Musing on Brexit vote – what next?

 

My main take on Brexit was that it would be, as usual, a narrow win for stay, with a bit of fraud (pardon me, irregularities), like we have seen in all the recent elections everywhere in the OECD…

I was quite surprised about the result, but honestly, I do not think anything “serious” will happen following this vote, and all the news coming since the vote are making me feel I am right:

First, Europe elite has a loooong history of not following the popular vote:

Some examples:

June 2, 1992: Danes Reject Maastricht Treaty

June 8, 2001: Irish Oppose E.U. Expansion

May 29, 2005: France Vetoes European Constitution

June 1, 2005: Dutch Voters Also Reject the Constitution

June 12, 2008: Another Irish No Vote

April 6, 2016: Dutch Rebuff Accord With Ukraine

I found a great article listing many more items like that on the web last week, but I cannot remember where and cannot find in when looking for it, so I used this article from the NYT as reference.

The bias on this NYT article is quite clear: European integration is good and the unwashed masses, when being asked their opinions, better voter correctly, or there will be a re-vote until they get it right, or even more scandalous, the country parliament will not follow the popular vote and still validate what has been just rejected after cosmetic changes.

One glaring missing example from the NYT article is the Greek vote on more bailout 5 July 2015, to which 61% voted against and after which… more bailout where provided, enslaving the population even more. Maybe this one is missing as it is quite obvious now that the situation in Greece is not better at all, that the population is even poorer now and that in any case, Greece will still default again at some point.

Anyway, back to the main topic:

The impact of the Brexit vote in the coming years, in a political vacuum:

My core opinion is that nothing fundamental will change. First the political class will drag their feet and stall as much as possible, until either an event “save” them from this “ridiculous” popular decision like let’s say a huge crash in Europe (Italy bank or Deutsch bank anyone), forcing the Central Banks to have a coordinated answer and bringing back UK into the fold.

If nothing happens (really unlikely in my view), then the parliament, which still needs to vote on activating article 50 or not, will ask for studies, commissions etc. in order to take an “informed” decision, delaying even more. All the while, the political class can say they are negotiating on better tems with Europe and at the end of the day, may choose, without asking the people, that the cosmetic concessions they are getting are a great victory and that they can remain after all.

Even in case they activate article 50, there is a span of up to 2 years before its activation, leaving plenty of time for events to “force” them to come back to Europe…

 

That is what I am quite certain would happen, in a vacuum. Now UK is definitely not in a vacuum in Europe.

I have always been saying (but not writing, sorry), that the main risk of the Brexit vote (be it a narrow win as I was expecting or an actual lose) is not the changes for UK (with all the banks there lobbying for a stay, and the referendum being non-binding, the chance for an actual, real exit was/is close to none in current environment), but the impact such a vote would have on all the independence parties in Europe (I do not want to write far-right, as wanting to have sovereignty for your own country and not follow the diktats of Europe does not make you far-right in my book) is quite real.

This is not limited to all the anti-European parties in every countries, but also the regional parties within each countries (Catalonia in Spain for example). This is where the risk really is. From the start the UK vote was a non-starter for sure, since the political class was not interested in that, the rich/lobbyist do not want that as well and so forth (see the reaction of the political class winners…). With no popular leader to follow through on Brexit, the situation will remain indecisive until an event brings back UK into the fold.

On the contrary, should a popular leader somewhere else in Europe wins a major election on that “leave Europe” platform, they may really well actually follow through on it. Imagine Italy’s Five Star’s Grillo wining the national elections on a “leave Europe” platform (which means leave the Euro in the case, something far more serious). It would be likely to happen.

Indeed, as a comparison, Greek leaders were elected on a stay in the Euro but no more austerity platform, a contradiction mathematically (meaning it could no happen without a political union and the agreement from the North to bankroll the South, something we are really far from) hence one of the side had to give,. “No more austerity” became… more austerity for longer.

That would be different in Italy I suppose, if they are elected on the “leave the Euro” platform. It could actually be compatible with a “no more austerity” platform (and a huge devaluation of the Lira, something all countries want to get without advertising it). If this happens, say goodbye to Target2, Deutsch Bank and a score of other things…).

Where does that leave us economically:

I see the GBP going down more on a short term basis. Indeed, until it is clear the Brexit vote is not followed by the political class (something that may take 1-2 years easily), Brexit is on, and it means Bank issues in UK, issues on UK sovereign debt, Scotland or Wales possible referendums to leave UK etc. In my opinion none of this will end up happening (or at least not due to the Brexit vote), but until it is clear to everybody, it is negative news upon negative news for the GBP.

I am looking to buy GBP on a 10-20% additional drop from here (Cable at 1.30 roughly today). Would most likely buy it shorting the JPY if the risk-off trade carries on during that period, as GPB/JPY could have dropped even more (beware of BOJ interventions though…). I am not advising to short from here, I am looking to go long later.

I see Banking stocks taking more of a beating short term, and honestly, I could imagine a Bear Stearns/Lehman moment somewhat soon, where a big actor default (Deutsch Bank is a good candidate, Monte Dei Paschi too, one defaulting could actually bring the other down, and a score of others after that).

This would create turmoil, and after that it becomes hard to evaluate what would happen. Brexit may end up happening, not because of the vote, instead that would be because of this chaos and the rest of Europe exploding, which is why my above prognostic was mentioned “in a vacuum”.

That does not change the above trade though, as I see a real Brexit, once consumed, as a plus for UK long term (and the JPY is doomed anyway), assuming the rest of Europe also disintegrate, which is the case “not in a vacuum”. Such a mayhem would mean an even better entry point for a GBP/JPY long. Given the risk to overshoot on the downside first, with the above Armageddon scenario, it will not be possible to use a lot of leverage though (and hopefully your broker will not die in the process…).

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