The Brexit Day Edition

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S1: This ad free podcast is part of your slate plus membership.

S2: Hello and welcome to the Brexit Day edition of Sleep Money, your guide to the business and Finance News of the Week.

S3: I’m Felix Salmon of axios. I am in London. Today is January 30 for well, today. As far as you guys listening to the show are concerned, it’s February the 1st, but for me it is January the thirty first. We record the show on Fridays. I am in London on Brexit Day. It is a highly emotional day here in the UK.

S4: And I am joined not only. By Anna SHYMANSKY and Emily Pack of Breakingviews and Huff Post, respectively.

S3: Hi, guys. Hello. But also by the one and only Izabella Kaminska of the Financial Times. Oh, has to be him. If he has a bit of a frog in her throat.

S4: Sorry, but she’s gonna help us navigate the wild terrain of Brexit. She is also. Would you say that the biggest contrarian of. The pink paper, the salmon colored paper.

S5: I think there’s one other person who probably is more contrarian than me, but we’ve just exported him to China, so it’s okay. He’s the new Shanghai correspondent. But yeah, of that I’ll take that title.

S3: So Isabel is going to do her very best to explain why the Brexiteers aren’t completely insane and why they might have a point. We may or may not be convinced about this, but she will. She will give it the old college try.

S6: She’s going to talk about. Yes. Gee, we are going to talk about ESG environmental concerns when it comes to investing and whether they actually make things better or not. And because Izabella is the world’s biggest nerd, we are going to take this opportunity to answer all of the questions you didn’t realize you had about libel. It’s worth it. Trust me on this one.

S4: All of that coming up on Slate. Money. So, Isabella, we are recording on January the thirty first 2020.

S3: The day has arrived. What is the day and why is it important?

S5: Today is our Independence Day.

S3: I mean, the UK is now its own independent country, which apparently it wasn’t before.

S5: Apparently not. Yeah. So where there are flags flying down the mall. There’s an address from our prime minister, Boris Johnson tonight at 10:00 p.m. I believe it’s a big deal. We are we are becoming fully independent, akin to when the great U.S. went independent back in so many conservatives.

S3: Yes, exactly. OK. So, Emily, what do you make of this? Is this makes almost no sense to me. Does it make any sense as an American who is who has declared independence in 1776 is making sense here?

S7: I mean, it seems like it’s kind of anticlimactic. It doesn’t seem like anything’s actually changing until maybe next year. Maybe not. It just seems boring. There was all this buildup for the past few years like the world was going to and something about the lorries stuck in traffic Irish backs.

S8: Know the better ways to learn from a language channel. There is no doubt a proper Brexit if it isn’t working.

S5: All right. Yeah. I mean, I think as we’ve everything to do with Brexit, everything we know about Brexit is wrong and has been mis sold to us. So nothing is happening as expected. Well, the reality is you’re absolutely right. The today is just like a sort of transition day. We’re going to be in transition for a very long time, possibly years.

S9: Trade talks, to be clear, everything continues as per yesterday, basically at least until the end of December. Right.

S3: Except Britain is no longer a member of the EU. There were no British members of the European Parliament. Britain has no say no, no membership on the European Council.

S10: Whatever rules Europe sets, we’re in limbo will still bind Britain, at least at the end of the year. But Britain has no control over what those rules at are actually right.

S5: So we are in limbo for then.

S9: And then at the end of this year, either.

S10: That limbo gets extended in what the new extension controversy no doubt in was what some people have been calling Brian, though Brexit in name only, or if you believe Boris Johnson, all of the deals will be done by December the thirty first, and then it will be a proper Brexit. At that point.

S9: Now, the next big obvious question is, is there any reason to believe Boris Johnson?

S11: Well, he did get Brexit done. It took him a lot longer than he thought it would.

S5: I mean, look, is there any reason to believe any politician ever? I think we we can’t deal with the future. Anything can happen. Corona virus could come along and enforce all those border restrictions anyway. Right. So life is a big unknown. I mean, you know, he’s very optimistic that he can do it. Reality is the diplomacy is difficult. Look at the Canada trade deal that gives billions of years. Trade talks are, you know, again, I mean, Bonnie’s back in, you know, calling the shots on everything on the EU side.

S3: So what does that mean? Who is who is Michel Barnier and why does he matter?

S5: He’s the chief Brexit negotiator on the EU side. And he’s been you know, he’s been. He hasn’t been a pushover. Has he? So I don’t I doubt he would change his position of the hot. I could never pronounce his name. The hostetter. What? He’s still going strong. And there’s not going to be suddenly a situation with whether you kind of backs down and so no more lenient.

S12: Well, think. And I’m curious, like in terms of like, what exactly is the ideal situation here for Britain in terms of.

S3: What’s the best case scenario here?

S5: So I think, you know, it really depends what sort of Brexit here you are. Because. Okay. Let’s just do your Boris Johnson. OK. Well, it’s unknown what kind of Brexit he really is. I mean, one what one might call him a sort of libertarian style Brexit, a bringing in. Well, he wants to bring about some sort of independence. Singapore on Thames, possibly some people perceive it. But then there’s, you know, the indications that he’s much more you know, he he has made promises that he will keep the good rules out of Europe when it comes to climate.

S13: And then all these other things, it’s not like we’re shedding everything. People are concerned that some of the sort of financially focused rules might go away. But I do. Again, that’s gonna be much harder than what people like the sort of Singapore and Thames lobby would be making out, because there is an issue of equivalence. You need to have the rules anyway to be able to trade in.

S10: Okay. Let’s let’s let’s rewind a bit. We’ll get. I’m going to rescue your hamzaie. So, yeah. This is this is the problem. Trying to talk to anyone English about Brexit. If they assume you know everything, right. As an American, we know nothing.

S9: So let’s rewind a little bit and say Britain is famous as a financial services center and financial services were a big international thing.

S14: And to what degree what does Boris Johnson need to do between now and the end of December in order for financial services to continue to be able to financially service in London?

