6-7-17 BUSINESS BY CARLSON with PAUL VAALER

Content provided by Paul Vaaler of the Carlson School

Greetings to everyone in ‘CCO Land from England. Today, I’m at Oxford University where I am working on some research projects and giving a talk later this week at Oxford’s Said Business School. Here is where you can learn more about Said: https://www.sbs.ox.ac.uk/. It is an exciting time to be in the UK if you are a political or business junkie. And I’m both. So why’s it such a special time to be in the UK? Two words: Elections and Brexit.

1) Elections first. Tomorrow (Thursday, June 8, 2017), the UK will hold a general election. All 650 seat in the UK House of Commons are up, and it’s not quite clear who will win a majority and lead the next government. Here is the latest polling and analysis: http://www.express.co.uk/news/politics/813778/Election-2017-polls-latest-will-Conservatives-win-majority-Tory-minority-Labour. This election was supposed to be a cake walk for the ruling Conservative Party and their leader, Prime Minister Theresa May. May called this “snap” election in April, she said to strengthen her majority and get voter approval to finish negotiations on the UK’s exit from the European Union, the so-called Brexit. Conservatives started the campaign with a +20 point advantage over the opposition Labor Party in opinion polls. This morning, the UK’s YouGov poll says that the Conservatives now have only a +1 point advantage. There’s a good chance that tomorrow’s election will result in a “hung” parliament –no party will have a majority. If that happens, then Conservatives or Labor will need a coalition partner to get to 326 seats. Which party has the votes to get either to 326? The Scottish National Party with an estimated 45-50 seats will. Here’s the irony. The SNP is dedicated to the eventual independence (within the EU) of Scotland. A UK government party dedicated to the break-up of the UK and remainder within the EU. As you might guess, this scenario is not heartening to foreign exchange and stock market traders in London. We’ll have the first exit poll information by about 3pm US CDT on Thursday. If it’s a hung parliament, look for the British pound to drop from its $1.30 to somewhere nearer to $1.20 or even $1.15. Good news if you are a US tourist heading to London (or Oxford). Not so great news if you are trying to export to the UK like many Minnesota-based companies (e.g., 3M) do.

2) Brexit second. Well, you already see the link between tomorrow’s elections and policy approaches to Brexit in the near term. Even if the Conservatives hold onto their majority, I think Theresa May will be in a weaker position to negotiate the terms of the UK’s departure from the EU. France and other EU stalwarts want to make an example of the UK to deter other members from threatening departure. That means a “hard” Brexit: No special deals on trade in goods and services between the UK and EU after exit is completed in two years. Here’s why that matters to the UK. London is the second-most important financial center in the world, after New York. Many foreign banks, including Minnesota-linked Wells Fargo Bank and US Bank, have large offices in London. A hard Brexit with the EU would give those banks incentives to move operations related to European clients across the English Channel to Paris, Amsterdam or Frankfurt. Here is where you can learn more about the Brexit Exit contingencies that foreign banks are planning over the next two years: https://amp.ft.com/content/a2af5c60-de16-11e6-9d7c-be108f1c1dce. I don’t see how the UK can back away from the Brexit process. After tomorrow, I don’t see how the UK will be able to negotiate a softer Brexit. I expect 2017 to see the beginning of a shift in bankers and banking (and insurers and insurance) transactions from London to the Continent (or to Ireland). National sovereignty has a price, and the UK is paying it.

3) While we’re in Europe, it might be worth noting some business implications for another election happening this Sunday in France. Last month, France elected Emmanuel Macron, 39, as its president, the youngest French leader since…Napoleon. This Sunday will see a separate legislative election to fill the 577 seats in the French National Assembly. Polls in France give Macron’s upstart party “France on the Move” a commanding lead. FM may take 350-400 seats overall. This is remarkable given that the party had NO legislative candidates as of early May. Not bad for improvisation! Here is where you can learn more about the French elections: https://www.bloomberg.com/politics/articles/2017-06-06/now-macron-needs-to-win-france-s-parliamentary-elections-q-a . Voting this and next Sunday would give Macron the legislative authority to pass his package of reforms designed to deregulate the workplace, start new businesses, and get French workers to contribute more to healthcare and retirement. France’s unemployment rate is 9.6%. Compare that to a 4.8% rate in the UK and a 4.3% rate in the US. France and Germany are the indispensable partners of the EU. If Macron can bring down unemployment, especially among French youth, and increase economic growth, especially in the countryside, it’s great news for the EU despite losing the UK. Watch the US Dollar-to-Euro exchange rate, which is at $1.13 today. On Monday, it will rise with a big Macron victory on Sunday. A UK pound-Euro parity party on Sunday is a possibility.

4) Okay, back across the Atlantic, where there is a US economy…and US politics. Former FBI Director James Comey will testify in Congress about his work on the Russian meddling in US presidential politics last year as well as his interactions with President Trump leading up to his firing last month. None of this is good for Trump and Republicans trying to craft healthcare, tax, and investment policy reforms. Most US business analysts think the Russian election meddling scandal and Comey’s firing have scuttled any hopes of meaningful reform in these areas. Here is such a pronouncement from Forbes magazine: https://www.forbes.com/sites/stancollender/2017/05/14/the-comey-fallout-trump-legislative-agenda-is-dead-in-2017/#6ce78f72c84e. And here’s an admission from Trump’s own legislative team: http://www.politico.com/story/2017/06/05/trump-russia-overwhelm-agenda-239166. US Senate Republicans talk about crafting their own healthcare bill this and next month, but nobody can say what it will look like. I remember similar confusion and dithering in 2009 and 2010 when US Senate Democrats were trying to craft Obamacare legislation, and then they had a 60-seat majority, not the bare 52-seat lean Republicans now have. It is hard to see how meaningful reforms issue from the US Senate this summer or fall, and then how they pass a more conservative House. That may be fine for some in opposition, but it is a drag on businesses and individuals trying to guess what will happen to Obamacare mandates, tax rates, and infrastructure investment plans in 2017-2018. Confusion slows business decision-making and economic progress, particularly in healthcare, an important sector in the Minnesota business community. United HealthGroup, Medtronic, and others need some cues from Washington on what’s next in the way of policy rules. Not many, just a few. Instead, it’s scandal, real or imagined. Tomorrow’s latest installment with former FBI Director Comey is the latest indication of diverted attention in Washington.

5) Last Friday’s Buffalo Wild Wings shareholders meeting in Wayzata saw the victory of Marcato Capital’s short slate of directors and the announcement that long-standing BWW CEO, Sally Smith, would step down later this year. It was a big victory for Mitch McGuire’s San Francisco-based hedge fund and a lesson about the vulnerability of top managers and businesses to attacks by such activists. What’s happened this week after the fireworks last Friday? Monday saw BWW’s stock price drop 7.5% to a four-month low of $140/share. Here are details: https://www.ft.com/content/340290aa-40a8-367c-88e0-5251906ea51f. Former New York Governor Mario Cuomo said that “[y]ou campaign in poetry. You govern in prose.” Well, the hedge fund’s campaign for influence over BWW is over as of Friday. Now, Marcato needs to help govern BWW going forward. This is a great company with the cash and capability to grow and expand in the casual dining sector. Time for Mitch McGuire and his slate of directors to start governing at BWW –first by finding executive leadership to replace Sally Smith and her current team. The poetry slam is done. Time for some business prose.

In case you missed it, CLICK HERE TO LISTEN back to this week’s show.

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