Hey everyone! 

 

Today its all about Brexit!

Here’s what we’ll discuss:

 

1. What Brexit is and how it happened.

2. Why they wanted to leave.

3. Funny Youtube video (also informative).

4. Does Brexit matter?

5. What is Article 50 anyway?

6. What the Brexit process looks like.

7. We drop the economies proverbial pants and compare GDP’s…

8. What Brexit means to Britain’s.

9. And finally what Brexit means to us as investors.

 

 

What the heck is Brexit and how did it happened?

 

Brexit stands for ‘Britain’s Exit’ of the EU in a referendum that was a simple ‘in or out’ vote (the opposite coined Bremain). The Brexit referendum was promised by David Cameron in January 2013 to satisfy around half of the conservative party (because they wanted to leave the EU) and to help guarantee re-election.  Cameron never thought it would actually come about, and thought it was a gamble worth taking (you can find his speech transcript here).

 

Well, it wasn’t the best bet, but for quite some time, it worked!  The problem is that they (meaning the conservatives) never thought they would have a majority government, and that the minority government, as they do, was likely to immediately take the referendum ‘off the table’ when the time came.

 

In 2015 however they did get majority government, sealing the deal, and making Mr. Cameron’s gamble the worst of his life, and most likely what he will be best remembered for.

 

Here’s how the vote turned out across Britain.

The day after the vote took place (June 24, 2016), David Cameron announces his resignation, and that ‘fresh leadership’ should replace him by October giving him three more month as the PM.

You can watch his speech here.

 

Why Ever think of leaving the EU?

 

A brief history; the EU came to be after the second world war, and was intended to basically stop future wars from happening. The Economic union consist of 28 countries, all of which enjoy free trade and open borders to those with a European passport.

 

In a nutshell, it’s a giant market that allows people, and products to move freely throughout the 28 countries.

 

One argument for Brexit was that Britain could save $350 Million Pounds a week that they were sending to the EU, but this number actually turned out to be more like $180 million pounds and may be close to what it costs the UK to continue to be a part of the common market.

 

One of the biggest campaigns was put together by a political party called UKIP (United Kingdom Independence party).  Their focus was on controlling the borders and keeping the Migrants out, and to basically “give Britain back to Britain’s’ which feels a wee bit racist. Some of the party leaders literally have been.  Watch this clip of ‘This Week Tonight’ with John Oliver, it’s hilarious as ever and a bit informative, which is nice…

    Of course, take what I say with a grain of salt.  I’m here in Canada, so it’s difficult for me to fully understand the situation.  From what I’ve heard, locals have been losing jobs to migrants for quite some time, especially in the larger cities like London.   And it was a majority that voted to leave the EU, with a huge turnout.

 

Here’s how the different demographics voted:

 

Is Brexit a big deal? (does Brexit really matter?)

 

The short answer is… Yes!

Before the vote occurred, almost unanimously, economists thought that if the vote was to leave that it would potentially cause a huge destabilization across the UK.  Turns out the shockwaves were not only locally, but all over the world.

 

Global stocks lost a record breaking $2.1 Trillion dollars in one day of trading. Yikes.

Here’s what the stock markets looked like the morning of June 24th

In Asia:

Japan -7.9% to 14952.

Hong Kong -2.9% to 20259.

China -1.3% to 2854.

India-2.2% to 26398.

In Europe, at midday,

London -4.5%.

Paris -8.2%.

Frankfurt -6.7%.

USA Futures at 6:20,

Dow -3.4%.

S&P -4.2%.

Nasdaq -4.2%.

Crude -4.8% to $47.69.

Gold+5.2% to $1328.90.

Ten-year Treasury Yield -26 bps to 1.47%

(from Seeking Alpha)

 

Banking stocks were hit the hardest, and so they should be, as they are the ones who are the most leveraged, and thus most likely to take the brunt of the punishment if Britain goes into a recession following Brexit.

 

Question: Do you think the ECB will help bail out British banks if they start to default on their debt burdens?  I’m thinking no…

 

Here’s what Seeking Alpha had to show the morning after the Brexit vote:

‘Banking stocks across the globe are taking a serious beating post-Brexit. Much of the regulations that govern the financial services industry and allow for cross-border transactions are at the EU level, meaning regulatory changes will need to be negotiated and altered from their current financial infrastructure. Premarket movement: BCS -25%,RBS -24%, LYG -27%, HSBC -10%, DB -16%, UBS -10%, C -7.5%, BAC -7%, JPM -6%,WFC -5%, GS -5%, MS -5%.’

 

Who’s next?

 

Locally, Northern Ireland and Scotland are talking about leaving the UK in order to re-join the EU, basically saying that they left against their will (as you can see by their voting results).

 

The thing about Brexit is, that it will take quite a bit of time to come into effect. After article 50 is triggered, they basically think it will take 2 years to get out of the EU.

