1. TOSCAFUND Economics
July 2016 Thoughts on the Hero Syndrome, J-Curse, U-bends & U-turns
1
Ahead of the referendum, it was my habit to write what for many seemed an endless
series of notes on the issue. For the most part, these were penned because I felt compelled to
react to claims made by ‘remainers’ concerning the economic consequences of a vote to leave
the EU. My ire would invariably be raised by what, I at least considered, their ‘bad’ economics.
As it was, they ultimately failed in their full frontal assaults. Undeterred, some would say
ungracious and extremely bitter and hubristic in their defeat, this group is now pursuing a
guerrilla campaign. And with each fresh assault on elementary economics I will defend it.
As I have already noted since the referendum result we have been confronted with a
cacophony of negative economic stories from those aghast at which way the majority went.
Days – indeed mere hours – after the result became clear, voices were raised claiming the
decision to ‘Leave’ was having serious negative effects on the UK economy. As a keen data
watcher, I have sought to discover exactly where precisely the information raising so many
concerns is coming from. My efforts have thus far been to no avail. This is not to say there
isn’t data; just that it is anecdotal, patchy and extremely short-term. Neither is it to say that
when reliable data does become available it does not show cause for concern. My point is that
it is perfectly possible that the naysayers of ‘Leave’ are creating a self-fulfilling prophesy. This
said, the UK can boast a number of developments since June 23
rd
which can only be described
as economically encouraging.
There has for one been the competitiveness boosting decline in the pound. We have
also had the compression to Gilt yields. Added to these has come the offer from the Governor
of the Bank of England to cut the base rate. Indeed, the speech which contained this
expression of readiness helping shave a few more percentage points from sterling. For his part
the Chancellor has shifted his tone from threatening an immediate emergency austerity
budget and tax rises to abandoning his 2020 balanced budget target and declaring his
intention to bring the corporate rate down, not to 17% but 15%. George Osborne’s efforts to
redeem himself have gone still further with plans to ‘speed’ up HS2 and HS3.
So to recap since June 23
rd
the UK economy has faced a barrage of negative commentary
but also a barrage of immediate and promised improvements to its fiscal, monetary and trade
stance. Problems like these I’d take happily, and so would most of our soon to be erstwhile EU
partners.
Author:
Dr Savvas Savouri
Contact information
Toscafund Asset Management LLP
90 Long Acre
London WC2E 9RA
England
t: +44 (0) 20 7845 6100
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e: ir@toscafund.com
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2. TOSCAFUND Economics
July 2016 Thoughts on the Hero Syndrome, J-Curse, U-bends & U-turns
2
A Brexitstential view ahead
When Mark Carney spoke one week after the UK electorate went to the polls and voted to ‘Leave’ the EU, he did so by
voicing concerns over the impact this would have on the UK economy. He suggested that the Bank of England would act to
loosen monetary policy, indeed it was stated as a near certainty. What the Governor seemed to have missed was that the UK
had enjoyed a considerable degree of monetary easing from the reaction in the pound to the decision to Brexit. In fact, in his
monetary jawboning Mark Carney shaved a few more percentage points from sterling. Let me make a number of points very
clear. Given we have instructed our central banks to be data dependent it was premature of the Governor to talk of
economic weakness when quite frankly there has been no tangible evidence that the UK real economy has indeed suffered a
post-referendum negative shock, far from it in fact. The UK has experienced what a great many economies are desperate to
enjoy; a competitive boost. This is not to say that a UK rate cut will not happen. Rather that it should only happen if the data
demands it. From my perspective the foreign exchange fall-out from the UK referendum result will act to send its RATE OF
consumer price inflation out of the “breach” territory where it has been ever since the end of 2014, and back into the
comfort zone of 1-3% where the Bank of England is mandated to contain it.
Now those who listened attentively to Mark Carney should know one thing. His is not the job to talk about prospects for the
UK’s economic growth. That responsibility falls squarely on a man who has thus far said nothing. The man whose words have
so much significance is Robert Chote, the chair of the OBR.
If I were to anticipate what he will say it will be this: until we have tangible reliable data we will not know what effects the
events of last week have had on the UK’s REAL economy. This accepted, based on recognised macro-economic principles the
devaluation in sterling is likely to provide a boost against the forces that might otherwise slow the economy; i.e. caused by
those traumatised by the “shock” of the result. The pound’s decline, which Mark Carney’s post referendum press conference
can at least be commended for helping slip still further, will also boost inflation including wage growth, which in itself is not
unfavourable to our economic good fortunes. As for why Mark Carney chose to speak ahead of Robert Chote the answer is
simple, he is trying to undo the harm to his reputation caused by being so vocal against Brexit.
