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Dec 13, 2018

Analysis | The Finance 202: Brexit for Dummies: What just happened in the U.K. and what’s next

By Tory Newmyer



THE TICKER
The Brits can’t get no satisfaction. Prime Minister Theresa May is limping, victorious but wounded, out of a no-confidence vote that leaves the future of her Brexit plan as muddy as ever and not much to cheer about for partisans across the spectrum in the United Kingdom. 
May won a year-long reprieve from another such challenge by surviving the vote, 200-117. But the surprising strength of the revolt from within her own party reflects the widespread antipathy at home to the deal she negotiated for the British withdrawal from the European Union. And to hold off the rebellion, she pledged to step aside once a Brexit plan is approved.  (“This must be the first time a premier has won a leadership challenge by turning herself into a lame duck,” the FT’s Robert Shrimsley writes. “She has paid a very high price for a pretty poor win.”)
The whole thing is pretty complex. Let's break it down.
What’s next:
 May has until March 29 — 106 days — to win support for her lengthy plan aimed at providing an orderly exit from the European Union. It won’t be easy. “May and her Brexit plan have been pummeled for weeks by members of Parliament, both from her own party and the opposition,” The Post’s William Booth, Karla Adam and Michael Birnbaum write. “Hardline Brexiteers want a cleaner break from the E.U., while Remainers worry about the economic and other costs of what May has proposed.”
And May’s critics from the left and right continued heaping disapproval on her in the wake of her putative win. Hardline Brexiteer Jacob Rees-Mogg called on her to resign; Labour leader Jeremy Corbyn said the vote revealed May’s “government is in chaos and she is unable to deliver a Brexit deal that works for the country and puts jobs and the economy first.”
Why it matters:
 A failure to secure an agreement could lead to a “no-deal Brexit,” in which the country crashes out of the European bloc with no grace period and no legal arrangements in place to smooth ongoing cross-border commerce. “A no-deal Brexit could bring chaos at ports, a freeze in trade, empty grocery store shelves, grounded aircraft and the threat of recession, economists have warned,” Booth and Co. write.
Bank of England Governor Mark Carney has estimated in the worst-case version of a no-deal Brexit, the British economy could shrink by 8 percent in a year, with property prices diving by a third. 

Prime Minister Theresa May makes a statement in Downing Street, London, on Wednesday. (Kirsty O'Connor/PA via AP)
May’s game plan:
 Via the New York Times: “Her strategy appears to be to delay the critical vote — now probably in the middle of January — and to hope that the growing risk of a disorderly departure brings some lawmakers back into line. But many doubt that will work.” May heads to Brussels today as part of a last-ditch effort to shore up the deal she spent 17 months negotiating.
The key flashpoint:
The so-called Irish backstop, a piece of May's plan guarding against the reemergence of a physical border between Ireland, which is remaining in the E.U., and Northern Ireland, which will still be part of the United Kingdom.
Both sides agree they don't want to see the return of the checkpoints and patrols that once marked the dividing line on the island. But the E.U., which wants to ensure substandard goods aren't snuck into its market from Northern Ireland, has proposed preserving the bloc's rules there if the E.U. and U.K. fail to reach a long-term trade agreement. Critics say that would keep the U.K. under the E.U.'s thumb. (Bloomberg has a good summary of the issue's history and state of play here.)
What’s really going on with the British right:
Post columnist Anne Applebaum breaks it down elegantly. “Any Brexit deal involves bad choices,” she writes. “Either Britain pays an economic price for losing access to markets, or — if Britain stays inside European customs arrangements without helping to set the rules — there is a price to be paid in influence. With an eye on voters’ wallets, May chose the latter. And now — now! — after months of debate and thousands of hours of broadcast news and millions of words — most of the Brexiteers still will not accept their own responsibility for this outcome, the least bad of the bad outcomes on offer. They still do not want to admit that they misled the British people.
“They still pretend there is some better, alternate reality. And they are still jockeying for power. Instead of taking responsibility, they have blamed May — claiming, again falsely, that a different prime minister would get a different deal.”