S13: So basically the background is that I remember being at a BBA banking panel thingee in the city and just before Brexit and taking a poll like us, a hand, a straw poll about who was in and who is anti Brexit. And basically all the bankers in the room were remain they were all pro remain, which kind of tells you the issue in banking. So bank the UK banks really need access to the European market. They can’t get that if we pull out and start making our own rules and regulations. The EU will just not let us passport into that market. That’s the big issue. Passporting and being able to sell our services cause we are such a major financial centre.

S5: That’s really important because quite frankly, you know, without the ability to service Europe, you know, some people might say, oh, well, the future is markets and in Asia or markets, you know, elsewhere in in in in the world. But the reality is, is that our core financial sense is really need access into the UK, into the European Union now. And they’re not going to get it.

S13: Well, they’re not. That doesn’t look like they’re gonna get it. But there’s been this longstanding argument from the pro-Brexit bankers that I do know that, you know, it doesn’t matter whether we get it or not, because there’s some sort of legal logic that if we have equivalence, which means that we match the the rules of the Europeans, regardless of whether, you know, essentially we we are bonded to their rule-making anyway. And we keep going with the rules that they establish. Then they have to give us access that they can’t discriminate against us because there’s no reason to discriminate against.

S15: This is something I find kind of interesting because it seems like a big. Part of Brexit was the idea of the UK being able to kind of take back control and make its own rules, but because it is just so tied to the EU through trade of goods and services, it seems like that’s impossible and it’s going to end up being controlled by the EU rules regardless.

S16: Yeah, if it wants access to the EU market is going to practically have to abide by EU rules on pain of not having access to the EU market. So in what sense is that taking back control?

S13: So I think you have to look at the mix of the economy, though. So in terms of the UK, you know, the EU from an export is point of we’re not a really big exporting country compared to the European countries themselves who export into us. So we are a net importer from Europe anyway. Our main export is financial services. That’s one of our really big ones. So that’s why the passporting issue is so huge. But if you speak to Brexiteers, they would say, well, this was the problem all along the way. Europe was set up. It sort of killed Orlove Industries. We had no choice but to be entirely sort of concentrated in financial services. And that’s a kind of rent G-A elitist industry that has massively led to inequality in the UK. And quite frankly, if the banks have to move to Frankfurt, why not let them go there?

S17: Right. But that’s kind of a probably not the greatest argument, though, right?

S15: If you’re thinking of like what what other industries did the Brexiteers think that the UK was going to all of a sudden become dominant? And if you’re looking at labour costs in the UK verse in the strength of the pound, you know, comparing this to like, say, Germany, I mean, this is that really the greatest argument that they’re making there?

S5: Well, I mean, it really you have to look at the big picture. I think if you if you are looking at it from a Brexit point of view, you have this long standing rhetoric about how we had the Commonwealth, you know, before the EU.

S13: We were we were bound to our interests and in the larger sort of former British Empire. And so back in the day, back in the 70s, you would find sort of New Zealand lamb and all these sort of Commonwealth products everywhere.

S5: Not so much the Danish bacon men, you know, as we joined the EU. My dad always goes on it and my dad is a Brexit talks, you know, about how oh, and you could see the transition. We all at Danish bacon after that. So the point being, though, that there was a sort of legacy commitment that we had to the Commonwealth and we sort of let go of that in favour of preferential treatment to which we may or may not be true.

S4: But either way, like it, there’s no particular reason to believe that doing trade deals with New Zealand or Uganda or anyone else is going to be particularly easier than doing trade deals with the EU and especially not the big one, which is the United States.

S16: You know, we just managed to piss off everyone in the Trump administration by saying that we would be buying while away equipment for the 5G system. So they have no particular incentive to do a good trade deal with us. HORSLEY Is there any country in the world where Britain has any negotiating leverage on trade?

S5: I mean, the former sort of, you know, Commonwealth countries are probably our first bet. There is some positive inclinations coming out of some, like Canada has. Actually, I have been surprised they’ve been more open to trade talks than I thought they would be. But, you know, this is a big unknown. I don’t know what’s gonna happen. I would imagine we own a small market. We are a big market. We’re also we have that sort of connection to the fund, to the financials sort of stream.

S18: So I think people will want to strike a deal with us eventually.

S16: But I mean, I’m I’m I I if I if I knew how to negotiate trade, I mean, that that’s the other thing is that literally no one in Britain knows how to negotiate trade deals because Britain has outsourced all of those skills to the European Union for the past few decades. And and with their whole no decent trade and good trade, negotiation is an insanely complex thing. And it does take years and years and years, even for the relatively easy ones. This is the hardest trade negotiation anyone has ever had. Britain has no trade negotiate. Doesn’t they want to get the biggest bit of all, which is the EU bid done by December, which is this timeline like.

S5: No one’s unlikely that it will happen by December, I think.

S19: One question I have to like pull back from the difficulty of trade negotiations is what has happened to the UK over the past three years is I see a lot of headlines and I admit to not reading most of the articles about how the the British economy is struggling under the uncertainty that certainly surrounds it and has surrounded it for three years and will continue to surround it because people still don’t know how this is all shaking out. Like how are things going over there?

S3: Right. There was that famous estimate that the British economy is already.

S20: Lost like 200 billion pounds due to late businesses. Holding off on investment. Thanks to uncertainty.

S5: Yeah, I think uncertainty has been the issue. And but the Brexiteers would say, well, that’s not awful. Because we would have got it done years ago if not for all these horrifically obstructionist Remainers. So, yeah. Yeah, I mean, business. How is the economy doing? Business obviously hates uncertainty. And I think that was my. You know, interestingly enough, when when Trump was elected, I was at Web Summit and I remember the day before going around all these tie tech companies and sort of saying, you know, who who do you support? And they were like, oh, definitely. Hillary! Hillary! Hillary! And what I found really interesting is the next day I went round and I started talking to them and they and I was like, so isn’t is it awfully well, you wanted Hillary to win an R? And they were like, yeah, but, you know, we can make it work. We can make some. And that’s what I find really interesting about business people, is that they tend to be quite pragmatic. And so they go for the easiest option. But then they they try to make the best the best out of a of a terrible situation. So I kind of suspect business once they have the certainty, they can work around it.

