Today in Brexit, Day 1,092

Sunday marks three years since UK voters opted to leave the EU by a 52-48 margin, with 72% of registered voters turning out.^[i] Since then, the country has had two prime ministerial resignations, one general election, 11 consecutive quarters of GDP growth (through Q1), one royal wedding, two royal babies, one interest rate cut and two rate hikes. Through Thursday’s close, UK stocks are up 12.9% in USD and 31.9% in sterling.^[ii] Oh, and the UK remains an EU member-state, stuck in a tangled web of politics. Our thoughts on this whole saga haven’t changed: We still think the lack of clarity is a drag on sentiment and investment, and we expect UK stocks (and the economy) to benefit from simply having clarity, whenever it comes and regardless of Brexit’s ultimate form. But in the meantime, we thought it would be fun to share a few random musings.

1. Three years ago, the prospect of the US and UK being led by Donald Trump and Boris Johnson, respectively, was either a long shot or a joke, depending on one’s biases and point of view. Yet now, it appears increasingly likely, with one of those blond gentlemen residing at 1600 Pennsylvania Avenue and the other cycling quickly toward 10 Downing Street as he mows down the competition in the Conservative Party’s leadership contest. He could yet lose the final round—a party-wide vote between him and Jeremy Hunt in five weeks. But given his outsized lead within the party, it would likely take something dramatic to derail him. (Then again, no one expected David Cameron to win in 2005.) Relatedly, the smart money said Nigel Farage—a single-issue UK politician—would have no political purpose after the vote and would be retired to a life of leisure and punditry. Instead, he leads the new Brexit Party, which happens to outpoll Labour and the Conservatives. If ever you needed an example of why markets don’t price events beyond 30 months out, this is it. They are unpredictable.

2. Keep the above in mind if you encounter think-pieces claiming Rory Stewart will be prime minister in five years.

3. In May 2016, the UK Treasury released its official forecast of the economic impact of a vote to leave the EU. Recession was a foregone conclusion—the only uncertainty was how bad it would be. The milder scenario envisioned GDP falling -0.1% q/q for four straight quarters from Q3 2016 through Q2 2017, then growing only 0.2% q/q for each of the next four. The more dismal scenario saw GDP plunging -1.0% q/q in Q3 2016, followed by sequential -0.4% declines in the next three quarters. From there, GDP would flatline in Q3 and Q4 2017 before growing 0.1% q/q in each of the next two quarters. This forecast was one of the hallmarks of “Project Fear,” a derisive nickname given to the Remain campaign’s approach. It was also wildly incorrect. UK GDP growth accelerated to 0.5% q/q in Q3 2016 and 0.7% in Q4.^[iii] It slowed from there but remained in the black. Recession never came. Lesson: Official economic forecasts are not a good basis for investment decisions.

4. Keep the above in mind as you encounter similar dire forecasts warning of calamity if the UK exits the EU without a deal. It is all just (potentially biased) guesswork, no matter how much jargon and how many charts they dress it up with.

5. With that said, it seems beyond question to us uncertainty is having an effect. Business investment fell all last year, and we suspect its Q1 growth came from companies’ stockpiling ahead of Brexit’s original due date, March 29. Long-term projects remain on ice. Meanwhile, UK stocks, though positive, have underperformed the world quite a bit since the vote. Continued growth despite the uncertainty fog is a testament to the UK’s amazing resilience, making us wonder how much faster the country could be growing if Brexit had been settled a long time ago.

6. Former Prime Minister David Cameron—the person who started this whole saga by promising a referendum in order to prevent euroskeptics from ditching the Conservative Party—has a memoir due out in September. His publisher reportedly asked him to cut 100,000 words from his original manuscript. That translates to about 150 pages of text in a Word document with size 12 font, which probably rounds to about 200 pages of book. Yowza. Good luck word pinching, Mr. Cameron.

7. Since Brexit is now due by Halloween, we think it is only right to dress as Brexit for Halloween. Theresa May, Jeremy Corbyn and the aforementioned Boris are also acceptable potential costumes, particularly if you do them as a group.