don’t tour the TV studios,” she has stated.

This brings us to the second reason we want to give specific mention to this development.  We are struck by the “adult” attitudes of the U.K. leaders at this time.  Boris Johnson, who seemed to be a leading candidate early on, and Andrea Leadsom, the other finalist for election as Conservative Party leader, both pulled out to allow the selection to take place with the least controversy possible.  At this point in time, with much uncertainty, having the election process as brief as practicable helps significantly in both domestic and international affairs, and we are impressed that egos have not gotten in the way and that everyone has seemed to be in line to move forward, despite the shock of the Brexit vote outcome.  Concluding the Prime Minister decision promptly will permit more time on the substance of the conditions for the U.K.’s departure from the EU, and Ms. May seems to be someone who will give ample consideration to all concerns in this important step.

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Maybe the 3rd Servant Was Right To Bury his Talent
The Gospel selection assigned for today’s (July 12) Daily Office readings in the U.S. Book of Common Prayer is the parable of the talents, Matthew 25:14-30.  A man of wealth is going off on a long journey and decides to let three slaves manage some of his funds while he is away.  To one slave, he gives 5 “talents”, to a second slave, 2 talents and to a third slave, 1 talent.  The first two make investments or form businesses, and each doubles his money.  When the master returns, he is very pleased with their performances and promises them promotions.  The third slave buries his talent in the ground; he doesn’t lose any money, but he doesn’t gain anything either.  As we know, the master is upset at this action – or non-action – by the third slave; he takes back the talent and throws the slave out on the street, leaving him penniless and homeless.

In some dialogue this morning with Barbara Crafton, she and I both realized that there might be times when the third slave actually did the right thing in burying the talent.  Last week in Japan, for instance, that government issued 10-year bonds with a yield of  -0.243%; that is, there is negative interest on the bonds, so that investors are paying the government a fee to keep their money safe for 10 years and return it to them.  Similarly, in Germany, a recent auction of 30-year government bonds carried a negative yield of -0.76%.  So investors there also are paying the government to keep their money for them and return it at the designated time.

Thus, simply by burying the talent in the ground and returning it to the master at the proper time, the slave might have fulfilled an important function, keeping the master’s money safe and keeping it from eroding in value.

However – you knew there had to be a “however” – the broader economic environment that surrounds these negative bond yields is hardly one that produces many business opportunities that result in doubling someone’s active investment.  So it’s unlikely that the other two slaves would have been nearly as successful in this scenario. The German stock market is down 13% from a year ago, the Japanese stock market 21%.  The U.S. market is up, but by only 1.3%.  Investors would have done all right with gold, at a gain of almost 15% from a year ago, but a broad index of industrial and agricultural commodities is down 13%.

The lesson for investors in these differential results is that we need to assess the whole environment and be aware of the risks.  As Barbara wrote in her own comments on this parable, the underlying issue is not money but risk.  For the three slaves and for us, probably the best answer is a mix of assets with varying risks.  We see that sometimes, burying the talent in the ground can be the best thing.  And perhaps all of the time, at least some of the funds should be in something with a guaranteed outcome.  Otherwise, nothing is totally sure.

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Thursday, July 07, 2016

What the _______ Just Happened Between the U.K. and the EU?

The people of the U.K. voted in a referendum on June 23 that tells their own government they want to disaffiliate from the EU.  This outcome was clearly a major surprise.  Even though, as we pointed out a couple of weeks ago, results of opinion polls had gone back and forth in the months running up to the vote, no one really expected the Leaves to come out ahead.  But they did, 51.9% to 48.1%.

First, why did this happen?  Second, what happens next?  Third, do we know what it all means? What follows is hardly complete, but we’ll try to make some response to these questions.

First, why did people want to leave the EU?
There seem to be two main proximate causes: discomfort with immigration and impatience with EU bureaucracy.  In our commentary on June 20, we noted that many people in the U.K. are concerned about immigration, and we drew a parallel to the interest in Donald Trump in the U.S. elections.  We’re hardly the only observers making this comparison.  Citizens of an EU member country can live anywhere in the EU they want at any given time, and these days, among other implications, this causes nervousness about terror threats.  Notably, however, the U.K. does not have the most liberal border policy it might have; it is not an adherent to the EU’s so-called “Schengen Agreement,” which allows totally free travel, basically passport-less, among almost all the other EU countries.  But EU citizens can move into the U.K. without undergoing any approval process.

In addition, a country’s membership in the EU means that it participates in the EU’s joint regulatory system, which amounts to a huge bureaucracy.  The EU administration consists of seven different bodies, most of which are headquartered in Brussels.  These include the European Council, which is the summit of the heads of each member nation; the EU Parliament & Council of Ministers, which together constitute the legislative body; the European Commission, which is the executive branch; the Court of Justice; the European Court of Auditors; and the European Central Bank.  Since the U.K. has its own currency, it does not participate in the Central Bank.  

The functions of each of these institutions are classified by “competences”, some of which are “exclusive” to the EU, some “shared” with member nations’ governments and some “supportive” of member governments.  A few examples might give some sense of the reach of the EU into each member’s internal affairs.  Clearly, since the EU is a free-trade zone, customs regulations are “exclusive” to the joint organization, and many international agreements are also reserved for the joint system.  Much commercial policy, including antitrust laws, is managed by the European Commission, which has just brought new charges against Google, for instance.

Much of the “shared competence” work also involves businesses, such as consumer protection, energy and the environment and agriculture.  Social policies and public health matters are also managed by the Commission.  Among the “supportive” competences, the Commission helps members with disaster response, tourism and education, among other functions.

