In all my global wanderings, I’ve only been to London twice—during one of those visits, I didn’t even leave Heathrow. To say that I understand the inner psyche of the British is foolish, but I certainly would have voted in favor of Brexit. I would have voted this way, not because I’m uneducated, impoverished or racist. I certainly don’t feel disenfranchised. I would have voted for Brexit out of sheer personal self-interest. As I watch both leading UK parties disintegrate into internecine chaos, I feel even more confident that having one less layer of politicians and bureaucrats is a net positive for everyone.
Over the past week, a lot has been incorrectly written on this Brexit vote and how it will destroy UK economy along with the British Pound (GBP). I find that much of this content comes from those who depend on the EU for their own livelihoods. As I sift through endless studies, I have this continued head-scratching moment full of confusion and frustration. Why are all these studies coming from the same fools who have bound the EU into a straight-jacket of no growth and endless regulations? They know nothing about economics, so why are the big banks all quoting them. Brexit, simply put, is an existential threat to the Eurozone intelligentsia and their ability to continue their vapid lives paid for by the citizens of Europe. Why aren’t people willing to call it what it is? Peddling fear is the only recourse for those who have already lost the debate. Investors are now running around terrified of nothing.
At this year's SALT New York conference, Jean Hynes, the CEO of Wellington Management, took to the stage to discuss the role of active management in today's investment environment. Hynes succeeded Brendan Swords as the CEO of Wellington at the end of June after nearly 30 years at the firm. Wellington is one of the Read More
I tend to think that Brexit will be quite good for the UK economically. As the dust settles and the fear-mongering abates a bit, rational logic will prevail and this view will become more universal. Until then, fear, panic and forced sales will likely create one of the best opportunities this year to pick up bargains in well-positioned companies standing to benefit from the tail-wind caused by increased UK economic growth.
Let’s start with the obvious, less regulations makes your economy grow faster. Any time you reduce regulation, it’s a good thing. I don’t think anyone can dispute this. The UK is about to abandon a lot of silly rules. So what are the legitimate fears of Brexit?
Let’s start with trade. Right now, the UK is party to numerous treaties with the EU. Does anyone think that the UK will be excluded from future trade with the EU? The EU will make a big stink and likely make things tough on the UK at first, but that won’t last long. The UK imports more from the EU than it sells to the EU. Who would want to stop trade with a net-importer? What does the UK sell a lot of? Oil. If the EU doesn’t want that oil, it will get onto a tanker and go somewhere else that it’s welcomed. I can’t tell you how the new treaties will get re-drafted, but the UK will end up in a favored position in regards to trade. I’ve read a number of thoughtful articles that point to the UK’s rather large trade deficit—another legitimate concern—however, after a nearly 20% drop in the GBP against the Euro (EUR) in the past year, that will begin to self-correct.
The next fear is that the finance industry will leave London and seek out a new home. Let’s be serious here—London is the capital of European finance because finance goes where there’s liquidity. There is no other city in Europe that has the density of bankers, traders, brokers, insurers, etc. You cannot recreate London. Look at all of the Caribbean islands that have tried to become a finance hub for North America. Capital will always go where there’s liquidity and it’s treated best. With low taxes and the same common first language of all international trade, London will remain the finance hub of Europe—the same special position that it’s had for centuries.
The final fear was that after Brexit, there would be a period of forced liquidation by various pension funds, endowments and sovereign wealth funds, leading to a short-term decline in wealth amongst the elites of Europe. The EU may even punish the UK and create a crisis in order to threaten other wayward nations from leaving. This has now happened and it’s no longer a fear. The liquidations probably have yet to run their course, but the short-term self-interest of the 1% can’t dominate a country. Besides, the more that the EU scares people senseless, the better the bargains will become for everyone else. At some point in the future, this will all be forgotten—much like the reason for all the selling in the first place.
With that out of the way, I want to throw my first (of many) ideas out there. I want to be long GBP against the Euro. This spread has blown out by almost 20% in the past year—first on fears of Brexit and then the actual event. The panic in the GBP has overshot and the EUR has plenty of its own problems—from secession movements to plebiscites over EU membership, to the neutron bomb known as Deutsche Bank (DB: NYSE). Brexit almost guarantees that the EU as we know it will fail. Once one leaves, they all will. As the EUR continues its slow-motion implosion capital will continue to go somewhere (often nearby) for safety. Think of the tens of billions spent by the Danes and Swiss to stop their currencies from appreciating. Now think of the GBP which has a 3-month positive treasury carry of nearly 100 bps when compared to Germany and plenty of liquidity. Where do you think capital flees to during the next Eurozone Crisis?
Disclosure: Long GBP.EUR