Brexit Redux

The British High Court weighs in on Brexit protocol.

By George Friedman

It’s the season for amazing electoral events. On Nov. 3, the British High Court – which is not the highest court in Britain – ruled that the vote in favor of Brexit does not permit the prime minister to officially notify the European Union of the United Kingdom’s intent to withdraw.

Rather, Parliament must authorize the prime minister’s actions. This raises the possibility that Parliament might refuse to authorize notification. Even more likely, Parliament could choose to be informed of and oversee the terms the U.K. offers and agrees to. Regardless of any previous ambiguity on this point, certainly members of Parliament would be expected to ratify the final proposed agreement and, therefore, could refuse to ratify the terms.

British Prime Minister Theresa May gives a press conference on the second day of a European Union leaders summit on Oct. 21, 2016 at the European Council in Brussels. STEPHANE DE SAKUTIN/AFP/Getty Images
British Prime Minister Theresa May gives a press conference on the second day of a European Union leaders summit on Oct. 21, 2016 at the European Council in Brussels. STEPHANE DE SAKUTIN/AFP/Getty Images

It is important to remember that Parliament authorized the Brexit referendum and former Prime Minister David Cameron pledged to abide by it. At the same time, the vote was not legally binding.

Still, the Parliament’s authorization and the prime minister’s assurance gave the vote significant weight. The ruling, of course, doesn’t reverse the Brexit vote. It does, however, raise an interesting question, because on this issue Parliament is somewhere between divided and chaotic.

For Americans, it is important to understand the European parliamentary system. When it is functioning properly, the prime minister has far more control over policy than the U.S. president. The president’s party does not nominate candidates to the U.S. House of Representatives or Senate. Therefore, U.S. politicians may like the president or opposition party leaders, but they utterly depend on their constituents, state and local organizations, and others. They welcome money from national parties, but usually it is not enough to win an election. More importantly, a senator or representative is not going to commit political suicide by supporting a policy that constituents oppose simply to please party leaders. Presidents can’t count on congressional majorities to follow their commands.

In Europe, political parties have a great deal more power. Most importantly, leadership in Parliament and in the party organization – normally controlled by the prime minister or opposition leaders – has tremendous say over who represents the party in a district. Normally, if a member of Parliament crosses the prime minister on an important vote, there will be consequences. This sometimes occurs at the end of a career. Of course, party splits and revolts against leadership sometimes exist, but decisions by the prime minister – who is supported by a majority in his or her party – are followed. Unlike the U.S. president, who we might call a great proposer, the prime minister normally disposes. Both systems are far more complex than I describe, but with apologies to European readers for stating the obvious, this is the vast difference between a presidential and parliamentary system.

Because Prime Minister Theresa May has announced her commitment to Brexit, normally this should be the end of the issue. But in this case, it is not. First, Parliament is divided into three factions not at all having to do with party affiliation. Some support Brexit as a matter of policy.

Others oppose Brexit but reluctantly affirm the legitimacy of the vote. A third group continues to oppose Brexit despite the vote. A likely read is that the first two hold the majority, and the latter would like any excuse to sink Brexit.

I would think that a vote against the referendum is unlikely. Opponents of the results constantly point out that the people who voted for it didn’t understand what they were voting for or were misled by unscrupulous leaders. That may or may not be the case, but in the last YouGov poll in the U.K., 45 percent remained committed to Brexit, and 44 percent were opposed. That means that an outright repudiation of the vote would alienate almost half of the population, and some opponents who regard the referendum as legitimate might join them.

Repudiation would certainly force a new election, and along with it, a revolt in the Conservative Party’s national organization, as we already have seen in the Labour Party.

But assuming the vote will affirm Brexit, this ruling creates two other possibilities. May assumed that as prime minister she was free to negotiate with Europe based on a Parliament-approved referendum. In asserting that Parliament must approve Article 50’s statement of withdrawal, it would seem logical that members of Parliament would have a voice in the negotiations and the agreement. In other words, May must negotiate to the satisfaction of a parliamentary majority. Because her own party is divided, May’s ability to get a majority of parliamentarians who wish Brexit would go away is uncertain at best.

