DUBLIN — In this episode, Alec Hogg and I look back on a chaotic week in Brexit. Theresa May secured a draft agreement, but defections from her own party have put its future in doubt. With some calling for a hard Brexit, it’s anyone’s guess what the future holds. Meanwhile, markets and businesses try to muddle through the uncertainty, at great cost. We also discuss Bitcoin, which had almost as difficult a week as May. Down over 60% on the year (and more than that from its December 2017 high), Bitcoin has broken free from a months-long period of relative stability and started to fall again. Alec Hogg has some interesting theories about why that is. – Felicity Duncan
Hello, and welcome to this week’s episode of the Editor’s Desk. I’m Felicity Duncan. This is BizNews Radio and with me, Alec Hogg. Alec, the only thing in the headlines this week, I’m sure where you are and, to a big extent, where I am, here in Dublin, was Brexit. It was a very big week in Brexit. Theresa May finally secured a draft agreement with her counterparts, on the European Union (EU) side, and brought that back home to Westminster and started trying to sell this deal to not only members of her own party but also obviously, Parliament and the UK as a whole. There were a number of high-profile resignations once the deal was revealed, and it has caused really, a political crisis, (to an extent). Everyone’s eyes now on May, on what’s going to happen, and on how this deal is going to progress. Do you want to give us a bit of a sense of what it’s like on the ground in London?
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As you say, the headlines on all the newspapers were to do with Brexit and Mrs May, and you’re depending on what the proprietors of various newspapers believe, i.e., the guys on the left think this is the end of the Conservative Party, and Labour will come to power. The guys on the right believe that Mrs May has taken far too liberal an approach and in fact, Britain will be better off by just having a ‘hard’ Brexit, and so on. So, you have these range of opinions across the sides but what I really liked and the timing was absolutely perfect. Now, Schroders ever year has a conference where they bring together journalists from around the world and there were about 170 of us there and they go over for two days and they talk about various things to do with the investment outlook. Why I liked this so much is Schroders is the biggest asset manager in Europe so, they handle something like £400bn of assets.
So, you can imagine, being the biggest asset managers, they would be employing some pretty smart people and they’ve been around for 200 years so, it is an organisation that the quality of information was extremely high. I liked, and let me just relay a little bit of this of what Sue Noffke, who’s their head of UK equities and what she had to say about the whole Brexit thing. She reminded us that since 2016, the London Stock Exchange has under-performed the rest of the world by 20%, and that the Pound has fallen against the US Dollar by 12%. Now, those are substantial movements, if you own assets. The point that was made this week was the uncertainty now, is getting to absolute fever-pitch.
Mrs May is trying to put something on the table that the country can live with. The chances of going back for a second referendum are very low and the reason for that is, they had a poll after Mrs May’s Brexit proposals had been put forward and you had the resignations, as you say. There was a poll done here in the UK, a very reputable one by YouGov and it showed that one-third of the people who were interviewed thought a second referendum was a good idea. One-third of them thought a hard Brexit, i.e., no deal with Europe was a good idea, and the other third of them thought Mrs May’s proposal was a good idea. So, you’ve got this complete split and, by the same token, you also have a lot of uncertainty.
So, the UK markets are still weighed down, down 20% in relative terms, by the Brexit uncertainty, and the people are confused, hence the headlines are confused and so on but how do you make sense of this? Effectively what she’s trying to do is she’s trying to find a compromise between those three parties, i.e., those who want another referendum because they think that everybody is going to vote the other way – that’s not going to happen by the way, because Britain just… They’re just not going to do it. You can see from all of the readings that a second referendum is completely off the table. It would be more chaotic than what we have at the moment. So, she’s trying to appease the remainders, she’s trying to find a way forward for the hard-liners or something that the hard-liners would not totally reject, and then find something for the way forward.
It does appear that what she’s put on the table is hugely imperfect but it is the kind of idea or the kind of plan that has a better chance of getting through than any other. Now, there’s all kinds of commentaries on this and really, if we were to start speculating all we would be doing is just adding to speculation because it’s all guess work, at the moment, but I like what sensible observers have been saying about this. They say that there’s always a deal at the 11thhour, right at the end, just before you think that everything is going to be chaotic and that’s what we need to be doing. So, while we can speculate and we can follow all the discussions and make up our own assumptions on either way. Actually, that is an exercise in futility. Much better to have a look from an investment point of view, what are you talking, the markets are down 20%, because of the uncertainty. If the uncertainty is going to be reversed and at some point, in time it’s going to be either there’ll be a hard Brexit or there will be the ‘chequers plan’ as they call it (Mrs May’s plan). At that point in time the uncertainty comes out of the market then all you have to worry about is, is this going to really hammer the UK economy, into the future? So, should you be downgrading all the stocks on the London Stock Exchange, or is it not?
