We all woke up to the news that the Leave campaign has succeeded in persuading the British to leave the EU.
While I am shocked at the results, it also leaves me very worried about the future of the UK. Throughout the campaign, there has been no concrete plan by the Leave campaign about what they will be doing next after destroying a relationship that has taken almost half a century to build.
This is the most frustrating part of politics for me as an investor and someone genuinely interested in social and political discourses. Countless man-hours and other resources have been spent to invest in the relationship from both sides but for the sake of political expediency, it was simply thrown away.
The wastefulness of this practice disgusts me because, in the private sector, we are investing our money and the inheritance of our children so in the majority of cases, that level of flippancy does not exist.
Beyond this, I have continually spoke about the lack of leadership in our world today and this is compounded by a political class that is now mainly drawn from newspapers, PR Group and political research organizations.
This rise of career politicians was highlighted in the last election in the UK where the three party leaders were essentially career politicians including Prime Minister Cameron. This type of politician is not driven by conviction and real world experience but on opinions formed within the bubble of party politics that can act as a counterweight to the advice given by pollsters.
This was the case with Prime Minister Cameron, he knew that there was a strong anti-EU sentiment in the nation and also within his own party and rather than clearly state his position, he constantly turned based on the prevailing mood in the country and within his party.
It was this indecisiveness that mobilized, galvanized, and emboldened his opponents to push harder before and during the referendum because they knew that his indecisiveness and lack of conviction will be an asset to their campaign and so it proved.
To say that the negotiations to pull out and stabilize the UK will take two years is incredibly optimistic, I expect it to take at least seven years as there is so much to do. As a former lawyer working with EU law, it can be fiendishly complex especially at the constitutional level and how this affects other pieces of legislation affected when the European Court of Justice and European Law were the highest level of law in the land.
These laws have permeated every facet of business life in the UK from competition, employment, health and safety, food regulations, export policy and many more.
How these are resolved over time will be very critical to UK's industry success in the short, medium, and long term.
As an investor, I like to take a broader approach to detect patterns in order to understand the various dimensions of a challenge and/or a business opportunity.
One of the worrying trends we are seeing is the growth of the right wing all over the world and the popular mode of operation is for a right wing leader to be ousted, he is replaced by a left wing saviour who, at first, pleases everyone but by the end of the reign, that person is removed amid claims of financial profligacy and a so-called fiscal conservative is handed the leadership in which they immediately set out to destroy all of what the previous government had spent ten years building in the name of saving the economy.
We are seeing this happening right now before our eyes in Brazil and Argentina.
We have seen this take place in Britain. Across Europe, the debate rages on about whether the correct way forward is austerity or it is time to move to a more growth-oriented spending model.
While it may be easy to dismiss these trends as being transitory in nature, it is also important to note that what we are seeing explode in Britain and elsewhere is a force that has been burning in the underground for years. In Europe, this has manifested in the disdain for the European Union and its institutions.
I have argued in a previous article that Europe has really done a very bad job of PR because it has not trumpeted its achievements enough. Traveling across Eastern Europe today compared to the late 1990s, the difference is palpable.
The European Union helped to drag what was a very backward post-Soviet Eastern Europe and East Germany into the modern and developed nations and regions we see today. They have created a foundation of legal, economic, and political institutions that have prospered and increased living standards across Europe and have also been an advocate and donor of numerous international development initiatives worldwide.
They developed and implemented the euro currency seamlessly which has created excellent conditions for doing business with Europe compared to previously when one had to contend with drachmas, pesetas, francs, guilders, deutschemarks, liras and much more.
As someone who has studied the EU in depth, I can state categorically that it has been badly misrepresented.
Europe's farmers will have all been bankrupt today without the common agricultural policy because, strictly speaking, agriculture is not a general European competitive advantage. Its supposed obsession with bureaucracy has constantly been geared towards maintaining high standards in food, business, industry, consumer protection and so much more.