A woman walks past a mural that states 'Derry Girls Against Borders' at Free Derry Corner on October 9, 2018 in Londonderry, Northern Ireland. (Photo by Charles McQuillan/Getty Images)
The silver-lining scenario:
Sebastian Mallaby, writing for The Post, sees a hard Brexit as unlikely in the event May can’t muster support for her plan. Instead, he writes, “Brexit will probably be postponed or put to a new vote. Britain might exercise its right to freeze the exit process and then never return to the negotiating table. Or it could freeze and hold a new referendum.”
The local angle:
Candidate Trump recognized Brexit’s isolationism as kindred to his own #MAGA movement, taking its success as a harbinger for his bid and declaring himself “Mr. Brexit.” The affinity runs deeper: Both campaigns were covertly boosted by Russian operatives, raising questions about the hand that Russian President Vladimir Putin has played in sowing internal discord among Western powers. (Indeed, congressional Democrats have probed whether Brexit leaders served as a conduit between the Kremlin and Trump’s operation.)
Trump’s own push to cut off the U.S. economy from its traditional trading partners by raising new barriers has similarly unnerved business leaders and rattled stock markets around the world.
And both Brexit and Trumponomics prove moving to withdraw from the global order as a shortcut to prosperity is a promise easier made than kept. 
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MARKET MOVERS

Employees of the New York Stock Exchange take a break on Dec. 6. (Photo by Yana Paskova for The Washington Post)
— Recession coming in 2019, CFOs say. CNBC's Jeff Cox: “Chief financial officers at companies are pessimistic heading into 2019, with nearly half expecting a recession by the end of that year, according to a survey released Wednesday. Duke University's look at where 212 CFOs stand showed that 48.6 percent think the next negative growth period is less than 12 months away. If the U.S. manages to make it through the year without a recession, 82 percent figure one will start by the end of 2020. . . .
“The results show 86 percent see a Canada recession by the end of 2019, with the figure at 66.7 percent for Europe, 54 percent for Asia and 42 percent for Latin America. Overall, respondents expect the U.S. to grow by 2.7 percent for the year, with the bulk of the gains front-loaded, while there's a 1-in-10 chance of GDP rising just 0.6 percent. Primary risks include the inability to attract and retain qualified workers, an oft-cited issue referred to as the 'skills gap.' ... Other issues the CFOs cited were government policies, benefit costs, economic uncertainty and rising employment costs.”
— Stocks closed higher amid trade war. CNBC's Fred Imbert: “Stocks closed higher on Wednesday as investors digested news related to the ongoing trade war between the United States and China. The Dow Jones Industrial Average rose 157.03 points to 24,527.27, led by gains in Caterpillar. The S&P 500 climbed 0.6 percent to close at 2,651.07 as the consumer discretionary sector outperformed. The Nasdaq Composite jumped 1 percent to 7,098.31 as Facebook, Amazon, Netflix and Google-parent Alphabet rose.
“The major averages came off their highs in afternoon trading. The Dow had risen as much as 458.05 points, while the S&P 500 gained 1.85 percent at its session high. The Nasdaq rose as much as 2.35 percent . . . Shares of Caterpillar and Boeing both rose more than 1 percent. These stocks are considered global trade bellwethers because of their exposure to markets abroad.”
— Fed takes a big hit. Bloomberg's Rich Miller: “The Federal Reserve is piling up unrealized losses on its $4.1 trillion bond portfolio, raising questions about its finances at a politically dicey moment for the independent central bank. The Fed had losses of $66.5 billion on its securities holdings on Sept. 30, if it marked them to market, according to its latest quarterly financial report. That dwarfed its $39.1 billion in capital, effectively leaving it with a negative net worth on that basis, a sure sign of financial frailty if it were an ordinary company.
“The Fed, of course, is not a normal bank and does not mark its holdings to market. As a result, officials play down the significance of the theoretical losses and say they won’t affect the ability of what they call 'a unique non-profit entity' to carry out monetary policy or remit profits to the Treasury Department. Case in point: the Fed handed over $51.6 billion to the Treasury in the first nine months of the year. The risk though is that any perceived deterioration in the Fed’s finances could dent its standing with Congress and the public when it is already under attack from [Trump] as being a bigger problem than trade foe China.”
Shares of China-based music streaming company Tencent Music Entertainment Group ...
Reuters
TRUMP TRACKER
TRADE FLY-AROUND:

