No-Deal Brexit isn't just a British problem: This could wipe $15 trillion off global markets

January 19, 2019 | Phil FershtJamie SnowdonOllie O’Donoghue

In 2008 Lehman Brothers nearly took down the global banking system... in 2017 Greece's debts were poised to destroy the European economy... today, we are staring at a stock market that gyrates up and down double-digit percentages in a single day, based on one awkward tariff tweet-up between Xi and Donald...

We're talking about the world's 5th largest economy going into immediate meltdown.  This is more than a UK-only debacle

So... who cares about the world's 5th largest economy potentially plummeting into a complete meltdown? Let's just have a good giggle at those idiotic British politicians hell-bent on destroying the country over a referendum staged 2.5 years ago on a topic no-one actually understands.  Yeah, let's not worry as they'll be screwed, and we can all make Brit-jokes at parties as those idiots run out of medical supplies and are forced to import frozen butterball turkeys pumped full of Ractopramine and several other GMOs... yum.

Here's the bad news - Lehman and Greece are small-time when you consider the potential damage a complete Brexit failure will cause, if - as it possible - the UK government paralyzes itself and lets its economy degenerate into a warzone of regulation chaos, complete data disaster, supply chain meltdown and political purgatory.  While we have boldly - and positively - predicted (see earlier post) that Brexit won't actually happen, there is also the distinct possibility that Brexit and no-Brexit blindly meander into the nothingness of a "No-Deal" scenario.

We have predicted that - at the end of the day - politicians are surely not that selfish, and voters really aren't that stupid to allow their country to descend into complete economic and social chaos... and madness.  But that's because we, at HFS, have assumed a modicum of intelligence does exist in the world. But, we could be sadly naïve.  However, there is some hope - and that hope is the simple fact that if we Brits commit the ultimate harakiri of a No-Deal Brexit, we take the rest of the global economy down with us.  You thought Lehman Bros was bad?  You've seen nothing yet folks.

Why this could be a $15 trillion global decimation

If we look at similar shocks to the stock market over the last century, it takes relatively little to create a major downturn in global asset values. We don’t need to look too far back this decade to see how even a moderate dip on global stock markets cans seriously impact the health of the economy.

If we look at the Asian financial crisis in 1997, for example, we can see just how quickly the collapse of even a relatively small economy can wipe off a huge percentage of global stock values. If we look at the potential consequences of not only one of the world’s largest economies, but one tightly integrated with the global economy, it’s not hard to see how much of an impact this could have on the major stock exchanges. That’s not to mention the major role the UK currently plays in global finance – with some estimates advising that the City of London manages over $9 trillion in assets, three times the size of UK GDP.

In a no-deal scenario, almost overnight the UK will no longer be compliant with EU rules and regulations – of which the previously discussed GDPR is just one of. There are countless other regulations that have formed part of the business environment of the United Kingdom, Europe, and by extension, the rest of the global economy, that are likely to emerge during the real-time stress testing that a no-deal crash out will lead to.

We can simulate (with the same degree of absolutely no certainty characteristic of the Brexit process) a major tumble in global stock prices by examining how previous shocks to the market have impacted in the past. And it’s worth noting, that our estimates are generally very conservative compared to other financial crises over the past century.

In the following illustration, we can see how some significant impacts to the value of stock markets can play out – particularly in areas most likely to be impacted by Brexit. In this simulation, we can expect the value of the twenty largest stock markets to drop by $14.9 trillion as a result of the major market shock of no-deal Brexit.

 

Click to Enlarge 

Bottom Line: A no-deal Brexit has far-reaching consequences, and could knock chunks of value from global stock markets to send us crashing into a serious economic depression

The warnings about the implications of no longer being compliant with GDPR are chicken-feed compared to the true global impact of allowing Britain to hive itself off from the EU with no insulation from the multiple disastrous consequences. In the past, major financial crises have been caused simply from a much smaller and less integrated economy defaulting on debts, now we’re facing the very real prospect that one of the world’s largest economies will wake up one morning with a completely different rule book, and much more red-tape and bureaucracy between it and the rest of the world. It’s not hyperbolic to say, the consequences to the global economy could be huge.

In a sick way, maybe this No-Deal scenario is what we all deserve to open the eyes of the politicians and gullible voters of the world for losing their grip on reality.  Maybe a period of poverty and hardship will knock us into shape to prepare for the next chapter of economic and political life.  

Ugh - we seriously hope it doesn't take a crisis of these immense proportions for everyone to wake up to the world we are shaping, where facts are merely tools to shape opinions and this sense of entitlement that so many people possess is threatening to destroy everything we've worked so hard to create.

There never was a "Brexit deal".  Brexit was all about pissed off working class people (mainly older folks) sticking it to the rich and to "foreign" people they saw 'stealing' jobs (they were never going to do themselves in any case).  So the only "Brexit" these people wanted was to ruin the economy for the wealthy British middle class and to stop immigrants coming into the country (and kicking out the existing ones too).  This is why the situation is such as mess.  The real motives behind Brexit are not the ones being discussed in Parliament or in Brussels.  It's a mess and needs to be somehow reset so the real debate can take place.  Otherwise this never ends.  

We all agree at HFS that change can be good, and we must embrace change... but changing to what?  That is the issue right now - what is wrong with the current system and what is the ideal system we need to move to...  and its not only the UK grappling with this problem...

Posted in: Policy and Regulations

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