The Brexit opportunity

The highly anticipated Brexit referendum is coming up, so the topic will dominate the news and the markets this week. I want to give some comments on aspects that got lesser attention and then move on to my weekly stock market chart.

For weeks (if not months) every drop in British stock prices or GB Pound has been blamed on “Brexit fears” in the popular media. Whenever stocks or Pound went up I never saw it being attributed to “Brexit hopes”. That’s how the media is imprinting our minds with the idea that a Brexit is something to be feared, not hoped for. And if something gets repeated often and long enough then it starts being believed. We thank Joseph Goebbels for that concept. Google Trends shows us how the use of the term “Brexit fears” has been cranked up tenfold in the recent month, while “Brexit hopes” is never used.

The “Brexit fears” meme has been spread successfully, but is that enough to decide the vote? We will find out soon.

Many people probably wonder: isn’t it much better for everybody if Europe is united rather than divided? Well, that depends on what type of union is being chosen. You can create a Soviet style European Union, which concentrates ever more power in the capital and sets up mechanisms for punishing the countries or regions that refuse to comply with the “orders from above”. Or you can create a decentralized Swiss style European Union, which leaves most power in its member states/cantons and lets those states free to leave the union if they want. That’s the choice between a EU of coercion or a EU of cooperation and partnership. My impression is that most people in the UK (and in Europe) are not against working together in the region and coordinating things wherever possible. But more and more people don’t want to be held prisoners in a supranational organization that doesn’t always have their interests in mind.
A “union” that works for the good of all its member states doesn’t need to make it prohibitively expensive to leave that union, because if everybody benefits nobody will want to leave. That’s why the Swiss model succeeds in serving all its cantons. Even the smallest Swiss canton retains the right (guaranteed by constitution) to hold a referendum on leaving the Swiss union. The procedure to leave is clearly laid out in its laws.

Compare that with the EU, which has been moving in the other direction since the 1990s. The Euro has made it very difficult and expensive to leave the union. And even the countries that didn’t take the Euro, such as UK, see themselves threatened if they dare to consider leaving. The UK will be sent to the back of the queue, according to Obama. And it will be economically suffocated into an insignificant Guernsey, according to France’s economy minister. Just to name a few… As if independence has become something bad that needs to be punished?
And it amazes me that nobody is pointing out this glaring contradiction: the same politicians who have been insisting for years that Ukraine’s independence should be respected and that it should be able to chose its own trading partners rather than have a more powerful neighbor decide what it should do, are the very same people who are now telling the UK that it will be isolated and dwarfed as an economy if it goes back to full independence and makes its own trade deals. Ukraine is strong enough to make it, but the UK will be sent back to the Middle Ages if it dares to stand on its own legs. Weird…

A union of coercion that stands ready to punish any country that wants to leave is always going to be a dangerous organization. Even mobile phone companies have figured out that the best way to prove their commitment to good service is by making it easy and quick for customers to cancel and leave. The EU avoids that kind of commitment and that’s why it has become a bureaucratic quagmire. It doesn’t need to offer good service because its “customers” are locked in.
A union of coercion, where the members are made to serve the organization instead of the other way round, is always going to lead to increasing tensions within that union and will revive nationalism rather than soften it. The problem is that when power becomes too concentrated into a few hands then “narrow interests” become very eager to grab those few power positions for their own convenient use and sooner or later they succeed. They typically use “good intentions” as lipstick on the pig, but such a centralized union can never be safe. Only a decentralized cooperative network can guard us for that danger. A Brexit would be a great opportunity to force the EU to rethink itself and go for a Swiss style union, which has clearly been the more prosperous and peaceful model. Then Brexit would become a blessing in disguise.
Let’s not forget that the UK has been moving in that direction for decades already, first by letting its empire dissolve, and later by giving more and more autonomy back to regions like Scotland and Wales. The EU is headed the opposite way and that’s why there is a growing disconnect and a growing anti-EU sentiment all over the region. It is not too late to change direction and Brexit can become the catalyst for that change. If so it will also be bullish for stocks in the longer term.
Brexit will not cause UK to become a small Guernsey, but it may cause Europe to become a bigger Switzerland. And who wouldn’t want that?
That’s the Brexit opportunity. Will it be taken?

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Stocks have remained under pressure and the Nasdaq has been holding on to the 4800 support level we indicated last week. Here is the current S&P 500 chart:

I would look for the 2000-2050 zone to keep offering support here. We remain in a lunar red period until Thursday and the LT wave for June reaches a low on the 23rd, so I wouldn’t be in a hurry to buy. The Earl indicator (blue line) is in the bottom zone and ready to turn up. Thursday may well become the perfect day to buy, and I wouldn’t wait for the Brexit referendum result.