Tax-smart domestic travel: Combining business with pleasure

Summer is just around the corner, so you might be thinking about getting some vacation time. If you’re self-employed or a business owner, you have a golden opportunity to combine a business trip with a few extra days of vacation and offset some of the cost with a tax deduction. But be careful, or you might not qualify for the write-offs you’re expecting.

Basic rules

Business travel expenses can potentially be deducted if the travel is within the United States and the expenses are:

• “Ordinary and necessary” and
• Directly related to the business.

Note: The tax rules for foreign business travel are different from those for domestic travel.

Business owners and the self-employed are generally eligible to deduct business travel expenses if they meet the tests described above. However, under the Tax Cuts and Jobs Act, employees can no longer deduct such expenses. The potential deductions discussed in this article assume that you’re a business owner or self-employed.

A business-vacation trip

Transportation costs to and from the location of your business activity may be 100% deductible if the primary reason for the trip is business rather than pleasure. But if vacation is the primary reason for your travel, generally no transportation costs are deductible. These costs include plane or train tickets, the cost of getting to and from the airport, luggage handling tips and car expenses if you drive. Costs for driving your personal car are also eligible.

The key factor in determining whether the primary reason for domestic travel is business is the number of days you spend conducting business vs. enjoying vacation days. Any day principally devoted to business activities during normal business hours counts as a business day. In addition:

• Your travel days count as business days, as do weekends and holidays — if they fall between days devoted to business and it wouldn’t be practical to return home.
• Standby days (days when your physical presence might be required) also count as business days, even if you aren’t ultimately called upon to work on those days.

Bottom line: If your business days exceed your personal days, you should be able to claim business was the primary reason for a domestic trip and deduct your transportation costs.

What else can you deduct?

Once at the destination, your out-of-pocket expenses for business days are fully deductible. Examples of these expenses include lodging, meals (subject to the 50% disallowance rule), seminar and convention fees, and cab fare. Expenses for personal days aren’t deductible.

Keep in mind that only expenses for yourself are deductible. You can’t deduct expenses for family members traveling with you, including your spouse — unless they’re employees of your business and traveling for a bona fide business purpose.

Keep good records

Be sure to retain proof of the business nature of your trip. You must properly substantiate all of the expenses you’re deducting. If you get audited, the IRS will want to see records during travel you claim was for business. Good records are your best defense. Additional rules and limits apply to travel expense deductions. Please contact us if you have questions.

© 2019

Buffett's Betting on Oil, and He's Rarely Wrong

I’ve long been a believer that there’s always opportunity in the energy field, if you know where to look for it. With his recent commitment of $10 BN to help Occidental acquire Anadarko, Warren Buffett appears to be of the same mind. And history has shown that many investors have done well by following the Oracle of Omaha’s lead.

Much of the opportunity in that sector these days is related to hydraulic fracturing (fracking), which has turned the entire original paradigm for the oil business upside down. After bemoaning our reliance on foreign oil ever since the OPEC-induced shortages of the 1970s, the US’ crude oil production now stands at record highs of ~12 MM barrels/day. Fracking has made it cheaper and easier to find oil in the US and turned this country into the world’s largest producer. That’s great news for our domestic economy, but it also pays geopolitical dividends by making us less dependent on imported oil from hot spots like the Middle East or Venezuela.

Although lower costs of extracting oil have made the sector much more attractive for new entrants, the resulting new supply shock has also caused all kinds of volatility in oil prices. Volatility can be a killer for upstart fracking companies with weak reserves and junk-rated debt funding. Such firms can easily find themselves facing a liquidity crisis and/or default as the price of oil drops. When that happens, stronger companies with cleaner balance sheets may be poised to pick through the wreckage and acquire new reserves in low-extraction-cost regions at attractive prices.

