On Friday, the UK decided to not only screw itself over, but also everyone else by voting themselves out of the EU. As a result a record $2.1 TRILLION of market value evaporated in a single day. It was the single largest equity rout in history, eclipsing even the day that Lehman Brothers collapsed.
The effect on those living in the UK was almost immediate. The Pound Sterling experienced its largest one-day drop in recorded history (with no bottom in sight), immediately making everyone in the country 7% poorer. 100,000 jobs are estimated to go poof, as banks move positions out of the City (their version of Wall Street), and into more stable EU countries like Germany and France. The housing market has already frozen up, as panicked buyers are running for the perfectly manicured rolling British hills. And bankers are now saying a recession in the UK is a “near certainty.”
Here’s why all this will ultimately end up saving the UK.
First of all, let me say that as much fun as the news has been, I’m not planning on doing any trading at all during this crisis. If markets continue to plummet to a point that my asset allocations go out of whack, I may rebalance but that’s it. This is not the end of the world, and as long as nobody nukes anyone else, all this is just noise in humanity’s near-continuous march towards prosperity. Things will work themselves out eventually.
But I do think that things will work themselves out a lot sooner than people think, and that ultimately despite the referendum, Brexit won’t actually come to pass.
That’s a bold statement, I know, especially in the face of the hundreds of pundits, reporters, and politicians running around like their hair’s on fire. Why would I, some lowly blogger, think that I know better?
Because there’s one major distinction between this crisis and every other crisis that everyone seems to be missing for some reason.
In nearly every other crisis, the pattern goes: Something bad happens, then there’s a long painful aftermath. For example, Russia invades the Ukraine, and the Ukrainian economy falls apart. Or Lehman Brothers collapses, sparking a recession.
In all of those cases, once the painful repercussions start getting felt, it’s too late to reverse the thing that caused it.
Brexit is different. People seem to think that the Brexit vote means that the UK is definitely leaving the EU. It doesn’t. It’s not even legally binding. It’s simply a message from the voting public to their elected officials. The actual event that causes the UK to leave the EU is the UK PM triggering what’s called Article 50 in the Lisbon Treaty that governs the EU. Outgoing PM David Cameron, the defacto leader of the Stay campaign, has resigned, and, disgusted with the result of the referendum, has left it to his successor to actually trigger the UK’s exit.
Why is this important? Because people are feeling the misery NOW, before the eject button has actually been pushed.
It will take 3-6 months before Cameron’s successor is known. And in that time, the entire population of the UK will be feeling the hurt. 3-6 months of job losses and a plunging stock market would make anyone rethink their decision. There’s already a growing body of anecdotal evidence that the Leave voters didn’t fully understand just what in the Hell they were doing, considering that the two most searched terms in Google following the Brexit vote in the UK were “What does it mean to leave the EU?” and “What is the EU?”
And if that wasn’t enough, the UK is now facing the unprecedented possibility of their own country breaking up for good. While large swaths of the English countryside and Wales voted to leave, London (and surrounding cities), Scotland, and Northern Ireland voted to stay. Now faced with the prospect of being involuntarily dragged out of the EU, Scotland is now threatening to secede, and Northern Ireland is now threatening to split as well and join the Rebulic of Ireland. Even the city of LONDON wants to jump ship and become its own independent city-state.
If you think about it, that’s fucking INSANE.
Not even HITLER could screw over the UK that badly, and here the UK just up and did it to themselves. If Brexit actually goes through and all these secession efforts succeed, the once-mighty British Empire will be reduced to an area roughly the size of my desk.
So whenever the new leader takes over the government, they will be faced with the choice of pushing a big red button that he knows will destroy his own country, while his citizens, his fellow lawmakers, and ghosts of every British monarch past will be screaming at him not to do it. And at that point, he (or she) will likely be scrambling for political cover NOT to do it.
There are already clues as to how this will pass. Already, there signs that the MPs at Westminster, who overwhelmingly support staying with the EU may block any legislation on Brexit. And the Liberal Democrats are preparing to frame the next general election as a 2nd referendum on Brexit (which would happen in the likely event that a non-confidence vote brings down the current Tory majority).
So despite all the news articles out there declaring that Brexit was pretty much a done deal, I don’t actually think it is. The British people will go through an intense period of short-term economic pain, and I think that will cause enough Leave voters who didn’t actually know what they were voting for to switch sides.
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