The second possibility is simply that Parliament could delay a vote on Article 50 and then delay the negotiation. The date for invoking Article 50 was vague to begin with, and if Parliament has the voice, then Parliament will have to study the matter. May’s only option would be to call a new election without having any idea of the possible results. A Conservative victory would be likely, but not a parliamentary vote for Brexit. Parliament might now have the option to delay Article 50 ad infinitum without repudiating the referendum. It could delay now, and during and after the negotiations.

The Supreme Court (higher than the High Court) still must rule. If it upholds the High Court vote, the U.K. will face a major political crisis. Half of Britain supports Brexit, and they won the referendum. They are now being told that they are too simple to understand the complex issues facing them. In effect, their betters should be trusted. Half of the British public will take the position that referendums count only when the establishment wins. They also might take offense at being treated with contempt.

A great deal of the movement supporting U.S. presidential candidate Donald Trump is rooted in the sense that the establishment treated with scorn those who disagreed with it, and that the self-satisfied establishment was actually incompetent. Similar movements exist throughout Europe, including the Brexit movement. If parliamentary delay reverses the referendum’s outcome, two things will happen. First, the Brexit movement will broaden to questioning fundamental issues about British democracy. Second, the system in which the prime minister is a decisive force will break down. Parliamentary government with small parties and weak coalitions is the worst of all worlds. It has rigid party lines, but a weak executive – a recipe for paralysis. Winning the battle over Brexit, I suspect, would cause far more serious problems for the U.K. than leaving the EU would.

How the U.S. Election Will Affect Capital Markets

Outlook for Markets and Volatility

Gomes says the markets would be “fairly comfortable” with a Clinton victory so long as “that includes a Republican majority in at least the House of Representatives.” But if the Democrats were to take over the House, which now appears unlikely, then he would expect more “swings in valuations” and more nervousness about tax policy and regulation in the years ahead. Kass agrees. “The market is more comfortable with a Clinton election; there is a lot more uncertainty associated with a possible Trump election.”

“The markets have priced in a Clinton win and are comfortable with it,” says Jones. But a Trump victory would bring volatility into the markets, “not least because our ability to anticipate what would be the safe-haven asset is a little bit more limited. Normally you would want to go into U.S. Treasury instruments or Treasury-backed instruments, but given what he has said about his attitude toward debt, that becomes a little bit more of a questionable prospect.”

If Clinton is elected, Kass expects a “relief rally of a few percentage points” on the Dow Jones and the S&P indices, assuming there are no post-election problems. He thinks the markets are “fully valued and not overvalued – there is still room for growth.”

Focus on Dollar’s Value

According to Gomes and Jones, all eyes should first be on the value of the dollar after the elections. “That is the one number that could dramatically change forecasts into next year,” says Gomes. He expects a downward move in the value of the dollar if Trump were to win, but nowhere near the 20% loss in value the British pound has seen in the aftermath of the Brexit vote in June.

Jones adds that “if Hillary wins and the Fed begins to tighten monetary policy, we have to watch the divide in monetary policy between the Fed and the ECB (European Central Bank).”

That is going to play out “as the ECB tries to continue with its large-scale asset purchases, and it may be joined by the Bank of England, which is wrestling right now with whether to respond to the accelerating inflation or to pay more attention to what is happening in the real economy,” he adds.

Near Certainty on Interest Rate Increase

Kass expects the Federal Reserve to start raising interest rates at its December meeting “and perhaps begin an upward movement in that regard, and that would assist the financial sector.”

He notes that the financial futures markets are indicating an over 80% probability of a rate increase.

Gomes is not so sure about that increase. A Trump victory would not only depress the stock markets, but also put “a question mark” on the anticipated interest rate increase, he says. “If the stock market wobbles in the next month and a half – the elections could do that – we will not have a rate hike and that’s a very different outlook going into 2017.” The Fed’s decisions would be influenced also by several reports that are expected before its December meeting.

