Thursday, December 19, 2019

Why Brexit Will Be a Disaster

The party ain't over just yet, but that doesn't mean it will never end.

As I noted in my previous posting, there seems to be a lot of cheerleading articles out there saying the bull market is back and will continue through 2020.  I'm not sure how to parse these other than perhaps they are trying to bootstrap the market by getting people to believe that any recessionary fears are over.  That way, the authors of such articles can sell their stocks for a profit.   Bear in mind that right before any market crash, stock prices are at an all-time high (and often not justified by earnings).   The stock market is not the economy nor even an indication of the health of one.

But in addition to the factors I mentioned in my previous posting, are concerns about earnings.  FedEx is reporting disappointing earnings.  The railroad industry is in recession and CSX earnings are down.  Boeing, well, you know how that is going to play out.  I would be surprised if they make any money at all in 2019 or 2020, as profits for the first nine months are down 95% already.   Every day the 737MAX is grounded is millions of dollars in lost revenues.  And as the planes pile up, it could be 2021 or 2022 or longer for airlines to take delivery of this backlog of planes.

And of course, there are political dramas, such as impeachment, which doesn't directly affect stock prices or the economy, but affects consumer sentiment.  But one political drama will have dramatic effects on the economy, particularly in the UK, no matter how it plays out.

The article cited above argues that with the re-election of Boris Johnson (or more precisely, his party), fears of Brexit can now be put to rest.  However, if anything, Brexit is more uncertain than ever.  No deal has been reached with the EU and Johnson has a very short timeline to request yet another extension or end up with a hard Brexit.

Many people, including Johnson himself, seem to be under the delusion that the European Union will allow the UK an easy pass in these Brexit negotiations, even after years of disagreement on terms.  Of course, the UK was never really fully part of European Union, maintaining its own currency, the pound, as the Queen wasn't ready to forgo having her smiling face on their money.

The big selling point for Brexit that was pushed by the Brexiteers was that they no longer would have to take in Polish immigrants for the European Union.  It was pitched as a means of controlling borders, much as Trump has pushed his wall.  It was also a bit of racist pandering.

But if you look at it from the EU point of view, they cannot allow England to remain a quasi-part of the EU, with a duty-free trade zone, but without having to contribute to the EU's governing through taxes and contributions.  If they did, every other EU country would want a similar deal and threaten to bail out. The Brexiteers live under the fantasy that they can "negotiate" a heads-I-win-tails-you-lose quasi-membership in the EU that allows them to select from EU benefits, cafeteria-style.

Obviously, the EU will have to enact some sort of tariffs or other punishments to make it clear that if the UK doesn't want to be part of the EU, they cannot benefit from membership a la carte.  There is literally no benefit to the EU to allow the UK a "soft Brexit" or indeed anything very short of a hard Brexit.  In fact, the EU could benefit from a hard Brexit, as London might wane as a financial center in favor of European capitols.  Moreover, the consumer market in Britain, while large, certainly isn't so large that the rest of Europe can't afford to walk away from it.  Mercedes, BMW, and VW sell the bulk of their vehicles in the US and China.  People on the dole in the UK are not a big portion of their marketing plans.   Besides, one does tire of putting the steering wheel on the wrong side.

So, as I see it, there are two possible outcomes, neither of which are very good.  First, if we assume that Boris Johnson gets everything he wants and the EU allows the UK to maintain open borders for trade, but closed borders for immigration, the rest of the EU countries will demand similar privileges. Ironically, Poland might end up being one of the first, as they are chafing under criticism from other EU countries regarding their treatment of their Supreme Court and the rise of far-right politics.  But one by one, individual EU countries will see that Britain got a better deal than they did, by leaving, and they too, will want to get out of EU membership in favor of such a parallel agreement.

Vlad Putin will be so pleased.

The second, more likely outcome, is that Johnson is only able to negotiate something less than a free-trade zone and the resulting tariffs and backups at border crossings will hurt both the EU and UK economy.  Of course a third possible outcome is a hard Brexit, which would be even worse than the second, but not by much.

Of course, there are ancillary effects. Since Ireland has a huge unregulated border with Northern Ireland, it will create quite a path for smuggling, should tariffs be enacted.  And I suspect it will raise again the specter of a unified Ireland, as maybe even by this point, the unionists decide that one Ireland is better than a bifurcated one.  And of course, Scottish independence is on the menu as well - and no doubt Wales will want to dive in, too - as Welsh nationalism has been on the rise for some time now.  The "Queen of England" may find herself just that - sovereign of an increasingly smaller and smaller empire.   Poor Chuck may end up as King of London and little else - at which point maybe Brits will finally "chuck" the monarchy as an unafforable luxury - replacing the monarchs with animatronic robots manufactured by Disney.   Hard to tell the difference, stiff upper lip and all.

While the UK economy is not very large by world standards, the repercussions of such a Brexit recession could be felt worldwide.  London would no longer be a major financial center for the world, and the overall European Union would be weakened.  By itself, perhaps not enough to cause worldwide recession - but throw in all the other factors I mentioned in my previous posting, and it is icing on the cake.

Of course you have to ask yourself who would benefit from a weaker European Union.  As we know now, Russia did interfere with the Brexit non-binding resolution vote. No doubt Vladimir Putin is quite happy that Boris Johnson was re-elected and no doubt Russia probably played its ugly hand in this.

It is odd how the Internet affects the madness of crowds.  In India and China, internet service is interrupted when protests break out - not to "censor" opposition, but to dampen the flames of online outrages and pitchfork-and-torch movements, which can be aided and abetted by outside forces. Western countries, tied to ideas of "free expression" of ideas - even if those ideas are disinformation spread by a foreign government - are susceptible to manipulation.  Solving this problem, without resorting to suspension of the internet or actual censorship, will be essential for the survival of Western democracy.

Oh, right, I am just another one of those paranoids seeing a "Russian under every bed".   Hello, Vlad - like the dust-bunnies down there?  Of course there is Russian interference - and Chinese interference, and Iranian interference, and so on and so forth.   We know this because our government interferes with public opinion in other foreign countries and has been doing so for decades.  Anyone who argues that Russia - or anyone for that matter - are innocent actors is just being delusional, or perhaps is an exemplar of the problem themselves.

But the overall point is, the idea that we will avoid recession because of the re-election of Boris Johnson is kind of flawed. Brexit is far from a certainty and how it will play out is anyone's guess. There is probably less certainty today than there was a few weeks ago.

The idea that we should "back up the truck" and buy stock - any stock - is an idiotic idea in any market. Even during our record bull market of the last decade, there have been some real stinker stocks out there.  It is ludicrous investment advice in almost any scenario.  To argue that this is good investment advice based on Boris Johnson's re-election is five times as ludicrous.