Thus, there is a lot of bureaucracy – the Commission itself has 32,900 employees – and many kinds of business decisions are governed or influenced by policies, not made in London, Paris or Madrid, but in Brussels by people who may not be directly associated with the specific country having a particular need.

Again, then, we see the parallel to the Trump model in the U.S.   Many people in the U.K. – more than had been understood – want to “take their country back,” to bring decision-making powers back home.

All this is no small matter.  As you might imagine, trade is very important to the U.K. economy.  Total exports of goods and services were 27% of GDP last year, compared to 13% in the U.S.  Imports of goods and services were 29% of GDP, compared to 16% in the U.S.  Of goods exports, 55% go to the EU, and 47% of imports come from the EU.  If they lose export market share and also have to pay duties on imports that now enter without such fees, that will be costly in several ways.  Of course, one of the goals is to help domestic production by making imports more expensive.  So there are potential offsets.

Further, some private economists estimate that 3 million jobs are presently associated with EU trade, constituting about 10% of total employment.  The stakes are high.

Second, what happens now?
The referendum vote on June 23 was not the enactment of a law, but the expression of a viewpoint.  Now the U.K. Parliament must pass legislation instructing its government to invoke an article of the EU organizing document, Article 50 of the Treaty of Lisbon of 2007.  This will set in motion specific negotiations for the withdrawal of the U.K.; these negotiations could well last for two years and that may be extended.  Even before Parliament acts, however, the U.K. government will need to outline its needs, surely in consultation with a variety of business and other private institutions.  Prime Minister David Cameron has said he will resign to permit new government leadership to execute these very fundamental changes.  Two candidates have emerged in preliminary Conservative Party voting; a final choice will be made in September.

Thus, nothing structural will happen right away.  Surely there has been an immediate and dramatic reaction in financial markets as a result of the shock of the unexpected vote result.  However, where market valuations move from here depends on many factors currently unknown.  Some of the dust has settled, and the best-known stock index, the FTSE 100, is now running slightly higher than prior to the announcement of the vote result.  In contrast, the foreign exchange value of the pound fell immediately, and it has not recovered; it presently down 13%, to about $1.29 from $1.50 on June 23.  These differing market reactions highlight the overall uncertainty.  This exchange rate movement already means the U.K. exports have become cheaper.  The Motley Fool website points out that a trip there for U.S. tourists and business travelers is now already cheaper.  However, it just got much more expensive for U.K. residents to go anywhere else.

Third, do we know what this all means?
Not really.  There is no explicit timeframe for concrete actions, although we note with great interest that the Conservative Party is moving promptly with its election process.  And while the Article 50 authorization for the U.K. to leave the EU supposedly has a two-year time limit, associated negotiations on accompanying trade policies could drag out far longer than that.

Such basic questions mean economic growth, already sluggish, of course, is well likely to be restrained further.  Forecasts range widely, from a roughly 1% hit to growth in the near-term to 3 or 4%.

The effects on specific businesses are also uncertain.  Some analysts believe that international banks might leave London to better concentrate their work in Europe itself.  But other analysts point out that Parliament might take advantage of newfound flexibility to effect tax reductions, making the U.K. more attractive to businesses than locations on the Continent.

These notions apply broadly – even to the Arts.  We were startled to find a commentary in the weekly email from New York’s classical radio station, WQXR, titled “How ‘Brexit’ Affects Opera and the Arts.”  The drop in the U.K. exchange rate has already had a major impact on the value of European singers’ salaries when they perform at the Royal Opera at Covent Garden, for instance.  British conservatories also have two scales for their tuition fees, EU and non-EU, the latter as much as twice the former.  What will happen to those fees when the actual “Leave” takes place and will European students still come to study there?

People from other EU countries who currently live and work in the U.K. face uncertainty.  They will no longer have automatic authorization to live there.  Some of them have already applied to the U.K. Home Office for permanent residency or outright citizenship.  Some may have to leave.

Another issue is that Scotland voted heavily to Remain in the EU, and its government is already trying to figure out if there is a way to handle that.  The “United Kingdom” might then be less “united” if Scotland remains while Great Britain leaves.

Prayer for Healing
The distress over the vote and the nasty campaign ahead of it, marked by the tragic murder of MP Jo Cox, has brought a response from Church leaders.  As we in the U.S. struggle with our own political divisions, we might take note of the following selection from a Church of England litany for these days:

Guide our nation in the days and months ahead
to walk the paths of peace and reconciliation.
Hear us, Lord of life.

Lord, graciously hear us.

Give to our leaders wisdom and sensitivity
to work for unity and the common good.
Hear us, Lord of life.

Lord, graciously hear us.

Mend broken relationships
and restore to wholeness whatever has been damaged by heated debate.
Hear us, Lord of life.

Lord, graciously hear us.

Sustain and support the anxious and fearful
and lift up all who are dejected.
Hear us, Lord of life.

Lord, graciously hear us.

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Various issues of The Wall Street Journal and associated website

U.K. economic data from the Office of National Statistics.  Sourced from Haver Analytics, Inc., databases.

Wikipedia entry: European Union Politics.

Dominic Webb and Matthew Keep. In brief: UK-EU economic relations.  U.K. Parliament:  House of Commons Library.  Briefing Paper number 06091, 13 June 2016.

Sean Williams.  “8 Ways Brexit could directly affect you and your money.”  June 27, 2016.  Some of Williams other ideas besides cheap trips to the U.K. also include the fact that anticipated sluggish economic performance will keep interest rates low, making mortgages cheap and keeping credit card rates from rising.  However, the sluggish economies could also keep house prices under pressure.

Fred Plotkin.  “Operavore: How ‘Brexit’ Affects Opera and the Arts.”!/ July 1, 2016.

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