Brexit from across the pond

Published 6.28.2016
This is the second in what will be an open-ended series for LWRAS regarding Britain's exit from Europe. This time the notes are made from US news sources. Before beginning, a brief summary analysis, based on readings from both sides of the pond.

• Brexit will happen. There are sore feelings on both sides of the Channel, but there is no going back.
• Nigel Farage is a pill, and the Brits will get what they deserve if they ever vote hm into any position of real power.
• Brexit lead for weeks in the polls and had both huge tabloids (Sun and Mail) supporting it. Those who claim that Brexit support was "hidden" from the elites and so portends the same kind of hidden Trump support are delusional. The polls in Britain did misread the strength of the late "Remain" surge after Jo Cross was killed, but overall polling correctly showed Brexit for months.
• Frexit, Nexit, etc are not a given after the vote. In fact, if anything the recent results in Spain (which voted after Brexit) suggests that calamity that followed Brexit might convince many voters that the status quo is safer. Even if that status quo isn't great.

US coverage of Brexit

The coverage in the US almost uniformly Brexit will occur, the only question is how.

Investors have begun and are expected to continue pulling their money out of England— but of course, others will see an opportunity and move in. And markets… tend to fluctuate. Drawing firm conclusions from market movement is a fool’s game.

A weaker pound will make it harder for Brits to travel, and imports will cost more, and as a small island, Brits import a lot. Mostly from Europe… but they need Europe at least as much as Europeans need them. This is the reality. But the pound may well recover. Especially if people come to think that Brexit might not actually happen.

The real issue for Britain is that it was the financial services capital for the EU. And that won’t hold. The EU will want their banking done within the Union, not without. Without a firm assurance about the form of future British participation, the financial services are likely migrate out. All that means is that jobs (and tax receipts) will migrate to other EU cities. Frankfurt and Dublin are most often mentioned.

That prospect is particularly troubling for London, an international financial center that trades on its close connections with markets around the world. In a report in April, consultancy PWC estimated that Brexit could lead to the loss of up to 100,000 additional jobs in country’s financial services sector by 2020. This is likely one reason why a greater proportion of Londoners opposed Brexit than people in other parts of England.

Pro-Brexit people say that lower regulation will make Britain a better place to do business— but that’s not guaranteed AND if they want to sell in Europe they will still have to meet EU standards— not British. The Tory Prima Minister (PM), assuming he is pro-Brexit, will face a hostile Parliament, which voted 75% for Remain.

Wall Street was "Bremain" because its banks have built huge presence in London, and now much of that will have to move.

From London, Wall Street has been able to sell its services across 28 nations without the headache of having to get regulatory approval from each individual country. The prospect of a more complex, and potentially costly, regulatory structure has some banking officials worried, analysts said. U.S. banks could move more than 10,000 employees out of London after Britain completes its exit from the European Union, according to Keefe, Bruyette & Woods, a boutique investment bank.

This explains why banking stocks got slaughtered on Friday. Goldman and JP Morgan in particular are going to feel the pinch — Citigroup too. The banks are already drawing up plans to move. Of course, the Brits could negotiate a way to keep its status, but that’s doubtful. London is a huge hub, that won’t change overnight. Brexit will take two years, and a lot of the details will take much longer. Two years from when Article 50 is invoked.

Jamie Dimon said the bank would stay in England and maintain a presence, but that some positions would need to move.

Dimon said earlier this month that Brexit could force the bank to relocate thousands of employees. "After a Brexit we cannot do it all here, and we will have to start planning for that. I don't know if it means a thousand jobs, 2,000 jobs. It could be as many as 4,000," he said from Bournemouth on the southern coast of England, according to the BBC.

Many have tried to apply Brexit “lessons” to the US election and Trump. Brexit was mostly about anti-immigrant sentiment. Yes, regulations are annoying, but absent the anti-immigrant sentiment, Brexit doesn’t pass. Basically, the message is don’t discount how angry people are. Feelings trump facts (pun intended).

