Monday, March 25, 2019

Doom and Gloom for UK according to the people, not priced in to GBP

It's too late to undo Brexit votes, but according to polls many voters probably would have changed their votes had they known the economic damage Brexit would have caused.  Now it appears that the locals are restless, and they feel its doom and gloom no matter what happens, according to surveys.
Recent survey results published by Money Transfer Comparison highlight a very fractured outlook for the United Kingdom’s economy amongst respondents as the extended April 12th deadline for the British exit from the European Union approaches.  The survey, which collected responses from 2,552 British citizens, underscores the highly divergent views for the economic outlook amongst respondents.   Data collected by research analytics firm Corus uncovered the following:

-Only 11% of respondents who voted “Leave” in the referendum believe the UK economy will flourish during the 2 years following Brexit, while less than 7% of all respondents believe that will be the case
-Over 60% of respondents surveyed who voted to “Leave” believe the economy will either stay the same as before or worsen
-Approximately 48% of all respondents believe that the economy will worsen over the next two years if Prime Minister Theresa May’s Brexit agreement is advanced
-More than 54% of all respondents believe that the economy will worsen if a “no-deal Brexit” unfolds
-Nearly 52% of all respondents believe Prime Minister Theresa May mishandled the Brexit situation
-Slightly more than 55% of all respondents are dissatisfied with how Parliament has handled the situation

Interestingly, in the event of approval of the May Brexit agreement, the highest proportion of respondents, whether “Leave” voters or otherwise, believe that the economy will be the “same as before” in the following 2 years.  However, that figure drops below both the “doom and gloom” and “taking a small hit” economic scenarios forecast in the case of the “no-deal” Brexit.

Apart from highlighting the general level of frustration with public officials responsible for overseeing Brexit negotiations, the survey indicates that “Leave” voters are increasingly concerned about the economic outlook. This development might be another affirmation of the growing dissatisfaction with elected officials and the widespread discontent over the failure to reach an exit consensus.

Additionally, “Leave” voters are increasingly echoing exit concerns voiced by leading economists, with more believing that the “doom and gloom” outcome will come to fruition relative to the scenario whereby the economy is “flourishing”. Nonetheless, a comparison of the survey results with the recent performance of the UK Pound suggests that financial markets are deviating from increasingly negative public sentiment.

According to Money Transfer Comparison, this divergence might be attributable to financial markets and investors discounting the more extreme possibilities of a “hard Brexit” or “no-deal Brexit” which would align with the more polarized viewpoints underscored in the survey.  Nonetheless, the survey emphasizes that public sentiment does not necessarily mirror economists’ expectations. 

With all the uncertainty that remains in place ahead of the Brexit deadline, these more extreme scenarios still have a possibility of unfolding, potentially weighing on the Pound’s value despite financial markets increasingly discounting the likelihood of a disorderly EU exit.

The Trade

Here the trade is short GBP/USD because this negative bias is not priced in to the GBP/USD, in fact in the face of a gigantic crisis, GBP/USD has held up well.  So is Brexit really a crisis?  Government officials are preparing for the worst, including putrefying stockpiles of rubbish that can breed diseases and worse:

Government officials are preparing to deal with “putrefying stockpiles” of rubbish in the event of a no-deal Brexit, according to documents leaked to the Guardian.  If the UK leaves the EU without a deal on 29 March, export licences for millions of tonnes of waste will become invalid overnight. Environment Agency (EA) officials said leaking stockpiles could cause pollution. The EA is also concerned that if farmers cannot export beef and lamb, a backlog of livestock on farms could cause liquid manure stores to overflow. A senior MP said the problems could cause a public health and environmental pollution emergency. An EA source said: “It could all get very ugly, very quickly.”  The emails leaked to the Guardian were sent to EA staff, asking for 42 volunteers to staff crisis management centres that would deal with incidents. On Tuesday the chief executive of the civil service revealed plans to move up to 5,000 staff into an emergency command and control centre in the event of no deal.
As you can imagine, that’s just one potential issue there are many.  So let’s take a look at the GBP/USD chart:


If we are to take into account the polls referenced above, GBP/USD could be much weaker.  The strategy here is not to sell the GBP/USD outright but to buy Puts deep out the money.  That’s as a protection and as an alpha generator.

The political fall out

In the UK the Political class is clearly out of touch with the voters, in an eerily similar situation to what happened in the US during the last Presidential election.  Just moments before official results came in, the mainstream media had Hillary Clinton winning in a landslide.

But unlike their US counterparts, UK officials are at least preparing for an end game scenario, including revamping plans to evacuate the Royal Family out of the blood and gore that may develop in the cities:
If rioters take to the streets of London following a hard Brexit, a Cold War plan to evacuate the royals to an undisclosed location in the countryside would be immediately implemented.  The Queen and other senior royals will be evacuated from London in the event of riots triggered by a no-deal Brexit, under secret plans being drawn up by Whitehall.  Emergency proposals to rescue the royal family during the Cold War have been "repurposed" in recent weeks, as the risk continues to rise of the UK crashing out of the EU without a deal before next month’s deadline.

Whatever happens it looks like doom and gloom, according to the polls.  It seems that no matter what is negotiated the British economy will suffer.

There is a price to pay for Freedom.  When the United States separated from the United Kingdom, it took a long time for the economy to stand on its own.  The United Kingdom is itself a super state comprised of England, Northern Ireland, Scotland, and Wales.  By the UK joining the EU they completely lost their sovereignty and some say their identity.  But for many Britons, the economic downturn which may last only years is a small price to pay to be British once again.

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