You Only Brexit Once (YOBO)

Not even a month ago, I wrote to you and shared my thoughts on Britain leaving the European Union (EU).  I guess I was wrong.

Thursday’s 52%-48% vote by the British electorate to end its 43-year membership in the European Union seems to have taken just about everybody by surprise, but the aftermath could not have been more predictable.  The uncertainty of how, exactly, Europe and Britain will manage a complex divorce over the coming decade, sent global markets reeling.   London’s blue chip index, the Financial Times Stock Exchange 100, lost 4.4% of its value in one day, while Germany’s DAX market lost more than 7%.  The British pound sterling is getting crushed (down 14% against the yen, 10% against the dollar).

Compared to the global markets, the reaction among traders on U.S. exchanges seems muted; down roughly 3%, though nobody knows if that’s the extent of the fall or just the beginning. I think after a bit of a hangover on Monday, Wall Street will move on to the next brick in the Wall of Worry that builds bull markets.

The important thing to understand is that the current market disruptions represent an emotional roller coaster, an immediate panic reaction to what is likely to be a very long-term, drawn out, ultimately graceful accommodation between the UK and Europe.  German companies are certainly not 7% less valuable today than they were before the vote, and the pound sterling is certainly not suddenly a second-rate currency.  When the dust settles, people will see that this panicky Brexit aftermath was a buying opportunity, rather than a time to sell.  People who sell will realize they were suckered once again by panic masquerading as an assessment of real damage to the companies they’ve invested in.

What happens next for Britain and its former partners on the continent?  Let’s start with what will NOT happen.  Unlike other European nations, Britain will not have to start printing a new currency.  When the UK entered the EU, it chose to retain the British pound—that, of course, will remain.  Stores and businesses will continue accepting euros.

On the trade and regulatory side, the actual split is still years away. One of the things you might not be hearing about in the breathless coverage in the press, is that the British electorate’s vote is actually not legally binding.  It will not be until and unless the British government formally notifies the European Union of its intention to leave under Article 50 of the Lisbon Treaty—known as the “exit clause.”  If that happens, Article 50 sets forth a two-year period of negotiations between the exiting country and the remaining union.  Since British Prime Minister David Cameron has officially resigned his post and called for a new election, that clock probably won’t start ticking until the British people decide on their next leader.

After notification, attorneys in Whitehall and Brussels would begin negotiating, piece by piece, a new trade relationship, including tariffs, how open the UK borders will be for travel, and a variety of hot button immigration issues.  Estimates vary, but nobody seems to think the process will take less than five years to complete, and current arrangements will stay in place until new ones are agreed upon.

The exit agreement also requires obtaining the consent of the EU Parliament.  When was the last time the EU parliament got anything done quickly? The answer is never. Heck, even Prime Minister David Cameron’s splashy Friday morning resignation is not effective until October. For the foreseeable future, despite what you read and hear, the UK is still part of the Eurozone.

An alternative that is being widely discussed is a temporary acceptance of an established model—similar to Norway’s. Norway is not an EU member, but it pays EU dues, and has full access to the single market as if it was a member.  However, that would require the British to continue paying EU budget dues and accept free movement of workers—which were exactly the provisions that voters rejected in the referendum.

Meanwhile, since the Brexit vote is not legally binding, it’s possible that the new government might decide to delay invoking Article 50.  Or Parliament could instruct the prime minister not to invoke Article 50 until the government has had a chance to further study the implications.  There could even be a second referendum to undo the first.

The important thing for everybody to remember is that the quick-twitch traders and speculators on Wall Street are chasing sentiment, not underlying value, and the markets right now are being driven by emotion to what is perceived as an event, but is really a long process that will be managed by reasonable people who aren’t interested in damaging their nation’s economic fortunes.  Nobody knows exactly how the long-term prospects of Britain, the EU or American companies doing business across the Atlantic will be impacted by Brexit, but it would be unwise to assume the worst so quickly after the vote.

When I want to gauge the intermediate-term economic outlook, I often look at how the large commercial traders are positioned in copper. Being the most basic component of the home/commercial building engine, how they’re positioned in copper tells me how optimistic they are on the economy. As of this week, they’re positioned more bullishly in copper than they have been in the past few years. I would say that offers us some degree of hope about the future of the global economy, even if one country amounting to less than 1% of the global population decides that it doesn’t want to be in an economic union anymore with the rest of Europe.