One of those regions is the Permian Basin, which was the major attraction in the Anadarko deal since it now produces more oil per day than the United Arab Emirates. In an interview with CNBC, Buffett described his investment as “a bet on oil prices over the long term” and “also a bet on the fact that the Permian Basin is what it’s cracked up to be.”

That’s a markedly different picture than what we saw in 2014-15, when crude oil prices dropped from ~$120/barrel to under $30. Back then, nimble distressed-securities specialists were able to short-sell numerous oil and gas exploration and production (E&P) firms which had taken on too much debt. As their cash flows ran dry, many of these E&P firms were forced into bankruptcy with their pre-petition shareholders substantially diluted or even wiped out.

The E&P space has really straightened itself out since then, with many firms that restructured emerging with much cleaner balance sheets and in a better competitive position. Energy XXI (ticker: EGC) was one such firm. This company had properties in the U.S. Gulf of Mexico waters and on the Gulf Coast onshore. It operated nine of the largest oil fields in the Gulf of Mexico Shelf, but was also heavily levered due to a junk-debt financed purchase of its EPL Oil & Gas subsidiary in 2014. Fortunately, Energy XXI was able to eliminate over $3.6 BN in debt in its reorganization, which later made it an attractive acquisition for privately held Cox Oil, a deal which closed last October.

Samson Resources is another example. After being purchased in 2007 for $7.2 BN, in what was then dubbed the largest ever oil and gas LBO, it was ultimately forced into Chapter 11 by 2015. With that, LBO-specialist KKR was forced to write down its entire $4.1 BN equity investment to $0 while the company’s billions of dollars in of junk-rated bonds and loans traded down to just pennies on the dollar. However, after Samson Resources emerged from reorganization, its outlook improved substantially. It eliminated over $4 BN in liabilities from its balance sheet and reduced over $300 MM per year in interest expense when it emerged as Samson Resources II, LLC in 2017. Since then, it has sold $1.4 BN in non-core assets and used the cash proceeds to pay its new shareholders $11.00 in special dividends. It also invested heavily in drilling new wells, which allowed the firm to ramp up production by 80% year-over-year. Today, privately owned Samson Resources II is on track to generate nearly $196 MM in EBITDA from production of over 11,500 barrels of oil equivalent per day. With those operating statistics and its attractive low-cost reserves, it’s become an excellent acquisition candidate for strategic acquirers interested in more rapid growth.

The super-major oil producers—Royal Dutch Shell, ExxonMobil, et al.—weren’t hit too badly when oil prices plummeted a few years ago. That was because of their healthy balance sheets and their diversification into more than just crude oil drilling (gasoline and other derivatives, refining, retailing, chemicals, etc.) Oil industry distress was much more prevalent among smaller E&P companies with highly concentrated revenue streams and excessive junk-rated debt. Their distress presented and continue to present numerous opportunities for acquisitions similar to the Occidental/Anadarko deal. Oil and other energy commodity prices will remain volatile going forward. This means there will continue to be numerous opportunities for distressed investors who understand the space and exercise prudence to generate profit.

Comparing Self-Driving Cars To Humans At The Wheel

In speaking at various industry events, I am often asked about some of the various statistics frequently mentioned as a form of justification or rationale for the pursuit of autonomous driverless cars. At times, such stats are batted around, and it is hard to know where they came from, nor know whether they are reliable, and often these “magical” numbers are inappropriately utilized.

You might at first thought believe that autonomous cars don’t especially need any kind of numeric or quantitative justification. It would seem obvious to assume that driverless cars are going to be a boon to society, some would assert. In a qualitative manner, self-driving driverless cars will presumably expand mobility throughout society, unlocking the sometimes costly or arduous, some say friction-based, access to daily transportation. That’s enough to convince many that we are on the right path by seeking to develop and field autonomous cars.

There is a rub.

The path to achieving driverless cars is not going to be quite as easy as some might suggest. For example, society currently appears to be reactive to any kind of injury or death involving an autonomous car, and yet proponents of driverless cars are quick to point out that conventional car injuries and deaths are happening each and every day.

