What the Forex Guys Know About Brexit That the Rest of Us Don’t

Some years back, we decided to move permanently to Europe. We purchased a home. We put the kids in school. My daughter started there at the age of four. We left New Zealand with no plans of return.

And that is what you need to do if you want to really know life in another place.

Did we leave because we didn’t like NZ? Not at all. We were comfortable in Auckland. Too comfortable. We needed to be stretched, irreversibly.

In hindsight, my father asked the best question: ‘Wouldn’t you be better off to try Australia or the US?’ He and my mother had lived in London for several years before I came along.

It took me two years to realise that the New World is new for good reason.

 

Could Brexit renew the UK?

Day to day, Britain can be a sad place. During my regular commutes to Gatwick Airport and the commuter line to London Victoria, I often had pause to wonder if the modern world had gone into reverse.

So much of life is controlled.

What do I mean? Well, bureaucracy seems to creep in and erode the freedoms that make life bright. Where I lived, there was a campaign to try and reduce the number of warning signs in public places. In one beauty spot, there were five large signs covering parking, littering, turning, dogs, removal of stones, and further signs at the children’s’ playground covering ‘stranger danger’.

There was a campaign afoot to reduce signage blight. No doubt, they will add another sign warning of that.

My wife taught at a fee-paying high school. The same culture was evident. As a result, low-level rebellion amongst the suffocated students made it a tortuous experience. In one instance, allowing a student to retrieve a dropped eraser from a ground-floor window resulted in a lengthy health and safety inquiry and review of CCTV.

Meanwhile, in the financial sector, I met advisers who were afraid to give advice due to compliance overkill. Older advisers wanted to leave the industry as soon as they could. Younger advisers spoke of advice sessions needing to be filmed.

The reality is the best financial advice you might give to many people in Britain with money would be to leave.

Inheritance tax, capital-gains tax, stamp duty, compliance overkill, and an array of other life-sapping state interventions drains the entrepreneurial spirit — let alone the ability for all but zero-sum contributors to generate wealth.

In such a system, it is the lawyers and regulators that prevail, gorging on the decaying bones ring-fenced by the government. Real innovators like James Dyson up sticks to Singapore.

We are facing the same slippery slope in New Zealand. Since returning, I noticed we are divesting our freedoms. Compliance has become a big industry. CGT is being recommended to reduce your property rights. And the old Kiwi assumptions that most people are honest, and that hard work and good investment has its rewards, are being chipped away.

 

Will Brexit help?

Amongst my finance colleagues, I was one of the few that thought Brexit was a good idea.

The reality is that, since the financial crisis, UK GDP per capita has been going backwards. The widely used measure of economic output per person put it at US$39,720 in 2017.

Meanwhile, New Zealand has surged ahead at US$42,940. Australia and the United States have also enjoyed an upward climb against the UK’s decline, with GDP per capita of $53,800 and $59,532 respectively.

The reality for Britain is that many of the overarching laws that pervade all areas of life stem from common EU rules.

Further, the EU has been a dead zone for growth. Last year, the US grew more than twice as fast as the EU (including Britain).

A Singapore-style Brexit could give the UK the shot in the arm it needs to turn back entrenched socialism and create a thriving and prosperous state.

It would be a painful change. The sort of change New Zealand went through with deregulation in the 1980s that transformed our economy.

 

Brexit and immigration

The big bugbear for the UK is a lack of control over borders.

In New Zealand and Australia, we get to choose who comes. We pick younger, wealthier, and experienced people from all over the world that can fill skill gaps. At times, governments have abused that to boost economic growth (while inflating a housing bubble), but the choice factor remains.

The US follows a similar approach and voted in 2016 for a builder president promising to secure its southern border, a process that the losing side now seems hell-bent on trying to delay. It is telling — you hear of no such problems with America’s longer northern borders.

Within the EU, the UK must share a free-movement border with many poorer countries — for example Bulgaria (GDP per capita $8,032), Romania ($10,814), and Croatia ($13,295).

When you have a few hundred thousand people crossing into the UK from the EU every year, you don’t have any remaining space to run a selective-migration programme seeking bright talent worldwide. Nor is there benefit to poorer EU states losing their more motivated citizenry to wealthier members.

London has benefited from EU migration. Property prices have been pushed ever upward. Businesses are able to employ from a vaster pool.

But for the bulk of people across the UK, there’s no real benefit, and in many cases, wages have been pulled down.

 

Watch the forex guys

If there’s one thing I’ve learnt from watching the markets for years, it is this: forex traders have a great handle of which way the market is really going.

A couple of things have happened with the pound.

During the worst of the Brexit fears, it never completely crashed. It’s got scarily soft, but it’s held a reasonable amount of value against the majors.

This is because the long-term prospect for the UK economy, despite Brexit — deal, no-deal, or a new referendum — is good.

Britain will benefit in the long run from establishing new economic freedoms.

Over the past few weeks, the pound has strengthened.

This is because the risk of Britain crashing out with no-deal is now looking like a very small chance. Goldman Sachs forecast that at only 10%, with the most likely scenario being a Brexit deal to leave the EU, albeit delayed.

The most likely scenario is that the pound will rise. Although there’ll be fluctuations, we’re likely going to see a long-term rising trend as the UK finds a new groove.

Although the prospect of a second referendum, which Jeremy Corbyn is backing, is probably also appealing to the market if the UK remains in the EU and uncertainty is erased — this appears less likely.

If somehow the UK overturned the leave vote, the UK’s ongoing role within the EU would remain in question. Any UK leader would face a divided country with many very angry constituencies. To remain in power, he or she would need to oppose much of the EU’s raison d’être.

The wisdom of crowds is undeniable. The bulk of British people without vested interests promulgated by the City of London want change. And millions of forex traders buying and selling the pound each day see potential upswing.

The upside with Britain is there’s room to move. The signs can come down. The red tape can be cut. Welfarism can be reined in. It would be a painful but worthwhile process. Then the government and the EU can step back from people’s lives and let them fulfil their own potential.

Regards,

Simon Angelo
Analyst, Money Morning New Zealand

Important disclosures

Simon Angelo holds UK shares and currency via wealth manager Vistafolio.


Simon is a contributor to Money Morning and has been investing in the markets since he was 17. He recently spent a couple of years working in the hedge fund industry in Europe. Before this he owned an award-winning professional services business and online learning company in Auckland for 20 years. He has completed the Certificate in Discretionary Investment Management from the Personal Finance Society (UK), has written a bestselling book and manages global share portfolios.


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