Learn to love the Brexit bomb.

Hugh Hendry is back.

Hugh Hendry: How We Learned To Sop Worrying And Love ” the Brexit bomb”

Excerpt

Put simply, prior to Brexit, we believed that the Fund had a high probability of making a modest return. But now with the UK set to follow a divergent and unexpected economic policy, certain scenarios ranging from the questionable viability of the euro to the prospect of a major economy rejecting fiscal balance to pursue an expansionary fiscal policy and the likelihood that other nations will copycat this policy in the future no longer appear so extreme. It feels like we have returned to the dysfunctional logicality that reigned prior to the crash of 2008: if you think the future is inflation, prepare to profit now from the deflationary-like catalysts. For the latter scenarios appear the most likely within our investment time horizon.

Our current enthusiasm for our book therefore is predicated on the notion that our investable universe has just expanded greatly as certain events have moved from the uninvestable shadows of tail-like probability into the realms of investable profit opportunities. This has enabled us to expand our risk taking meaning that the Fund, in our view, now also has a reasonable probability of making rather a lot of money.

First, however, let me explain a curious historical precedent which, if I adopt my mantra from an earlier report, allowed us to stop worrying about the present and learn to love the Brexit bomb. For it may be that having spectacularly failed to anticipate the outcome on the 23rd of June the markets may be just as wrong with their revised forecasts of what this means for Britain and Europe.

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We have discussed this period of history previously. It persuaded us not to wager on a euro break up too early back in 2011 when markets questioned the resolve of Greece to remain. The UK generations earlier, and Italy since the passing of the lira, have grimly and with some resolve trudged through the economic sludge of a decade or more with no growth in nominal GDP. This seems to demonstrate that people can be stoic and hardy as long as they feel hope that their standard of living might improve. And so five years ago, and with a likely economic recovery imminent, it felt too early to radically challenge the perception of prosperity; the system was safe.

Today however, following Britain’s announced departure, the equation has changed. Previously with 28 members and no history of exit the system’s gravitational pull was immense. But it was vulnerable to just one defector weakening the system. This is where we are now. We believe that the UK has the upper hand. Political commentators may be in revolt, but the combination of higher gilt prices and the sharp drop in sterling mean that the British need not fear the passage of time.

Recall that there were 45 member countries committed to the gold standard prior to the UK’s departure in 1931 but just 12 by 1933. How many of the remaining 27 European member countries will there be in 2018?

The modern EU has always seemed quixotic. On the one hand we have the wistful and laudable romanticism of the principle of the free movement of people between member states. On the other, an avowed German inspired obedience to the tenants of “hard” money much beloved by the architects of the gold standard. It was always questionable just how long this curious mix would last.

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Hugh Hendry: How We Learned To Sop Worrying And Love ” the Brexit bomb”