Actionable advice in a Brexit scenario

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JCE66
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Actionable advice in a Brexit scenario

Post by JCE66 » Sat Jun 11, 2016 6:27 am

Bogleheads....Some time ago, I started a thread on what a good Boglehead should do if bond yields turn negative. I got a lot of great replies. Many of which were actionable. Now I am thinking about the growing possibility of a Brexit, eyeing my portfolio with a 25% exposure to international index funds, and wondering what a good Boglehead should do if Brexit becomes a reality. Is Brexit just market noise, or does Brexit represent a fundamental market change....and if something fundamental changed, how to account for this in my IPS.

At this stage of the game, I am not doing anything, I am just standing there. I continue to make weekly contributions to my Roth and 401K int'l index funds. I have not changed anything, contribution-wise. Possible options:

Do nothing. Just stay the course on the theory that Brexit is market noise and not a fundamental change.
Move away from developed EU index funds to Emerging markets index funds (meaning, redirect future contributions - not sell) as I own both types. Redirect all international contributions to total bond index funds or US equity index funds for the balance of the year (if Brexit) and re-evalaute 1/17.

Right now, my greatest asset is my labor capital so a big move downward is something I can make up in earnings, but quite honestly, a huge decline in 25% of my portfolio would not make me particularly happy.

From an actionability standpoint, what should a good Boglehead do in the event of a Brexit?

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LAlearning
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Re: Actionable advice in a Brexit scenario

Post by LAlearning » Sat Jun 11, 2016 6:36 am

Nothing.
I know nothing!

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JoMoney
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Re: Actionable advice in a Brexit scenario

Post by JoMoney » Sat Jun 11, 2016 7:46 am

JCE66 wrote:...Do nothing. Just stay the course on the theory that Brexit is market noise and not a fundamental change...

Until (if) it happens, it is just market noise, and the current prices are already reflecting peoples opinions on it. When (if) something actually does happen it will be too late to take action on it.
Seems to me, the appropriate thing to do is maintain the risk profile / allocations you thought was appropriate and stay the course. Nobody is really happy to see there current assets drop in value, but situations like this is probably why you only have 25% in this allocation and are diversified into other things with the other 75%.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham

qwertyjazz
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Re: Actionable advice in a Brexit scenario

Post by qwertyjazz » Sat Jun 11, 2016 7:54 am

Financial markets in Britain will have to do some restructuring. Money flows might change. There are really smart people though. So a short term bet of problems is not unreasonable, but the market already priced that in. Long term, I am not sure what clever ways people in London will come up with to make money. I am not willing to bet against them. Thinking this through, Brexit might get me to bet on these clever people given the likely short term drop. So actionable - consider move money to Europe and especially UK if Brexit occurs. But probably not too much
IOW rebalance your AA if prices change to keep your same percentages.
If Brexit occurs - I am thinking of increasing my international exposure - especially with buying in dollars as I expect an even further flight to safer dollars YMMV

long_gamma
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Re: Actionable advice in a Brexit scenario

Post by long_gamma » Sat Jun 11, 2016 10:25 am

JCE66 wrote:Do nothing. Just stay the course on the theory that Brexit is market noise and not a fundamental change.


Course of action may be "do nothing". "Leave" vote is fundamental change for both British and Euro economy. It is reflected in Cable vol's and they are reaching 2009 levels. Leave vote will embolden other countries in the EU, including France. It is quite a disaster scenario for world economy in my opinion.

Image
http://www.bloomberg.com/news/articles/ ... vote-nears

Some what similar scenario in smaller scale was Quebec campaign in 90's. Markets calmed down after stay vote.

Image

http://macro-man.blogspot.com/2016/03/t ... rexit.html

Short term trade is to fade the vol's if your forecast is in favor of stay campaign or buy Swiss futures if your forecast is leave vote.
"Everyone has a plan 'till they get punched in the mouth." --Mike Tyson

Valuethinker
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Re: Actionable advice in a Brexit scenario

Post by Valuethinker » Sat Jun 11, 2016 12:01 pm

The shockwave could hit the whole Eurozone very hard.

If Brexit occurs, and on the polls right now, it will, then there will be serious political ructions (the Prime Minister will likely be fired by his own party) and the knock on effect will be to embolden other right wing populist anti-European movements like the French National Front. Sweden at least is also likely to have an anti EU referendum and maybe other countries.

The exit negotiations will be long and fraught as any game theorist would tell you.

That will bring uncertainty, volatility and unpredictability.

There's really nothing to be done about it in portfolio terms-- however given the benefits to Mr. Putin, I might consider buying Russia ;-). Europe is going to be very distracted.

Valuethinker
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Re: Actionable advice in a Brexit scenario

Post by Valuethinker » Sat Jun 11, 2016 12:02 pm

long_gamma wrote:
JCE66 wrote:Do nothing. Just stay the course on the theory that Brexit is market noise and not a fundamental change.


