An Analysis of Brexit

Ok I know this is a finance blog, but for one day only I am going to be offering my interpretation of the sorry saga that has been Brexit. Usually, I focus only on the implications for the market, but today I consider the ridiculous rationale which led to this catastrophic failure of common sense.

Ok, and for those of you who prefer the term, I am going to be a remoaner today. Feel free to disagree with anything I say in the comments.


So where did this all begin? 

https://www.newyorker.com/news/news-desk/new-evidence-emerges-of-steve-bannon-and-cambridge-analyticas-role-in-brexit

Many argue that the Brexit saga began at the referendum, but debates on the EU had begun far before at the far right end of the political spectrum. Entitled buffoons like Jacob Rees-Mogg seemed to believe they had some right to deride the EU and decide the fate of the masses. However, what many do not realise is that the Brexit arguments were actually orchestrated by Steve Bannon. For those of you unaware of Steve, he is an American right-wing owner of the hysteria-inciting Breitbart news.


Brexiteers mutter something about sovereignty when our fate as a nation was orchestrated by a mass press campaign delivered by an American...

After he plucked Nigel Farage from nothing in 2012, Bannon orchestrated one of the most successful propaganda campaigns ever launched. This is clear based upon the importance the British public placed upon leaving the European Union as illustrated in the following graph.



What was the turning point? 

It seems like such a long time ago but it is clear that the turning point of the referendum was the Syrian migrant crisis. The UK public seemed completely apathetic to the plight of those who were fleeing Western created conflict. Instead, it resulted in a tide of hatred towards migrants along with a fair dosage of fear.

But what created this fear? Without doubt, it was the firestorm of media which surrounded the migrant crisis, the economic ideas were lost and instead the emphasis of the campaign was on immigration.

The torrent of lies from British newspapers only continued to whip up this image of UK sovereignty and riled the British people - especially those who were older. The BBC only served to exacerbate this firestorm by maintaining its pledge to "unbiasedness". However, under this pledge it can point out falsehoods in reporting and blatant lies. However, it chose not to.



And then there were the lies....

It is great with the benefit of hindsight that we are able to examine the various stories put forward by both sides. I start by criticising the remain side.

An emergency budget would be required following a leave vote. 

This is clearly false. Nothing immediately changed.

There would be immediate and dangerous economic consequences following a leave vote. 

Ok, there was some significant capital flight, but we did not enter a recession. That being said, we are only just about to leave the EU.

A Hard Border Would Be Required in Ireland. 

Turns out the border would be in the Irish Sea; making Northern Ireland a proxy state of the European Union.

That's about it for the Remain Campaign. We are unable to test some of the other claims of Project Fear because we have still not left the European Union!

Financial Services would be Decimated:

Might have to wait and see with this one a little longer. But this does look like a classic project fear.



And now the Leave Campaign - I've taken a few highlights since the number of lies told by the Leave Campaign and its associates was, quite literally, thousands.

£350 million a week for the NHS. 



Ah yes, the classic vote leave argument. £350 million. Well, we are about to send the EU £32 billion in the Brexit divorce bill, which is equivalent to £610 million a week. If we account for the fact that we don't get the rebate anymore, the real new cost is well over £700mn a week.

Oh. Seems like we aren't getting any new hospitals then. (Also, the Boris Pledge for additional hospitals was largely untrue - most of them are going to be new wards).

Migrants are Stealing Briton's Jobs and Benefits:
Not true. Refer to the Migration Advisory Committee Report which suggests the average migrant from the EU contributes more to the system than they claim in benefits. This is not a remoaner response, this is factually true. I provide the source below:

18. Our commissioned research found that EEA migrants pay more in taxes than they receive in benefits. The positive net contribution to the public finances is larger for EU13+ migrants than for NMS migrants.
    
    https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/741926/Final_EEA_report.PDF

UK Sovereignty is at risk: 
Nope. Just no.

Notice how we had to spend the last three years grovelling to Brussels, begging for extension after extension. Ultimately, we now have a Boris deal which Theresa May herself said that no sovereign British PM could accept - a border in the Irish Sea.

The EU is Undemocratic:

Again, just no. It may be bureaucratic yes, but not undemocratic. Remember the EU elections in May?