They include the unemployment numbers as of October and three readings on the GDP growth in this year’s third quarter.

Focus on Health Care

Gomes also notes that “the future of Obamacare (the Affordable Care Act) is very much on the line in this election and that matters very much for the health care industry and health care stocks.” Concerns over health care reform have mounted over the past year with many insurance companies wanting to exit certain markets, reducing choice for consumers and increasing premiums. “The problem needs to be fixed and it is fixable,” says Kass, adding that a Clinton administration and a likely Democratic-controlled Senate could make that happen. However, Clinton’s “aggressive stand” on pricing of drugs following media reports on alleged abuses could hurt pharmaceutical company stocks, he adds.

Signature Achievement

“Whoever wins will be hard pressed to have some signature achievement quickly that is as bipartisan as possible,” says Gomes. Making peace with a divided Congress will be crucial for the next president to secure a legacy initiative like Barack Obama’s ACA, he adds. “Hillary needs a signature achievement to be re-elected and to be a successful president, and the only way to do that is to deal with the Republicans.”

Those “signature achievement” moves could be “small and restricted to infrastructure and some tax form” but they could also be more ambitious, says Gomes. “Corporate tax reform is the minimum” and could find bipartisan consensus more easily than individual tax reform and elimination of loopholes, he notes.

Bulls Panic Buying

funny animated GIF

It’s not easy for a long-term bear to abruptly change stripes and become a raging bull.

How could this happen?

The election results Tuesday were not factored in to any forecasts. Specifically, no one I’m aware of expected Trump to win along with both houses of the U.S. congress.

Abruptly flipped from stocks flipped from extreme losses the night of, to extreme gains in just a few days.

Stocks entered this week with YTD gains of only 2% in the S&P 500 Index to gains of nearly 7% which we had seen extreme oversold conditions to extreme short-term overbought. Such was the power of this reversal.

Given the political outcome the way ahead seems to resemble a Reagan-like agenda—pro-growth and, no matter what you think of it, trickle-down economics. The sector beneficiaries would be defense and financials while the losers would be bonds and so forth. The latter means higher interest rates, which if anything, means a normalization of monetary policies thanks to the bond vigilantes. Tech fell as investors fretted that Trump trade policies would hurt their overseas manufacturing business.

For me, being a bear over the past 10 years, changing to a bull is a tough task. It reminds me of the interest rate policy change in 1982 that led to the major bull market which lasted nearly 20 years. And, while it remains to be seen how Trump’s policies will mirror Reagan’s it seems more likely than not this will be the case.

Lastly, and no differently than the Reagan experience, the long-term road ahead will be uneven. So, let’s understand many investors, large and small, are improperly positioned for economic and political policies ahead.

Now, are we at least short-term overbought? Absolutely! But this is the notoriously the best investment season for bulls and they’ve seized the momentum.

11-10-2016 4-23-23 PM
Below is the heat map from Finviz reflecting those ETF market sectors moving higher (green) and falling (red).
Dependent on the day (green) may mean leveraged inverse or leveraged short (red).

Volume continues to expand as the short-squeeze and scramble to get invested continues. Breadth per the WSJ remains positive.

 11-10-2016 4-24-55 PM
12-17-2015 9-04-44 PM Chart of the Day
11-10-2016 4-25-51 PM ITA