Now, a point that everybody seems to be missing, well certainly not Ms Noffke who explained this, was that two-thirds of the shares listed on the London Stock Exchange are multi-national businesses, with only a small exposure to the UK economy. So, think of this. Here you’ve got, it’s a bit like the JSE, where you have the big stocks, who are internationally focussed, yet they get affected when things go wrong in SA. What Richemont gets out of SA is fractional. The same with British-American Tobacco, and many of the others. It’s a similar thing in London but because of Brexit all ships, if you like, have been sunk. So, her point that she was making was actually, ‘get smart, have a look at those companies that are not exposed to the UK, that are primarily international companies – then whatever happens at Brexit is irrelevant because you’re taking advantage of ‘Mr Market’s’ fear and pessimism, which in fact has got nothing to do with the underlying operations in that business. I like that approach and I think there’s an opportunity here, if you do your homework.
Yeah, I think for investors there’s definitely that aspect to consider, which is the sell-off overdone and once certainty is restored what is the other side going to look like? Is it going to look as harsh as it has been over the last couple of years? Or is it really going to start to rebound once that’s re-established. I think for businesses of course, there’s been a very difficult process and a lot of uncertainty and a lot of needing to make a lot of different kind of contingency plans and a lot of costs, and I have nothing but sympathy for the leaders of UK based businesses who have had two, very rough years, and it looks like it’s not going to be a smooth ending for another few months, at least.
Now, another currency that’s been having a bit of a rough time is Bitcoin. We saw it falling 10% Wednesday. It fell down below 6.000 and it’s down about 60 or a little bit more than 60% this year. Some of the members of the Bitcoin community and some fund managers said that the fall was the result of an upcoming split in Bitcoin Cash. If you recall, Bitcoin Cash was a cryptocurrency that kind of hived off from the main Bitcoin to try and overcome some of the payment limitations that have bedevilled the primary currency Bitcoin itself. But I believe you’ve heard a different theory this week, explaining the prolonged crash in the Bitcoin price, down from almost $20.000 a coin back in 2017, December. Down now to about $5.600 (perhaps a little less than that right now) – what did you learn about cryptocurrencies this week, Alec?
Felicity, it’s been my week of conferences and as you know in London, you really get the best of the best. The first conference I went to on Monday and Tuesday was the Offshore Alert by David Marchant, a guy that we’ve done quite a lot of work with. He is the expert or the leading financial investigative financial journalist on offshore entities, these tax havens, and he puts this conference together, it’s the 7thyear he’s had it in London, he’s had 17 annual conferences in Miami so, it’s pretty well established. The real focus or the headliner, if you like, was where he had the chief of criminal investigations at the IRS (American Tax Collectors) and his counter or his equivalent in the UK, the Director of Fraud Investigation at HMRC. So, Don Fort from the USA and Simon York from HMRC – Google them, you’ll see these are really big deals.
Essentially, what they said was one thing that the focus they have is on cryptocurrencies. So, think of this, the criminal investigations departments/units, which employ thousands of people in the US and the UK are focussing on Bitcoin, and a few of the other cryptocurrencies. Why’re they’re doing that? Their analysis shows them that 97% of the transactions that are concluded in Bitcoin are done by criminals (the underworld). This is a shocking number because when you sit outside of it and you have a look from our perspective, you think people are saying, ‘let’s invest in Bitcoin because it’s going to be the currency of the future, etc.’ But that’s really not its utility. Its utility, at the moment, is that you can transfer money anywhere and it is completely invisible, and who would love that the most? Organised crime. How big is organised crime? Well, it’s as big as organised business, by many instances. There are many books on the subject, Moisés NaÃm wrote perhaps the best one of them called ‘Illicit’ but basically, organised crime is huge.
So, if you’re trying to move money around in organised crime now you can use Bitcoin, and that’s where the IRS and HMRC and their investigators are onto it. So, as they have made this more of a focus and as they are starting to put or to understand better how cryptocurrencies are being used by organised crime, clearly the incentive to use by criminals is reducing and, as a consequence, the price of this utility is falling as well because it’s like having electricity. If it’s abundant and plentiful and everyone can use it, and all the criminals can use it then everyone is going to try and get more of it. However, if you can’t use it anymore then clearly, you’re going to try and find alternatives. This is exactly what’s happening. In the past, if you were a criminal and you wanted to move money from point-A to point-B you took a chance with a crooked bank, and we know that they’ve come under more and more pressure with big data and technology and so on. Otherwise, you put money into a briefcase and you took your chances at the airport, by transporting money from one place to another.