Course of action may be "do nothing". "Leave" vote is fundamental change for both British and Euro economy. It is reflected in Cable vol's and they are reaching 2009 levels. Leave vote will embolden other countries in the EU, including France. It is quite a disaster scenario for world economy in my opinion.

Image
http://www.bloomberg.com/news/articles/ ... vote-nears

Some what similar scenario in smaller scale was Quebec campaign in 90's. Markets calmed down after stay vote.

Image

http://macro-man.blogspot.com/2016/03/t ... rexit.html

Short term trade is to fade the vol's if your forecast is in favor of stay campaign or buy Swiss futures if your forecast is leave vote.


Quite good analysis.

For the benefit of readers, the "Cable" is, for historic reasons, the Pound: Dollar exchange rate (trade in same).

qwertyjazz
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Re: Actionable advice in a Brexit scenario

Post by qwertyjazz » Sat Jun 11, 2016 12:08 pm

Long gamma and value thinker - thank you for your thoughtful analysis

I know long term predictions are dangerous. A Brexit would clearly have multiple knock on effects. But the market will have thought of them. I think the big question is the effects in 10-20 year time frame. Is that even a reasonable question?

Valuethinker
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Re: Actionable advice in a Brexit scenario

Post by Valuethinker » Sat Jun 11, 2016 1:36 pm

qwertyjazz wrote:Long gamma and value thinker - thank you for your thoughtful analysis

I know long term predictions are dangerous. A Brexit would clearly have multiple knock on effects. But the market will have thought of them. I think the big question is the effects in 10-20 year time frame. Is that even a reasonable question?


You are in the land of unknown unknowns. My view is it would kick off the unravelling of the EU - embolden the (largely right wing populist) parties that want to dismantle the EU. The Polish government and the Hungarian government would love it (EU objections to their new legislation would probably drop away, in a bid to keep the thing together).

Really all you could do is scenario analysis, because there are too many dependencies-- big unknowns (like what happens to rest of EU).

I do believe it would increase volatility and risk, and therefore increase the cost of capital and decrease investment in the long run.

Church Lady
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Re: Actionable advice in a Brexit scenario

Post by Church Lady » Sat Jun 11, 2016 1:39 pm

Likely we will see a panic reaction if BREXIT is voted in. However, it takes more than a referendum to exit the EU:

http://www.europarl.europa.eu/RegData/etudes/BRIE/2016/577971/EPRS_BRI%282016%29577971_EN.pdf

1. Any Member State may decide to withdraw from the Union in accordance with its own
constitutional requirements.
2. A Member State which decides to withdraw shall notify the European Council of its
intention. In the light of the guidelines provided by the European Council, the Union shall
negotiate and conclude an agreement with that State
, setting out the arrangements for its
withdrawal, taking account of the framework for its future relationship with the Union. That
agreement shall be negotiated in accordance with Article 218(3) of the Treaty on the
Functioning of the European Union. It shall be concluded on behalf of the Union by the
Council, acting by a qualified majority, after obtaining the consent of the European Parliament.
3. The Treaties shall cease to apply to the State in question from the date of entry into force of
the withdrawal agreement or, failing that, two years after the notification referred to in
paragraph 2, unless the European Council, in agreement with the Member State concerned,
unanimously decides to extend this period.
4. For the purposes of paragraphs 2 and 3, the member of the European Council or of the
Council representing the withdrawing Member State shall not participate in the discussions of
the European Council or Council or in decisions concerning it.
A qualified majority shall be defined in accordance with Article 238(3)(b) of the Treaty on the
Functioning of the European Union.
5. If a State which has withdrawn from the Union asks to rejoin, its request shall be subject to
the procedure referred to in Article 49.


Clearly, the negotiated exit will have great bearing on what the impact of the exit will be. When markets realize this, they will calm down. My reading of (3) is that in the absence of a successful negotiation, UK is out in two years in any case. To my mind, this gives the UK some leverage in negotiations, as it appears (from this side of the pond) that EU needs UK more than UK needs EU.

A lot can happen in two years. If you have an unbogleheadish appetite for risk and speculation, you can buy on the panic reaction and sell them when the media realizes this is just first inning of the game.

Of course, I'm just an American church lady. How can I know about such European things? I could be wrong. I am certainly more optimistic about brexit than others on this forum. I think I will buy the US panic reaction for sure.

Thanks for bringing this up!
Last edited by Church Lady on Sat Jun 11, 2016 6:47 pm, edited 1 time in total.
He that loveth silver shall not be satisfied with silver; nor he that loveth abundance with increase: this is also vanity. Ecclesiastes 1:8

Tanelorn
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Re: Actionable advice in a Brexit scenario

Post by Tanelorn » Sat Jun 11, 2016 3:07 pm

If you think they will exit, here are two actionable things:

1. Short the pound. The GBP exchange rate, vs dollars or euros, has moved down when exit polls have risen and up when the polls suggested staying.