 

What is article 50 you ask?

 

Well basically it’s basically the rules on how a country can leave the EU.  The British Government must first formally notify Brussels (the de-facto capital of the EU) that it is invoking article 50 (of the ‘Treaty of Lisbon’ signed in 2007).

 

After this the unravelling-mess (not a word you say?) will ensue.  The UK will have to negotiate trade deals with the 27 remaining EU states.

 

The problem is, that as far as I know, no one has ever actually invoked article 50, meaning that this is completely new territory, and we don’t really have any idea of how it will all play out.

Here’s what I’m thinking…

 

This can go one of three ways:

 

First possibility: The EU plays hardball, and makes an example of the UK by placing very strict and difficult conditions during negotiations, to send a message to others who are thinking of following in their footsteps.

 

Second Possibility: The EU makes a special case for the UK and helps them stabilize things by making them an associated partner country of the EU as they are an important exporter and importer of  goods and roughly 1/6th of EU’s GDP.

 

Third Possibility: This is the somewhere in between option after Brexit.  Both the EU and UK will make concessions and work out something that is suitable for both parties (this is the most boring option so it’s probably most likely…).

 

The two main front-runners for PM have slightly different ideas when it comes to Article 50.

 

Teresa May

 

The current frontrunner and a supporter for ‘Bremain’, says she wouldn’t trigger article 50 this year because she wants to make sure to get the right deal for the UK.

On the flipside we have…

 

Andrea Leadsom

 

Has pledged to make the ‘Brexit’ as quick as possible.  She became the second favourite and believes that as a Brexit supporter, she should be the new leader.

 

Update:

Today Andrea Leadsom has dropped out of the race for the Conservative leadership making Theresa may basically uncontested.

 

How Big is the EU and Britain anyway?

 

Some important information to consider:

The UK has the second largest GDP in the European union.  Germany has the highest, with France and Italy securing third and Fourth.

 

EU’s top 4 highest GDP’s in 2015 in billions:

Germany              = $3355.77USD

United Kingdom = $2849.35 USD

France                  = $2421.68 USD

Italy                      = $1814.76 USD

 

Here’s how 75% of the world’s GDP is comprised:

Here’s how the Majority stack up (again in Billions USD)

USA    = $17947.00

China = $10866.44

Japan = $4123.44

India  = $2073.54

Brazil = $1774.72

Canada = $ 1550.54 (Yay!)

(Numbers found here)

 

What Brexit means to Britain’s

 

Some economists are saying that Britain’s GDP could drop anywhere from 4%-10% in the years following Brexit. If it does drop the 10 % that drops Britain’s GDP from 2849 Billion to 2564 billion which is fairly significant though I think it’s impossible to model at this time.

 

Some immediate effects include the British Pound dropping to 30 years lows following the Brexit vote from $1.50 to USD on June 23rd to now $1.30 USD.

 

What that means or the British is that they just lost 14.2% of the spendingpower when they leave Britain.  Another way of thinking of this is that everything outside of Britain just became 14% more expensive.  Ouch.

And finally…

 

What Brexit means to us as Investors

 

Well, for right now I’d say the short answer is Nothing.

Markets took only a week to recover following Brexit and are now reaching brand new highs on the tailwind of an excellent jobs report.

 

So the overall market is still way to expensive for me.  For example, The Shiller PE ratio is currently at 26.59.  For perspective, the Shiller PE hasn’t been this high since the crazy-ness of the 2000 tech bubble, and before that it only reached this level in the 1930’s.  The average Shiller PE is 16.68.  Arguably you could say above that the market is getting expensive, while below that it’s beginning to look cheap.  So I’d say we are still in the overly expensive territory.

 

So what can we do?

 

Well we can keep learning, and adding to our investing arsenal and be ready with lots of cash when the next big market drop happens.  We just have to be patient.  I would recommend signing up to my newsletter to get some free stock option lessons from me and other exclusive content to take your investing to that ‘Next Level’ that everyone mentions so often but rarely defines.

 

What the billionaires are saying

 

Buffett said before the vote that if the British vote to leave the EU it won’t change one iota what I’m doing with business or with stocks’ and as a value style investor, I have to agree (you can watch the video here).

 

Soros says it is a huge blow for Britain, and the EU needs to act fast in order to stanch the

bleeding.  You can read the full article here

 

Yes, it potentially will suck for Britain and future trade, growth, and their currency, But for the long term investors it won’t do too much.

 

I’m actually hoping that this causes a lot more uncertainty.  The market doesn’t like uncertainty as seen after the Brexit referendum vote, and this will potentially help us find better opportunities in the markets future.

 

What do you all think? Agree with what I’m saying? I’d love to hear from you so please comment below or email me.  That’s all for today, we’ll talk again soon…

 

~Ryan Chudyk~