Recently, I wrote an article describing my views that Brexit is growing increasingly likely, rather than unlikely, by simple virtue of the fact that it is already current law, and attempts to repeal it have failed.
Contributor Peter Cooper responded with an emphatic assertion that whatever the technical merits of my article, the practical reality was very different because the MPs would simply hold a new vote. And if the government tried to stop them from holding a new vote on the EU Withdrawal Act, they could always just call a vote of no-confidence instead.
This echoed some points made when Contributor Global Risks Insights wrote an article describing the potential for a no-confidence motion and what it would mean. They criticized Labour for moving a doomed motion, wondered what the point of such a thing could be, and explained the mechanics of no-confidence.
The purpose of this article is to respond to their points, and to re-iterate why I believe that sterling (OTC:GBB) is not poised for substantial gains prior to the actual Brexit day. Depending on the course of events it simply is not possible to anticipate sterling subsequent to Brexit day, especially with it unclear if we will even have a Brexit at all. But I believe that sterling will continue to have Brexit priced into it for now.
After Some Reflection
I try to make it a practice whenever myself and other colleagues on Seeking Alpha have a difference of opinion to not reply immediately. I want the points they made to be able to settle in both among our mutual readers, and in my own head as well. And Mr. Cooper’s citation of William Hague, a Conservative Party luminary, seeming to have much the same point of view about it as him was particularly noteworthy. So I didn’t write any reply straightaway.
Mr. Hague in fact has particular credibility and expertise, as a former leader of the Conservative Party and a longtime eurosceptic who surprised many by backing Remain in the 2016 referendum. He has seen this issue from just about every perspective, and therefore has a very good one of his own on the matter. It takes a lot of temerity to disagree with not only two fellow Contributors, but also one of the UK’s leading political authorities.
But, that’s what I’m going to do. The argument that has been advanced is that ultimately, a no-confidence vote or the threat of one will bring the government back into line with the majority of MPs who are either outright Remainers or at least opposed to a hard, no-deal Brexit. With respect, this is too oversimplified, and may even be simply wrong.
The Legal Law
First, I must respectfully correct one thing in Global Risks’ description of the no-confidence rules themselves. This is key to understanding my position. As they put it,
The motion will trigger a Parliament-wide vote on the government itself which, if it passes, will oblige Theresa May to ask the Queen to dissolve the legislature and force a general election.
Well, almost, but not quite. And the small difference is, in this context, crucial.
Under the terms of the Fixed-Term Parliament Act 2011, the Leader of the Opposition would have fourteen days after winning a no-confidence motion against the government to try to put together a majority in the current Parliament. Only if he failed would new elections then be called, when the clock had run out.
Of course it is very likely that he would fail, since Conservative Party members would not want to support a Corbyn-led Labour government even if they were willing to bring down their Prime Minister. However, this is, respectfully, to miss the devil in the details. The real significance of this clause is not the new government that won’t be formed, it’s the extra fourteen days before Parliament dissolves. Since the Act also provides for a five-week campaign before the vote, this means that even in the event of winning a no-confidence vote, there will come a date well in advance of the actual Brexit day - March 29th - when it is no longer possible for Brexit to be stopped by a vote of no-confidence.
The World Will Turn Upside Down
Indeed, worse than that, there will come a time when a no-confidence vote could actually favor a “hard Brexit.” The tradition in Britain, called ‘purdah,’ is that no major policy shifts are undertaken between dissolution and the new election. If there has been no Brexit change before the Parliament is dissolved, there might be surprisingly large difficulties in executing one in the intervening period between dissolution and Brexit Day. A no-confidence vote held anytime from mid-February on might well serve to lock in Brexit rather than cancelling it.
All members of Parliament know this full well, but it has received surprisingly little attention from the media at large, since few MPs are actually discussing it openly, perhaps considering it too “inside baseball” for general consumption. But this countdown, the real countdown, is very much on every MP's mind. One MP finally looked the elephant in the room in the eye when Conservative MP Desmond Swayne called on May to “prorogue” - essentially, recess - Parliament until April to make sure no legislation blocking Brexit could get through.
That was interpreted in many circles as a jest, but it is legally true, and even more so when Parliament has been dissolved instead of prorogued. A dissolved Parliament essentially freezes law into place - and the law is for Britain to Leave.
This has obvious implications for Brexit and sterling, but let me dispense with my other objection to Global Risks’ position first. Which is that Labour opposition leader Jeremy Corbyn “wasted time” making a no-confidence motion that had no chance. GR is correct that it was, indeed, almost universally agreed that this would fail from the moment it was announced, since neither Conservatives nor their DUP partners want to see far-left Corbyn come to power under any circumstances.
But that wasn’t really why it was brought. Corbyn has to contend with his own political calculations, including the real possibility that May will stay in power until mid-February when the terminal line is crossed on the countdown clock, with relation to the 2011 Act. At that point her own Brexiteer MPs might withdraw their support, as soon as it becomes favorable rather than unfavorable to Brexit to do so. Resulting, as GR says, in an election seven weeks later.
This is by no means certain, but it’s a real possibility Corbyn can’t discount. If Labour does run for office in a few months, Corbyn couldn’t allow it to happen that he never even tried to stop it. That would decimate turnout among Labour’s core supporters, two-thirds of whom favor Remain. He had to show them he was in their corner and at least make an effort now, in case Parliament dissolves before he can make an effort later.
The purpose of the motion, then, was really just for Labour to show that it left no stone unturned, that it did its level best. Some things are just so terrible for people to cope with that they expect every last thing, no matter how fantastical, to be tried. Such is the case for Labour’s pro-EU supporters and Brexit. Labour is now on record as wishing it could stop Brexit. That was the point.
Now, finally, back to sterling and investing, the reason we are all here. Sterling is essentially becoming rapidly a proxy bet on Brexit, to the exclusion of almost all other factors since the stakes in Brexit are simply nothing less than multigenerational. Think Brexit is still heading for the trash bin, like Peter Cooper and Sir William Hague do? Then you go long sterling and short British equities, since a stronger sterling will have such a large, deleterious impact on their overseas earnings.
Think Brexit is still on course for now with the outcome too close to call? Then you probably want to short sterling, as well as going long British equities, since they’ll do well with a weaker currency.
My own take is that the Brexit shutdown clock can now be measured in days, rather than weeks. No later than mid-February, and perhaps as soon as next week, the no-confidence motion will cease to be a tool in the Opposition’s tool kit to oppose Brexit with, and control of the process will pass even more than it already has into the Brexiteer Conservative MPs who now control Theresa May’s fate. With no imminent prospect of a Brexit reversal vote in the time remaining, I am not willing to call time on Brexit. And so I believe that sterling will remain weak, and British equities comparatively strong.
A no-confidence vote held tomorrow could indeed stop Brexit if passed, but a vote isn’t being held tomorrow, nor the day after, nor the day after that. And there will soon be crossed a crucial tipping point where the logic of a no-confidence vote, for both sides, will be turned upside down. Even assuming one does eventually pass, it has somewhere between one and two weeks to do so and still be a barrier to Brexit, rather than a boon to Brexit. The prospects for a no-confidence vote in the time allotted do not appear to me to be very good, and so I remain bearish on sterling.
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.