If I were to reflect on how the events in the UK may relate to the euro-zone, the answer is simple, they have delivered
another unfavourable competitiveness shock, to compound the other deep rooted deflationary forces it is struggling with.
And whilst I am aware that the ECB’s QE efforts are impacting across the single currency, it is creating negative forces
alongside the positives. True, the injection of capital has boosted new car sales and has worked to lift the fortunes of those
who operate along the auto making supply chain. The problem is that, just as we saw in the 1990’s with the Bank of Japan’s
ZIRP, extremely loose policy creates unintended negative consequences. Most notably, it creates ever more competition for
“prime” assets within the bank-assurance sector. This forces insurance and pension funds into more exotic areas in search of
the yield they demand to meet their obligations, invariably into carrying capital into ‘outside’ currencies and so exposing
them to sizeable capital losses from “currency shocks”.
From my perspective we are no more than a handful of years away from currencies within the EU but outside the euro-zone
doing what the pound has recently done; falling markedly against the euro. I am talking here of the Polish zloty and the
Hungarian florint as well as the Romanian leu, Croatian kuna and others. Were this indeed to happen, it would deliver a blow
to the euro-zone which, quite frankly, would send it down the extremely lacklustre growth path Japan has followed since the
Asian currency crisis of autumn 1997. As for China and India, I have total confidence that they will continue to deliver
impressive real growth, using the scope they have to cut interest rates to lift domestic demand. These economic behemoths
will also increasingly “internationalise” across a range of areas, creating an ever greater presence in global financial markets,
with post EU London certain to be their preferred western hub. They will, in effect, open themselves up to foreign direct and
portfolio investment and increasingly invest in their turn outside their borders.
As to where the United States fits into all this, I would rather wait in answering that question until after the Presidential race.

3. TOSCAFUND Economics
July 2016 Thoughts on the Hero Syndrome, J-Curse, U-bends & U-turns
3
U-Bends, J-Curves & U-Turns
Ahead of the referendum, it was my habit to write what for many seemed an endless series of notes on the issue. For the
most part, these were penned because I felt compelled to react to claims made by ‘remainders’ concerning the economic
consequences of a vote to leave the EU. My ire would invariably be raised by what, I at least considered, their ‘bad’
economics. As it was, they ultimately failed in their full frontal assaults. Undeterred, some would say ungracious and
extremely bitter and hubristic in their defeat, this group is now pursuing a guerrilla campaign. And with each fresh assault on
elementary economics I will defend it.
Before I try to flush away the economic smells that still linger from ‘Remain’, I will consider the man whose invention ensures
to this day that leave means leave. In 1880 Thomas Crapper introduced a design feature which we have been grateful for
ever since. His addition to the pantheon of civilising advances was no less than the U-bend to plumbing fixtures. He
recognised that whilst he could not interfere with our regular habits, he could at least ensure leave meant leave. From
consideration of the U-bend I wish to move to considering how our decision to evacuate the EU has raised the spectre of the
UK suffering a J-curse.
We saw the pound weaken in the run-up to the Referendum and we cannot have failed to notice its far more significant
decline in the wake of its historic outcome (although less than some had feared, and less than I had hoped for). Just as the
referendum divided economists as to what was ‘best for Britain’ so has this currency decline. Lined up against those who see
this as a competitiveness boosting economic positive, of which I am one, are those who invoke the J-curve or as they might
ominously describe it the J-curse to our balance of payments. Without prejudice, let me sketch rather than elaborate such
concerns.
Whilst a weak pound may eventually improve the affordability of what we produce, it has had an immediate impact on
inflating the costs of those essential ingredients we import. The argument is that rather than narrow the deficit in our current
account, a weaker pound cannot fail to widen – read worsen – it. This line of reasoning goes on to suggest that the erosion in
our trade position will trigger further currency weakness, will undermine corporate profitability and will force redundancies.
It goes on to claim that higher imported costs will force firms to raise prices in an effort to recover some of the cost increases
coming through quickly because of the pound’s decline. The conclusion of all this dire thinking is that we cannot fail to see
interest rates forced higher – base rate, Gilt and corporate bond yields – and domestic consumption and investment
undermined as a result. Our current account deficit will ultimately narrow but only because domestic demand is so
weakened that our appetite for imports is reduced rather than because our exports increase. In fact, the J-curse includes the
codicil that a large part of the competitiveness benefits which would otherwise come through from a weaker currency risk
being eaten up by price increases, and a wage price spiral. This is all some scary stuff indeed.
It was exactly because of all the negatives, outlined above, which once emanated from a weakened currency why so much
effort was expended to manage a stable pound in the post-war years, and a large part of the reason we moved towards
joining the EMU from 1988.