Populism for the Rich

Ian Buruma

Poverty Protest in front of Bucharest Parliament

BUCHAREST – I recently joined a tour in Bucharest of the Palace of Parliament, the gigantic folly built in the 1980s on the orders of the late Romanian dictator Nicolae Ceauşescu, who was executed before he could see it finished. The statistics rehearsed by our guide were staggering: the third biggest edifice in the world, 220,000 square feet of carpet, one million cubic meters of marble, 3,500 tons of crystal. The enormous marble stairways had to be rebuilt several times to match exactly the steps of the dictator, who was a small man.
To construct this neoclassical monstrosity, an entire swath of the city, a beautiful area of eighteenth-century houses, churches, and synagogues, was razed, displacing 40,000 people.
More than a million people worked on the project non-stop day and night. It pretty much bankrupted the state, even as Ceauşescu’s subjects had to do without heat and electricity for much of the time. It still costs more than $6 million a year to maintain the palace, which now houses the Romanian parliament and an art museum, leaving 70% of the building unused.
Ceauşescu’s folly is a monument to megalomania. But it is by no means unique, except in its size (though Turkish President Recep Tayyip Erdoğan has tried to rival it in scale with his new palace in Ankara). It is indeed remarkable how megalomaniacs of a certain kind think alike, or at least share a similar taste in architecture. Hitler’s plans for the reconstruction of Berlin reflected the same neoclassical gigantism. And the interior of the palace in Bucharest, a kind of Louis XIV style on steroids, is just a more extravagant version of Donald Trump’s living quarters in Florida and New York.
These places are what you get when socially insecure outsiders dream of being the Sun King. To mention Trump in the same breath as Hitler and Ceauşescu is perhaps unfair. Trump is not a murderous tyrant. And his social background is more complicated.
Hitler was the son of a minor customs official, and Ceauşescu was of poor peasant stock. Both men felt small and provincial in their capital cities. Their way of dominating the more sophisticated urban elites was to oppress them violently and rebuild the cities according to their own grandiose dreams.
Trump, too, wants everything bearing his name to be bigger and shinier than everything else.

But he was born in New York and inherited a considerable amount of money from his father, Fred Trump, a real-estate developer with a somewhat shady reputation. And yet he, too, appears to seethe with resentment against the elites who might look down on him as an uncouth arriviste, with his absurd golden skyscrapers and rococo mansions full of gilded chairs and massive chandeliers.
Modern populism is often described as a new class war between the beneficiaries of a globalized world and those who feel left behind. Supporters of Trump in the United States and of Brexit in the United Kingdom are, on the whole, less educated than the “establishment” they oppose. But they could never have gotten as far as they have on their own. The Tea Party in the US would have been relatively marginal without powerful backers and demagogues. And these are often newly rich men who share their followers’ bitterness.
This was clearly the case in Italy, where former Prime Minister Silvio Berlusconi, whose background is almost identical to Trump’s, managed to tap into the dreams and resentments of millions of people.
Populist movements in other countries show a similar pattern. In Thailand, the Sino-Thai business tycoon Thaksin Shinawatra, the son of a nouveau-riche father like Berlusconi and Trump, ran against Bangkok’s social and political elites, becoming Prime Minister with the backing of provincial and rural voters, before being ousted in a military coup. In the Netherlands, a newly rich class of real-estate moguls backed the right-wing populist Pim Fortuyn and his cruder successor, Geert Wilders.
The newly rich are as important a force in the rise of populism as the poorer and less educated people who feel neglected by the elites. Despite huge inequalities of wealth, they share a deep anger at those whom they suspect of looking down on them. And they are not entirely wrong.
No matter how many palaces or yachts new money can acquire, old money will continue to despise the acquirer. Likewise, the educated urban class tends to dismiss the voters who supported Brexit or back Trump as stupid and ill-bred.
It is the fusion of resentments, felt by the newly rich as much as by the left behind, that drives right-wing populism. In extreme circumstances, this can result in dictatorship, with the tyrant free to indulge bizarre fantasies at the expense of millions under their control.
So far, in Europe and the US, the demagogues can only serve up dreams: taking back our country, making it great again, and so on. To stop such dreams from becoming political nightmares, something more is needed than technocratic expertise, or calls for civility and moderation. Angry people cannot easily be persuaded by luminous reason. They must be offered an alternative vision.
The problem today, all over the world, is that such an alternative is not readily at hand. The French Revolution happened more than two centuries ago. “Liberty, Equality, and Fraternity” is only a historic slogan today. But this might be a good time to update it.

