Brexit and the bioeconomy

OK, the UK is exiting the EU, Cameron has resigned, Scotland is considering secession, Moody’s put the British credit rating on watch, and over the weekend 12 shadow ministers of the Labor Party were either sacked or resigned, as the UK’s extraordinary political crisis unfolds. Markets melted on Friday, with $2 trillion in value wiped off the globe’s account books — the largest one-day value downgrade in world history.

And, so what, you might be tempted to ask. What does it mean for the economy, for me, my company, my job? Do I even need to pay attention to this.

The Bottom line

Pay attention, but out of the corner of your eye. Currencies will revalue, investment portfolio structures will go conservative for a period. Commodities will get punished. But the structure of the overall 2016-2019 narrative won’t be changing. Just yet, anyway. Too many “what ifs” need to be resolved vis-a-via Britain, the EU and the rest of the world.

The bioeconomy. Major currency revaluations will create winners and losers. For right now, investors will be pulling away from first-of-kind technologies in a flight from risk. Climate agendas in the EU will be delayed but not changed.

The economy. The UK may be in for a rough trip if Epsilon Theory’s Ben Hunt is right and the EU sets out to make an example of the UK to prevent further defections. Meanwhile, eyes will be on the watch for further contagion — defections, loss of growth, dips in consumer confidence, or a surge in nationalist/protectionist/anti-globalist sentiment, which is exerting pressure from the left and right.

The climate. Delays in implementation, not much else as yet. But carbon prices are harder to impose — especially on a global basis as liquids and transport needs — when there is political disarray.

Trade. Trade liberalization will take a pause. The Transatlantic Trade & Investment Partnership — well, that was on life support as it is. Consider it cryofrozen for now. Maybe it’ll get unwrapped successfully from the cryo-foil later on.

Here’s a summary of views

US President Barack Obama, to outgoing UK Prime Minister David Cameron

“Bummer.”

Ben Hunt, who writes Epsilon Theory, opines:

There are two market risks associated with Brexit, just as there were two market risks associated with Bear Stearns.

In the short term, the risk is a liquidity shock, or what’s more commonly called a Flash Crash. That could happen today, or it could happen next week if some hedge fund or shadow banking counterparty got totally wrong-footed on this trade and — like Bear Stearns — is taken out into the street and shot in the head.

In the long term, the risk is an acceleration of a Eurozone break-up, which is indeed a Lehman moment (literally, as banks like Deutsche Bank will become both insolvent and illiquid). There are two paths for this. Either you get a bad election/referendum in France (a 2017 event) or you get a currency float in China (an anytime event). 

What’s next? From a game theory perspective, the EU and ECB need to crush the UK. It’s like the Greek debt negotiations … it was never about Greece, it was always about sending a signal that dissent and departure will not be tolerated to the countries that matter to the survival of the Eurozone (France, Italy, maybe Spain). 

IMF chief Christine Lagarde

“There was a violent, brutal, immediate massive move, the pound went down by 10 percent. But there was no panic and the central bankers did the job that they were prepared to do just in case, which was to put a lot of liquidity on the markets. At this point in time, policy makers both in the UK and in Europe are holding that level of uncertainty in their hands. How they come out in the next few days is going to really drive the direction in which risk will go.”

Former US Federal Reserve chairman Alan Greenspan

“The euro currency is the immediate problem. Brexit is not the end of the set of problems, which I always thought were going to start with the euro because the euro is a very serious problem in that the southern part of the euro zone is being funded by the northern part and the European Central Bank.”

US National Security Adviser Susan Rice

“We will do all we can to ensure that the areas in which we are cooperating — counter-terrorism, you name it, will remain solid.”

Charlie Sernatinger, global head of grain futures at ED+F Man Capital

“Make no mistake about it: Brexit was a huge change in the macros. It is going to change a lot of hedge fund ideas about the dollar and how to position themselves in commodities.”

Reuters’ Elisabeth O’Leary

Scotland’s devolved government will start a drive to protect its European Union membership and will prepare for a possible fresh independence vote after Britain voted to exit the bloc, First Minister Nicola Sturgeon said on Saturday.

“We are determined to act decisively in a way that builds unity across Scotland,” Sturgeon told reporters, adding that might include a vote on Scottish secession from the United Kingdom.

Scots rejected independence in a 2014 referendum by 55-45 percent and at the time the vote was considered a decisive verdict for a generation. Since then support for independence has not shifted significantly, according to polls.

France’s Economy Minister Emmanuel Macron 

“We would first build this new project with European peoples and then submit this new roadmap, this new project, to a referendum. It must be done in the right framework.

ECB Governing Council member Francois Villeroy de Galhau

“If tomorrow Britain is not part of the single market, the City cannot keep this European passport, and clearing houses cannot be located in London either. There is a precedent, it is the Norwegian model of European Economic Area, that would allow Britain to keep access to the single market but by committing to implement all EU rules, It would be a bit paradoxical to leave the EU and apply all EU rules but that is one solution if Britain wants to keep access to the single market.”

Ken Polcari, director of the NYSE floor division at O’Neil Securities 

“I don’t think this is a catalyst that’s going to cause a bear market in this country at all. People should not be going ‘the world is coming to an end.’ It’s not.”

German Chancellor Angela Merkel 

“Negotiations must take place in a businesslike, good climate. Britain will remain a close partner, with which we are linked economically. Quite honestly, it should not take ages, that is true, but I would not fight now for a short time frame.”

Italy’s finance minister Pier Carlo Padoan

“[We should not] concern itself only about banks. [There’s] “deep dissatisfaction” over immigration, security and slow economic growth.”

Billionaire investor George Soros

“Disintegration of the EU [is] practically irreversible. Britain eventually may or may not be relatively better off than other countries by leaving the EU, but its economy and people stand to suffer significantly in the short to medium term.”