S21: There’s gonna be a major challenge going his years, right. He isn’t going along with the other night. And it was like we knew who was gonna be president. But I guess it’s like Bob saying that lines are are long said.

S13: We do have the advantage this time around that, you know, Boris Johnson has got a massive majority. So the sort of parliamentary process, at least on our side, is not going to be as divided as it was working up to the thirty first of January. So from that perspective, that is his trump card.

S22: Sorry to speak, not funny jokes, but yeah, this is gonna make a difference in terms of how how quickly he can push, sir.

S5: And, you know, developments and trade talks to parliament and Morvan lightly, unless he has a massive sort of rebellion in his in his own ranks, then you’re not gonna get that sort of a position that you used to. That will probably make an even a from a from a political standpoint. The Europeans know that. And that limits there. It does, I think, eliminate one of the little their leverage. I think it does reduce a little bit.

S11: But as that. Is there anything other than trade that we should be worried about? Is Brexit basically 100 percent a trade thing? No.

S5: I mean, there’s a lot to worry about. I think, you know, if you are a foreign national in the UK, there’s been a lot lots of assurances that everything’s gonna be okay. But in terms of, you know, we read we really don’t know what the immigration picture is going to look like. Post-Transition period. I mean, there’s talk of an Australian points system where we let in sort of highly skilled people and not so much unskilled people and that we rank them, but we don’t really know. We dont really have clarity on how that’s going to look as yet. That’s concerning to anyone who has ambitions working in Europe. If you’re British, because theoretically there’s going to be less positive reciprocity. Exactly. So I think that is quite limiting. My you know, I have a lot of friends who live in France and that concerned about whether they will continue to have their access to some sort of French schooling systems or French healthcare, that sort of stuff. One would think that reciprocity is in everyone’s best interests.

S20: So it does kind of defeat the purpose on some level, because that was a large part of the reason why people voted for Brexit in the first place. As they said, there are too many bloody foreigners in as well.

S5: Some people would have voted for that. But yes, I think I think generally speaking, immigration was one of the key policy areas. So they’re going to have to move on this. Otherwise, you know, for the benefit of the US listeners, I’m sure know that Boris Johnson like completely sort of surprised everyone by getting a foothold of these former very Labour strongholds in the UK, the sort of what I would call equivalent Rust Belt, who have historically always voted Labour. And this was a really unexpected turn in the election. And to continue to carry favor in those areas, he’s going to have to live up to some of their expectations, which a lot of them were based around immigration. So he’s going to have to look tough or lose his base. So I’m not I’m not a political strategist, so I have no idea how that’s gonna be achieved. But, you know, he’s he’s really you know, Boris is the buffoon PM who likes to play. You know, he’s he wants to see himself as a man of the people. He’s already reducing himself to sort of funny little publicity stunts. I mean, he famously impersonated that scene tonight. Which actor was from love? Actually, you know. I mean, he’s not he’s the sort of man who will do very strange things to get attention. I mean, there’s an entire like array of memorabilia, bricks at tea towels that you can get. I mean, that’s that’s coming straight from conservative HQ. So they’re really thinking outside of the books. How do. Continue to appear and you can you can become you can now buy it. There’s a commemorative coin coming out. There’s all sorts of strange ways that changing color. Oh, yeah. The pop people are very upset about the passports. I had shows. I found my old blue passport. I was gonna bring it and I forgot. Yes. But back in the day before, we we were in the European Union. The passports were blue. And now and then they went red. And now they are famous. You going to go blue again?

S7: So here in the U.S., after Trump was elected in the past few years, I think culturally the country has gone through some things. There’s white nationalism has sort of gotten stronger. There’s more hostility, open hostility towards minorities, that kind of thing. Has it been kind of a similar situation in UK in terms of like a cultural shift and like a more open hostility towards foreigners?

S5: Yeah, I think it depends what side of the debate you’re on. But like I think if you’re on the remain remained a side of the debate. Absolutely. People have lost friends and family over to pay like people I don’t know so much if in the U.S. that would be so much where the families would be divided over. Trump versus Hillary for sure. Yeah. Yeah. Okay. So that said, same thing here. Like remain would remain. Leave defines who you are.

S22: And that’s kind of been my main issue with it because I find it absolutely upset that people who have had like really good relations for like thirty years or so, you know, not not friends anymore because of the how they voted in the referendum. So there has been a lot of hostility. It’s got very factional. And and I don’t think I think both sides suffer from the fact that neither side is really listening to each of us still. Well, I think as a poll, because I’m I’m a second generation immigrant myself. The polls are you know, there was a great piece in the F.T. over the weekend about how the Polish feel guilty for causing Brexit. And I just saw Schakowsky’s said. I mean, he’s one of the Bullingdon Club. He was all Polish Bullingdon Club member. Therefore, he was with Bojo. So he famously said that, you know, we perhaps feel a bit guilty for for causing Brexit because we can’t win in inundated England with all this immigration. Yeah, but that’s kind of like the sort of Pogge thing to do to be self-loathing. We had this piece about the Poles saying how how they’ve, you know, come here, made a life for themselves and now they don’t know about whether they’re wanted or not. And, you know, I thought it was a very powerful piece, but I would say as a pole, you know, Poles themselves are quite xenophobic and quite this is going to be very controversial. You know, if you look to Poland and you look at the political situation in Poland itself, they’re not exactly on the liberal side of the equation at the moment. So I sympathize with the Poles are lots of progressive, very kind of open minded poles who’ve come here and really made a life of themselves and and lent to sort of absorb British practices and then really, you know, try to make the best of things and not upset. You know, obviously you’re going to be culturally different, but they’ve tried to integrate as well as possible. But then there are other Poles who do unfortunately come to the UK and then not integrate and continue to be quite xenophobe themselves about the British diversity situation. And I think that is why it’s a complex situation of the Poles. But yeah, look, there’s a little Polish members of UKIP, for example, is little known fact that kind of Tommy Robinson rallies by the natural allies.

S3: So these are some of the people who are being racist, legally discriminated against, a racist themselves. This does not make it any better.

