Ron Rowland

About the Author Ron Rowland

Ron Rowland has been providing market commentary and active investment advice since 1991. He is the founder and editor of Invest With An Edge, a website and weekly newsletter providing free actionable ideas for ETFs, stocks, and mutual funds. Additionally, he is the Executive Editor and Publisher of the All Star Fund Trader newsletter (http://allstarinvestor.com), a highly regarded paid subscription investment service he started in 1991. Ron is also president and founder of Capital Cities Asset Management, a registered investment advisor providing separate account management and investment research for individual investors as well as other advisors and institutions. Outside of CCAM, Ron serves on the Board of Directors for the National Association of Active Investment Managers (NAAIM) and is chairperson of the Active Fund Index committee.

Brexit Is Years Away and Might Not Be Bad


I am amazed at all the negative press surrounding the recent U.K. referendum vote in favor of leaving the European Union (“EU”).  Various observers, many of whom are unfamiliar with British politics, have apparently decided that this decision is a bad one.  However, since negotiations haven’t begun, or even been scheduled yet, the details and terms of the exit are completely unknown.  I am not an expert on British or European politics, but I do know that proclaiming the outcome as “bad” at this early juncture would be premature.

Markets reacted negatively to the vote for two reasons.  First, they were caught off guard because the polls leading up to the vote were in favor of the U.K. remaining in the EU.  Second, the EU has been a one-way street since its inception—many nations have been admitted over the years, but no country has ever left before.  This combination of a surprise referendum outcome and the uncertainty created by an unknown exit process caused global markets to pull back.  The media, and much of the public, seized upon this as an opportunity to panic.

The outcome was essentially a vote against the incessant march toward globalization.  The EU was on a path toward centralized government.  Brussels has been placing more and more requirements on member states while simultaneously restricting their independence.  The EU elite, the bankers and politicians controlling this grand experiment in global politics, recognized the vote for what it was and immediately retreated.  The founding member nations of the EU issued a press release stating they will “recognize different levels of ambition amongst member states when it comes to the project of European integration.”

Let that sink in for a while.  The EU elite threw in the towel.  They backed off their hard stance.  They capitulated.  The EU understands that it could crumble unless it softens its stance regarding its desire for complete uniformity across the Union.  The U.K. referendum was a populist victory and a defeat for the elite.  This trend has been building momentum around the world—spanning Europe, crossing the Middle East, and finding support here in the U.S. with the rise of political figures like Bernie Sanders and Donald Trump.  Populism is fast becoming the new global political force.

Despite what the media may lead you to believe, Brexit has not happened yet, and the U.K. is still part of the EU.  So far, there has only been a nonbinding referendum, and the British government is not required to take any action on any specific timetable.  Prime Minister Cameron has indicated he will honor the vote but not lead the country through the process.  Therefore, he tendered his resignation, although there is no clear path to identify and elect a successor that is in favor of separation.

Assuming this eventually gets resolved, nothing changes until the U.K. invokes Article 50 of the Lisbon Treaty.  Article 50 stipulates that a Member State of the EU must give official notification of its intention to withdraw.  Forming a new government and issuing the notification will not occur before the fourth quarter, and 2017 is a distinct possibility.

Once the U.K delivers its notification, the process calls for starting a two-year clock for the U.K. and European Council to negotiate the terms of the exit and obtain approval from the EU bloc.  This is key from a couple of perspectives: It reinforces the fact that the terms of the exit are currently unknown, and it establishes a multiyear timetable for negotiating those terms.  Implementation of the separation agreement is a completely different matter, and it could span many years, with a gradual phase in of provisions.  Therefore, we are probably looking at an implementation of currently unknown provisions that commences in 2019 and extends well into the next decade.

Despite the negative tone regarding the vote, independence is not necessarily a bad thing.  In fact, many of the people that seem to be upset by the result are probably fans of independence.  Here in the U.S., the 50 states want to keep various rights for themselves and not concede total control to the federal government.  For the U.S. to concede much of its independence to Brussels would be bad for the country and intolerable for its residents.  Therefore, why is it so hard to come to grips with the citizens of the U.K. wanting to regain their independence?

 

SPY, SPX, QQQ, IWM, VIXY, SQQQ VOO

 

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