Why should we get upset when an autonomous car happens to do something that human-based driving is already doing?

Indeed, some are worried that if society is only going to permit some kind of roadway perfection as the standard bearer, it means that we would likely need to stop all autonomous car tryouts on our public roadways. Meanwhile, automakers and tech firms say that without public roadway tryouts, and if only confined to using proving grounds or closed tracks, and using simulations, the odds are that it will take a lot longer to arrive at autonomous cars, possibly never getting there at all.

This Hedge Fund Superstar Thinks Climate Change Will Impact All Your Investments—And Soon

Since November, Robert Gibbins has crisscrossed the globe attending scientific conferences, traveling from his home in Geneva, Switzerland, to Arizona, Spain and Austria. The events had a common theme—climate change—and were well attended by academics, bureaucrats and politicians. One group was conspicuously absent. “I didn’t see any other investors there,” he says. 

That boggles his mind. “Climate change is something we have to include in every single analysis, every investment,” he says. Most people think—or hope—that global warming is something their children or grandchildren will have to reckon with. Gibbins disagrees. The 49-year-old founder of Autonomy Capital ($5.5 billion in assets) thinks that climate change is happening suddenly and soon.

He structures every bet his hedge fund makes around his belief that the world is skidding toward a future that’s overheated and underwater—and that carbon will be treated as a costly waste product that needs to be captured and stored. Gibbins has already made good money betting on European carbon-futures contracts and expects richer plays to come. 

Gibbins has an impressive track record making big calls. His fund, which places large bets on sweeping economic and political trends, is an industry standout, returning an annualized 12.85% net of fees since its November 2003 inception, compared to 8.9% for the S&P 500 index. 

The ski-happy, outdoors-loving son of a Vancouver real estate agent, Gibbins made stops at the University of Pennsylvania and the trading desks of JPMorgan and Lehman Brothers before starting Autonomy. For many countries, he believes, climate change will be a major stress on economic stability. If a country is a basket case now, it’s only going to get worse as the seas keep rising and other fast-paced changes hit. “It’s not enough anymore to create a cheap T-shirt, car or semiconductor,” he says. To that end, Gibbins recently shorted the debt and currencies of Turkey and South Africa. He views both countries’ governments—led by Recep Tayyip Erdogan in Turkey and the ANC party in South Africa—as totally inept. “You can choose to be ruled by the ANC or Erdogan, or you can be a modern industrial economy,” he says. “You can’t have both.” 

By contrast, he’s going long on Argentina. On recent trips there, Gibbins found people were exhausted after a decade of economic hardship and failed policies, convincing him the country won’t return populist Cristina Fernández de Kirchner to power (she last held the presidency in December 2015). The country’s debt is priced for disaster. “My view is, in Argentina, the society has had enough. It doesn’t want policies that are designed for the next three days,” Gibbins says.  

As he sees it, all sophisticated investors these days have access to the best government and economic data. He travels 150 days a year in the pursuit of an edge and expects the 24 investment pros and economists working for him to do the same. He meets with local bureaucrats, journalists and business executives to gauge how decisions are made and how well local institutions function—and whether they can handle chal­lenges like climate change.

What about individual stocks? One obvious thought is to avoid property insurers like AllState and Travelers, which seem likely to get clobbered by rising costs, paying out more as weather-related damage piles up. Gibbins doesn’t buy it. He thinks insurers could fare just fine because much of their business is writing coverage for short periods, giving them the chance to reprice their products. Gibbins says REITs have a lot more risk. 

You want even more against-the-grain thinking? Despite President Trump’s decision to pull out of the Paris climate accord, Gibbins anticipates the U.S. will eventually take the lead with Europe on a global deal to limit carbon emissions and penalize countries that don’t comply. So Gibbins thinks big oil stocks, like Exxon, or the currencies of oil-addicted nations, like Nigeria, are vulnerable.  