Now, although in personal terms I remember the 1970’s as if they were only yesterday, in UK economic terms that decade is
pre-history. Back then we had a sizeable heavy industrial base, hungry, indeed addicted, to voluminous imports of natural
resources, which were essential to feed kilns, furnaces, foundries and factories. From shipyards to steel mills across to glass
firing plants to tyre making factories, etc., we imported the raw materials that were essential to manufacture the finished
products which earned us foreign income. Against this traditional industrial backdrop a weakening pound did indeed bring
upon us the J-curse, indeed it could not fail to do so. Yes, in short in the past the pound going down sharply was not to be
welcomed but feared. What must however be made clear is that our economy is much different now, for which read much
advanced, and much improved.
If one looks at the UK economy today one sees that it has been transformed for the better with each passing decade since
the awful 1970’s. Our industry has shifted from being cumbrously heavy, low value-added and commoditised, to being lean,
high-end and almost peerless around the world. This applies to the cars we make to the aero-engines we assemble, and it
applies to the technology and pharmaceutical products which we develop, design and earn foreign income from licensing

4. TOSCAFUND Economics
July 2016 Thoughts on the Hero Syndrome, J-Curse, U-bends & U-turns
4
around the world. Our traded services too have expanded like no other developed nation. These generate foreign income not
because we sit on uncomfortable stools alongside noisy lathes grinding out metal tools but sitting relaxed at our desks
creating for the world market the expert services it demands of us; legal, insurance, advertising, media and other creative,
financial and educational services.
Those pointing to James Dyson having shifted his production to Malaysia need it pointed out to them, in turn, that it is the UK
where he employs his large, well trained and well rewarded research and development team, and where the profit of his
endeavours return to. Who knows he may indeed choose to re-shore some of his manufacturing. My point is that the J-curse
has been exorcised by our becoming a prototype of where a modern developed economy needs to be. We are a positive role
model unlike so many EU nations which still dwell on their former glories.
As well as all the other features which favourably separate the UK economy from the rest of Europe, there is the way it has
been at the forefront of disruption. I am not alluding here to disrupting the EU by voting to leave it, but to the way it has
been Europe’s crucible for disruptive technologies. Crucially, these are set to provide a welcome degree of import-cost-
inflation-shock-absorption for the UK economy. And, here again, we have a development which is unprecedented in the UK’s
history helping to make J-curve arguments largely anachronistic.
The reality then is that we must not fear that a weak pound will create a J-curve in our balance of payments. There will be NO
such hockey-stick to beat us with. Instead the multiple economic benefits of recent sterling weakness will come through
rapidly. They will come through quickly in tourist numbers and their spending. They will come through rapidly in increased
export orders and substitution of imports for home-produced goods and services. And they will come through rapidly from
the new academic year as students from overseas enjoy their wealth benefits from a more affordable pound, their benefits
proving our benefit. This is not me presenting some rose-coloured vision but a clear economic argument un-obstructed by
the bitterness and hubris some insist on carrying in the wake of the vote to leave. As I have said it the ‘Leave’ side which
actually needs the obstruction of a U-bend, so as to flush away the economic outpourings (I wanted to write excrement but
wasn’t allowed to) they still insist on producing.
In this short vignette I have written about of the recent momentous referendum making reference to the U-bend which we
now need to flush away the nastiness from the campaign. I also gave consideration to the J-curve or J-curse and argued it
should be dismissed because it is not relevant for the UK’s modern economy. My assertion is that at some point there will be
enough data reflecting the post-referendum performance of the UK economy, to force one side to accept a humiliating U-
turn. Be ‘Out’ with it I say.

5. TOSCAFUND Economics
July 2016 Thoughts on the Hero Syndrome, J-Curse, U-bends & U-turns
5
A positive Brexit Quintet
Since the referendum result we have been confronted with a cacophony of negative economic stories from those aghast at
which way the majority went. Days – indeed mere hours – after the result became clear, voices were raised claiming the
decision to ‘Leave’ was having serious negative effects on the UK economy. As a keen data watcher, I have sought to discover
exactly where precisely the information raising so many concerns is coming from. My efforts have thus far been to no avail.
This is not to say there isn’t data; just that it is anecdotal, patchy and extremely short-term. Neither is it to say that when
reliable data does become available it does not show cause for concern. My point is that it is perfectly possible that the
naysayers of ‘Leave’ are creating a self-fulfilling prophesy. This said, the UK can boast a number of developments since June
23
rd
which can only be described as economically encouraging.
There has for one been the competitiveness boosting decline in the pound. We have also had the compression to Gilt yields.
