Brexit Post-Mortem: Analysis, Economic Impact, Market Calls

by the Curmudgeon with Victor Sperandeo



In a repudiation of the status quo, British citizens voted on Thursday to leave the European Union.  The vote for independence was due to frustration over EU restrictions on the UK's sovereignty.  In particular, Brits became increasingly opposed to policies associated with the EU, such as liberal immigration laws, lack of border controls, high regulatory costs, and restrictions on trade outside the Union.  Victor and I discussed all these issues in our very popular posts: Brexit Explained (from last weekend) and Effects of Brussels on Brexit and a Potential EU Breakup (in March 2016 after the Brussels bombing).


In this article, the Curmudgeon reviews expert analysis on how Brexit will affect the global economy and markets, including a NY Times op-ed piece by former UK Prime Minister Tony Blair.  Victor offers his usual no-holds barred, honest opinions of what happened, why and what's next for the markets.


Economic and Market Impact of Brexit:


The press, mainstream and social media have been going bonkers trying to assess the economic fallout from the Brexit vote.  We defer to an excellent NY Times article by Neil Irwin titled: How ‘Brexit’ Will Affect the Global Economy, Now and Later.  


“If you’re an American company that has its European headquarters in London, do you keep calm and carry on (see illustration below)? Or do you start checking out real estate in Frankfurt or Dublin or some other place where the relationship with the E.U. is more settled? If you run a British company thinking of building a new factory, do you start to entertain the same question?


The decision (to leave) comes at an uncomfortable time. The world’s central banks, normally the first responders in times of economic distress, are poorly positioned to help. Those banks have signaled that they are ready to act, with statements from the Bank of England, the European Central Bank and the Federal Reserve promptly dispatched Friday morning.


And it is looking as if the Fed is leaning toward easier money in the wake of Brexit. Futures markets priced in a 50 percent chance of a Fed interest rate hike Thursday, but that fell to 14 percent Friday after the news, along with a 12 percent chance of an interest-rate cut this year.”


Postcard featuring a World War II slogan for sale in London.

Credit Leon Neal/Agence France-Presse — Getty Images


Former UK PM Tony Blair wrote in a NY Times op-ed: 


“The immediate impact of the Brexit vote is economic. The fallout has been as swift as it was predictable. At one point on Friday, the pound hit a 30-year low against the dollar, and a leading British stock index had dropped more than 8 percent. The nation’s credit rating is under threat.


The lasting effect, however, may be political, and with global implications. If the economic shocks continue, then the British experiment will serve as a warning. But if they abate, then populist movements in other countries will gain momentum.”


Here's what Citi Velocity had to say (via two emails to subscribers):


·      The UK vote to leave the EU has caused markets to sell off and has raised uncertainty about the longer-run status of the UK and the EU.

·      For now, it appears that there are no serious market dislocations, and the volatility in bond and equity markets remain below the levels that caused the Fed to pause in the past.

·      The (narrow) dollar index has appreciated, but to levels of a week ago, which also describes the path of 10-year Treasury yields.

·      While we have often pointed to higher uncertainty dampening GDP growth, it is too early to conclude that our forecasts need to be revised down.

·      The very weak US May payrolls report challenged the view that a strong labor market would continue to support the “economic recovery.”

·      Consequently, September remains the most likely occasion for the Fed to raise rates. December (or even later) may become even more attractive alternatives, but it seems too early to declare that now.

·      Further analysis of the fallout from UK voters’ decision to leave the EU is likely to dominate the domestic data flow next week. We see little direct effect to the US economy, but increased uncertainty regarding economic and financial market outcomes may modestly reduce the pace of US growth this year. Brexit makes rate hike delays more likely and US rates markets are now pricing the potential for cuts in 2016.

·      While focus will remain on financial conditions and USD strength, domestic data still has the potential to move markets next week.


Also, could there be another referendum attempting to annul the results of 1st one?  The UK Telegraph reports that a petition calling for a second EU referendum has reached three million signatures, attracting the biggest surge of support Parliament’s website has ever seen.


Victor:  The Brexit Surprise-Vote to "Leave" and Markets Reaction:


First, a big congratulation to the people of the UK for the courage to make the decision to "leave" the EU. They have my utmost respect and admiration.  The vote came in the face of the craziest propaganda imaginable. This included:



Most of the UK press, especially the BBC, engaged in this daily barrage of Brexit warnings. Yet the people (mostly those over 45) voted to leave the EU.


Let's look at the assumptions the markets made just before the UK referendum and the price action the next day. At the end of the US trading day on Thursday, June 23rd:

-->It seemed like a guaranteed victory for the "stay in the EU" camp and the equity Bulls?


The British Pound (BP) traded at it's high of 150.021 per US$ at 6:40pm Eastern Daylight time on June 23rd. Astonishingly, at 12:20am on June 24th (less than six hours later) the pound traded at 132:28! That was a multi decade low for the BP to US$ exchange rate.  You have to go back to the 1985 "Plaza Accord" to find a lower exchange rate to the dollar.