Donald Trump shakes hand with China's President Xi Jinping in Beijing in Nov. 2017. (Fred Dufour/AFP)
China budges on its industrial plan. WSJ's Lingling Wei and Bob Davis: "China is preparing to replace an industrial policy savaged by the Trump administration as protectionist with a new program promising greater access for foreign companies, people briefed on the matter said. China’s top planning agency and senior policy advisers are drafting the replacement for Made in China 2025, President Xi Jinping’s blueprint to make the country a leader in high-tech industries including robotics, information and clean-energy cars. The revised plan—Beijing’s latest effort to resolve trade tensions with the U.S.—would play down China’s bid to dominate manufacturing and be more open to participation by foreign companies, these people said.
"Current plans, they said, call for rolling out the new policy early next year, when the U.S. and China are expected to be accelerating negotiations for a deal to end their bruising trade battle... Odds are long that Beijing’s new industrial policy will go far enough in addressing U.S. complaints.
China is buying American soybeans again — but not very many. CNBC's John W. Schoen: "China is back in the market for U.S. soybeans, but the recent purchases represent just a fraction of sales American farmers have lost since the Trump administration embarked on a trade war with Beijing in July. Chinese state-owned companies bought at least 500,000 tons of U.S. soybeans on Wednesday ... in the first major purchases since [Trump] and [Xi] met in early December. The deals — valued at some $180 million — helped propel U.S. soybean prices to a 4-1/2-month high on the futures market Wednesday."
— Trump still deciding what to do in Huawei case. Jennifer Jacobs at Bloomberg: "Commerce Secretary Wilbur Ross cautioned against assuming [Trump] will stop the extradition of a Huawei Technologies Inc. executive arrested in Canada, and said the president hasn’t yet decided to intervene in a case that’s roiled trade talks between Washington and Beijing. 'Let’s see what he actually decides,' Ross told reporters at the White House... Trump said in an interview with Reuters on Tuesday that he would intervene in the U.S. effort to extradite Huawei chief financial officer Meng Wanzhou if it would help him win a trade deal with China."
— China detains two Canadian diplomats. The Post's Anna Fifield and Amanda Coletta: "A second Canadian has been detained in China on charges of 'suspected involvement in activities that jeopardize China’s national security,' increasing fears that Beijing is taking hostages in retaliation for the arrest in Vancouver of a top Chinese business executive. China’s Foreign Ministry confirmed that both Michael Kovrig, an analyst for the International Crisis Group, and Michael Spavor, who runs cultural exchanges with North Korea, were detained on Monday on 'suspicion of engaging in activities that endanger national security.'
"Both men worked for nongovernmental organizations and appear to have been picked up for violating China’s strict new rules aimed at controlling the work that foreign NGOs do in China, part of a broader crackdown on civil society and freedom of expression."
It's Chinese hardball. Christopher Bodeen at AP: "In many ways it looks like a classic Chinese response to perceived slights: Deny any wrongdoing, seize the moral high ground and exert maximum pressure to extract concessions. But Beijing’s detention of Michael Kovrig also reflects an increasingly bold approach to international disputes under President Xi Jinping, who has overseen a vast expansion of China’s diplomatic, military and economic power."
FBI official: Chinese threat not properly understood. ABC News: "FBI Assistant Director Bill Priestap said he is still 'amazed at the lack of understanding of the gravity' of the threat among some of those being targeted the most by China. 'I believe this is the most severe counterintelligence threat facing our nation today,' Priestap said during the Senate Judiciary Committee hearing. 'What hangs in the balance is not just the future of the U.S., but the future of the world.'"
Proposals for reforming the World Trade Organization fail to deal with problems ...
Reuters
MELTDOWN WATCH: 
POCKET CHANGE

