Brexit Explained: Overview, UK Newspaper Positions/Analysis, Market and Economic Impact

by the Curmudgeon with Victor Sperandeo

Introduction:

Next Thursday’s (June 23^rd) UK “Brexit” referendum to "leave” or “remain" in the European Union (EU) is a critical factor for all financial markets. If the vote is to "leave" and the EU and England abide by the vote (see discussion below) the consequences are unknown and thereby very threatening for the markets and global economy. Many experts believe that the entire EU will be threatened, if not doomed, if the UK exits.

The Curmudgeon summarizes UK newspaper analysis and comments on Brexit, while Victor provides his views and opinions on the markets and the UK economy.

Curmudgeon: UK Newspaper Positions and Analysis of Brexit:

1. In the UK, The Times newspaper supports the "Remain" campaign in a front page article titled: “Why remain is best for Britain.” The support of The Times will be seen as a significant boost to David Cameron, the prime minister, and the Remain camp after Rupert Murdoch’s other UK daily newspaper, The Sun, came out forcefully for Brexit this week.

2. The Sun, The Spectator, and The Telegraph newspapers all support "Leave".

3. The Financial Times (on line subscription required) wrote “Britain should vote to stay in the EU:”

The FT has supported British membership of the EU from the outset in 1973. The Financial Times does not favor membership of the single currency. It makes no economic sense. But opting out of the euro is quite different from opting out of the EU, which would seriously damage the UK economy. Constructive engagement is vital when Europe confronts threats from Islamist extremism, migration, Russian aggrandizement and climate change. These can only be tackled collectively.

Separately, the FT provides this analysis of “Brexit:”

The promise: the UK would seek to leave the EU by 2019 and would be prepared to defy Brussels over immigration laws, according to a leading pro-Brexit minister.

The risk: George Osborne, UK Chancellor of the Exchequer, has warned of a £30bn black hole in public finances if Britain should vote to leave on June 23.

The immediate aftermath: David Cameron would probably face the end of his career as prime minister as EU membership was put aside.

The politics: the political and constitutional questions caused by a vote to leave could open up a period of profound uncertainty for the UK and the EU.

The legal analysis: the referendum is advisory rather than mandatory; what happens next is a matter of politics, not law.

The mechanics: the UK would have two years to negotiate a deal after triggering the exit clause of the EU treaties; extending talks beyond that would require unanimity.

The economics: the professional consensus is clear - leaving the EU would hit growth. The size of that impact would depend on factors such as trade, productivity and foreign direct investment. But champions of Brexit argue that the economy would prosper outside the EU.

Immigration: the record influx of EU nationals has proved a powerful rallying call for the Leave campaign. Some three-quarters of EU citizens working in the UK would not meet current visa requirements for non-EU overseas workers if Britain left the bloc. But such restrictions are likely to apply to new entrants rather than to EU migrants already in the UK.

Trade options: leading “Leave” campaigners say they would not seek to join the EU’s single market — which requires free movement of labor. Instead they would seek a trade deal with the bloc. Treatment of the service sector, which accounts for 80 per cent of UK gross domestic product, would be a huge issue.

4. The Herald (Scotland newspaper- on line subscription to Press Reader required) - Wealth worries may be crucial in determining in/out decision, by Simon Bain:

PERSONAL financial fears may help to shape the outcome of next week’s historic EU referendum, with many voters holding apparently contradictory attitudes. With the polls predicting a knife-edge result, wealth worries and their effect on wider political views may be a critical factor in the privacy of the polling-booth.

The latest Disposable Income Index published by savings and Isa provider Scottish Friendly shows 54 percent of Scottish households are anxious about the impact of the referendum on their finances. The main reasons cited are the possibility that a Brexit may cause prices to rise (47%), lead to job losses (39%), or result in falling business investment (23%).

Calum Bennie, savings expert at Scottish Friendly, said: “Our study continues to suggest that people are feeling financially fragile. Uncertainty caused by the forthcoming EU referendum is also leaving many UK families feeling concerned.

One in five Scots who are worried about a Brexit effect on house prices – that they would fall – believe their home would never regain its present value.

Savers and investors are already downright confused, according to Elaine McInroy, tax partner at accountants Saffery Champness in Edinburgh. “Firstly, they didn’t know if Scotland was going to get independence or not, then the Scottish tax situation added to the unknown, then the LBTT (Land and Business Transaction Tax) caused a stir in the property market, then the Government clamped down on tax avoidance, outlawing previously accepted practices, and now Brexit is casting a shadow of doubt over the future.

“Add to that the confusion and perplexity of tax changes, such as the introduction of a new personal savings allowance and new dividend tax rate, then it is no wonder they are bewildered.”

Brexit Impact on Financial Markets and Gold:

The mood of the markets and the politics of the propaganda on each side were vividly demonstrated on June 16^th. The polls released that day showed the "leave" vote ahead, which was negative for equities, but bullish for US $, Treasury bonds and gold. When it was revealed that UK Parliament Member Jo Cox (a “stay in the EU” supporter) was shot, stabbed, and killed, the markets immediately reversed (across the board), on the belief that sympathy for Ms. Cox assassination would turn the vote from “leave” to “remain.”

1. The cash S&P 500 index rallied from an intra-day low of 2050.37 to close near the high of the day at 2077.99. Many stock market analysts, including Dan Sullivan of the Chartist, suggested that Thursday’s price action “had all the elements of a key reversal day.” They were wrong as US equities didn’t follow through on the upside and closed down on Friday June 17^th.