S22: No, no, of course it doesn’t. The whole thing is like ending’s that a can of worms.

S15: And doesn’t all of this kind of, you know, go back to probably what one of the most negative things about Brexit for the UK and UK business and also just kind of the world is just it’s it’s one more sign of this kind of, you know, breaking down of globalisation and this increased factionalism like, you know, this no matter what happens with Brexit, no matter what is decided like that, does seem like it’s a trend that’s continuing. That’s not going to be good.

S5: Yeah. I mean, I think in it’s very complicated in the UK because one of the biggest sort of remain supporting parties is the Scottish National Party who wants independence themselves.

S22: So, I mean, there isn’t devolution trend in the UK. There has been for I think decades now. And in certainly there, you know, where were these forces coming from? And I think, you know, part of it is to do with wanting to have control of your local sort of resources, politics, et cetera. But part of it is also about maintaining culture. And, you know, diversity is great. And globalisation has brought. So many good things, but it has also, in some ways people feel like it’s it’s infringed on their home cultures and they want to protect them.

S16: So the one thing that we’re absolutely it seems absolutely certain in us politics, going forwards, no matter who wins the presidential election, is that there isn’t. It’s not going to be a globalist.

S20: It’s not going to be an internationalist. It’s not going to be someone who’s like, let’s have more free trade and more immigration. Like, is it? That ship has sailed, you know, and I feel like we’re on the back swing now and Brexit is a symptom of that. And from business, one symptom of that.

S9: And it remains to be seen how long this batwing lasts.

S20: But it could last for a very long time.

S22: Yeah. I mean, how what what do you think in terms of how globalisation can go move forward in this in this context at all? Yeah, I think it goes backwards to just just me. I mean, but do you think that is going to be economically very damaging?

S3: Yeah, because yeah, both by definition.

S23: But do you think we see a decline in total global trade? I mean, it’s. And the only times when we’ve seen this this these types of drops in global trade, you seen this types of increase in factionalism have been, you know, in periods of history where we’ve had very bad things happen afterwards. I mean, and it just the reality is, you know, you’re not going to see economic conditions improving throughout the world if you’re seeing less trade. I don’t see that happening.

S22: You know, I will play devil’s advocate as usual, because that’s just what I do. But the counter argument would be, well, there are lots of things we do the her ourselves for the sake of what might be perceived a greater good. And in the UK, at least, there’s a there’s a feeling that that globalisation has shifted a lot of employment to either outsourced it to other countries in Europe or it has sort of undercut domestic workers in favour of foreign workers, etc. And it’s undermined the cohesion of our local communities. And the High Street has suffered everything from the sort of phenomenon of the abandoned cities like Grim Grimsby etc to Horizon. Well, we’ve had a lot of crime go up in the UK as well. We’ve had the emergence of sort of really violent drug gang phenomenon here in London. So people would link all of that together and they would say, well, if we have to suffer a little bit economically just to get the return of our communities, it might be a price that’s worth paying. And then I would also counter it with the argument of like, well, ESG and us being very environmentally friendly, mindful these days. We all know that’s gonna be a cost to our economy. In some ways. There’s no way we can achieve that kind of Grétar targets without cutting our growth and in some shape or form. I mean, Gretta herself famously said that the fairy tale of economic growth is something we have to abandon if we want to save the planet. So I think the other perspective is that sometimes it’s not just about economic growth at any cost. And yes, we are. We can measure it in financial terms, in pure purely pecuniary sort of terms. Or gee, gee. And I quote, what does that Gini coefficient see numbers. But the reality is that there are some things that are not financialized that are worth a great sacrifice for. That would be the counterargument. I’m sure they all tell me I’m an idiot.

S6: No, I think I think that’s the perfect segue way for us to move on to the whole question of EU, which stands for environment, society and governance, isn’t it?

S5: Some something like that.

S9: In short, it’s a it’s this big buzz word which the buyside loves to throw around, the buyside being investors, people who buy stocks and bonds and everyone and their mother these days is claiming to be hyper conscious of ESG issues and wanting to invest in companies which are good on the ESG front and wanting to disinvest from companies that are bad on the ESG front.

S20: And we’ve had lots of high-minded letters from the likes of Larry Fink, who controls 7 trillion dollars of assets or something enormous like that. And somewhere the implication is that all of this activity by fund managers of investing in this and not investing in that is going to make a positive difference to the planet.

S3: Emily, as the resident bleeding heart liberal, like presumably you are all in favor of this.

S7: I mean, in theory it sounds great.

S19: But in practice, the idea that these funds can somehow change the world or make us. Go green or make us more socially conscious. I think has been and is a failure. I don’t think that social change comes is going to come at us by, you know, me deciding to put my retirement savings into a socially conscious index fund or really giving it to Al Gore, too, or giving it to Al Gore.

S7: I just I mean, it just seems like with so many things that companies do, it seems maybe well-intentioned, maybe just PR.

S19: And at the end of the day, it’s sort of. Doesn’t matter all that much.

S15: So, you know. But I think that I agree with you to a certain extent. And I think I used to agree with you maybe a little bit more. But I will say I do think some things are shifting here. And I agree with you that I just think like an individual saying, OK, I’m going to invest in this ESG fund is is probably not going to make a lot of difference. But how much ESG is becoming part of the conversation? When you talk to CEOs and CFO, I like this is something people are thinking about and it is actually affecting change. You talk about people who are working at energy companies and they are actually doing things because this is something that the people who who are investing in them, their clients are asking about. You have a way.

S9: Hang on a sec. But when you say change and let’s be really clear about this, let’s assume for the sake of argument that it is actually changing asset allocations and it is in, you know, decreasing the amounts of money that people are putting towards theirs and increasing the amount of money that people are putting towards that.

S3: Is there any evidence that that those kind of decisions, insofar as they’re being made by investors, are having any actual effect on the planet?