Hedge funds bang defensive drum on oil: Kemp

LONDON (Reuters) - Hedge funds liquidated more of their bullish petroleum positions as concerns about the health of the global economy and oil usage outweighed European and Middle Eastern supply disruptions.

But selling in the most recent week was notably lighter than in the three previous, suggesting at least some managers think prices have pulled back enough for the time being.

Positions were reported at the close on May 21, before oil prices slumped on May 23 amid fears about the economic impact of a prolonged trade conflict between China and the United States.

Hedge funds and other money managers cut their combined net long position in the six most important petroleum futures and options contracts by 4 million barrels, exchange and regulatory data showed.

Portfolio managers have now reduced their net long position by a total of 64 million barrels over the last four weeks, after raising it by 609 million barrels over the previous 15 weeks.

Funds trimmed total long positions by 14 million barrels, but in a sign the liquidation cycle was expected to slow, also cut short positions by 10 million (tmsnrt.rs/2I7yblE).

Liquidation was again concentrated in crude and U.S. gasoline while funds bought U.S. heating oil and European gasoil, probably anticipating an IMO-driven consumption rise.

Fund managers sold 13 million barrels of NYMEX and ICE WTI, 4 million barrels of Brent, and 5 million barrels of gasoline, but purchased 6 million barrels of heating oil and 12 million barrels of gasoil.

Middle distillates such as heating oil and gasoil are normally the most exposed to the economic cycle since their use is concentrated in freight, manufacturing, mining, and oil and gas production, as well as farming.

But the prospective increase in consumption as a result of new marine fuel regulations at the end of the year is likely supporting interest from fund managers despite the deteriorating economic outlook.

Overall, fund managers are still bullish on the outlook for oil prices, though that optimism has been dented by the stream of worse-than-expected economic indicators in recent weeks.

Supply disruptions stemming from U.S. sanctions on Venezuela and Iran, as well as interruption of Russia’s exports because of pipeline contamination, have helped underpin prices.

But there is some evidence fund managers are starting to rotate positions defensively toward parts of the petroleum complex that have guaranteed demand irrespective of the economy as a result of changing fuel regulations.

From a fundamental perspective, the price outlook remains precariously balanced between a bullish supply side picture and a bearish consumption scenario.

Positioning risks are still concentrated on the downside, however, with hedge fund long positions outnumbering shorts by 7:1 in crude, 31:1 in gasoline and 4:1 in distillates, which could generate a sharp pull back in prices if the economy does deteriorate as much as some analysts fear.

Targeting and converting your company’s sales prospects

Companies tend to spend considerable time and resources training and upskilling their sales staff on how to handle existing customers. And this is, no doubt, a critical task. But don’t overlook the vast pool of individuals or entities that want to buy from you but just don’t know it yet. 

Identifying and winning over a steady flow of new buyers can safeguard your business against sudden sales drops or, better yet, push its profitability to new heights. Here are some ideas for better targeting and converting your company’s sales prospects:

Continually improve lead generation. Does your marketing department help you generate leads by doing things such as creating customer profiles for your products or services? If not, it’s probably time to create a database of prospects who may benefit from your products or services. Customer relationship management software can be of great help. When salespeople have a clear picture of a likely buyer, they’ll be able to better focus their efforts.

Use qualifications to avoid wasted sales calls. The most valuable nonrecurring asset that any company possesses is time. Effective salespeople spend their time with prospects who are the most likely to buy from them. Four aspects of a worthy prospect include having:

• Clearly discernible and fulfillable needs,
• A readily available decision maker,
• Definitively assured creditworthiness, and
• A timely desire to buy.

Apply these qualifications, and perhaps others that you develop, to any person or entity with whom you’re considering doing business. If a sale appears highly unlikely, move on.

Develop effective questions. When talking with prospects, your sales staff must know what draws buyers to your company. Sales staffers who make great presentations but don’t ask effective questions to find out about prospects’ needs are doomed to mediocrity.

