26 Jun Life Is Like A Box Of Chocolates

“My Mama always said, ‘Life was like a box of chocolates. You never know what you’re gonna get.’”

David Cameron may have well thought that he was Forrest Gump reincarnated. In a bid to stave off parts of his own party from defecting he pushed as part of his election mandate in 2015 that all UK citizens would have the ability to vote on Brexit. Well he knows what he has got now – UK to leave the EU (and the EU have politely told them to POQ ASAP) & he has resigned as Leader of the Conservatives

“Mama always had a way of explaining things so I could understand them.”

Now the typical “Doom & Gloom” proponents are talking plunging markets, recession in Britain/World, the disintegration of the EU, etc. etc. The UK stock market whilst falling 3% on Friday was actually up 1% for the week. In terms of crisis the immediate response is typical, share markets fall & money ploughs into the $US Dollar – this happened again on Friday. Just look the $AUD rose against the Pound & fell against the $USD Friday.

Nobody however likes uncertainty or instability, especially investment markets. You can expect markets to continue to jump around the place in the short term whilst the implications are considered. You will see many “expert” opinions over the coming days, weeks & months the majority of which will be totally wrong.

It’s true that the UK pound has fallen by a lot compared with normal daily fluctuations. In terms of past events the fall isn’t that big – in fact, it’s not that big when compared with other falls in Britain’s history. The pound fell by 25% during Britain’s exit from the Exchange Rate Mechanism in 1992 & by 33% during the 1970’s crisis (compared to around 10% on Friday). Remember when Keating was announced as the world’s greatest Treasurer after floating the Australian dollar in the mid 1980’s. Since then our dollar has traded anywhere from 48 cents through to $1.10 against the $USD.

Britain is also a country that borrows in its own currency and won’t be subject to a crisis due to it’s currency falling – that is, it’s not like Argentina (or more recently Venezuala), where the fall in the peso (which was pegged to the $US dollar) caused mayhem for consumers & businesses alike who had borrowed in $US dollars (similar to Australians in the late 1980’s who borrowed in Swiss francs on an unhedged basis). If you were worried that fears that Brexit would cause money to leave the UK and drive up interest rates, well, Brexit – if anything is likely to have the opposite effect. A fall in currency will also help British exports.

“Stupid Is As Stupid Does”

The vote was really along class, age & locality distinctions. Those who have voted to stay had: –

• Generally higher levels of education
• Lived in capitals or large urban areas i.e. London
• Were young & liked mobility in jobs and areas to live

As an example here is a breakdown of the different age groups & those who voted (the “donkey votes” have been excluded)

Age Group  Median Age  Remain   Leave   Life Expectancy      Average Number Years Have to Live With Decision
18-24                 21             64%        24%              90                                               69
25-49                 37             45%        39%              89                                               52
50-64                 57             35%        49%              88                                               31
65+                    73             33%        58%              89                                               16

“My Mama always said you’ve got to put the past behind you before you can move on.”

The “leave” decision is about much more than a small majority of voters refusing to follow their political leaders. It should be seen as a notable rejection of the political and business elites, as well as “expert opinion”. The public felt alienated by the establishment, angry about lack of control over immigration and resentful of the EU in that the governance of the European Union in some way lacks democratic legitimacy (i.e. the Brits don’t like being told what to do by the Europeans)

It also points out the divides between areas and classes of people that can occur following a period of low economic growth, especially growth that has benefited some groups more than others (Does anybody recognize this in our current political climate whereby “fairness” is the trade mark for every political decision taken). As is now typical in many political arguments (Jobs & Growth vs Save Medicare/Hospitals/Education), the Brexit referendum decision ended up boiling down to a gross oversimplification – one that pitted economic wellbeing versus regaining control over immigration. For the older generations it turns back the clock prior to the UK having been a member of the EU and having to take instructions from the Europeans

Forrest: What’s my destiny, Mama?
Mrs. Gump: You’re gonna have to figure that out for yourself.

This puts the UK in the same position as Australia in future. A sovereign nation in it’s own right who can control it’s own borders and have to negotiate free trade agreements. It is highly probable that a favourable trade agreement would be reached after Brexit as there are advantages for both sides in continuing a close commercial arrangement. But the worst-case scenario, in which Britain faces tariffs under ‘most-favoured nation’ rules, is certainly no disaster. Exporters would face some additional costs, such as complying with the EU’s rules of origin, if they were outside the single market. However, these factors would be an inconvenience rather than a major barrier to trade.

Financial services have more to lose immediately than most other sectors of the economy. London (The City) is seen as one the world’s major finance capitals and this is unlikely to change any time soon. Even in the best case, in which passporting rights were preserved (which would sound the simplest option to me given the flow of people into & out of the UK), the UK would still lose influence over the single market’s rules. The City would probably be hurt in the short term, but it would not spell disaster. The City’s competitive advantage is founded on more than just unfettered access to the single market. An EU exit would however enable the UK to do trade deals direct with emerging markets (same as we do now) that could be extremely beneficial for the financial services sector in the long run.

Concerns about a drying up of foreign direct investment if Britain votes to leave the European Union are somewhat overblown. Access to the single market is not the only reason that firms invest in Britain. Other advantages to investing in the UK is that foreign firms continue to want a foothold in the country. It is likely Britain would remain a haven for foreign direct investment flows even if it was outside of the EU (just check house prices in inner London suburbs like Mayfair or Knightsbridge as an example of flow of foreign monies – Chinese monies have been pouring in here the same as Sydney, Vancouver & Manhattan). Of course, we could see a period of weak foreign direct investment inflows as the UK’s new relationship is renegotiated. London is however an international destination city and the $$ will return from Middle Eastern, Chinese & Europeans in due course which would probably recoup this lost ground over time.

“Mama always said, dying was a part of life. I sure wish it wasn’t.”

So is the end of the world as we know it – I hardly think so. On Saturday when I was out and about I can tell you that both JB Hifi & OfficeWorks were full of people shopping. This morning Silvia & I went to the Adelaide Farmers Markets at Wayville when it opened at 9 and then had brunch afterwards at Duthy Street Deli (both highly recommended by the way). I can tell you both places were packed & no sign of anybody panicking over Brexit. I can imagine this scene being repeated time and time again around the globe today.

Footnote – There was a man of Scottish descent sitting at the table next to us at brunch with his nephew (who also carries an EU passport) who overheard Silvia & I discussing Brexit. He remarked to us that he wasn’t concerned by it & his nephew was more worried about having to get in the passport line with the rest of us Plebs, rather than the EU fast queue (the old vested interest). I told them both there was a simple solution for the Scots – Rebuild Hadrian’s Wall !!!!

Footnote Part 2 – If I had a vote I would have voted to Remain. I can’t see the benefits of exiting the EU to only renegotiate free trade agreements. In light of the present position of people leaving war torn countries & crossing the Mediterranean to enter Europe, some of these will end up in the UK whether they like it or not (same way as we take in refugees each year on a humanitarian basis). It’s not like the UK is only made up on white Anglo-Saxon persons & are all educated at Oxford or Cambridge. Those people who wish for the old days or protectionism are also in for a rude shock as the exit from the EU will not do anything to stop Globalisation, Robotics, Artificial Intelligence, Driver Less cars, etc. entering into our world in the not too distant future. Our Politicians should take note and think about this subject too.