Readers in the United States may be too overwhelmed by news stories regarding porn stars, presidents, and prosecutors to recall that there is another high-stakes international drama playing out just on the other side of the pond – Brexit. American investors should stay informed, as there are uncanny parallels between Brexit and President Trump’s ‘America First’ doctrine.
In a recent Framework Investing Office Hour conference call, we were joined by two European-based “Superforecasters,” as identified by Philip Tetlock’s Good Judgement Project, to discuss their take on the UK’s split from the European Union. We have posted several video excerpts below, and Framework members can log into the “Archived Webinars” section of the Dashboard to see the full set of videos. We have also opened a Framework Forum posting on Brexit, which has some additional thoughts regarding attractive investing opportunities.
I have been watching Brexit with an eye to the US, as the fundamental issue behind both Brexit and President Trump’s “America First” trade policy is similar in my view: the move to sever trade relationship with erstwhile trading partners.
An argument that I have made in my Forbes column in the past is that making international trade costlier and time-consuming limits economic activity, makes all products – domestic and imported – more expensive, and eventually limits real economic growth.
The Superforecasters had a similar take, with one – Mr. Brett Specter, an American ex-patriot who runs a UK-based import-export business and lives mostly in Spain – drawing a distinction between short-term Brexit effects and long-term ones. Mr. Specter believes that in the near-term, temporary arrangements and work-arounds can be found that will limit the degree to which UK’s separation from the EU customs area will negatively affect current business. However, longer-term, the UK will simply not be as an attractive of a place to base a business.
The Anglo-Dutch consumer products giant, Unilever’s, recent decision to scrap its London headquarters and locate all of its executive functions to its Rotterdam headquarters is a case in point. The firm will keep manufacturing plants in the UK – a work-around that will limit the impact of Brexit on Unilever’s operations – but its future is on the continent, as management must see it as a more attractive corporate environment.
In the US, we have seen what would have been our TPP trading partners do an end-around the United States by forming their own Pacific basin free trade zone. The development of such a zone will not affect most US businesses’ competitive outlook in the short-run (though agricultural concerns have reportedly met with immediate competitive setbacks), but in the longer-run, US firms lose out because they no longer have a voice at the community negotiating table.
Stocks allow investors to buy a piece of future cash flows, and the vast majority of any stock’s price is derived by the assumption that it will continue to generate growing cash flows in the future. At present, stocks are being valued as though growth will last forever, but both in the UK and the US, we see structural factors limiting, rather than boosting growth in the medium term. We retain our cautious outlook on stocks.
We are posting several excerpted video clips of our talk with the Superforecasters. The first has to do with the question of immigration, about which I’ve been recently reading a book entitled The Strange Death of Europe: Immigration, Identity, Islam by Douglas Murray. While the author style is too sanctimonious for my taste, his book has made me start to think that the EU’s immigration policy should be an issue at which the European community should look more thoughtfully.
The second has to do with the sticking point of Northern Ireland. Generations of Irish Republicanism succeeded in creating the Republic of Ireland, which is an EU member state, and the British territory of Northern Ireland. As Superforecaster Seamus Fagan explains, the Brexit negotiators must walk a fine line with regards to how borders are handled between these two nations. The Good Friday Agreement specified that no hard border be established between Northern Ireland and the Republic, but Brexit would entail a hard border between the two states be constructed.