S15: So two things. On the one hand, I will agree with you that I think because we’re still in early stages, that obviously I don’t think you could say that you could point to numbers and be like, oh, because this amount of money has moved from this fund to this fund that’s going to change someone’s behavior. I agree with you. I don’t think that is that is happening. I’m more talking about the conversation and the fact that you have clients talking to fund managers who are then talking to these companies. And I do think that is changing behavior. You’re seeing mining companies who are actually starting to deal with their tailings dams after bunch of people dying. But you know, you. But because also you have now a lot of pressure. You have a large funds saying, well, you know, we’re going to be moving money out if you’re not making these changes. And while individuals and individual investor. Yeah, that’s probably not the biggest deal in the world. But if you’re talking about large institutional investors moving forward, I do think they can have an impact.

S3: Okay. So you’ve kind of changed a little bit. I think you said like you started off saying that has been an impact. Now you’ve moved to I think there might be an impact. Which one is it? Has there been an impact or do you think there might be an impact?

S12: I would say that’s a little bit of both. So much more the latter. Yeah.

S1: I mean, I think, as I said, we’re okay in relatively early stages.

S3: You know, let’s let’s look at this and the things that might be an impact. And presumably when you’re saying and then you mean the positive impact. Isabella Kaminska is the world’s greatest contrarian. So you are now going to tell me that there has been an impact and it has been negative?

S13: Well, so ESG is definitely a thing. It’s it’s going to be impacting the markets for sure. We’re going to see a huge shift in the portfolio. Reallocation is going to be massive. It’s already started. I was kind of involved in a little bit of this because I got to moderate a climate finance panel back in. And at the Paris summit thing, they did that before main Paris thing. There was a special climate finance thing a few months before that. So I got to speak to like a bunch of asset managers and interview them onstage and have the time. There was a there was already a perception that divestment might not be the best way forward, because the problem with divestment, of course, is that someone still has to buy it.

S14: There was someone someone’s gonna wind up owning it. Yeah. And, you know, I think there is a case for divesting from capital intensive industry. It’s because if you’re not pumping capital into them, then they will produce less bad stuff. But if you’re talking about inherently profitable industries like coal, divesting from coal does no good at all.

S5: And then. Well, so yes. So here’s the issue is that look at tobacco. Tobacco has been a vice sort of stock for a very long time and it’s been a great performer and dividends like hugely wonderful. So if you want to sit back and take very little risk and just feed off nice dividends, then high dividend, these these stocks that people are divesting are very likely to turn into that, especially as if their cash flows remain high, which is very likely because the transition to renewables is going to take a while. And in the interim, we’re still going to have fossil fuel consumption is still growing. Right. Let’s not forget it. There is an annual increase every year in terms of how much we’re consuming.

S13: And if you take away the financing, meanwhile, you could argue, well, they will naturally have to like adjust or they won’t get financing. But then if you take that like chess chess wise a little bit forward, well, what happens then? You have assets that even get shut down and make. Which makes countries like the UK at least increasingly dependent on imports from other other less, say, democratic countries like Russia or China. Not not that China’s an oil exporter, but essentially Russia mainly. Or you end up with a situation where if the. Stand by, banks or pension funds are not going to be financing these assets. There’s no reason why the Russians or the Chinese or countries that are less inclined to worry about these things might might they might come in and swoop in and buy all those assets anyway.

S7: I had a thought, regardless of whether divesting works or doesn’t work. And practically speaking, it seems like there is a big symbolic and real effect just in the fact that these massive financial companies are taking environmental issues seriously. And that could have an effect politically that I think is actually pretty important.

S3: Like I say, okay, I’m going to I’m going to ask you what your evidence is that financial companies are taking environmental issues seriously because because you have like you have big companies, you know, saying, you know, oh, yeah, we take environmental issues seriously. And then at the same time, they underwrite the Saudi Aramco IPO.

S7: Right. It’s kind of like this. It’s like it’s like all things dialectical, Felix, like you say that you believe a thing with one hand, like Larry Finger, whoever saying like the environment, super important. And then on the other hand, you do like some nasty stuff.

S3: But at some point you get held to account for the thing that you say and don’t mean a monolithic mechanism by which these financial companies are being held to account.

S7: So far, there is none. But. Well, I mean. But I think that’s where this like little thing called democracy might come in handy. And sort of like once the rhetoric starts going, you can’t really control what happens politically as.

S24: So that’s that’s exactly where I agree with you.

S4: And this is as far as I’m concerned, the beginning and the end of this discussion is that real change when it comes to the environment has to be political change.

S25: It can never come from the financial sector. The financial sector is always going to lag political economy. If you look at the question about, say, like how did the big index funds vote their shares because they have to own these companies and then if they’re going to own these companies, they may as well vote their shares in an environmentally responsible way.

S4: And they’re not even doing that.

S25: And the reason they’re not doing that is because big financial institutions are always going to be much more cowardly than even the most cowardly and ineffective government. And the thing that is actually going to happen to change the planet, automated planet better is going to come from governments. And the governments are going to have to drag the financial along institutions along behind them. I wish to a greater or lesser degree of willingness. I just don’t believe that the causality works the other way. And Jamie Diamond, making some noises about environmental friendliness is going to, you know, suddenly going to get Donald Trump to resign onto the parents.

S7: I don’t that is selecting back. I think popular sentiment, they’re reflecting back like not the greeters, but like most people now who want at least to feel like we’re doing something about climate. I think that corporate America, these financial institutions are very sensitive to that. And I think that’s where their rhetoric is coming from.

S3: And that’s the bit where I worry the ESG concerns are actually counterproductive. Is the.

S4: It.

S14: They make people think that they’re doing something. And well, we are so far from making the film, making even the beginnings of the necessary degree of adjustment. And if you look at how much adjustment is needed to the world’s carbon emissions in order to keep the global temperature rise to within a catastrophic 2 degrees Celsius over pre-industrial levels, like we need to slash these things. And what we’re doing right now is we’re talking about tiny little tinkering at the margin. And if people think that tiny little tinkering at the margin is like a step in the right direction or helpful, that what that’s actually bad like inoculates you against the massive changes that the world needs to make on pain of catastrophe.

