A few years back – when Kathy Lien and I were just starting our forex business and I was no longer on a fat expense account – I had to go to London for a few days of work.
Talk about sticker shock. A basic cup of coffee was five bucks, and I wound up eating most of my meals in the form of egg salad sandwiches at a ready-to-eat shop called Pret a Manger.
These days I suspect I would be able to afford much more luxurious meals, not only because my business is no longer a startup, but also because the value of the pound has plummeted by more than 40% since that time.
|The value of the British pound has nosedived as investors grasp the long-range impact of Brexit.|
For the past few weeks, I have been warning you that investors have been lulled into a false complacency in the wake of the Brexit aftermath. On the surface, everything in the U.K. economy appears to be hunky-dory.
The PMI data has seen some of the largest gains in decades, wages are up and growth is some of the best among the G-7. But all of this positive economic news is really the result of fortuitous circumstances that won’t last.
How long before Britain’s out of the EU? Well, Prime Minister Theresa May has declared that the U.K. will formally start the exit process in March 2017 by filing what’s called Article 50 of the Lisbon Treaty. After that, the country would have two years to disentangle itself from the 28-country bloc.
Right now, the U.K. has the best of both worlds. It enjoys full access to the EU as well as a significantly depreciated currency, whichallows it to compete in European markets. But the markets are not dumb. They are beginning to see that U.K. politicians are favoring immigration reform at the expense of trade policy and that Europeans are in no mood to offer any concessions under such conditions.
The term “hard Brexit” has now become part of the market lexicon, and that essentially means that the U.K. may leave the EU without any favorable trade status whatsoever.
To make matters worse, the head of the World Trade Organization recently stated that if the U.K. reneges on its deal with the EU, then the U.K. would be forced to renegotiate its position with the WTO as well. Such a move would be the final death blow to the U.K. economy. Most experts estimate that “hard Brexit” could cost as much as 66 billion GBP in trade and shave a Depression-like 9.5% off the U.K. GDP next year.
Little wonder then that the pound crashed last Thursday, dropping 700 points in less than 30 seconds. Most analysts tried to blame the crash on “fat-finger” mistakes by some traders. But if that was the case, the cable would have recovered most of its losses by now. Yet it remains well below the pre-crash levels targeting the 1.2000 figure amid relentless selling in the currency market.
Indeed, the “hard Brexit” scenario could trigger something that almost no one thought would be possible – eventual parity between the pound and the dollar. Were this to occur, it would be a complete historical round turn for Great Britain as it loses all vestiges of its status as a global empire and once again becomes a small, isolated island nation.