It has been more than two weeks since the historic Brexit referendum in the UK, a surprise to all and a torpedo in the hull of financial markets the world over. We are now officially “Post Brexit”, and, no, that is not a new fiber cereal that will lower your cholesterol and keep you alive until the next EU-exit referendum. The outcome of the vote, 52% for leaving versus 48% for staying, is no longer in doubt, but the uncertainty of what happens next and what consequences may surely come is overarching.
There seems to have been more articles written over the past few weeks about the implications of a Brexit than were ever written before the event took place. Google woke up, after the ballots were counted, and was inundated with searches by concerned Brits with such questions as “What is the EU?” and “What does it mean to leave the EU?” Seems a little late to be asking these questions, but never underestimate the ignorance of voters appearing at the ballot box. Few are ever as informed as they should or need to be. God save the Queen and democracy, too!
Social media soon came alive, as well, sporting such hashtags as “#BREGRET” and “#REGREXIT”, which soon rose to astronomic heights of popularity as Twitter-based conversations. Unfortunately, there was no “morning-after” pill that would roll back the clock and permit a “re-do”. This hangover was real and would last for years, if pundits were anywhere near correct. Perhaps, the best insight of the road ahead was put forth by a London cab driver: “I might as well light myself on fire, because it would be less painful than the slow death my business will suffer as a result of the vote.”
What were a few of the immediate reactions to the surprise Brexit outcome?
After several months of debate, one political assassination, an electorate divided right down the middle, and an emotion packed night of counting votes, one could expect a bit of an emotional let down, no matter what the result. Such is life. Rampant enthusiasm, unfortunately, is often followed by overpowering disillusionment, and, in the case of Brexit, the morning after champagne corks had popped in many an establishment was greeted more appropriately with a plea of, “Oh my God! What have we done?”
How you might have felt depended on what your individual perspective might have been. If you were embedded in the UK tourist industry, then your phones were already ringing off the hooks, as Canadians planned their next holiday vacation. The Pound was literally pounded in the foreign exchange market, losing nearly15% in value. It had nestled in at 1.33, just above the psychological support level of 1.30. It has also been testing 1.25, but in any event, you would have to go back to 1985 to find a lower valuation in the annals of history. The proud Pound Sterling was taken down a notch, so to speak.
On other fronts, if you were an expat in London and paid in U.S. Dollars, you suddenly received a nice little raise. If you were abroad and imported English products or medicines, you suddenly received a nice little discount. But, if you were an investor and guessed correctly, then you could have made a tidy little 10% return on your UK stock portfolio, a bit better than with the S&P 500, as the following graphic illustrates:
Granted, you would have needed to be fleet of foot, buying only on the dips, to profit in this manner from UK stock positions, the “Blue” line in the above chart. The S&P 500, an accepted proxy for the global stock market, was sluggish, at best, suspecting that the financial ramifications had been underestimated. The big winners and losers, however, were in forex. A $1,000 short position in the “GBP/USD” currency pair, leveraged at “100:1”, would have yielded roughly a $15,000 return, a nice day’s work to be sure.
The foreign exchange market, however, is a two-way street. If someone profited by $15,000 on one end of a transaction, then someone else either lost the same amount or had to pay higher costs for whatever product was being traded on the international scene. Brits will not be jumping on the next plane to the States or buying Kansas City steaks over the Internet anytime soon. In fact, many analysts are predicting that the Pound could approach parity with the greenback, if trade negotiations do not go favorably in discussions with EU officials, a likely outcome.
What efforts are ongoing to roll back the Brexit vote?
While the supporters for “Leaving” were still celebrating their victory, opposing forces were hard at work developing legal gambits to reverse the tide of public opinion. These efforts were met with outrage with comments like, “A decisive 52-48 win for Leave in the referendum means a divorce must happen. Anything less would be a slap in the face of democracy.” Even David Cameron in his resignation speech admitted that, “The will of the British people is an instruction that must be delivered.”
