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Making money from Brexit – the weekend after

June 27, 2016
Neil Milton

The pound will fall further and stay down a long time.

Likely a slower swoon not a precipitous fall, but a swoon nonetheless.  Last week was ‘a traders’ crash; now, the fundamentals crash will slowly, but inexorably grind the pound down further – there will inevitably be supply/demand imbalance as many people look to take funds out of the UK, and foreign direct investment into the UK dries up.

Tip one: short the Pound

It will fall more against safe haven currencies like the US $ and the yen.

 Uncertainty will rein in the UK, for a long time, over a wide swath of issues:

  1. Over the Conservatives. With Cameron announcing his resignation, who will be the next leader of the Conservative Party and the Prime Minister?  Here is a prediction: it will be Boris Johnson.  Clever, entertaining Boris. Who is a lightweight, and rich, and thus completely the wrong person and totally unrepresentative of the people who voted for Brexit.  Such are the follies of referendums.
  2. Over the government. Who will be the Chancellor of the Exchequer? (not Osbourne for long).  Boris will be the PM, but of a bitterly divided nation, and a bitterly divided caucus.  This is crucial, because I very much doubt that the government of the UK will be able to do anything substantive for months.  This is not WWII; this is a self-inflicted crisis, with a bitterly divided government and country.  The government will barely be able to run a lemonade stand, let alone make substantive policy choices for months.
  3. Over the Bank of England, as the Brexiteers are no fan of Mark Carney.
  4. Over investment. Only a fool would make any sort of long term investment in anything in the UK right now. Whether it is real estate, or physical plant (cars for instance), or people, no sane business person will invest in anything in the UK right now, and not in England until at least the exit is complete.
  5. Over Labour. The opposition Labour party is in crisis too, and this will further accentuate the sense of uncertainty that will depress the economy.  The leader of the Labour party is very weak and has completely lost the working class.  The prospects for Labour in the next election are terrible, so this is not a case where an election will solve things by replacing the government.
  6. Over Scotland and Northern Ireland.

 

As Britain leaves the EU, Scotland will push to leave the UK, and stay in the Euro. Why?  Three reasons. I) Last time, the “conservative” (‘don’t rock the boat’) view was ‘stay in the UK’.  Now, the conservative view is “stay in the EU”.  2) Last time, countries like Spain were opposed to Scottish independence, as they could not appear to show willingness to let Scotland separate from the UK, then immediately rejoin the EU because it would embolden the Basques and othes.  That reason is gone, and a socially progressive Scotland will be welcome ‘to stay in the EU’, not ‘join the EU’.  3) Scotland is well positioned to compete for all of the jobs in financial services and technology that will be looking for an English-speaking base, outside London, inside the EU.  You heard it here first: why go to Dublin, if you can take the train to Glasgow?  If London is leaving, then Edinburgh and Glasgow will compete hard for those folks.  And unlike England, with its weak politicians right now, Scotland has a competent leader in Nicola Sturgeon.

Even if this does not come to pass, it will inevitably create a lot of uncertainty for a long time.

Tip 2: go long high quality office properties in Scotland and Dublin

There is no rush, but slowly, inexorably, every new hire in Big Law, Big Accounting, investment banking and technology that would have been in London will now be outside London, and I think Dublin, Edinburgh and Glasgow are the likely beneficiaries (not Paris and Frankfurt as many have suggested, because really, who would want to try to run a real business in either of those places?).

Random other thoughts

Northern Ireland Protestants are completely screwed. The stupid fools voted for Brexit.  Little England will be too distracted, poor, and overwhelmed to care about them.  Scotland, their natural ally, will be leaving Britain.  The weird thing is, however, that I doubt that the Republic will really want the North – too poor, too weak – and certainly will not pull to have them join.  Besides, the Republic has a weak, divided government.  It will not mount any campaign to take on Northern Ireland which will be left to twist in the wind while everyone is distracted, but Northern Ireland is not good a waiting patiently – expect, alas, a mess, which will further drive down sentiment about the UK and the pound.
Boris Johnson will inherit a truly poisoned chalice. Much of the UK will hate him, and correctly perceive him as a selfish, opportunistic liar.  He is an intelligent and entertaining but does not have the skills required to manage and intractable, long term crisis that he helped unleash.  He will be unable to stop the inevitable recession.  Worse, he will have no way to deal with the huge anger that this recession is going to create among the very people who voted for Brexit.  Recall that the pound has already fallen and likely will fall more.  The prices of food and petrol will rise directly and because of the pound’s fall (Britain imports a lot of food, and oil is priced in US $).  Food and fuel price inflation are politically toxic because a) they hit people every single day, as they buy groceries and fill up their cars, and b) they are strongly regressive, in that they impact the poor disproportionately.  These price increases will start to bite right away, and there is no possible way that Boris can do anything Keynesian to address them in time – the government will be far too shambolic to pass a budget for months, and likely not in 2016.  As for monetary policy, the BoE has few tools left with interest rates so low, and to make matters worse, the Brexiteers are at war with Mark Carney.

The EU cannot stand the English. They have been selfish, non-committal partners in the EU project since inception.  The English are owed no favours by the UK, and now don’t even have a ranking representative there (a Remain supporter, he resigned on the weekend).  The EU leadership, and most national leaders (Germany, France) have no interest or reason to be kind to the British, and have many reason to ‘send a strong signal’ pour encourager les autres.  Recall that the Greeks had a referendum.  The EU stood very firm, and within months, the Greeks had caved completely.  Do not underestimate European (especially German) resolve.  Few Brits can read German; all educated Germans can read English.  They know perfectly well what vile nonsense the Brexiteers said about them and the EU.

More rapidly and more inexorably than most expect, the UK will face a talent crunch. Absolutely no one who is real star material will want to go there now.  The talent needed to drive law, banking, and tech to the highest levels – will not be leaving Ottawa, or Bangalore, or Ankara, to go to Little England, for years to come.

Some good news

Here is some good news. The misery in England over the next decade will not go unnoticed. From Quebec to Basque, separatists will have lost their ‘sunny days’ story.  Everyone will realize that separation has nasty consequences.  And I suspect that the Eurosceptics in places like France and Holland will initially crow greatly about Brexit, and then slowly, gradually, as the scope of the train wreck comes into view, stop crowing and see their support ebb away.  All the EU has to do is hang tough long enough for England to visibly sink, and the enthusiasm on the continent for busting up with EU will wane a lot.

Tip 3: go long Canada.

It is by far the best-governed, least-divided large democracy in the world.  The US economy is stronger right now than Canada’s, but the US is an order magnitude more divided and more poorly governed.

 

As always just some random thoughts.
Smart money is patient but never passive.

Neil