They say the most effective salespeople spend 20% of their time talking and 80% listening. Whether these percentages are completely accurate is hard to say but, after making their initial pitch, good salespeople use their talking time to ask intelligent, insightful questions based on solid research into the prospect. Otherwise, they listen.

Devise solutions. It may seem next to impossible to solve the challenges of someone you’ve never met. But that’s the ultimate challenge of targeting and winning over prospects. Your sales staff needs the ability to know — going in — how your product or service can solve a prospect’s problem or help him, her or that organization accomplish a goal. Without a clear offer of a solution, what motivation does a prospect have to spend money?

Customers are important — and it would be foolish to suggest they’re not. But remember, at one time, every one of your customers was a prospect that you won over. You’ve got to keep that up. Contact us for help quantifying your sales process so you can get a better idea of how to improve it.

© 2019

The chances of IRS audit are down but you should still be prepared

The IRS just released its audit statistics for the 2018 fiscal year, and fewer taxpayers had their returns examined as compared with prior years. However, even though a small percentage of tax returns are being chosen for audit these days, that will be little consolation if yours is one of them.

Latest statistics

Overall, just 0.59% of individual tax returns were audited in 2018, as compared with 0.62% in 2017. This was the lowest percentage of audits conducted since 2002.

However, as in the past, those with very high incomes face greater odds. For example, in 2018, 2.21% of taxpayers with adjusted gross incomes (AGIs) of between $1 million and $5 million were audited (down from 3.52% in 2017).

The richest taxpayers, those with AGIs of $10 million and more, experienced a steep decline in audits. In 2018, 6.66% of their returns were audited, compared with 14.52% in 2017.

Surviving an audit

Even though fewer audits are being performed, the IRS will still examine thousands of returns this year. With proper planning, you should fare well even if you’re one of the unlucky ones.

The easiest way to survive an IRS examination is to prepare in advance. On an ongoing basis, you should systematically maintain documentation — invoices, bills, canceled checks, receipts, or other proof — for all items reported on your tax returns.

Just because a return is selected for audit doesn’t mean that an error was made. Some returns are randomly selected based on statistical formulas. For example, IRS computers compare income and deductions on returns with what other taxpayers report. If an individual deducts a charitable contribution that’s significantly higher than what others with similar incomes report, the IRS may want to know why.

Returns can also be selected when they involve issues or transactions with other taxpayers who were previously selected for audit, such as business partners or investors.

The government generally has three years within which to conduct an audit, and often the exam won’t begin until a year or more after you file your return.

More audit details

The scope of an audit depends on the tax return’s complexity. A return reflecting business or real estate income and expenses is likely to take longer to examine than a return with only salary income.

An audit can be conducted by mail or through an in-person interview and review of records. The interview may be conducted at an IRS office or may be a “field audit” at the taxpayer’s home, business, or accountant’s office.

Important: Even if your return is audited, an IRS examination may be nothing to lose sleep over. In many cases, the IRS asks for proof of certain items and routinely “closes” the audit after the documentation is presented.

Representation

It’s advisable to have a tax professional represent you at an audit. A tax pro knows what issues the IRS is likely to scrutinize and can prepare accordingly. In addition, a professional knows that in many instances IRS auditors will take a position (for example, to disallow deduction of a certain expense) even though courts and other guidance have expressed a contrary opinion on the issue. Because pros can point to the proper authority, the IRS may be forced to throw in the towel.

If you receive an IRS audit letter or simply want to improve your recordkeeping, we’re here to assist you. Contact us to discuss this or any other aspect of your taxes.

© 2019

U.S. inflation steadily firming; labor market strong

WASHINGTON (Reuters) - U.S. consumer prices recorded their largest increase in nearly 6-1/2 years in the year through June, while the monthly pace continued to suggest a steady buildup of inflation that could keep the Federal Reserve on a path of gradual interest rate increases.

