While SocGen's Albert Edwards has opined previously on the topic of Brexit (with an apparent interest in a "leave" outcome), overnight he once again revisits the only thing that matters to markets over the next 24 hours, and looks at the possible outcome of a second "Black Wednesday", an event that could send the sterling plunging, from the prism of George Soros' recent op-ed predicting doom and gloom should the British currency rapidly devalue, and concluding that he disagrees:
"thinking about this from the point of view of my Ice Age thesis, where interest rates cannot be normalised because of economic weakness and deflation pressures persisting throughout this recovery, I would have thought a 20% sterling devaluation is exactly the antidote needed in the current circumstances."
We will have more to say on Edwards' comparison of Brexit to Black Wednesday and how the potential outcome, like back in 1992, may actually end up being a blessing in disguise for the UK economy, should Leave end up winning. Ultimate outcome for the UK aside, however - and Edwards believes that the pound will "fall with or without Brexit" - In this we will focus on what according to the SocGen strategist is a far bigger risk to the global economy - the same risk that defined risk for the entire second half of 2016: China's devaluation, which has returned, only this time it is far more strealthy which may explain why the market has largely ignored it for now.
Here is Albert:
The UK referendum is neck and neck. Commentators think it so close that the deciding factor could be whether it rains on Thursday – with rain seen reducing the Remain vote. How mad is that? One year ago we wrote that the UK economy was a ticking time bomb. The ticking has got even louder. The UK economy is a mess and that has nothing to do with Brexit – it has everything to do with economic mismanagement. We studiously take no view on the outcome of the vote; we simply discuss the possible implications of a sharp decline in sterling in the event of Brexit. But there is an argument that global investors have overly focused on Brexit at the expense of other more important macro events. We believe China’s ongoing stealth devaluation of the renminbi is far more important for the global economy.
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The UK economy is a mess ? see ?The UK is a ticking time bomb?. I think sterling will end up falling substantially whether the UK stays or leaves the EU - it is just a matter of timing.
That's the "good news" (and we will have more shortly). Here is the bad news:
Meanwhile, our attention has been diverted. China has embarked on a stealth devaluation of the renminbi. Its new trade-weighted currency basket has fallen 10% since just before its initial August 2015 devaluation (white line in chart below) and it has continued to decline since January even as the Rmb/dollar has stabilised. The Wall Street Journal has reported that this is a deliberate shift in policy ?- link. China is now exporting its deflation, and my goodness it has a lot of deflation to export. In the Ice Age world, countries need to devalue to avoid deflation. So if sterling slumps in the aftermath of a Brexit vote there may be at least one silver lining outside the EU if the UK economy manages to avoid the quagmire of outright deflation.
And what better cover for China to continue implementing what in 2015 was seen as the "biggest risk" than the one event that has been dubbed as the "biggest risk of 2016."