In ten days, one of the most destabilizing events to hit global financial markets in modern times will play out in the United Kingdom. Voters will go to the polls to determine whether the UK should remain in the European Union, or secede and forge its own path.
A successful referendum, known as "Brexit," will either usher in a new Golden Age for Great Britain, or crash the economy into third-world status, depending on who you're talking to.
The truth: No one can predict what will happen, because nothing like this has ever happened before. There is no data to analyze the risk, so any conclusions of a risk assessment are totally based on guesswork. The only responsible option is to replace any data-free risk assessment with a survival-management plan.
What is the Brexit?
Officially named The EU Referendum, the ballot's text is simple and straightforward:
"Should the United Kingdom remain a member of the European Union, or leave the European Union?"
Remain a member of the European Union ( ) Leave the European Union ( )
However, this simple language hides a Pandora's Box of unanswered questions. These questions have radically different answers, depending on which side of the fence you're on. It's no wonder that, ten days before the election, 15% of voters remain undecided.
There exists an economic divide, in general, between Leave and Remain, with higher net worth people tending to agree with Remain, and lower net worth (or ideologically driven) people siding with Leave. This has given a whiff of class warfare to the campaign, with some Leavers reckoning that if the big bankers in The City are against leaving, then that is the best reason to leave.
What "Leave" Says
The "Leave" side has the most energetic followers, and plays to a sense of British exceptionalism and a distaste of being governed by unelected officials across the Channel in Brussels. Their opponents on the "Remain" side charged that the "Leavers" have a far too Pollyanna view of the EU's reaction to a Brexit.
The Leave side contends that the EU will still allow free trade between the UK and the Continent, similar to the arrangement between Brussels and the European Free Trade Association (Norway, Liechtenstein, Switzerland and Iceland).
A summary of their positions is:
The EU is bleeding Britain dry, to the tune of £350 million a week, which equates to nearly £20 billion a year. Vote Leave maintains that the UK has sent over a half-trillion pounds to Brussels since 1973.
Loss of sovereignty. Leavers claim that more than half the laws the UK is subjected to were written by unelected bureaucrats in Brussels, with no recourse. They claim these EU-mandated laws have cost British taxpayers £2.4 billion. Britain is regularly out-voted in the European Parliament when it objects to new laws. In fact, the Vote Leave movement warns that a new power grab from Brussels will occur if the UK referendum is defeated (there is some talk of bringing the EU nations into a tighter union, using Brexit as an excuse).
One of the hot spots in this election is the EU migrant crisis. Leavers claim EU Judges are using the Charter of Fundamental Rights to take away more power from the police and security services. They say that these migrants end up getting free health care and housing on the backs of working Britons, straining services to citizens. They also say that the UK is prevented from deporting known criminals under EU law.
The economy is another category that sees widely divergent forecasts. The Leave side says that renouncing EU membership will free British businesses from millions of pounds in EU red tape each year, yet the nation will be able to slide right in with a free trade deal with Brussels.
What "Remain" Says
If "Leave" appeals to Britons' hearts, "Remain" asks the population to be like Spock, and make an unemotional, safe choice for the status quo. Remain supporters tend to be more involved in the financial market or run large companies. Bankers, of course, are especially concerned that a Brexit would destroy the London financial sector, the largest in the world.
Remainers assert that the UK gets more from the EU than it pays to Brussels (£5.7 billion to be part of the Single Market, for a £91 billion impact on the British economy). They say that 3 million British jobs depend on membership in the EU.
Acknowledging that something needs to be done about the immigrant crisis, Remain reminds voters that open borders work both ways. Britons are free to work in any other EU country they wish, and buy vacation homes and retire abroad (Spain is a very popular vacation/retirement destination for Britons) with no extra taxes or restrictions.
A Brexit would have severe economic consequences, according to the Remain side and various government entities. The Bank of England has weighed in on the subject, saying the economic shock of a Brexit would drag the UK into a deep recession, and cause market turmoil all over the world. Economists warn that leaving the EU could savage the pound, making goods more expensive for working families.
Another concern is the large impact on British trade. Remainers claim that the UK will have to start from scratch in renegotiating trade treaties, including with the EU. In contrast to Leave's hearts-and-rainbows prediction of UK trade with the EU, leaders of other EU nations are expected to enact "punitive measures" against the UK, to dissuade any other nation of entertaining ideas of an "exit."
From the above, you can understand why some Leavers accuse the Remain side of scare tactics. For their part, Remainers say the Leave side is basing the results of a Brexit on wishful thinking and ignorance of the facts.
No One Knows What Will Happen
The truth is, no one knows what will happen. Nothing like this has ever happened before, so there is nothing to compare it to. The impact of a Brexit on the global economy is impossible to predict. There are just too many interconnected economic relationships that will be disrupted by a Brexit.
This means that any financial planner, analyst, or talking head on TV, is working in a "data-free" environment. In this situation, any calculations for avoiding risk, much less making money in the event of a Brexit, are by necessity guesswork.
One thing is certain. If the Brexit vote fails, the Leave side WILL try again, and again. In effect, this threat will hang over the global economy until something happens to permanently take the wind out of Leave's sails.
Ten Days And Counting: Time For A Survival Plan
Doing nothing before June 23nd is like standing still before a tsunami. Trying to juggle risk is akin to climbing a tree to avoid the water. To survive, you need to "head for the hills." That is, put yourself in the best possible position to make it through a worst-case scenario that you can't even predict.
John Nugée, former Chief Manager of Reserves at the Bank of England, examines courses of action for surviving Brexit in this month's "Gold Investor" from the World Gold Council. Mr. Nugée calls the results of a Brexit not only unknown, but unknowable. Since this is a binary event (leave or not) ordinary market tools that measure continuing events are useless:
Averages do not offer a useful guide to the outcome of a binary decision, and it is not enough to position a portfolio so that it ‘comes out ahead on average.’ Nor can the usual risk analysis techniques offer any guide, for the simple reason that there are no facts, no percentages, no risk factors and no predictions about the aftermath of the vote. In other words, it is impossible to predict what will happen after an event for which there is no precedent.
In the case of Brexit, Nugée recommends coming up with worst-case scenarios, no matter how unlikely, and asking "can my portfolio survive that?" Even if Brexit is avoided, the weak global economy, negative interest rates that fail to stimulate growth, and a flood of refugees spreading across Europe make for an economically disruptive environment. This leads to a forecast of a "mildly upward trend" for gold.
If Brexit comes to pass, global uncertainty will hit crisis levels, prompting a run on safe haven assets, including gold. The possible result of "a closer union" in the EU as a reaction to Brexit will accelerate the deflationary spiral, leading to more QE and more deeply negative interest rates from the European Central Bank. Conversely, the EU may find it impossible to hold back the fracturing of the Common Market as Euroskeptic parties across the continent gain power and stage their own "Exit." This would make the euro valueless in the worst case, or nearly so, depending on which nations remain. Nugée concludes:
"The important feature of this sort of analysis is that the investor does not have to forecast which outcome is the most likely or what will happen next – for an event such as the referendum this is an impossible and fruitless task. Rather, a survival analysis looks at all possible outcomes, and shows that whatever the outcome, an investment in gold is unlikely to underperform and in some scenarios might outperform strongly."
You have ten days.
The opinions and forecasts herein are provided solely for informational purposes, and should not be used or construed as an offer, solicitation, or recommendation to buy or sell any product.