Brexit is not the end of the world as we know it

As I write this at 8:30 pm California time, some 70% of the UK Brexit votes have been counted, and "Leave" is winning 51.5% to 48.4%. The betting odds on "Leave" are now approaching 100%, up from just 11% only 24 hours ago. It appears the UK will be leaving the EU, something that as recently as yesterday was "unthinkable" according to the establishment types and many market participants. The hype mustered by those favoring "Remain" has undoubtedly fueled the panic that has sent the pound down 10% in a matter of hours. 10-yr Treasury yields are down almost 25 bps, and gold is up over $50.

I may be swimming upstream, but I don't think this is the end of the world as we know it. Matt Ridley, a very wise fellow, penned these comments in the WSJ two days ago, and they make a lot of sense to me:

In voting Thursday on whether to leave the European Union, the British people face perhaps the most momentous decision since Henry VIII broke from the Roman Catholic Church in the 16th century so he could marry as he pleased. Though lust is not the motivation this time, there are other similarities. The Catholic Church five centuries ago was run by an unelected supranational elite, answerable to its own courts, living in luxury at the expense of ordinary people, and with powers to impose its one-size-fits-all rules despite the wishes of national governments. We were right to leave. 

A centrally planned, regional customs union ... might have made some sense in the 1950s. That was before container shipping, budget airlines, the internet and the collapse of tariffs under the World Trade Organization made it as easy to do business with Australia and China as with France and Germany. 

Even worse than in Westminster or Washington, the corridors of Brussels are crawling with lobbyists for big companies, big banks and big environmental pressure groups seeking rules that work as barriers to entry for smaller firms and newer ideas. The Volkswagen emissions scandal came from a big company bullying the EU into rules that suited it and poisoned us. ... The de facto ban on genetically modified organisms is at the behest of big green groups, many of which receive huge grants from Brussels. 

... the EU’s obsession with harmonization (of currency and rules) frustrates innovation. Using as an excuse the precautionary principle or the need to get 28 countries to agree, the EU gets in the way of the new. “Technological progress is often hindered or almost impossible in Europe,” says Markus Beyrer, director general of BusinessEurope, a confederation of industry groups. Consequently, we’ve been left behind in digital technology: There are no digital giants in Europe to rival Amazon, Google, Apple and Facebook. 

The EU is also against free trade. It says it isn’t, but its actions speak louder. The EU has an external tariff that deters African farmers from exporting their produce to us, helping to perpetuate poverty there, while raising prices in Europe. The EU confiscated Britain’s right to sign trade agreements—though we were the nation that pioneered the idea of unilateral free trade in the 1840s. All the trade agreements that the EU has signed are smaller, as measured by the trading partners’ GDP, than the agreements made by Chile, Singapore or Switzerland. Those the EU has signed usually exclude services, Britain’s strongest sector, and are more about regulations to suit big companies than the dismantling of barriers.

The UK is right to reject the regulatory burdens heaped upon it by an extra-national bureaucracy. The U.S. would be wise to follow suit and shrink the size of our bloated government by a few notches at least. Brexit could be the beginning of a brave new world, in which trade becomes freer and business becomes less burdened by taxes and regulations. The only politician here who is talking about such "radical" ideas is Trump, but he is gaining traction, as did the "leavers" in the UK. There is room for hope.

To close, the chart above puts into perspective today's collapse of the pound vis a vis the dollar. As I see it, the current exchange rate between the pound and the dollar is reasonable (finally), and it has moved, over the past 40 years, pretty much in line with the differential between US and UK inflation (the green line is representative of how the exchange rate would have moved if it exactly reflected inflation differentials over time).