No-Deal Brexit Reality

Posted By Darren Winters on Dec 24, 2020

No-Deal Brexit Reality

So, the UK-EU leader’s dinner ends without a climax, and GBP goes down with gusto, a week later, as the market adjusts to a no-deal Brexit reality.

A no-deal Brexit reality should come as no surprise

Bearing in mind the UK government has been building up to 29 lorry parks across England to deal with border trading chaos after Brexit for the past year. 

What I found strange was how long it took the heavy volume algorithmic robot traders to figure out that a no-deal Brexit reality was in the wind. Perhaps it is a warning that trading on headline stories in isolation can lead to large losses. 

With the diplomatic show most likely over, what is the implication of a no-deal Brexit reality for the UK economy and UK assets

No-Deal Brexit Reality

A few fringe economists are saying that a no-deal Brexit reality is a “no big deal.” 

But I do not buy that view. 

In a few weeks, £28.6 billion of exports to the EU, according to 2019 figures, will be subject to EU tariffs and maybe even quotas. As they say the devil is in the details, but after three years of EU_UK negotiations, what a waste of taxpayers’ money, there are no clear details. France has mocked BoJ’s claim that the UK can have an Australian style deal with the EU after Brexit saying it’s “for the Birds.”

Moreover, the UK cannot have a Canada style trade deal with the EU, according to Brussels’ chief negotiator Michel Barnier. 

£28.6 billion of UK annual export to the EU and the UK government has not secured the terms of trade with its largest trading bloc, other than it is Brexit do or die

World trade terms would be a bureaucratic nightmare for smaller medium-size businesses. 

Meanwhile, five-mile lorry queues are being reported at the border. Is the UK sailing without a captain at the helm, as it approaches an iceberg?

To say that no-deal Brexit reality is “no big deal” would be to play down a major shock to the UK economy, which could disrupt capital flows and financial markets

The five-mile tailbacks of lorries trying to bring goods into the UK are just the beginning of what could be shortages of fresh produce and other items. 

In the words of Jacob Rothchild, a member of Europe’s banking dynasty, 

“We are surely witnessing the worst political situation in the United Kingdom since the Suez crisis”.

It is also an economic crisis, bearing in mind that a no-deal Brexit reality could spark a UK/EU trade and currency war in Europe

The automobile industry, pharmaceuticals, chemicals, food from agriculture, and so on are likely to be most affected, although it is unclear just how serious the additional disruptions and delays at key ports will be because the details of Brexit are unknown. 

But let’s assume that the UK responds with retaliatory tariffs on EU goods entering UK ports. Moreover, the Bank of England could let GBP depreciate, by say twenty percent, to cushion the impact of EU tariffs on UK goods and encourage the consumption of UK-produced goods and services at home to kickstart the economy. The UK could tackle a no-deal Brexit reality with tariffs on EU goods and a competitive devaluation of GBP

But currency and trade wars also invite retaliation from the other side. So, it becomes a zero-sum game with each side chipping away at each other’s economy until one side capitulates. 

What’s more, the two opponents are not equally matched. On the one side is the heavyweight EU economy with a GDP of $18.8 trillion (2018), and on the other side is the medium weight UK economy with a $2.8 trillion GDP (2019). A few heavy blows from the EU and the UK is on the ropes.

But what about the so-called special relationship between the UK and the US, does it still exist?

If history rhymes, then what comes next is that the UK ends up in a brawl with its European neighbors, then bloody nose and limping it beg Uncle Sam to come to the rescue, and the US gets rich doing it. Old habits die hard, the British, Germans, and French have been arch-rivals and suspicious of each other for centuries. 

Talks about how fishing became the deal’s biggest stumbling block I believe is a smokescreen. Probably the real reason is the UK wants to control its territorial waters for national security interests. 

A no-deal Brexit reality could also spur the UK to restructure its economy

The UK will have greater financial independence as it breaks away from the EU. One of the plans is to set up free ports, to get trade flowing with the UK.

Seizing on the opportunities presented by leaving the EU, UK Freeports will be created across the nation to help drive Britain’s post-Brexit growth.” 

Freeport hubs are intended to attract domestic and foreign capital flows into the UK as taxes and regulations are slashed.

The post Brexit plan could also fail

The EU has enterprise zones too. Moreover, unlike Singapore, where there are many unstable neighboring countries with low skills, Britain’s nearest neighbor, the EU, is relatively stable with a well-educated workforce.

So, the no-deal Brexit reality could mean that Europe becomes dicey for investors as the UK/EU takes aim of each other’s economies with tariffs and competitive devaluations. Already pandemic weakened, such an event could topple Europe into a deep recession, making risk assets in the UK and EU unattractive for investors until the dust settles.

So, I envisage a no deal Brexit could continue weighing down on GBP and UK stocks going forward.

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