Other data on Thursday showed first-time applications for unemployment benefits dropped to a two-month low last week as the labor market strengthened further. The tight jobs market is supporting inflation, and import tariffs, which are set to be broadened to include consumer goods, could fan price pressures.

“U.S. inflation continues to drift gradually higher in response to a nearly fully employed economy, with some nudging from tariffs,” said Sal Guatieri, a senior economist at BMO Capital Markets in Toronto.

The Labor Department said its Consumer Price Index edged up 0.1 percent last month on moderate gains in gasoline prices and sharp declines in the cost of apparel and hotel accommodation. The CPI rose 0.2 percent in May.

In the 12 months through June, the CPI increased 2.9 percent, the biggest rise since February 2012, after advancing 2.8 percent in May.

With gasoline prices rising modestly and the cost of household utilities dropping in recent months, the increase in the annual inflation rate is expected to slow.

Excluding the volatile food and energy components, the CPI rose 0.2 percent, matching May’s gain. That lifted the annual increase in the so-called core CPI to 2.3 percent, the largest rise since January 2017, from 2.2 percent in May.

Economists polled by Reuters had forecast both the CPI and core CPI rising 0.2 percent in June.

The Fed tracks a different inflation measure, which hit the U.S. central bank’s 2 percent target in May for the first time in six years. Economists expect the personal consumption expenditures (PCE) price index, excluding food and energy, to slightly overshoot its target.

Fed officials have indicated they would not be too concerned with inflation overshooting its target. The Fed raised interest rates in June for a second time this year and has forecast two more rate hikes before the end of 2018.

“While we continue to expect the next hike in September, even the hawks may sound more comfortable with the current gradual tightening pace,” said Michael Feroli, an economist at JPMorgan in New York.

The dollar was little changed against a basket of currencies while stocks on Wall Street were trading higher. Prices for U.S. Treasuries were mostly flat.

LOW LAY-OFFS

In another report on Thursday, the Labor Department said initial claims for state unemployment benefits dropped 18,000 to a seasonally adjusted 214,000 for the week ended July 7, the lowest level since early May.

That suggests robust labor market conditions prevailed in early July after the economy added 213,000 jobs in June. Steadily rising inflation, however, is eating into workers’ modest wage gains. Inflation-adjusted average weekly earnings rose 0.1 percent in June following a similar gain in May.

While economists do not expect inflation to accelerate much from current levels, they cautioned that the Trump administration’s protectionist trade measures could boost prices. Tariffs on lumber, aluminum and steel imports have left manufacturers facing rising input costs.

So far, they have not passed on those higher costs to consumers. President Donald Trump imposed the tariffs to protect domestic industries from what he says is unfair competition from foreign manufacturers.

Last week, Trump slapped 25 percent tariffs on $34 billion of Chinese imports. On Tuesday, Trump threatened 10 percent tariffs on an additional $200 billion of Chinese goods.

“We do not anticipate much movement in the year-ago rate of core CPI over the next few months,” said Sarah House, a senior economist at Wells Fargo Securities in Charlotte, North Carolina. “Broadening tariffs, including the possibility of consumer goods getting hit directly, create some upside risk to our inflation forecast in the second half of the year, however.”

In June, gasoline prices rose 0.5 percent after increasing 1.7 percent in May. Food prices gained 0.2 percent, with food consumed at home rebounding 0.2 percent after falling 0.2 percent in May. Food prices were unchanged in May.

Owners’ equivalent rent of primary residence, which is what a homeowner would pay to rent or receive from renting a home, rose 0.3 percent last month after increasing by the same margin in May. But the cost of hotel accommodations fell a record 4.1 percent.

Healthcare costs advanced 0.4 percent, with the price of hospital services surging 0.8 percent. Healthcare prices gained 0.2 percent in May, and consumers also paid more for prescription medication last month.