S23: I think you’re mostly true, but I do think that the fact that it’s such a conversation is also going to affect politics. Yes, of course, governments are going to have to take the lead on this. I mean, I think that’s obviously true. But the financial system is an incredibly important part of how a country runs. So if changes are going to be made, it’s going to be probably. Yes, from the government, but then it’s going to have to work itself through the financial system.

S5: But I again, paying the resident contrarian. I would I would just caution that, you know, I agree with you, said Felix entirely. It has to be government-led bottom. But I don’t know how familiar Americans are with the extinction rebellion movement here in the UK. So it’s a sort of militant environmental movement being led by a sort of, I would say mainly middle class white people who like to live in the counties. But the. But they’ve come they’ve paralyzed London. They’ve they’ve really kind of become a really evidence sort of political force. But one of the things they’re advocating is base basically the suspension of democracy, because their belief is that to get anything done, to reach those targets, we can’t do it in a democracy. And then you just have to look at France and the JLabel and the sort of general reaction to any sort of carbon emission reduction focused policy that they’re not going to be popular policies. And in a democracy, it’s very unlikely they’re going to get voted in. So you even have in my opinion, you need to even educate masses like in a wartime sense, and this has to be market led. So people are happy to make the sacrifices needed to get to the point that we need to get to. And that’s kind of what extinction rebellion is also trying to campaign for in terms of awareness.

S13: But on the other hand, you also have to in well, they just they just want to get rid of the political processes sands and bring in these citizens assemblies, whether you’re appointed to have experts who decide things and then random sort of lottery based system of like having someone from the regions represented every now and then. But it’s a complete suspension of democracy as it is. And so I think that is what we have to realistically be talking about. And I do think ESG as a result is not compatible with free markets and with unless we have the market led reaction. So it not only has to be a political response, it has to be complete suspension of the politics we have had today. And the other little pets, hey, I had have about the whole phenomenon at the moment is that we are so focused about lowering emissions here in the West, but that’s not really the area that we have to worry about. It’s the Chinas that we are in Asia. That’s the really, you know, the big polluting factor. And there has been a bit of forward progression from China. But, you know, Gretton needs to get herself over to China. I don’t know if she would do that currently, but with respect to the slight virus at hand. But but that’s really where she’s. That’s people she’s got to be, you know, speaking to in terms of the western sort of areas. We’ve done a lot already in terms of our waste, like the UK has not been adding to what its waste profile for for a while now.

S3: The more developed you are, the more likely you’re gonna be environmental, ironically enough, with the obvious and massive exception that the United States, which has had this massive fracking boom and has contributed significantly to carbon emissions.

S5: Right. But that is we’re talking about emissions. But even then, one of the other things that I think in in Europe, when we look at like this, you know, even if emissions are slowing, we have outsourced so much of our productivity and production manufacturing to China that were kind of, you know, it’s not fair to just blame China because we’re importing all these products that they make with coal fired plants by Amazon.

S26: And we know we are. So that’s just my little point.

S4: Okay. Let’s have a final segment on.

S21: Now, whenever you can rival label.

S3: Because you know, if you’re going to have Isabella Kominski.

S4: Come on your show, it is going to get nerdy. And there is a major change that is happening to the global financial system. And absolutely no one knows what is going to happen. And it is completely chaotic. And if he helped me out here. But has any progress been made?

S5: No, I don’t think so. Everyone is. Everyone I speak to is still completely in it. You know, I feel like I should back up and explain what you’re talk.

S14: Yes. Yes. Thank. Thank you. The way you mail in may not recall that there was a big scandal about this thing called libel, which is this floating interest rate which goes up or down according to how much it costs banks to borrow money. And it turns out the banks were quite good at manipulating this rate to make money for themselves. And people got very upset about this. And also, no one really cares how much it cost banks to borrow money in terms of how much they pay.

S3: They just want to know what prevailing interest rates are of unjust interest rates for banks and labor just didn’t make sense and the amount of different levels and it had obviously been gamed and abuse. And so a big international census consensus, rather, emerged pretty quickly that we were gonna get rid of libel. And everyone agreed. Yes, let’s get rid of libel or it’s out-of-date, it’s anachronistic. And we can all agree that libraries out-of-date and it’s anachronistic and will replace it with something better. And we all agreed on this very quickly. And now we’re like, oh, shit. Now we have to come up with something better. And the best that we’ve come up with is something called SOFA.

S1: That is. So you’re sitting on to watch Netflix? Yes. So for the secured overnight financing, right. In the U.S., there’s also Sonja in the U.K..

S27: Right. He’s also very big in the 80s. You know, that’s a joke that any Felix is going to get. Sorry.

S12: So so basically. And and also just explain why labor and why these rates are important is that you have, you know, somewhere near, you know, what, 400 trillion dollars in derivatives, in bonds, in loans that are tied to this rate. All of these contracts that are tied to this rate. So it’s it’s not a small thing to switch from run rate to another.

S28: And I think some and all of these contracts are written down on pieces of paper. And the pieces of paper don’t automagically update themselves. Wow. So when label goes away and someone pulls out that piece of paper to work out how much interest they’re supposed to pay, the piece of paper says label. And then they go they they took too long to the markets and they say, what’s label and label and market say label?

S14: We have not Laybourne years. And then what do you do? And well, that’s actual themselves.

S27: And the lawyers are having a field day. They’re going to be like, oh, lots of business for us representing all these upset investors when they don’t get liable.

S12: Well, because this is interesting because like I mean, especially if you’re talking about loans and bonds, because I mean, technically, like if you’re if you have a bond that has that written in it, you don’t have some other clause. But what happens if there’s no labor that it would basically you’d be changing a floating rate into a fixed rate. Half a sudden you’d be like, OK. It’s whatever labor was, which. So you would actually have to get like a if your bond holders to vote to change a rate. I mean, that’s it’s not a incredibly simple thing. It’s it’s a little bit easier with derivatives, but it’s gets little complicated with bonds. But the one other thing, I just wanted to take a step back, because I think sometimes when people talk about this, too, there’s a sense of like, oh, well, we’ll just exchange one rate for the other and it’s like, OK, but these rates are not the same thing. You’re talking about Lebar, which factored in the credit risk of banks, whereas the sofor or Sonia. That’s a that’s a it’s a risk free rate, right? Right. A risk free rate.

