British Flag

By Paul Schatz

Like Y2K, the second war in Iraq and other date certain events, the United Kingdom will vote on Thursday whether it wants to remain in the European Union (EU), otherwise known as BREXIT (BRitain EXIT). Unlike most geopolitical events which just happen, the BREXIT vote has been known about for some time as UK Prime Minister Cameron promised to hold this referendum if he won reelection in 2015.

What is the BREXIT & Why

Depending on who you ask, the reasons for staying or leaving are all over the place. However, I would speculate that less than half the people voting actually understand what they are voting for or against. And those with very strong convictions are the ones who probably have an axe to grind.

Personally, I don’t care what the British people decide. It’s their country and they should do whatever they want. I just laugh when people like Hillary Clinton, Barack Obama, Warren Buffet, Jamie Dimon and other Americans make these forceful arguments for staying. Or those like Donald Trump and Paul Ryan on the other side. When politicians and others from other nations opine on our affairs, we tell them to mind their own business. We should take our own advice and shut up.

Anyway, over the years, I have written about the flaws with the EU and euro currency. Flaws that some day would need to be addressed. It’s the “haves” and the “have nots”. Unlike the U.S. where the playing field among states is generally level, it is definitely not in Europe, especially on the fiscal front as we have seen over the past 7 years. If the EU and euro are to remain viable long-term, they have a lot of work to do.

Getting back to the BREXIT vote, nationalistic political parties throughout Europe have been surging as a result of the terrorist attacks and immigrant crisis and the UK is no different. Each side of the vote cites immigration as one reason to stay or leave with either closing the borders again or leaving them open.

Cost of EU membership is another black/white issue. In 2015, the UK paid north of $18 billion to be part of the EU and some argue that they received a fraction back in revenue. Trade is another huge issue as all EU members’ agreement are in accordance with EU law. Some argue that leaving the EU will allow the UK to renegotiate better deals while others don’t think it will get any better. Those in favor of exiting also cite loss of sovereignty as a reason to leave. They want the UK to make their own laws and regulations without having to answer to a high power.

The bottom line is that both sides are equally right to some extent.

Polls & Opinions

BREXIT has been a financial media obsession for months. More recently,it seems like any and every time stocks pull back, the media has “Breaking News” about the markets collapsing on an outcome to leave. Yet the few large rallies are attributed to opinion polls swinging back the other way. In the internet age, polls have definitely lost some of the value from the good ole telephone calls. We saw that really happen during the early primaries. I would put much more stake in how the bookmakers are viewing the vote as there is real money on the line.

While I don’t have a stake in this vote nor a strong opinion on what’s best, if I had to predict the outcome, I would go with the UK remaining in the EU, which flies directly in the face of my hatred of following the herd. It seems like more and more being interviewed are forecasting a BREXIT failure. Hmmmmm…

Does a BREXIT really matter?

If this was a one shot deal for one country, I don’t think it would matter at all. The problem is that it could have a domino effect around Europe as well as in the UK itself. If the UK votes to leave, it very well could bring up the issue of Scottish independence yet again, not to mention the potential for Northern Ireland to leave the UK. And those pale in comparison to potential exits by Greece, Portugal, Italy, Spain and France, in which case, the whole EU and euro begin to implode.

Let’s say there is a BREXIT. It doesn’t happen overnight. Rather, the EU and UK spend AT LEAST the next two years negotiating agreements on how an exit would take place. If the exit terms are too onerous or UK citizens have a change of heart, the UK could hold yet another referendum to overturn the one on the 23rd. Nothing is absolutely certain after this vote.

Markets Not Worried Which is Worrying

Global markets have been fairly calm and some would argue, complacent, about the vote. There doesn’t seem to be a high degree of stress in the system. I think the central banks and financial powers around the world have learned their lessons from previous missteps. There is an ocean of liquidity in the system now and my sense is that bankers are not going to let that change this month.

The doom and gloom has been very vocal lately with that quack, George Soros, forecasting a global meltdown and calamity on a vote to leave. He is not alone in “selling his book”. Markets have been on the comfortable side which puts me on guard for at least a short-term bout of weakness regardless of the outcome. As I have stated hundreds of times over the years, I don’t care as much about what the news actually is as much as I do about how the markets react.

If It’s Obvious, It’s Obviously Wrong

Early in the my career, the late Joe Granville taught me that if it’s obvious, it’s obviously wrong. Majority opinion regarding the BREXIT and market outcome is likely to be incorrect. As I discussed in this Media Interview last week, my thought process has been to go opposite whatever the markets did into the vote. If they rallied strongly, I thought we would see a decline after the vote. If they sold off into the vote, I thought they would bottom next week. Unfortunately, they haven’t done much on balance over the past week with a decline and then rally right back. Perhaps the best move right now is no move.

Regardless of the BREXIT vote, the naysaying pundits and doom and gloom crowd will get back to worrying about Donald Trump, the Fed, poor earnings, negative interest rates in Europe, China and the employment data before long. My investing theme remains unchanged. Until proven otherwise, weakness is a buying opportunity and new highs will be seen this year with Dow 20,000 on the way. The bull market ain’t over!