A train carrying cars loaded with coal leaving a nearby coal mine is seen in front of Dry Fork Station, a coal fired power plant in Gillette, WY. (Matt McClain/The Washington Post)
Apple to spend $1 billion on new Austin campus. CNN Business: "Apple is putting more detail on its plan to create 20,000 jobs in the United States over the next five years. The company said Thursday it will spend $1 billion to build a new campus in Austin, Texas. The city is already home to one Apple campus, a sprawling facility with 6,200 employees that is the company's largest outside its headquarters in Cupertino, California. Apple's new Austin campus will be less than a mile from the existing one and will be spread across 133 acres, the company said in a statement. It is expected to make Apple the city's largest employer, with a workforce of 5,000 employees and the capacity to add 10,000 more.
— States sue to stop coal. AP's Matthew Brown: "Four states that say burning coal will hurt their residents as it makes climate change worse are trying to stop the Trump administration from selling vast reserves of the fuel that are beneath public lands. Attorneys for California, New Mexico, New York and Washington argue the coal sales have been shortchanging taxpayers because of low royalty rates and cause pollution that puts the climate and public health at risk."
— The national debt is rising fast. Bloomberg's Alexandre Tanzi: "U.S. government debt is on track this year to rise at the fastest pace since 2012, as a stronger economy fails to keep pace with the wave of red ink that’s rising under the Trump administration. Total public debt outstanding has jumped by $1.36 trillion, or 6.6 percent, since the start of 2018, and by $1.9 trillion since [Trump] took office ... The latter figure is roughly the size of Brazil’s gross domestic product. If this year’s growth rate is sustained through the end of the year, it would be the biggest jump in percentage terms since the last year of President Barack Obama’s first term, at a time when the economy needed fiscal stimulus in the aftermath of the financial crisis. As of Monday, the nation’s debt stood at a record $21.9 trillion."
General Motors Chief Executive Mary Barra faces bipartisan anger in Washington over the company’s plans to cut 14,800 jobs and close four plants despite robust profits and a strong economy.
WSJ
Timothy Springer invested $5 million in the startup’s early days. His windfall is one in a series of savvy investments.
Bloomberg
MONEY ON THE HILL

Trump debates with House Minority Leader Nancy Pelosi (D-Calif.) and Senate Minority Leader Chuck Schumer (D-N.Y.) as Vice President Mike Pence listens during an Oval Office meeting on Tuesday. (Photo by Jabin Botsford/The Washington Post)
Trump's border wall ultimatum squeezes GOP. The Post's Erica Werner and co.: "Trump’s increasingly urgent push to construct a massive wall on the border with Mexico has created a nightmare scenario for congressional Republicans as they race to avert a partial shutdown of the federal government at the end of next week. A day after Trump declared he would be proud to let funding lapse for dozens of government agencies if he does not get the money he wants for the wall, congressional Republicans signaled little appetite Wednesday to join his cause.
"Some expressed befuddlement at Trump’s strategy, while others sidestepped his comments, marking a new rift between the president and his party on Capitol Hill with just weeks left at the helm of both chambers of Congress... The disconnect reflects the divergent priorities of Trump and Republicans in Congress during the twilight of their two-year grip on the federal government. While Trump made the wall a signature issue in his 2016 campaign, congressional GOP leaders have displayed less enthusiasm for it."
The longtime House Democratic leader is now on track to claim the speaker’s gavel for second time on Jan. 3.
Mike DeBonis
Regardless of the motives, rank-and-file senators have employed a mix of unique techniques, old-fashioned threats and insider persuasion to spark debates that had been previously blocked or delayed.
Paul Kane
THE REGULATORS

Federal Reserve Board Chairman Jerome Powell, left, and Vice Chair Randal Quarles listen during an open meeting in Washington. (AP Photo/Cliff Owen, File)
Trump appointees ease up on banks. WSJ's Lalita Clozel: "After years of acrimony, the nation’s top banking regulators are seeking a detente with the firms they oversee. Two Trump-appointed officials have spent several months touring the country, visiting bank examiners in regional offices and asking them to adopt a less-aggressive tone when flagging risky practices and pressing firms to change their behavior.
The officials—the Federal Reserve’s Randal Quarles and the Federal Deposit Insurance Corp.’s Jelena McWilliams—aim to change policy in a subtle but significant way and reshape regulators’ relationship with banks, which officials have said was too contentious during the Obama years that followed the financial crisis. Changing the supervision culture 'will be the least visible thing I do and it will be the most consequential thing I do,' Mr. Quarles, the Fed’s vice chairman for supervision and regulatory point person, said in an interview. 'The banks should feel that their supervisor is going to be firm but fair.'"
CHART TOPPER
The stock market doesn't care about government shutdowns. Via LPL Senior Market Strategist Ryan Detrick: "Although shutdowns get a lot of media hype, the reality is that stocks tend to take them in stride. In fact, the S&P 500 has gained during each of the five previous shutdowns."

DAYBOOK
Coming soon:
THE FUNNIES
— From The New Yorker's Navied Mahdavian:
BULL SESSION
The revolving door between Fox News and the Trump administration:
'Truth isn't truth': Rudy Giuliani tops 2018's quotes of the year list
A brief history of Capitol Hill's 'Monopoly Man'