Here’s the thing: The only certainty is uncertainty. All we can do is prepare ourselves to adapt to circumstances as they are and as they evolve.
Ours, however, is a chaotic opera with leitmotifs tragic, comic, and tragicomic. Absurdity, for instance, comes across on the regular.
And today we have word that German Chancellor Angela Merkel has cleared the way for the prosecution of German comedian Jan Böhmermann for writing a poem that mocked Turkish President Recep Tayyip Erdogan.
Here we have a clash between Germany’s free-speech traditions and the government’s efforts to safeguard its important relations with Turkey.
Comedy… tragedy… and this is just a subplot.
The slow unraveling of the European Union, an experiment started in the aftermath of World War II, lacks the dramatic punch of this ridiculous free speech/international relations “clash.”
But it is weighty. It has serious consequences.
And there’s the strain of stultifying democracy we see in the subplot coursing through the denouement of this chapter of Europe’s story. We don’t know how it will end. But we can prepare for possibilities.
Wall Street Daily’s Global Markets Analyst Martin Hutchinson analyzes the potential outcomes for the European Union ahead of Britain’s June 23, 2016 “Brexit” referendum.
He walks us through a potential “domino effect” and outlines the way Europe’s unions could be redrawn.
And, most importantly, Martin identifies investment opportunities that will emerge from the chaos.
As George Washington did write in his famous Farewell Address, “The great rule of conduct for us in regard to foreign nations is in extending our commercial relations…”
Video: The Final Steps of the Federation of Europe
Global Markets Analyst Martin Hutchinson breaks down the European Union before the British people vote on a “Brexit” that could lead to the dissolution of a 60-year-old experiment.
No Yes Exit
The British people will vote on whether to exit the European Union (EU), now known, of course, as “Brexit,” on June 23, 2016. Based on current opinion polls, the vote could go either way.
The main question Martin addresses in this weekend’s Saturday Spotlight is, “What would happen to the European Union if Britain did vote to exit?”
There are a number of other countries other than Britain that are unhappy with their positions in the EU. And they may look to exit, too… and they might be emboldened by Britain’s exit.
Greece and Portugal don’t like the austerity measures imposed on them by the EU’s central bureaucracy.
The Greek people have already spoken on the matter by electing socialist governments that want to spend money. They don’t want to be austere.
If Greece and Portugal continue on their present paths – spending more money, staying where they are vis-à-vis the EU – eventually European taxpayers will be asked to bail them out.
And that’s going to get uncomfortable… so much so that Greece and Portugal will be asked to leave the EU.
Up North, in Spite
A Dutch referendum last week rejected the association treaty with Ukraine. The result of the vote doesn’t mean Holland has a problem with Ukraine; quite the opposite, in fact.
It’s simply a matter of the Dutch people voting against the treaty to spite the EU bureaucracy. “And that,” Martin notes, “is becoming a real problem.”
The source of popular discontent is the fact that “supranational bureaucrats are not accountable to their voters, and their worldviews don’t represent the people they serve and don’t fit properly with the people they serve.”
You can get a taste of the local flavor by watching the satirical British TV series Yes Minister. The main character, the civil servant Sir Humphrey, is “busy running everything the way he wants it and not allowing any popular participation.”
“These international bureaucrats are all Sir Humphrey,” Martin quips.
There’s no popular participation at all in the EU government – which ostensibly represents 500 million people.
Whether you’re talking about Britain, Greece, Portugal, or Holland, this is the real problem.
“…Just Like the Soviet Bureaucracy”
Martin illustrates his point with an anecdote about a lunch he had, shortly after the fall of the Berlin Wall, with Mileti Mladenov, then the deputy chief of Bulgaria’s central bank.
Mladenov had recently made his first visit to the seat of the EU government. “The Brussels bureaucracy,” he observed, “you know, it’s just like the Soviet bureaucracy…
“Only they don’t have quite as much understanding of Bulgaria’s particular problems as the Soviets did.”