Added to these has come the offer from the Governor of the Bank of England to cut the base rate. Indeed, the speech which
contained this expression of readiness helping shave a few more percentage points from sterling. For his part the Chancellor
has shifted his tone from threatening an immediate emergency austerity budget and tax rises to abandoning his 2020
balanced budget target and declaring his intention to bring the corporate tax rate down, not to 17% but 15%. George
Osborne’s efforts to redeem himself have gone still further. Let me quote from a briefing from his office issued on July 4
th
:
“The Chancellor has announced further steps to become a super-competitive global economy with
low business taxes and a global outlook.
The Chancellor has… ...proposed redoubling efforts to build trading links with other parts of the
world, leading a trade mission to China later this month, and investment in the Northern
Powerhouse and HS2 and HS3 must continue. The Chancellor suggested the Bank of England could
take further steps to ease credit conditions, proposed deeper education reform and a quick decision
on the location of a new runway in the South East once a new prime minister is appointed.”
So to recap since June 23
rd
the UK economy has faced a barrage of negative commentary but also a barrage of immediate
and promised improvements to its fiscal, monetary and trade stance. Problems like these I’d take happily, and so would most
of our soon to be erstwhile EU partners.
PS – One cannot reflect on where we are without considering the events surrounding the Standard Life UK property fund, the
flight of capital from it, the decision to suspend redemptions and the stock-market shock waves which have emanated from
this announcement. In terms of capital flows from UK property I maintain this is a sentiment issue. Now, sentiment and
emotion is one thing, the fundamental occupational story is another. And I have NEVER been more confident that UK
property fundamentals are sound. Indeed, the rush to be in the UK so as to avoid the risk of being “gated out” if, or when,
Article 50 is invoked and potential limits on free movement into the UK will see a surge in the demand to live here and this
means occupational demand rises. Any suspension or moratorium on building will only help the rental growth outlook. I
simply cannot express how divergent the current sentiment has become from the present and future fundamentals for PRS
and CRE generally in the UK.
PPS – Until now the most infamous instances of ‘Hero Syndrome’ were cases of fire fighters actually acting as arsonists so as
to go to the rescue. We can now add an entirely new illustration of this syndrome where our Chancellor and Central Bank
Governor seemingly come to the rescue of a ‘crisis’ of their own creation.

6. TOSCAFUND Economics
July 2016 Thoughts on the Hero Syndrome, J-Curse, U-bends & U-turns
6
Euro-zone drives UK car making up
To anticipate what our economic data will look like in the months ahead in view of the pound’s decline, one need only
look at the recent past.
A casual inspection of UK car making volumes for export show a discernible improvement through 2015 and into 2016.
Our car assembling plants have capitalised on the ECB’s QE programme – which has spurned on new car sales thanks to
its effect on making refinance ever cheaper. They have also exploited the pound’s competitiveness enhancing decline.
Indeed, as sterling has weakened it has encouraged assemblers to substitute imported engines for those made within
the UK, hence the synchronised increase in cars made for export and engines made for the UK market.
QE continues across the euro-zone and the pound continues to fall. Against such a backdrop few can doubt that activity
across the UK car industry will strengthen and so the sentiment of all those who work along its extensive supply-chain.
As for the criticism that all this would be lost were the UK denied access to the Single Market, my reply would be that
whatever political hubris might exist to isolate the UK from the EU, the likes of Japan’s Toyota, Honda and Nissan (of
which Renault has a 45% cross-holding), as well as Germany BMW (Mini) would hardly sit by and watch their fortunes
damaged by political spite, nor too would the Indian owners of JLR.
There will no doubt be those concerned that UK car registrations might weaken in the face of post-referendum
uncertainty. Well, since almost four-fifths of UK assembled cars are exported, any interruption to what has been a
remarkably strong run in car sales should have a proportionately modest impact on our car plants and their suppliers.
Moreover, if I am correct in anticipating a surge in new arrivals from across the EU fearing they might be “gated-out” by
delaying, then these will drive (sic) demand for right-hand drive cars, new and old.
As I have maintained those who expect economic weakness in the months ahead should get their brains into gear.
CHART 1: Euro-zone drives British car making forward CHART 2: Sterling weakness strengthens UK car making
Source: SMMT, Bloomberg, Toscafund -Note: Grey vertical denotes ECB QE, March 2015.
-30
-20
-10
0
10
20
30
40
50
60
2012 2013 2014 2015 2016 2017
Yearonyear,%
Total Passenger cars : For Export Total Engines : For HomeMarket
EZ Car Registrations
1.10
1.15
1.20
1.25
1.30
1.35
1.40
1.45
1.50
2012 2013 2014 2015 2016 2017
EurosperSterling

7. TOSCAFUND Economics
July 2016 Thoughts on the Hero Syndrome, J-Curse, U-bends & U-turns
7
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