Prices for new motor vehicles rose for a second straight month. There were also increases in the cost of communication, motor vehicle insurance, education and alcoholic beverages.

But apparel prices fell 0.9 percent after being unchanged in May. The cost of airline tickets declined for a third straight month, while prices of household furnishings and tobacco also dropped last month.

Reporting by Lucia Mutikani; Editing by Andrea Ricci and Dan Grebler

Our Standards:The Thomson Reuters Trust Principles.

The China trade war is leading to lower mortgage rates for American homebuyers

Mortgage rates declined sharply this week after news of sluggish economic data, showing that trade tensions with China may actually be a boon to the U.S. housing market.

As markets prepare for a protracted trade war between President Donald Trump’s administration and the government of Chinese leader Xi Jinping, investors are rushing into the relative safe haven of the bond market, causing the yield on the U.S. 10-year Treasury to plummet. Mortgage rates loosely follow that yield.

The U.S. manufacturing purchasing managers index, or PMI, fell to the lowest level since September 2009, according to a Thursday report from financial data firm IHS Markit. This was a sign to financial markets that the trade battle could be slowing the U.S. economy.

The average rate on the 30-year, fixed-rate mortgage fell 4 basis points Wednesday, according to Mortgage News Daily, and fell even more sharply Thursday on the PMI news.

“Lenders will be repricing for the better,” said Matthew Graham, chief operating officer of MND. “The resulting rate sheets will put us right in line with the lowest rates in more than a year (same as March 26-28, 2019).”

The most qualified borrowers, or top tier, could see rate quotes under 4%, according to Graham. The average rate spiked over 5% last November, when the expectation was that the Federal Reserve would continue hiking rates. It then fell at the start of this year, as the Fed pulled back on its plans.

Homebuyers are incredibly sensitive to rate moves in today’s housing market because home prices are so high. With very little wiggle room in their wallets, buyers have to be able to make the math work on the monthly payment. Just a half percentage point move can mean $100 a month more or less on a $300,000 mortgage.

“The bigger news is that this could prove to be an inflection point for the broader rate market (and even the economy, if we’re to believe today’s Markit PMI data). That would result in even lower rates,” added Graham.

Low interest rates helped fuel the surge in home prices over the last four years, but price gains have been shrinking since less summer, when rates started rising. If rates fall to new lows, and stay there for a while, home prices could turn higher again.

Brexit is not the cause of Britain’s political breakdown; It’s a symptom

The French EU minister, Nathalie Loiseau, has called her new cat Brexit. “He wakes me up every morning meowing to death because he wants to go out,” she says. “And then when I open the door he stays put, undecided, and then glares at me when I put him out.” The Dutch prime minister has compared Theresa May to the knight in Monty Python who has all his limbs lopped off and insists “It’s just a flesh wound” and calls it a draw. “She’s incredible,” says Mark Rutte. “She goes on and on. At the same time, I do not blame her but British politics.” Italian friends tell me Brexit now comes on at the end of the news, in that wacky slot just before the sport and weather.

Everybody is laughing at us. Why wouldn’t they? We look ridiculous. If we weren’t so busy feeling betrayed, bored, enraged or bewildered, we’d be laughing at ourselves. Brexit, according to many of its advocates, would give us the chance to stand tall and independent again: to fulfil the potential, as May put it two years ago, to become “a great, global trading nation that is respected around the world and strong, confident and united at home”. Instead we look like a cross between a beggar and basket case. Yesterday, May pleaded for more time, and the EU said: only if you can get parliament to agree to your deal. May, displaying all the skills of brinkmanship and diplomacy that has got us to this point, then went and insulted parliamentarians, making them more hostile and fearful for themselves than ever.