There’s not really a way to have a union – as distinct from a trade agreement – without a big international bureaucracy.
According to Martin, the EU’s original goal of “ever closer union,” articulated in the 1950s, “was basically a mistake.”
“It’s just too big to manage.”
Disbanding the EU altogether would result in fewer regulations on economic activity. And they’d be set at national levels, so they’d reflect national preferences.
The Scandinavian countries, for example, would have much tighter regulation that everyone obeyed. In Southern Europe, they’d have regulations to which nobody paid any attention.
Ultimately, it would be less regulated and freer, and markets and economies would work better.
Easy as 1-2-3
Martin identifies three things that could happen if Britain chooses to exit.
Other countries may exit. Keep your eyes on the Netherlands and Scandinavia – none of Sweden, Finland, and Denmark are “terribly happy” with the EU.
Greece and Portugal could leave, or they could get kicked out. Spain replaced “a very good and sane government” with one that wants to spend.
A second potential outcome is a break into northern and southern blocs. In the north would be those who desire tighter regulation and an orderly society – Germany, Scandinavia, the Netherlands.
The southern countries, meanwhile, “welcome chaos and want to spend money on nonsense when they feel like it.”
The “Southern euro” would devalue continually against the “Northern euro.” “But there would probably be advantages to both groups of countries in association with each other but not pulling the two groups together.”
The third possibility is breaking up into independent countries altogether – in other words, undoing all the work since the 1950s.
That’s not very likely.
Economically, whatever happens with the EU, European countries should keep the free trade area intact, “rather like NAFTA.”
There are many advantages to having a broad range of countries trading together without tariffs.
A single currency, perhaps two and as many as three or four, makes sense. The alternative – 28 countries each with their own currency – will make a lot of money for foreign exchange dealers, but “cost everybody else a fortune.”
Investors “should favor the leavers not the stayers – at any rate, the leavers that are doing so for positive reasons.”
Germany, Scandinavia, the Netherlands: These are sensible countries, they’ll find that their regulations are less onerous and their economies will work somewhat better without being members of the EU.
Martin concludes that those countries look like places to invest.
The process of them leaving the EU will be complicated, and there will inevitably be panics in the market.
And that means you’ll be able to pick up assets on the cheap.
“Remember,” Martin writes in an April 12, 2016, piece for Wall Street Daily, “the EU was conceived from the war-torn Europe of the 1950s as a means of avoiding further conflict. Sixty years later, European countries are disinclined to cause strife, meaning the EU may no longer be necessary.”
Martin expands on the possible “domino theory” of a Brexit and identifies issues specific to particular countries that make their own exits more or less likely.
Chief Technology Analyst Lou Basenese kicks off his curious and entertaining story of a proposed takeover that really wasn’t with a bit of time-tested advice from President Ronald Reagan: “Trust…but verify.”
As Lou writes, “We live in a world where computers scrape regulatory filings and trade automatically based on headlines. Not to mention, many short-term traders are always hunting for momentum-based plays to scalp quick profits.
“But in this case, forget having merely a rumor of an offer. We had an official government filing with a specific price – $32 per share – which represented a 65% premium to Monday’s closing price.”
Too bad the offer was “totally bogus.”
Chief Income Analyst Alan Gula makes his own invocation, quoting Oscar Wilde – “Everything popular is wrong.” – in a story explaining why caution is critical “when sentiment reaches a bullish extreme.”
Senior Analyst Jonathan Rodriguez takes a hard look at an “overlooked and undervalued” stock from the industrial sector.
This engineering and construction firm was hit hard by the collapse of the global oil market. But shares are attractively priced, and the underlying fundamentals “look good.”
Finally, Senior Analyst Greg Miller picks up his ongoing coverage of the Internet of Things with an update on Revolv, which was once thought to enjoy “first-mover” advantage in a hot new market.
Well, Alphabet Inc. (GOOGL) unit Nest is winding up Revolv and will shut it down on May 15.
There are lessons to be learned – for consumers and investors. And Greg has ’em.