It has taken on global companies and won in its insistence on a fair deal for European consumers, these companies include Google (NASDAQ:GOOG) (NASDAQ:GOOGL), Microsoft (NASDAQ:MSFT), Monsanto (NYSE:MON) and many more. Within a territory like Europe, it is inevitable that international trade will grow but the EU has helped to develop this into a strong single market without barriers and tariffs coupled with strong and robust protection for consumer rights in cross-border transactions.
Despite this, right wing tendencies have surfaced because of fears that sovereignty is being swept away and that the European Commission is undemocratic, which is not true, because two out of the four main institutions in the EU are democratically elected, these are the European Council that is the democratically elected leaders of the nations and the European Parliament whose MEPs are directly elected by their citizens.
The other two which includes the European Court of Justice and the European Commission are truly pan-European in their makeup. One can also say the same of other institutions within the EU system like the European Central Bank and the Council of Ministers which is also a council of democratically elected ministers of member states.
This is not to suggest that the European Union is perfect because it is not in the same way, no organization on earth is perfect but in every type of mutually beneficial cooperation, there must be some quid pro quo, in order to get something, people will need to give up something else.
This is the way the universe works, it is a universal principle, in order for harmonization to succeed, each nation necessarily had to submit to a supreme decision-making body of which they play an equal role in shaping its policies because the decision-making at every level of Europe is done by Europeans from different member states.
Even when we decide to consider immigration, we cannot forget that the war in Syria or Libya or Somalia has its roots in failed Western economic policies nor can we forget the centuries of colonialism, the effects of which nations are still fighting to overcome its effects after two and in some cases only one generation. There is a humanitarian crisis of epic proportions taking place in Syria for which as human beings we are duty-bound to offer our assistance despite fear and scaremongering.
It is my observation that we see the growth of extremism from both the rise and left from deliberate misinformation of the masses because the truth is far more complex than extremist news sources will allow and when balanced truth is presented, it creates a more cooperative attitude in the citizenry than will otherwise be the case.
For us as investors, while Brexit was unexpected, it should not have been excluded especially in an environment where misinformation reigns, this should be a rule that we adhere to going into the US Presidential election.
Based on the foregoing, I believe that we will see a gradual but definite divergence between the EU and both the UK and the US.
As I have mentioned in a previous article, the EU is increasingly pivoting towards Russia and the Eurasian union to create a common market which will include a common financial market and capital markets union, this will be a significant boon for European banks and also Russian businesses as they will get access to large pools of European financing.
It will also open up Russia's 140 million plus population to tariff-free European goods and vice versa. It will have transformative effects in trade policy, energy policy, foreign policy and so much more.
Going forward, rather than seeing the vote last week as a negative, it should be seen as a positive and furthermore, it will not destroy EU but make it stronger.
A good way to take advantage of this is to sell or short a US-focused ETF, these have largely appreciated over the course of the last 12 months but I believe that it is time for investors to begin to sell especially as we come into the autumn.
There is one nuance to remember and this is that the large cap ETFs will not do because they will in fact benefit from EU expansion and growth but to really accomplish the goal of winning with both sides of the spread is to short a small cap US-focused ETF like IESM from which one can ride upon what is widely acknowledged will be a very challenging period for the US with increasingly lower consumer and corporate spending and investments.
The idea is to couple selling the US-focused ETF to buying an EU-focused ETF like IEV or even more precisely IEER, because I believe that it is this Central Eastern European market that we will see the strongest growth especially over the next five years as we start to talk about a single EU market incorporating Russia, Ukraine, and Belarus.
The effect of this will enhance both the growth of the European ETF with the fall of the US ETF.
Finally, in terms of Britain-focused ETFs like EWU, it will not really make a difference because the constituent companies are global in nature.
In conclusion, I will advise investors to use global policy frameworks as a guide to investment possibilities and looking at the policy framework of the EU in this article, the result is clear "BET ON THE EU".
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.