A View of Brexit from Chicago

A View of Brexit from Chicago

Our parent company, IG Group, asked if we at Nadex could report on the “US view” of Brexit. Which US view? Amused, bemused, panicked, opportunistic, ill-informed?

The Chicago skyline
The Chicago skyline

The short-term trader's view of Brexit is straightforward: there are short-selling and bargain-buying opportunities to be had. (Take them with binary options!) The longer view, which is just dawning, has to do with history and identity, something the US election has brought to the fore and which we all face.

The US, UK, and Europe all face the challenges and opportunities of globalization, ineffective monetary policy, and immigration, whether it’s Syrians fleeing war or Guatemalan children freeing drug gangs. Those problems haven’t gone away with the Leave vote. Now we just get to face them separately.  

The US stock market is delivering its short-term reaction, compounding the volatility of the end-of-Q2 rebalancing. It’s important not to assume that the price action driven by algorithms, programs, and technical factors is entirely or even mainly a macroeconomic verdict. It’s just trading.

True, US stocks took a dive after the vote, but not before the S&P 500 hit a new high. It fell to 2000, not a chance number. Technical analysts call it a Fibonacci retracement. Some just call it a buying opportunity. While US equities did lose their YTD gains, they’re likely to bounce back and may even benefit from uncertainty over UK and European stocks.

The pound, by contrast, hit new all-time lows and doesn’t look certain to bounce, even with the US dollar looking exhausted. What’s the difference? Britain also has a strong economy, low unemployment, all the things David Cameron recited to Parliament Monday. The difference is how stunned the UK government appears at, for example, the loss of EU funding to Wales and Scotland, which London will now have to take over or face the consequences. How is that a surprise?

The more obvious it becomes that even the “Leave” leaders like Boris Johnson had no plan for actually leaving, the more uncertain things look from this side of the pond. After all, we’re programmed by years of TV commercials to trust people with British accents to know what to do. Now I’m wondering if my cold medicine really is that effective.

As I write this, Standard & Poor’s (whose authority after 2008 is questionable but nevertheless real) has just downgraded the UK to a AA rating, same as Qatar and New Zealand and below the US and EU. Did no one see that coming?  

The American view may well be naive, shaped by World War II newsreels and both factual and romanticized notions. In the popular imagination, we paint the picture in broad strokes. It’s hard to reconcile the Britain that fought to save Europe with the one that voted (however narrowly or regretfully) to leave it.

After all, the EU idea began with Churchill’s call for a “United States of Europe.” We love when foreigners call for United States of things. In American history texts, that speech in 1946 is as seminal as Kennedy calling for a man on the moon. And now you’re leaving?

Which begs the question: why not a second referendum? Perhaps because America is the land of second chances, a do-over makes sense to many of us. Hearing David Cameron so quickly rule it out, when he started it by promising a referendum to get votes, makes us wonder what, if anything, is the guiding principle now.

And we need guiding principles in a world as uncertain as ours. I know, one of our two presidential candidates is far from a pillar of stability, but that’s our problem for now. Europe’s last crisis roiled global markets, then it was China’s turn. Somehow we didn’t expect Britain to add to it and bring the EU along for the bumpy ride. 

That’s not just the view of poorly-informed average Americans. It is on the minds of influential investors. The most famous pound bear of all, George Soros, didn’t bet against the sterling as he did in 1992, but he is saying gloomy things about the future of Europe and the UK. So are Alan Greenspan, Mohamed El-Erian, and others.

One possible upside, which maybe we can see better from over here, is that the EU now must rethink its austerity policy. Nor can it view immigration as a separate issue from inequality, either between or within member nations. Losing the UK must be a wake-up call, even as they call for Britain to hurry up and leave.

By the same token, the UK must face the fact that the “U” depends on greater equality between regions. If Scotland decides it can rejoin the EU as an independent state, it will.

As I write this, I’m watching Parliament. The PM’s questions have ended. Now, two MPs are discussing in florid language whether one may remain seated or not because of his back pain. And now they’ve moved on to the universality of back pain and declared that no one shall begrudge the honorable gentleman either sitting or standing as he sees fit. I would call it long-winded and pointless, except that it is more than our own Congress has done in a week.

He is carrying on despite his pain, discussing minutiae of incentive programs for the purchase of diesel cars. I wonder if it’s a metaphor for what’s ahead, a Britain in considerable, self-induced pain, but carrying on.

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