Brexit: The Illogical Comedy Version (3 min read)

The Brexit endgame is upon us and it's still anyone’s guess as to where we’ll end up on the outcome continuum. I anticipate two probable scenarios, and they’re both extreme. And since this whole situation is something of a comedy it seems best to me to take a comical approach to illustrate my reasoning – using the general market truth that whatever hurts the most desperate participants is typically what will happen to find my two endpoints, and then working backwards in an exercise of seeming illogicality.

The problem, as we all know but refuse to admit, is that trying to work out Brexit by betting on an actual winner is borderline insane. The only way to ‘win’ this game is to understand who loses.

So here goes my attempt.

We’ll start out with the two conclusions – a comedian’s version of the very worst and the very best outcomes (the comedians, of course, being our economists).

 

I have two assumptions: Brexit occurs, and it occurs on schedule on 31 October at midnight.

 

Scenario 1, Worst Outcome: A No Deal & Minority Corbin Govt.

Scenario 2, Best Outcome : A Deal & Significant Majority Johnson Govt.

 

Now before you raise a cry of defiance at the idea that a no deal Boris majority is the best scenario, remember that rule of this whole wheeze is to establish the diametric opposite of that axiom of Roman Law, Cui Bono (Who Benefits?), and work backwards.

 

Scenario 1: Worst

Principal Losers: The Bank of Mum & Dad. (The heart of the Leave voters)

Following No Deal and a general election, the housing market falls faster than a concrete Stuka. All the middle-aged Leave voters suddenly realise that they just delivered themselves into penury; as Real Rates go deep into the negative their pensions are not going to get honoured, meanwhile their deposit on that expensive 2-bed flat in Hoxton doesn’t cover the negative equity.

Summary: you voted for Leave, you end up with Poverty.

But how can Scenario 1 occur? Easily, in fact, if one deploys improbability: Labour gains votes where they are least expected to – in Scotland.

Given the clear Remain bias in Scotland, SNP loses votes to Liberals and Labour sneak in 15-20 seats. Don't forget that the SNP unexpectedly smashing Labour was the basis for the shock Cameron victory. Boris loves to think of himself as Churchillian, but what could be more Churchillian than delivering on the ‘war’ (Brexit) and then losing the ‘peace’? Just like his hero did in the 1945 General Election.

 

Scenario 2: Best

Principal Losers: Every Urban Millennial/Gen X/Gen Y (The heart of the Remain voters)

As the UK economy finally recovers with a lurch of clarity and optimism, the UK housing market enters a frenzy as a desperate 3-4 years’ worth of unfulfilled, frustrated demand tries to scramble onto the property ladder. But the BoE is raising raise rates fast. Prices skyrocket beyond affordability and rates shoot too high to borrow.

Summary: you voted to Stay, now you Stay living with your parents.

But how can Scenario 2 occur? Well, the same way that the first one can: using improbability, easy!

Conservatives win votes where they are least expected to – in urban centres.

Realising the Brexit argument is finally lost, the urban Remainers finally vote with their own wallets and not their conscience. They acknowledge that Labour is going to ruin their ability to afford half-caff long flat whites and vintage clothing, and so they begrudgingly vote for ‘coup’ leader Boris in an  unprecedented act of realpolitik.

 

Curtain Call

It’s the eternal logic of markets: whatever scenario hurts the most desperate participants is the one which will always happen. As such, I now believe that only these two extreme scenarios can play out.

Truly an Anti-Panglossian commedia dell arte.

 

P.S. We might spare a thought for the one set of participants who don't yet realise that they are the ultimate fall guys for Brexit, and who lose massively irrespective of whichever scenario plays out: Ireland. Because if No Deal implies backstop unsolved, and Deal implies a backstop unimplemented, then Ireland is economically compromised whatever happens. Let’s also not forget, of course, that the EC is also planning to serve the Irish an unpalatable Tax Harmonisation.

Written by the Macro Dilettante. One time Jackson Hole symposium attendee. He has traded since 1988, was a macro hedge fund portfolio manager from 2002 to 2015 and is currently a senior figure in the European pension fund industry.

(The commentary contained in the above article does not constitute an offer or a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs.)

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