But others are not so sure. Here is a brief recap of scenarios offered up by the quickly burgeoning “Regrexit” camp:
• Article 50 of the Lisbon Treaty, effectively the EU’s constitution, has never been invoked before. The House of Lords published a report in May that described how this article might play out, having consulted legal experts for their astute opinions. Derrick Wyatt, one of the professors involved in the study, remarked, “In law, the UK could change its mind before withdrawal from the EU and decide to stay in after all.”
• The Brexit referendum is only a public opinion assessment. It is not “legally binding”, as a few Members of Parliament have stated. These members believe that another debate and a final vote by Parliament on the issue is required before Article 50 can ever be triggered;
• Other opponents have noted that the rules for a binding referendum note that, if 75% of the electorate does not show up at the ballot box and the vote for the referendum is not greater than 60%, then a new referendum must be undertaken, before it can be binding. For the record, the voter turnout was 71% and the affirmative vote hit 52%;
• Based on the previous thinking, a petition circulated about the populace to call for a “do-over” referendum. By Sunday following the “Leave” vote, 3.3 million signatures were already on the petition;
• There is one other point to consider. As one pundit noted, “Under the United Kingdom’s complex arrangements to devolve some powers to Scotland, Wales and Northern Ireland, legislation generated in London to set off an EU divorce would have to gain consent from the three devolved parliaments, according to a report by the House of Lords’ European Union Committee.” Each of these areas voted to stay in the EU by wide margins exceeding 60%, and Scottish First Minister Nicola Sturgeon has already vowed to the press that she would use her powers to veto any motion to exit, if one actually materialized. Scotland, however, may hold another referendum on Scottish independence from the UK, a position described as “highly likely.”
Will any of these efforts gain traction and negate the vote to leave the EU? We may have to wait for the bookies to place odds on each one to answer that question, but the bookies got it wrong on the Brexit vote, so, at the end of the day, uncertainty reigns supreme. Each day reveals a little bit more, but meaningful momentum is yet to be had.
What about the powers that be in the European Union?
European officials have a say in these proceedings, as well, and many are already speaking out. As is normally the case for the EU, however, there is never a consensus. Germans have one opinion, the French, another. Some would like the negotiations to begin in haste, while others want more caution. Officials expect to make an example of the UK in order to thwart any other populist notions to leave the EU.
Such movements are already gaining momentum across the continent. The Brexit vote only served to pour gasoline on these burning embers, as one analyst noted, “The British people have rejected the arrogant rule of the EU superstate and the tyranny of its unelected courts, commissions and bureaucratic overlords. Brexit is now a contagious political disease. In response to Friday’s history-shaking event, determined campaigns for Frexit, Spexit, NExit, Grexit, Italxit, Hungexit and more centrifugal political emissions will next follow.” Many parties are suggesting that the EU’s very survival is at stake.
The first salvo fired back across the channel over the weekend was that the first deal breaker for any new trade treaty is that, if the UK wants free trade status, then UK borders must be open for the free pass of citizens and immigrants. This position is in stark contrast to the expressed desires of many British voters. They supposedly were irate over the loss of jobs brought about by immigration issues and wanted more freedom from the bureaucratic ways of the European cabal. Are EU officials moving with force to penalize British voters for what they have done?
George Soros, a pioneer of the hedge-fund industry and the billionaire trader that is known for shorting the Pound in 1992 and making over £1 billion in the process, is advising EU officials to take a step back. He is actually a supporter of the European Union and believes that the Brexit referendum was a wake up call for the EU: “European leaders should recognise their own mistakes and acknowledge the democratic deficit in the current institutional arrangements. Rather than treating Brexit as the negotiation of a divorce, they should seize the opportunity to reinvent the EU – making it the kind of club that the UK and others at risk of exit want to join.”
History warns us that when bureaucrats feel threatened, they tend to withdraw into their caves and resort to internecine behavior. In this case, their initial defensive tactics appear designed to punish the Brits and ignore “their legitimate concerns about the deficiencies of the Union.” Soros proposes a broader plan that redefines the EU ruling infrastructure, puts the EU’s immense credit to good use, and revises the current plans for dealing with the refugee crisis.
Will “Regrexit” gain more momentum and reverse the UK vote to leave the EU? Will the EU begin to disintegrate before our very eyes? Stay tuned! This play has many more dramatic acts to follow.