Two crises have been revealed by these events. The first relates exclusively to Brexit. With eight days to go, we have a deal few want and a timetable that can’t be changed without agreeing to it. The EU may soften its terms; MPs may change their minds. We have just over a week to either find a unicorn or convince ourselves that the donkey we got for Christmas was a unicorn all along. This awful game of chicken was May’s plan all along – waste time until the “choice” was between her deal and no deal. This would be a breathtaking gamble in the hands of the most gifted or charismatic politician. She has proven herself to be neither of those things.

The second crisis is more enduring. It can be seen in the complete breakdown in Tory party discipline, with cabinet ministers voting against the government and backbenchers in uproar. It is evident in the disintegration of party loyalty. Conservative MP Nick Boles quit his local association while remaining a party member, claiming the people who selected him have “values and views … at odds with [his] own”. Eight Labour MPs left the party to form the Independent Group. Both parliamentary parties stand terrified of their membership. Many Tory MPs are saying they will resign the whip if Boris is elected leader; it has taken three and half years, a failed coup and a successful election campaign for the parliamentary Labour party to come to terms with Jeremy Corbyn, and the threat of further mutinies still lurks. We have a hung parliament in which it is difficult to find a majority for anything, in which the Speaker had to invoke a four-century-old precedent to stop the prime minister bringing the same question to the house until she got a different answer. That breakthrough lasted all of one day.

This is a crisis in our polity – the norms of our political and electoral culture that has parties at its centre. It is now approaching full-scale collapse. Conventional wisdom has it that Brexit has precipitated this crisis. The crude question of remain or leave was always going to create divisions, embolden renegades and undermine moderates. Depending on your prejudice, once the country opted to leave by a narrow margin, it presented the political class either with the challenge of committing an irresponsible act responsibly or fulfilling the will of the people. Either way, our politics has proved inadequate to the task. Brexit has broken us.

But by ignoring what was going on in the country before June 2016, and trends beyond our shores, this gives too much credit to the Brexit vote. That didn’t create this dysfunction and dislocation, it all too powerfully illustrated it. Up until that point, the two most persistent trends in postwar electoral politics were the decline in turnout and waning support for the two major parties. Between 1945 and 1997, turnout never went below 70%; since 2001, it has never reached 70%. Meanwhile the two-party landscape that once dominated our first-past-the-post system has frayed. Fewer people want to vote and even fewer wanted to back the two main parties (these trends have reversed slightly since 2001 but are nowhere near where they were). In 1950, Winston Churchill won 38% of eligible voters and still lost. The year before the referendum, the Tories got a majority with just 24% of the eligible vote.

This is how we got to a place where all the mainstream parties, the unions and business representatives could back remain and the country could vote leave. 

That crisis is by no means unique to Britain. Since the 2008 economic crash, most countries across the west have seen electoral fracture, the demise of mainstream parties, a rise in nativism and bigotry, a marked increase in public protest, and general political dysfunction. The gilets jaunes are still out every Saturday in Paris; the European parliament has concluded that Hungary poses a “systematic threat” to democracy and the rule of law, and the conservative bloc has expelled Hungary’s ruling party; Estonia’s ruling party is contemplating inviting the far right into government; Italian humanitarians are being threatened with jail for saving drowning refugeesand bringing them home when the government wouldn’t; antisemitism is on the rise across Europe with a 60% rise in the number of violent attacks in Germany; protesters in Serbia stormed national TV calling for media freedom. All of this before we mention the preening authoritarianism of Presidents Donald Trump of the US and Jair Bolsonaro of Brazil.

The broad narrative arc in most places is similar, and in some cases even more pronounced, than the one that brought us Brexit. The key difference is that Brexit comes complete with a timetable, a deadline, and an entity – the EU – that has thus far escaped these trends because it is subject to the diplomatic pressure of governments rather than the popular pressure of voters.

It is difficult to imagine a scenario where Britain does not continue looking ridiculous for some time to come. We deserve to be laughed at. But those who laugh hardest should beware they do not choke on their own hubris. This virus that made this madness possible is highly contagious. We may, as yet, be the worst affected. But we will not be the last.