Victor notes that Thursday’s financial market reversal equaled a huge $500+ billion swing in market value world-wide.

2. Gold was up $35.9 on June 16^th (to over $1300 per ounce) with UK polls showing “leave” had the majority. But the yellow metal sold off late Thursday afternoon, due to rumors that the Brexit Referendum vote could be postponed as a result of the Jo Cox assassination.

Victor’s Observations & Opinions:

The potential fear in the market place was demonstrated by RJ O'Brien – a 100+ year old Futures clearing firm)– that increased margin for several futures contracts 200%, effective this Monday:

"The following contracts will be charged 200% margin effective at the close of business Monday June 20^th: British Pound, Euro FX, Gold, Silver, FTSE Index, DAX Index, Euro Stoxx, CAC 40, MEFF IBEX, MIB Index Margin on some Currency Cross Rate products may also be raised. The changes are being made in response to expected volatility from the Brexit referendum on June 23^rd. In addition, effective immediately, RJO will not accept the transfer in of any positions in financial contracts (Currencies, Precious Metals, Equity Indices and Interest Rate products) unless they are to offset customer positions already open on our books."

The “Brexit” vote outcome currently is still a coin flip. I believe that the "New World Order" globalists are particularly at risk of the UK exits, since the EU is their model for world government. However, if the vote is to “leave” it will most likely be temporary. Who says so?

1. Wells Fargo: What Does Brexit Mean for U.S. Markets? (Emphasis added):

"To be sure, the British government isn’t REQUIRED TO ACT on a successful vote for Brexit; the referendum is merely ADVISORY, and not mandatory. And David Cameron, the U.K.’s prime minister, is an opponent of the Brexit proposal so one can expect that he will use every means necessary to keep Britain in the European fold."

2. Business Insider: Brexit won't actually happen even if the public votes for it:

“Parliament doesn't actually have to bring Britain out of the EU if the public votes for it. That is because the result of June 23 referendum on Britain's EU membership is not legally binding. Instead, it is merely advisory, and, in theory, could be totally ignored by UK government.”

3. Financial Times (FT): Can the United Kingdom government legally disregard a vote for Brexit?

“What follows any referendum vote next week for the United Kingdom to leave the EU? From a legal perspective, the immediate consequence is simple: nothing will happen.

The relevant legislation did not provide for the referendum result to have any formal trigger effect. The referendum is advisory rather than mandatory. The 2011 referendum on electoral reform did have an obligation on the government to legislate in the event of a “yes” vote (the vote was “no” so this did not matter). But no such provision was included in the EU referendum legislation.”

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The FT is already suggesting that U.K.’s parliament could try to re-negotiate another deal and put that to vote in another referendum. There is a tradition of EU member states repeating referendums on EU-related matters until voters eventually vote the ‘right’ way.”

Like in the US presidential primaries and caucuses (i.e. super-delegates), the UK voting process is NOT ABOUT WHAT THE PEOPLE VOTED FOR, but what the elite "Establishment" wants. Will they get their desired outcome by hook or by crook? Either way the EU is headed into recession and worse soon, in my view.

At the same time, the EU country’s political leaders will certainly feel political pressure to act, particularly if a victory for the “leave” side is strong and convincing. Right now, a consensus view has emerged that a British departure from the European Union will be bad for the US, both financially and geopolitically. I believe an exit would cause volatility in the short run, but would be good in the long run.

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Victor’s Conclusions:

In deciding to vote for Britain's liberty or being controlled by the EU, we suggest UK Prime Minister David Cameron should read the "English Bill of Rights." It was written after "the Glorious Revolution (1688) to stop England from "foreign influence," much like the EU is controlling England today.

Permit me to quote just two sentences from The English Bill of Rights (1689) as per Yale Law School’s Avalon Project website:

“And I do declare that no foreign prince, person, prelate, state or potentate hath or ought to have any jurisdiction, power, superiority, pre-eminence or authority, ecclesiastical or spiritual, within this realm. So help me God.”

History is never a teacher to those with a lust for power; nor for those who take freedom for granted. England will survive going forward. The question is in what political form? As an Independent nation, or as a colony in the “Kingdom of Brussels (the EU),” led by unelected appointed technocrats?

The June 23^rd Brexit vote might give us a clue to the outcome for the UK. Then again it might not. If the vote is to “leave” and the powers that be try to circumvent what the people want (see references above) we’ll be back to subversive uncertainty.

Good luck and till next time...

The Curmudgeon
ajwdct@sbumail.com

Follow the Curmudgeon on Twitter @ajwdct247

Curmudgeon is a retired investment professional. He has been involved in financial markets since 1968 (yes, he cut his teeth on the 1968-1974 bear market), became an SEC Registered Investment Advisor in 1995, and received the Chartered Financial Analyst designation from AIMR (now CFA Institute) in 1996. He managed hedged equity and alternative (non-correlated) investment accounts for clients from 1992-2005.

Victor Sperandeo is a historian, economist and financial innovator who has re-invented himself and the companies he's owned (since 1971) to profit in the ever changing and arcane world of markets, economies and government policies. Victor started his Wall Street career in 1966 and began trading for a living in 1968. As President and CEO of Alpha Financial Technologies LLC, Sperandeo oversees the firm's research and development platform, which is used to create innovative solutions for different futures markets, risk parameters and other factors.

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