Brexit Story Running Toward Return

| About: iShares MSCI (EWU)
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Summary

Economic damage from the Brexit vote is real and growing.

Recession, a withdrawal from London, and economic pain are following its leaders out the door.

A humiliating return is still possible, and will profit those who hold their nerve.

Right now, everyone is assuming that the UK (NYSEARCA:EWU) vote for Brexit means Brexit is certain.

Legally, it's not. Legally, it hasn't even started. The government must invoke Rule 50 of the Lisbon Treaty in order to start the process, launching a two-year negotiation that could result in a decision to stay in.

Many British politicians, even those who voted Leave, think something like that is going to happen. They are exploring the membership models of Norway, Switzerland, and even Albania, and telling voters they can have the advantages of membership with none of the burdens, specifically the free movement of people. To these people, leave doesn't mean leave.

Well, it does. Europeans have been very clear on that point. If you want free trade, that includes free movement. Denial of that fact is the first step in a grieving process.

Meanwhile, real damage piles up. The pound has dropped from $1.50 to $1.30, and some are predicting parity with the dollar. Imagine what such a drop would do to your assets, and your purchasing power, for a minute, before we go on. Property funds have frozen redemptions, the biggest such freeze since the 2008 financial crisis. London real estate is in free fall -- check IUKP, which trades in London. How do you think that's going to end? JP Morgan Chase (NYSE:JPM) says it will take thousands of jobs out of the country if the UK loses "passporting," the free movement of money in-and-out of the EU, in the wake of Brexit. You know what the countries that have passporting have in common? Free movement of people.

Anger is all over the UK right now. Extremism is rising, and you can argue it's on both sides of the aisle. The feeling is not confined to the common left-right divide, but infects the UK's constituent parts. Scotland wants out. Many in Northern Ireland want out and they have Irish passports.

Bargaining is the third stage of the grieving process. Theresa May will be England's bargainer. She voted Remain. She will promise, during her leadership campaign, to invoke Rule 50, but she has already slow-walked the date from October to January. Meanwhile a recession is coming. I wonder how those who voted Leave feel as the Remain camp's predictions of disaster come true?

There are many, here and elsewhere, who continue to insist that Brexit marks the beginning of the end of the EU, of free movement generally, of free trade generally, that European unity was always a charade, a canard and a scam, and that Brexit proves "socialism" (which they never define) is what people should fear more than anything. They are welcome to that view, especially as Italian banks threaten to create a new pan-European financial crisis. I'm not buying it.

I am "just" a journalist. But I'm not the only person warning of a Brexit U-turn, one that could quickly bring UK stocks, including banking stocks, at least halfway back to where they were before the vote. Luis Cabral of NYU is saying the same thing.

"Ita-Leave" or any other talk of exit will be seen against the backdrop of what's happening in Britain, which is not pretty. Right-wing populism may be fun as a stance but it's horrible as economics. That is the lesson of Brexit.

Those who hold their nerve and refuse to panic, who step in when fear is at its height, are going to profit.

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.