But you can bet that, long-term, everybody will find a way to move past this interesting, unexpected event without suffering—or imposing—too much damage.  My guess is that the market will get back to its normal course of business by Tuesday or Wednesday and will have moved past this event. Meanwhile, hang on, because the market roller coaster seems to have entered one of those wild rides that we all experience periodically.

Sources:

https://www.yahoo.com/news/brexit-shows-global-desire-throw-142925862.html

https://www.washingtonpost.com/opinions/global-opinions/after-brexit-what-will-and-wont-happen/2016/06/24/c9f7a2f6-39f1-11e6-8f7c-d4c723a2becb_story.html

http://www.businessinsider.com/global-market-brexit-reaction-2016-6

http://www.ft.com/cms/s/0/f0c4f432-371d-11e6-9a05-82a9b15a8ee7.html#ixzz4CVixCz25

http://www.ft.com/cms/s/0/f0c4f432-371d-11e6-9a05-82a9b15a8ee7.html?ftcamp=traffic/partner/brexit/dianomi/row/auddev#axzz4CVide1Sz

http://www.newser.com/story/227149/brexit-now-what-happens-welcome-to-article-50.html

The MoneyGeek thanks guest writer Bob Veres for his contribution to this post

Will Britain Bid the European Union Cheeri-EU?

While we celebrate the Memorial Day holiday in the United States, the big question on European minds is how the British people will vote on June 23.  Will they vote to leave the European Union (what’s being called the “Brexit”) or decide to continue to be part of the 28-nation economic alliance?

What’s at stake?  It’s hard to know, exactly.  Great Britain already maintains its own currency, separate from the euro, so the vote will be about whether the country continues to pay into the EU budget and adhere to the eurozone’s regulations.  Norway is also living outside the EU, yet it contributes to the budget, adheres to the regulations and seems to get most of the benefits of membership—and thereby offers a way for Britain to exit and still maintain all the trappings of membership.  The uncertainty over the seven years that would be required to transition out of membership would be over how, exactly, a new relationship would be structured.

The eurozone is suffering from high unemployment, low economic growth and a disparity between the richer (UK, Germany, Scandinavia) and poorer (Greece, Spain) nations.  All European Union members are governed by policies created by the European Commission and the European parliament, and subject to the dispute resolution powers of the European Court of Justice.  British voters might decide they don’t like the shared sovereignty and ties to the economic problems.

Naturally, there is a lot of lobbying on both sides in the run-up to the vote.  Economists seem to be uniformly against a Brexit, pointing out the obvious: that it would be hard for London to continue its role as the financial capital of Europe if its nation is not actually a part of the European Union.  They point out that, unlike Greece, Britain already controls its own currency, and it is not a part of the passport-free zone, which is shorthand for having control over its own policies in regard to the Middle Eastern refugee crisis.

Those in favor of Brexit say that Britain would be freer to enter into trade deals with other countries (think: China) than it is today, and of course there is a lot of nationalist sentiment about reducing foreign influence over British affairs.

Who will win?  The most recent polls show 46% of British voters will cast a ballot to leave the EU, vs. 44% who will vote to remain—and 10% who say they don’t know how they’ll vote.  A little less than a month from the actual Brexit election, there appears to be plenty of time for either side to continue pressing their case.

Ultimately, hand-wringing over the vote during the month of June will likely contribute to stock market volatility until the vote is settled. My personal opinion is that British Citizens will vote to remain in the Union. Europeans, including the British, fought hard for decades to unite; they likely won’t give up on that union that easily.

If you would like to review your current investment portfolio or discuss any other financial planning matters, please don’t hesitate to contact us or visit our website at http://www.ydfs.com. We are a fee-only fiduciary financial planning firm that always puts your interests first.  If you are not a client yet, an initial consultation is complimentary and there is never any pressure or hidden sales pitch.

Enjoy your Memorial Day Holiday. We are grateful to the soldiers and families who paid the ultimate price for our freedom.

Sources:

http://www.ft.com/intl/cms/s/2/70d0bfd8-d1b3-11e5-831d-09f7778e7377.html#axzz40tXOLR6p

http://www.ft.com/intl/cms/s/2/e7b2d4d4-daea-11e5-98fd-06d75973fe09.html#axzz48O9tGx46

http://www.economist.com/node/21697253

http://www.express.co.uk/news/politics/668624/EU-referendum-ICM-poll-UK-on-course-for-Brexit-Europe-Day

The MoneyGeek thanks guest writer Bob Veres for his contribution to this post

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