S28: So all of these new rates on some sort of deeply fundamental a priority level going to be lower in terms of interest rate and labor. And so if you are a borrower, you’re really happy if you just switch one for, you know, because wouldn’t just you were unhappy, you wouldn’t do that.

S12: What you would do is you’d have to figure out some other way to factor in what that credit risk had been. You can’t just say like, oh, well, we’re just switching rates. That that’s not how it would work.

S3: You have it. No one knows, right? No one knows how it’s going to work. And the fact is and what this change is meant to happen in twenty. About.

S18: Yes. And one of the problems is also that you would think that by now we wouldn’t have this contractual problem, this tsunami of contracts that will have to be somehow rewritten because we do because currently people still using a label that there there’s no alternative. So new contracts are still being struck under the Leibel definition, which which is problematic for that reason alone. Because you would’ve thought, oh, well, we haven’t used Leibel for 10 years. And and people are trying slowly to do new contracts. But you just don’t because it’s a networking thing as well. So you don’t want to like tie yourself to suffer when the go to rate is gonna be something else. And and I think one of the issues of libraries that you’re getting from an unsecured rate and it’s been decided that those unsecured systems were very hard to assess in terms of, you know, they were very easy to game. This was. The problem, so in before the crisis, the traders would come club together and try and push the rates up as possible. They’d structured or supposedly to be game resistant, but by eliminating them the most extreme ends of the sort of.

S10: But it was game, but it was a game on to prison for gaming. Yeah.

S18: One like, well, Mr. Hay is still in some way. He’s there. He’s gone for ten years, right. Yeah. But what these were assessments essentially based on like what the banks were saying themselves was their cost of borrowing. But going to a transactional like okay we will set the rate based on an average of how many transactions are actually done in a day or in a week is a really problematic step because a lot of the time there was there’s just not enough flow. So there’s like one transaction that actually makes the system more game.

S14: Global labor famously had these things like there was like a one year yen label or something and no bank had borrowed from another bank in yen for one year, four months.

S4: And yet one year like yen label was still a thing that existed. And all of these things are going to have to get structured. There’s going to have to be a replacement for all of them. And the thing which is, is really confusing to me is. Are we going to do this or are we going to reach 20, 21? Everyone still going to be using label? No one can agree on how to transition. And somehow we’ll all just like kick the can down the road and we’ll never actually leave label.

S8: At which point Boris Johnson will come with a solution. No ifs, ands or buts. I would rather die in a ditch. Exactly. I think you’ll definitely get it done.

S15: I mean, I think you’ll definitely transition. I mean, I think there is a lot of will on both sides of the Atlantic. I mean, I definitely think you’re going to switch to these other rates, but I don’t think it’s going to be an easy process. And I think you’ll be seeing a lot of like weirdly what’s happening now, which has a lot of the contracts that are written with like sofor they actually end up like hedging back into libraries. I mean, I think you’re going to end up with this kind of very long transition process as the system kind of moves over to it to a new rate. But I do think it will eventually get done.

S18: But the problem with that. I was told by some people watching the space is that as you transition, the less people that use Leibel, the more capable. Of course. Of course. Yeah. So this is like really weird paradox we’re in during the transition period. It’s gonna be a real sort of opportunity. Foo, foo, foo manipulate. Right.

S3: And what’s your what’s your base case expectation for how long this like painful transition is going to take?

S23: I mean, I think you could easily see something taking a decade. I mean, I don’t think this is going to be a something quick. I mean, I.

S7: So the first time I heard about Limbaugh was because Jamie Diamond was involved and shady things were happening. So it actually seemed interesting for a second. My question is, why would anyone outside of the people who use this rate care about it? How does it affect the normals? That’s a very good question.

S3: Yeah, I think that’s an extremely good question, because my my my base case answer to that as with most high finance stuff is it doesn’t. And then again but then again, my answer to like how does label manipulate the fact that no. Yes. Is it doesn’t.

S28: One of the interesting things about label manipulation is that the banks were happy to manipulate label up and they were happy to manipulate label down and depending on whether you were a borrower or a lender.

S6: And depending on like, you know, whether they were manipulating it up or down, you might have made an extra couple bucks or lost an extra couple bucks. Probably all kind of came out in the wash. I don’t think that label manipulation actually made any difference to normal’s. I think on some level it really was a victimless crime and all of this intense effort to move away from label and towards something more honest. You can totally understand why you’re doing it. And you shouldn’t commit crimes even if they’re victimless. But it’s a huge amount of effort to make up for something where there was almost no harm done.

S13: My father in law would say, you know, I tend to agree with your assessment, but my foreign-owned would probably assess it the same way he set assesses BPI, which was another scandal in the UK to do of selling users insurance to people. His point is, well, it’s just gonna make everything more expensive for us because the banks have to pay for it and therefore everything’s when we moved. That’s how we talk.

S26: Scouse accent.

S3: And do you do you believe there were victims to the libel scandal?

S15: Yeah, I mean, I mostly kind of agree with you there. I don’t think. And if there were they were very sophisticated investors. So why wasn’t it exactly like mom and pop? I mean, look. Yeah, of course, nothing was good. It wasn’t good. No one should be committing crimes or, you know, manipulating rates. But no, I don’t think it was probably that the world’s biggest deal and I do think that this is going to be a lot of effort to fix a system that I don’t think was that broken in the grand scheme of things.

S7: It’s interesting how the financial industry kind of rallies to fix things that don’t matter and all the bigger broken things are like, well, but this was also interesting because the LIBOR scandal happened at a period after the financial crisis.

S23: I think also where in both the U.S. and the U.K. where this happened, that they wanted somebody to like be angry about it and finance so they could be like you were sending you to prison.

S15: And I actually think that it then became this big deal. And because it was also just in the news so much that I honestly think that’s also part of the reason that you’re right.

S13: Because we knew we needed a scope at that point. And and Tom Hayes was basically the fall guy. No, I mean, he was I’m not in any shape or form defending him, but he was like the definitive sort of fall guy that we needed in terms of like some bank has got to go to prison because none of them have.