Dalai Lama: Behind Our Anxiety, the Fear of Being Unneeded


In many ways, there has never been a better time to be alive. Violence plagues some corners of the world, and too many still live under the grip of tyrannical regimes. And although all the world’s major faiths teach love, compassion and tolerance, unthinkable violence is being perpetrated in the name of religion.

And yet, fewer among us are poor, fewer are hungry, fewer children are dying, and more men and women can read than ever before. In many countries, recognition of women’s and minority rights is now the norm. There is still much work to do, of course, but there is hope and there is progress.

How strange, then, to see such anger and great discontent in some of the world’s richest nations. In the United States, Britain and across the European Continent, people are convulsed with political frustration and anxiety about the future. Refugees and migrants clamor for the chance to live in these safe, prosperous countries, but those who already live in those promised lands report great uneasiness about their own futures that seems to border on hopelessness.


A small hint comes from interesting research about how people thrive. In one shocking experiment, researchers found that senior citizens who didn’t feel useful to others were nearly three times as likely to die prematurely as those who did feel useful. This speaks to a broader human truth: We all need to be needed.

Being “needed” does not entail selfish pride or unhealthy attachment to the worldly esteem of others. Rather, it consists of a natural human hunger to serve our fellow men and women. As the 13th-century Buddhist sages taught, “If one lights a fire for others, it will also brighten one’s own way.”

Virtually all the world’s major religions teach that diligent work in the service of others is our highest nature and thus lies at the center of a happy life. Scientific surveys and studies confirm shared tenets of our faiths. Americans who prioritize doing good for others are almost twice as likely to say they are very happy about their lives. In Germany, people who seek to serve society are five times likelier to say they are very happy than those who do not view service as important. Selflessness and joy are intertwined. The more we are one with the rest of humanity, the better we feel.

This helps explain why pain and indignation are sweeping through prosperous countries. The problem is not a lack of material riches. It is the growing number of people who feel they are no longer useful, no longer needed, no longer one with their societies.

In America today, compared with 50 years ago, three times as many working-age men are completely outside the work force. This pattern is occurring throughout the developed world — and the consequences are not merely economic. Feeling superfluous is a blow to the human spirit. It leads to social isolation and emotional pain, and creates the conditions for negative emotions to take root.

What can we do to help? The first answer is not systematic. It is personal. Everyone has something valuable to share. We should start each day by consciously asking ourselves, “What can I do today to appreciate the gifts that others offer me?” We need to make sure that global brotherhood and oneness with others are not just abstract ideas that we profess, but personal commitments that we mindfully put into practice.

Each of us has the responsibility to make this a habit. But those in positions of responsibility have a special opportunity to expand inclusion and build societies that truly need everyone.

Leaders need to recognize that a compassionate society must create a wealth of opportunities for meaningful work, so that everyone who is capable of contributing can do so. A compassionate society must provide children with education and training that enriches their lives, both with greater ethical understanding and with practical skills that can lead to economic security and inner peace. A compassionate society must protect the vulnerable while ensuring that these policies do not trap people in misery and dependence.

Building such a society is no easy task. No ideology or political party holds all the answers. Misguided thinking from all sides contributes to social exclusion, so overcoming it will take innovative solutions from all sides. Indeed, what unites the two of us in friendship and collaboration is not shared politics or the same religion. It is something simpler: a shared belief in compassion, in human dignity, in the intrinsic usefulness of every person to contribute positively for a better and more meaningful world. The problems we face cut across conventional categories; so must our dialogue, and our friendships.

Many are confused and frightened to see anger and frustration sweeping like wildfire across societies that enjoy historic safety and prosperity. But their refusal to be content with physical and material security actually reveals something beautiful: a universal human hunger to be needed. Let us work together to build a society that feeds this hunger.

The 14th Dalai Lama, Tenzin Gyatso, is the spiritual leader of Tibet and a Nobel laureate for peace. Arthur C. Brooks is president of the American Enterprise Institute and a contributing opinion writer.