UK Doesn’t Realize it’s just an Off-Shore Bank

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Political Leaders Don’t Realize the U.K. has become a Colossal Financial Institution with a Country on the Side

uk-inflation-vs-10sThe Bank of England has no room to raise interest rates to protect the plunging Pound and deal with pending inflation.  As you can see above, 5yr forward inflation swaps exploded to the upside this week.  The market is pricing in a coming inflation surge.  The UK economy is far too pound sensitive in inflation terms.  Many investors don’t realize the significant amount of floating rate mortgages with teasers in the UK.  The country would experience a housing crisis if rates rise too quickly. 

The UK’s global economic position is heavily reliant on trust in its banking system and capital inflows, much from the Middle East and Russia.   The current Brexit policy path is in direct contradiction to the main economic engine supporting the UK.

A Banking Explosion Near Danger Levels

In 1960, the UK’s banking balance sheet to GDP was 40%, by 2010 it was 450%, today nearly 600%; and “oh by the way” Brexit is this engine’s mortal enemy.  A nasty side effect of globalization is barreling toward us.  As developed markets globally produce less and less every year, they’ve become a shell of their former selves.  There comes a point where a country can become far too dependent on financial engineering.

uk-currentThe UK’s colossal current account deficit has the Bank of England fighting with one hand tied behind its back.  After decades of making mathematically unsustainable promises to labor unions (trying to buy votes), the UK is at its breaking point for its currency.

Hard Right Turn by the UK’s May

Prime Minister Theresa May’s harsh migration stance unveiled this week on will only exacerbate a worsening UK economic situation.   We feel this was a trigger with a heavy hand on Thursday night’s flash crash in the Pound, please see the chart below.  Far to the right of Donald Trump on immigration, her proposal requiring UK corporations to publicly list foreign workers “draws Nazi Germany comparisons” according to Bloomberg news.

uk-debt-to-gdp

With debt to GDP surging from 40% to 90% in recent years, the UK’s current account deficit is now a troubling -6% of GDP.  An economy heavily funded by a banking system, high level of external long term debt and real estate confidence; these engines are crumbling under the weight of Brexit risk pointed at them.  The Pound is losing support from all sides, has a way to go on the downside.  See our latest report below:

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The UK is essentially an offshore bank heaven.  When politicians begin messing with their trade agreements and banking counter parties, that spells trouble far more significant than the man on the street may realize.

An Incredible Week for Sterling

Since 1970, there have only been seven instances when the Pound fell 15% vs the U.S. dollar in six months. Since May, the pound is off nearly 13% against the greenback.  We’re living in financially significant times indeed.

pound-flash-crash

The UK’s external debt to FX reserves is nearly 133x, the mechanism to protect the Pound is just not there.  For the Pound there is no underlying bid foundation because the market is still only just now realizing the above factors.  Thursday night’s flash crash taught us there’s no bid for the Pound beneath the surface.

 

 

 

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