Note on US $: In July 1980 (a few months before Ronald Reagan became President), the US $ index was at a low in of 84.65.  In Feb. 1985, the US$ index hit an all-time high of 158.43.  Sept US $ Futures closed Friday, June 24th at 95.68.


The equity markets around the world sold off by various amounts.  For example, IBEX (Spain) -12.4%; CAC (France) -8.04%; Nikkei (Japan) -7.9%; DAX (Germany) -6.8%; S&P 500 (US) -4.1%; and (MOST INTERESTING) the UK FTSE fell ONLY -3.2%! 


While the UK stock market did the best (i.e. smallest loss on the day), Spain and France were the worst. They are high on the list, among other countries, to ask for a referendum vote to remain in the EU.  About six countries are not happy with being in the EU as per the people (via polls) expressing a desire to leave.


So what occurred? The bookies had fewer, but bigger bettors to "remain." The smaller, but more numerous "leave" bettors, did not reflect the odds, but far outnumbered the remain big bettors. Although they did not show up in "the odds" they we're far more important to the end result.                                                     


Also, the polls did not accurately represent the UK voters, as the breakdown of where the votes were, and the turnout were important factors.


London (big government) voted to remain by a 60-40 margin.  Many eligible voters did not turn out due to heavy rains.  The smaller suburban counties, which represented angry workers whose jobs were taken or threatened by immigrants/refugees, had far heavier voting participation.  That did not show up in the polls and proved to be a "tale of woe" for the "remain" pro-government backers.


An incredible statistic: According to UK Lord Christopher Monckton in an interview:


In the last two decades (or 19.5 years from 12/31/96 to 6/24/16) of being in the EU, the FTSE earned the lowest return for any 20-year period -a compounded return of only 2.07%.  Specifically, the last 20 years produced the lowest return for the FTSE in 650 years!  Clearly, the EU has not been good for UK equity investors by any standard!


Yet the last 20 years was a great period for virtually all stock markets worldwide.  For perspective, the S&P 500 earned 3.11% compounded in the worst 20-year period in the US, but that was during the depression years included in the two decades from 1929-1948. 

Victor's Bottom Line and Some Ideas:


What is being answered by most analysts when asked what to expect is "UNCERTAINTY" or "we don't know."  What a useless answer!  "Uncertainty" always exists, more or less. Perhaps there's more of it now?


The 27 other countries in the EU are the ones to worry about, not the UK.  France, the Netherlands, Austria, Finland and Hungary could all follow Britain out of the European Union in a rash of anti-Brussels rebellions, according to a paper prepared by the German finance ministry. More countries could follow UK out of the EU, says the German finance ministry, as European leaders warn radical reform is needed.


Charlie Gasparino, a well-known Fox Business reporter in London to cover Brexit, said "UK sovereignty is being hijacked by the EU and they get less than what they put in.”  


In my view the EU will end-I can't say when-but the concept of the EU (as a “socialist dictatorship) can't survive. The EU's system of government has never succeeded and never will. It will die and that is not "uncertain." When is another matter?


In the Conclusions section of the earlier referenced CURMUDGEON post on Brexit and a Possible EU Breakup, I wrote:


"This brings us to the end game! If the UK leaves it will cause the beginning of the end of the Euro currency and the EU. That in turn would cause Europe to go into recession, then leading to a possible depression...."


The next country to have a referendum vote to leave the EU, and wins, will cause the Euro to trade below 105, then down to par with the US$.  The current price is 111.33 as per the Sept Euro futures. France is the big vote to stay or leave the EU, but such a referendum will not likely take place until next year. My guess is the Netherlands will be next.


Victor's Market Calls:


The UK vote to "leave" and the potential breakup of the EU are uncontrollable events which the Fed can't do anything to help the markets.  As we've discussed several times, an uncontrollable event(s) would drive equity markets down.  That certainly was the case on Friday June 24th!



Victor's Conclusions:


To close, permit me quote a person who "rarely" had profound words to say and is in the running as the worst President in US history -Woodrow Wilson:


"Liberty has never come from Government. Liberty has always come from the subjects of it. The history of liberty is a history of limitations of governmental power, not the increase of it."                                                                                                                                          


[Too bad Wilson never lived by this thought.  He created the FED, the XVI Amendment, Prohibition and brought the US into WW I.]


The people of the UK have voted to "leave" the EU so as not to be subject to the increased power made by the bureaucrats of Brussels.

Good luck and till next time...

The Curmudgeon


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.

Copyright © 2016 by the Curmudgeon and Marc Sexton. All rights reserved.

Readers are PROHIBITED from duplicating, copying, or reproducing article(s) written by The Curmudgeon and Victor Sperandeo without providing the URL of the original posted article(s).