Today, you don’t have to do either of those. You can sit in your office, buy some Bitcoin on some exchange and then transfer it to somebody else and in that way transfer money around the world. So, this all makes a lot of sense and when you listen to these guys, who really are in the forefront of it, you can understand that as they’re getting better or paying more attention to it, and as, if you like, the good guys are focussing more on this area – it does mean that the criminals won’t be able to use these cryptocurrencies quite as freely as they did in the past. As a consequence, the price of those cryptocurrencies has fallen because you have to remember a cryptocurrency is a utility. The value that you talk about – there’s no value, you can’t transfer it and change it into gold. It’s only worth what the participants in that market believe it to be worth, and it came from cents, it costed cents as you said earlier to nearly $20.000 per Bitcoin, because suddenly there was a huge demand for it and the demand, primarily, was through money launderers. So, that’s the story.Â
By the way, 60% of the Bitcoin exchanges are unregistered so, that also has a huge warning bell. After listening to these guys I would suggest that Bitcoin’s decline is not yet over unless the baddies find a way to make their transactions even more invisible or even less being able to be tracked down by the IRS and HMRC, and other tax authorities, but I wouldn’t put much money on that because eventually when you pay attention to areas, which have been a problem, and you’ve put a lot of resources and the Americans have put some very smart people onto this – you will eventually be able to discover it and make it more transparent. The price of Bitcoin will then come down to, I guess, a level, which would reflect its utility as a potential store or exchange of value for a broad society and not what we’re seeing at the moment.
Yes, that makes a lot of sense to me because when the hype was started around Bitcoin it was really promoted as a seamless payment system but unfortunately, we don’t need to go into this in detail but there’s a lot of technological limitations to how quickly transactions can be processed in the network and so on, and so forth. So, it just had some technical limits to making it a useful form of exchange and today cryptocurrencies all told so, not just Bitcoin but things like Ethereum and so forth. Really by most assessments that count for a fraction of a percent of global transactions, or I should say of lit global transactions and not illicit global transactions. It’s just a tiny proportion of the market because there’s these problems with using it as a form of exchange.
So, then of course, the Bitcoin bros started to say, ‘well, no, we need to think of it more as a store of value instead.’ Obviously, with the volatility and various other things, there’s limits to how well it can perform as a store of value. We’ve seen how it has performed so far as a store of value, not necessarily too well. So, it makes a lot of sense to me that this is kind of a solution in search of a problem, and the problem that it really solves is this problem of illicit movement of money – that’s the problem it solves most efficiently, and for people who are trying to launder money the inefficiencies in the network are not really so much of an issue because they don’t really have an alternative, right, as this is the best way to do it.
So, you’re right. It’s going to create weird, artificial things in the market if there’s this whole dark use that Bitcoin is being put to. For an ordinary investor it’s a crazy thing to get involved in until the legal and regulatory system has sorted itself out because if, as you say, tax authorities are really cracking down, and I know a lot of people in America had issues when they did their taxes this year because the US started to tax crypto-gains as if they were commodity traded gains and it created a lot of chaos for legitimate people who had invested in it, and now they’re cracking down on the criminals. It’s just definitely a technology that is still very young and still going through its teething problems. I don’t know that’s it’s necessarily ready to be in peoples’ pension plans just yet.
Yes, Felicity, and one other very big point here is that we aren’t factoring in, is that the authorities have been a treasure chest of information, almost like Gupta-Leaks, through Paradise Papers and Panama Papers. Now, these are hundreds of thousands, in fact billions of emails and information from the underworld. So, you know what happened in SA, we well know what happened when Gupta-Leaks, when all of those emails of the noxious Gupta family became available to law enforcers and to journalists, etc., it changed the game. It completely changed the game in the country and when you think of organised crime, they have had their game changed through Panama Papers and, more recently, Paradise Papers, which are Gupta-Leaks on steroids. So, all that information is now sitting with the IRS and with HMRC, and clearly, as you start digging down then you’ll see they’ve been using their currency of choice, being Bitcoin, and now you can actually go after these guys. So, let’s not underestimate the impact that those leaks have had so far and more and both of these guys said it. They said that the huge advantage they have over the underworld is that there is no honour amongst thieves and if you have a system like the USA has got, and we’ve recently introduced it into SA, where if you can tell on somebody else, you can actually get away with your own crime. You tend to tell on everybody else and put ‘Mr Big’ being bars, or at least make it less comfortable for ‘Mr Big.’ So, technology, in this sense, is having a very positive impact on the rest of the world because there’s these huge vaults of information that have now been leaked – it is able to be processed and crunched though big data and through technology. It starts making the invisible, very visible, and who is the most invisible in the global economy? It’s clearly, organised crime. What does organise crime use? It’s Bitcoin so, just the rational approach and the logical way of looking at this is okay, they had a good run but the net is closing.