The UK would have to adopt the Euro: 

Another falsehood. According to the Lisbon Treaty, all member states must adopt the Euro by 2022. Correct. However, the UK and Denmark both have opt-outs.

Therefore we would never have to join the Euro.



So what now: 
Nothing. Until the end of the year nothing changes.



Who Benefitted from Brexit? 
One name leaps to mind; Boris Johnson.

Perhaps the saddest aspect of this whole sorry charade has been that people who can now see the facts choose to not alter their opinions in light of new information. Boris remains some sort of saviour figure despite getting to his current position by a torrential downpour of lies.


Anyway, that's the end of my remoaning. I am certain that the future is uncertain. And beyond that I will say nothing more. I truly hope that Boris is right and we are about to enter another golden age for British industry, but it seems unlikely.



In Summary: 

Brexit has been a victory for populism over common sense. A blow for the globalist movement. And incited division within the United Kingdom. I am saddened to be leaving, but looking forward to the future. In time, I believe we will look back on this period with sadness and wonder what might have been if we had voted remain. One thing, however, is clear. The UK is shifting in a new direction away from Europe and we have a new mega majority Conservative government; the next 5 years will be eventful.




Normal service will resume on my blog next week where we will return to solely financial implications.

LY

2020 Predictions

Happy New Year Everyone and I hope heads are not too sore today after the celebrations last night.


Anyway, to celebrate the start of a new year (and decade) I have decided to post a list of my predictions for 2020.

The 2020 Presidential Election:
Without doubt, this will start to move markets before long. In my opinion, barring any major change in the US economy and assuming that the Phase 1 trade deal is implemented and tariffs drop, Trump will be re-elected.
It seems likely that the UK election result will serve as a precursor for the US election and maybe Trump will do even better than expected. For the Democratic Primary, I am going to go against consensus and suggest that Biden will not get the primary nomination. I would like to see Mike Bloomberg win, but that still seems highly unlikely. I'm therefore making a totally wild prediction that Mayor Pete will receive the nomination - he is far younger than many of his competitors, and even if he does not receive the nomination, it would not be surprising to see him on the ticket of another candidate.


Brexit:
Well, clearly the UK will be leaving the EU on the 31st of January. In terms of my expectations for when the transition period will end, I imagine it will be extended far beyond the current 2020 deadline. Boris may pretend to be a tough negotiator, but I do not believe it is possible to negotiate a comprehensive trade deal with the EU in such a short space of time.

On the back of this view, I am anticipating a strong appreciation of the pound over the next 6-12 months. Probably up towards $1.40 again, but then I imagine there will also be weaker periods as Boris ups his rhetoric against the European Union.


The Fed:
I have a slightly different opinion about the Fed than is currently consensus. Whilst I believe they will remain on hold through 2020, I do not believe that any further easing will occur (apart from to calm money markets). Similarly, I would not be surprised to see a global modest uptick in inflation - significant enough to prompt the Fed to alter their base case on the economy. As such, I believe the case can still be made for further dollar strength.

The ECB:
To me, the negative rate experiment appears to be over. It now seems likely that the ECB will increasingly consider hiking rates to attempt to normalise them. In addition, the governments of Europe (especially Germany) appear to be more interested in fiscal stimulus. This will aid monetary policy decisions and likely lead to a modest increase in inflation towards the ECB target.

My next point is that I believe the ECB target will change. Currently, the target is below but close to 2%. I believe this will become more symmetric and the ECB will allow for an inflation overshoot.

All of this signals that the Euro is likely to become stronger going forward. We have already seen a rise in the value of EURUSD from around 1.09 to 1.12. I expect a push onwards toward 1.15 in the next 6 months.



S&P500: 
It seems likely given the partial trade war resolution that corporate profits could surprise to the upside. This would all add fuel to the fire for the S&P in the coming months. However, I do want to stress that this earnings season will all revolve around "showing the market the money". If earnings disappoint, then we could see a 10-15% fall in the S&P.
I personally agree with the Bank of America S&P target of 3333 by 3/3/2020. This seems highly achievable.

Yes, the market is exuberant, and therefore any earnings disappointments are likely to see marked moves to the downside.

My end of year S&P target however (assuming much of the above is true) is 3250. In other words, exactly where we are now.


Anyway, here's to a profitable and successful new year.