S7: So like, they they screwed up everyone’s mortgages. But the guy that goes to jail manipulated a rate no one understands or probably cares about that doesn’t really affect anyone.

S8: Well, I mean, I think that about people like if you add loans or like that, it’s a very important right to regulate, just to be clear.

S13: I just think in terms of relativity, like he’s got a pretty long sentence. Ten years is a very long time to go to prison. Considering the. I didn’t.

S26: Nothing happened to them, right? No, I think that’s completely true.

S24: OK, it’s time for a numbers round. I’m going to start with something which is not wonky at all, but just jumped out at me from a story which has been doing the rounds from Texas Monthly.

S4: My number is nineteen thousand and sixty four dollars, which is the annual per capita income in Marfa, Texas.

S6: And there are two types of people listening to state money. There are people who like. Of course I know what Marfa, Texas is and I know he will. Why on earth should I know what Marfa, Texas is? And Isabella is definitely in the latter group. Marfa, Texas is this tiny little town and its population is falling. It was 3000 in 1999 and is now just seventeen hundred. And it’s this tiny little town in the middle of the northern desert in west Texas, which is this art mecca. And this is wonderful Texas Monthly article about it.

S4: But the point is that it is famous on the tourist trail.

S28: A million light, super rich tourists from all over the world go there every year to go up a beautiful minimalist art by Donald Judd.

S6: And they stay in expensive hotels like the Hotel St. George and the Hotel Paisano. And there are, you know, cool coffee shops and bars and restaurants. And it feels like a really thriving place. And then you realize the annual per capita income is $19000. And that shows you just how limited tourism is as a force of economic development.

S4: Really interesting. And I. You have a number.

S12: I do. It’s one hundred twenty seven thousand tons. That is the amount of avocados from Mexico that will be coming to the U.S. for the Super Bowl. And I won’t actually be sitting in the stadium. No, they won’t. They won’t. Exactly. I mean, did they get the cheap seats? Oh, there are no cheap seats. You know, the Super Bowl. But I thought that. So is this actually a little interesting? For multiple reasons. With the Super Bowl. But B, because now avocados have become part of like crime in Mexico.

S8: And it used to be so just to be clear, the avocados and not the avocados or something.

S12: Yes, it is, in fact, because people eat guacamole while they’re watching the Super Bowl. And so avocados have they are part of like there was like avocado growers had to like pay protection money because Americans are eating so much more avocados. But then a number of other things have happened. But avocados are a very complex fruit and a lot of them are coming to United States.

S17: And so I will be eating them their toast on Sunday while rooting for.

S3: Apparently, there’s there’s a football game on Sunday. Emily, you’re going to be watching it probably.

S21: Yeah. Yeah. I think. Hey, Baldanza and I watch football. Maybe no guacamole this year, sadly. Yeah. What’s your number?

S7: My number is one hundred and fifty million. That is the number of households worldwide that have Amazon Prime membership. And it’s been a huge increase from less than two years ago. I think it was at a murder down, but I think less than two years is about a hundred million.

S6: And Amazon was famously always very reluctant to reveal this number for many years. And they only just started saying what it was.

S7: Yeah. They said they had earnings yesterday and earnings were very good. And one of the reasons is because now if you’re a prime member, they switched this year to giving you two doing more one day shipping, making that standard for prime. And like, it’s just so convenient. It’s so seductive. The greatest thing ever. It’s really incredible. Just think of all those Chinese goods made with coal fired, not shipped in the wasteful packaging delivered to you by a car emitting more CO2. I mean, it’s no bueno, but it’s really an amazing service. And it’s interesting that everyone’s a subscriber. It’s interesting.

S3: Is he, number one, kind of related?

S5: So I’ll be contrarian. I’m going to give you a negative number. I like that.

S22: I’m going to be minus five, minus five. So it’s minus five pounds per tutton at the moment in the U.K.. That’s the price for recycled paper. Wow. Because as this price used to be very much positive, but we are basically in the midst of a paper glut. There’s a paper, recycled paper, cardboard, Sunaj me, basically because we are recycling everyone’s, you know, being very good separating their recyclables. But there isn’t any demand for that recycled paper anymore, not least because China has closed its doors to recycled imports, which has upset the entire market. So we’ve got negative rates on in German bonds, but we’ve also got negative rates in wastepaper. And I’m gonna be doing a story about that, sir. Wow.

S24: So should we just give up on recycling in Australia?

S13: Panting They’re asking people because it’s not just a UK thing. It’s a global thing, apparently asking people to stop segregating some areas. I’ve heard a rumor charge. I haven’t confirmed it. PERRY They’re stopping people. Segregating that by paper because it’s an end. The funny thing is where they’re not all the papers just accumulating it because it costs so much to store it in internal conditions. You know, warehouses cost money that they’re burning it.

S7: I was watched with my own eyes, the sanitation people that come pick up my garbage, take the recycling that we put out in the plastic clear plastic bag and throw it in with the other garbage. And yet we still in my house separate out the recyclables. Why? Why?

S5: Well, I having it go into waste recently. I can tell you that actually the waste waste is them. The waste processing plants are resurfacing dated these days and they can segregate things quite easily. So we used to have to segregate things very meticulously, whereas now in the UK at least we can put like paper and and aluminium and everything together in the same one because they go to a plant and they’ve got magnets and clever sort of colour focused lasers that figure all this stuff out.

S13: So it’s and I always thought that was a myth. I feel it would just go and end up in China and Malaysia shipped elsewhere. It was all a big conspiracy. But now apparently these these plants are actually very sophisticated. The problem isn’t the sorting. The problem is the lack of demand for the recyclable. The recyclable. Yeah.

S4: Okay. I think that’s it for us this week. Thank you.

S3: Kaminska for coming on slate money and explaining everything, Brexit and everything else to us. You’re welcome back. Anytime. Thank you. Just me, Molly, for producing this trans-Atlantic edition of Slate Money.

S29: Thank you for listening. The email, as ever, is sleep. Money Never Sleeps. Dot com. And we will talk to you next week.

S30: Sleep many.