The Labor Party is in open revolt, and Scotland’s First Minister is looking to push her Nationalistic vision for Scotland. The sense is that Britain has neither a functioning government nor opposition party at the moment. People have begun to say that the UK needs time to figure this out. Apparently there was not real plan for a Brexit.

Not all coverage is negative of course, some thinks that Brexit will be good for the auto industry. But the UK as the Mexico of Europe? Not sure that's what the workers voting for Brexit were hoping.

Other coverage in brief:

• Brexit screws British youth.
• The US economy will survive the Brexit.

  The British decision is expected to hit the U.S. economy in at least three key ways: It will strengthen the dollar, weigh on business confidence and tighten financial conditions. All of that will saddle American businesses and investors, particularly those with a strong presence abroad. American households, on the other hand, could see some benefit from cheaper imports and gas prices.

• Brexit is Maggie Thatcher's fault?
• China wins from Brexit because a unified Europe can’t even compete with China— the fractured Europe will be even less able to. And the Brits? A small island nation that might over time become even smaller if/when Scotland bolts. Of course, Unified Europe never really worked as planned because of Nationalism in each country. Working as a unit meant giving up some sovereignty, and nothing is more of an anathema to a nationalist than that. But the fact that Europe never truly was a unit (each country continued to compete against each other is partly why the Brits never completely joined, and now have left. The lack of common policy towards China never let Europe have the leverage it wanted… but Brexit only makes that worse— UNLESS the Brits were the impediment. In any event, Britain is now just a singular relatively small market. Yes they imported tons from the Europe so the tariffs can’f be too high, but I think its status as #5 economy in the world is going to slide.
• Nobody in Britain seems very happy. It’s seems that “project fear” wasn’t really, the Bremain side was closer to the reality than the Brexit side. Lehman Brothers is invoked, but then dismissed.

  This CEO and other senior bankers on Friday spent hours explaining to clients and their own employees why it isn’t. This is a political crisis, not a financial one, they promised. Capital markets are functioning just fine. Banks, as the U.S. Federal Reserve documented on Thursday, are much better funded than they were in 2008. There is no crashing mortgage market or subprime security trapdoor waiting to spring open and swallow the world. When you put Friday’s selling in context, it ranks very low on the list of worst days ever.

• Brexiteers are back peddling from their lies.

  Perhaps no promise was more audacious — and mendacious, critics say — than the £350-million-a-week claim. Boris Johnson, the former mayor of London who was the frontman of the Brexit campaign, toured Britain in a bus emblazoned with the slogan: “We send the E.U. £350 million a week, let’s fund our N.H.S. instead,” a reference to the country’s widely revered National Health Service.
  
  Hours after proclaiming “independence day” for Britain, Nigel Farage, the leader of the fiercely anti-European U.K. Independence Party, conceded that the £350 million figure was a “mistake.” Asked by the BBC on Sunday about the spending pledge, Iain Duncan Smith, a former Conservative Party leader who campaigned for Brexit, said the Leave side had merely promised “to spend the lion’s share of that money” on the health service.

• India’s economy will be affected too.

  Indian information technology companies like Infosys and Tata Consultancy Services -- which rely on Europe for perhaps 30 percent of their export revenue -- might now have to set up dual headquarters, in Britain and in Europe. For the kind of low-margin projects they typically take on, this sort of increase in costs is a serious problem. Existing contracts denominated in British pounds might have to be reworked in order to stay profitable, according to Indian IT industry lobby Nasscom.

  Brexit could force India to look beyond the UK for its focus. India is the 3rd largest source of foreign investment in the UK— India invests more there than in all the rest of Europe combined. On the other hand, Brexit could allow India to get better terms with the UK. European standards are higher— which is part of why Brexit became a thing.
• Rupert Murdoch’s Sun tabloid helped tip the balance to leave.
• Immigration was a driver, There is also anger at the top % who is doing so well when others are not, but absent immigration "Leave" capitalizing on people’s fear and prejudice to gain political advantage, Brexit fails.
• Germany doesn’t want to delay. Merkel agrees it should wait until the new PM is in place, but no longer. The Irish are hoping for a rethink, as Brexit threatens the Good Friday peace because hard borders will go up again.

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