Money and Markets: Investing Insights

Brexit a Real Threat: What to Do

Boris Schlossberg | Wednesday, June 15, 2016 at 4:30 pm

Market Roundup Dow 17,640.17 (-34.65) S&P 2,071.50 (-3.82) NASDAQ 4,834.93 (-8.62) 10-YR Yield 1.60% (-0.02) Gold $1,295.10 (+$8.50) Oil $47.86 (-$1.20)

He writes one of the 10 most popular blogs in the world. He is a professional comedian with the skills of a forensic accountant. And he predicted the Parmalat scandal – Europe’s equivalent of the American Enron debacle – months in advance of its unraveling.
The avowed Italian nationalist is a constant irritant to his country’s politicians, although he is one himself. He has been called the most dangerous man in Europe, with some critics accusing him of being the second coming of Benito Mussolini. And it’s probably a safe bet that you have no idea who he is.
Yet the name of Beppe Grillo – along with the better known anti-European Union voices like Marine Le Pen in France and the rising nationalist Norbert Hofer in Austria – is going to become much more familiar to Americans if Britain decides to leave the EU.

Reading the financial press, I am astounded by the complacency and sense of myopia that informs most opinion on the subject. The writings basically fall into two categories.
One set of analysts simply dismiss the prospect of Brexit as far-flung fantasy. They believe that when push comes to shove the Brits will do the right thing, vote their pocketbook and decide to remain in the EU.

Brexit: The beginning of the end for the EU?

The second camp of financial analysts makes the argument that even if the U.K. voted to leave the EU, it would really not be a big deal. After all, the country has its own currency, its capital markets are literally the center of the financial world. And as the second-biggest economy in the EU, Britain’s trade relationships will likely continue since the Europeans need the Brits as much as the Brits need European goods.
All of that is true if you simply view Brexit as an economic event. But that’s also woefully shortsighted.
Personally when it comes to predictions, I defer to professionals – the bookies, like the legal Internet betting exchange Betfair. And what the U.K. bookies are showing should send a shiver up the spine of the most sanguine of investors.
Betfair recently reported that the implied probability of a “Remain” vote is now only at 60%. That’s down from 72% just a week ago, and it suggests that even the pros are moving the odds of a Brexit way up.
If Brexit were to occur, it would provide the template for the unwinding of the current economic order – which has been responsible for the most prosperous and peaceful period on the European continent in all of its turbulent multi-thousand-year history. The exit of the U.K. would reverse the longstanding trend of economic integration and cooperation that has been the foundation of policy since World War II.
By leaving the EU, Britain would open the way for eurozone fracture. It will give oxygen to Mr. Grillo and Ms. Le Pen and Mr. Hofer to spread their nationalist message to a frustrated populace that will opt for more borders, more tariffs, more transactional friction and ultimately less growth.

“The global capital markets are becoming so unsettled as the referendum draws near.”

That’s why the global capital markets are becoming so unsettled as the June 23 referendum draws near. This is not a simple story of a proud island nation seeking its self-determination. This, in fact could be the end of Pax Americana as we know it, and I don’t really have to explain what will happen in Europe when every nation starts to seek its own destiny.
Little wonder then that George Soros has been shorting the markets. The man may be in his 80s, but as a keen student of history, he can spot a crisis from a mile away.
In the meantime, if you are holding stocks, it wouldn’t be a bad idea to protect them with put options. Or if you really want to speculate like a Texas wildcatter, you can always trade the GBP/JPY cross in the FX market, which is the poster-child currency pair for this trade. Just choose a side; if you are right, there is no doubt the returns will be there come June 24.
Happy trading,
Boris Schlossberg

Other Developments of the Day

Iran says it has reached a deal to buy passenger aircraft from Boeing Co. (BA). The announcement came from the Iranian minister of roads and urban development. He said details would be announced in the next few days. If the historic deal is in fact finalized, it would be the first major contract between a U.S. company and Iran since sanctions on the country were lifted earlier this year.
The purchase is part of Iran’s effort to modernize its aircraft fleet, one of the oldest and most dangerous in the world. The country is now in desperate need of hundreds of new aircraft. Other manufacturers are also looking to profit from the end of sanctions. The country’s flag carrier, Iran Air, has already announced a huge deal for 118 aircraft from Airbus for $27 billion.
Two years ago, Vice President Joe Biden likened LaGuardia Airport to a ”Third World country.” Yesterday, he attended a groundbreaking ceremony for a $4 billion redevelopment project for the New York-area facility. Biden joined Governor Andrew Cuomo to praise the overhaul of the airport. The revamp plan includes a new 35-gate central terminal, scheduled to be completed by the end of 2021. Also planned: ferry access and rail service to connect to the Long Island Rail Road commuter line. More than two-thirds of the cost will be paid by private financing and passenger fees.
In view of slumping energy prices, the oil and gas industry will cut $1 trillion from planned spending on exploration and development, Bloomberg reported, citing consultant Wood Mackenzie Ltd. Worldwide investment in the development of oil and gas resources from 2015 to 2020 will be down 22%, or $740 billion, from previous expectations. The deepest cuts will be in the U.S. Some $300 billion more will be eliminated from exploration spending. The cuts will mean that global output this year will be 3% lower than previous projections.
Feel free to share your views with your fellow readers. Add your comments below.
The Money and Markets team