2. Sell some equities, especially European equities, and hold more cash. If the exit vote succeeds, those equity markets will fall due to rising uncertainty. Then if you're an optimist that it will all work out, buy some cheap shares and get paid to wait for the uncertainty to pass.

It is looking somewhat more likely than not that the exit vote will pass. The immigration crisis may well tear the EU apart.

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whodidntante
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Re: Actionable advice in a Brexit scenario

Post by whodidntante » Sat Jun 11, 2016 3:12 pm

I have significant international holdings, so Friday wasn't the best day for my portfolio. What am I changing? Nothing. I'll rebalance if the market continues to react negatively and ex-US stocks drop significantly. I don't think the UK, the Eurozone, or ex-US have suddenly become bad investments.

HomoLudens
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Re: Actionable advice in a Brexit scenario

Post by HomoLudens » Sat Jun 11, 2016 3:38 pm

JCE66 wrote:Bogleheads....Some time ago, I started a thread on what a good Boglehead should do if bond yields turn negative. I got a lot of great replies. Many of which were actionable. Now I am thinking about the growing possibility of a Brexit, eyeing my portfolio with a 25% exposure to international index funds, and wondering what a good Boglehead should do if Brexit becomes a reality. Is Brexit just market noise, or does Brexit represent a fundamental market change....and if something fundamental changed, how to account for this in my IPS.

At this stage of the game, I am not doing anything, I am just standing there. I continue to make weekly contributions to my Roth and 401K int'l index funds. I have not changed anything, contribution-wise. Possible options:

Do nothing. Just stay the course on the theory that Brexit is market noise and not a fundamental change.
Move away from developed EU index funds to Emerging markets index funds (meaning, redirect future contributions - not sell) as I own both types. Redirect all international contributions to total bond index funds or US equity index funds for the balance of the year (if Brexit) and re-evalaute 1/17.

Right now, my greatest asset is my labor capital so a big move downward is something I can make up in earnings, but quite honestly, a huge decline in 25% of my portfolio would not make me particularly happy.

From an actionability standpoint, what should a good Boglehead do in the event of a Brexit?


I think it will be great if you provide information about: 1/ your time horizon and 2/ attitude about risk and risk taking.

Personally, I think that a possible Brexit is just the first step in the disassociation process. Negotiations will have to determine the exact parameters of the exit; Scotland will renew its independence bid ( negotiations with Scotland will be interesting because Scotland wants to keep the pound while the British nuclear arsenal is located in Scotland and the Scottish nationalists want it out of the country so the proverbial horse trading will ensue). A "domino effect" in Europe is possible. It's true that the accumulation of crises in the EU will have repercussions of the market --the Brexit, Greek debt crisis, migrant crisis, rise of Le Pen in France -- but the EU is a resilient structure ( although not a democratic one depending on one's conception of democracy of course).
Having said that I will venture a prognosis just for fun: Britain will stay, there will be no Brexit. Do nothing. If there is Brexit ,on the other hand, use the opportunity and benefit from it. It's going to be a rough ride. Enjoy it!
"'Thoughts without content are empty, intuitions without concepts are blind." Immanuel Kant

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Watty
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Re: Actionable advice in a Brexit scenario

Post by Watty » Sat Jun 11, 2016 4:03 pm

JCE66 wrote:Now I am thinking about the growing possibility of a Brexit, eyeing my portfolio with a 25% exposure to international index funds, and wondering what a good Boglehead should do if Brexit becomes a reality.


Something like the Brexit would be good for some countries and investments and bad for other countries and investments. The nice thing about index funds is that you would own both so they would tend to cancel each other out. I am doing nothing special.

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Epsilon Delta
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Re: Actionable advice in a Brexit scenario

Post by Epsilon Delta » Sat Jun 11, 2016 4:32 pm

Watty wrote:
JCE66 wrote:Now I am thinking about the growing possibility of a Brexit, eyeing my portfolio with a 25% exposure to international index funds, and wondering what a good Boglehead should do if Brexit becomes a reality.


Something like the Brexit would be good for some countries and investments and bad for other countries and investments. The nice thing about index funds is that you would own both so they would tend to cancel each other out. I am doing nothing special.


I don't think that's a good assumption. It's entirely possible it's bad for everybody (and awful for some) or good for everybody. International relations is not a zero sum game.

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Phineas J. Whoopee
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Re: Actionable advice in a Brexit scenario

Post by Phineas J. Whoopee » Sat Jun 11, 2016 6:38 pm

If we suppose money flows and financial sector profits will continue, but perhaps shift between banking centers, then for a well-diversified international equity portfolio it won't make much difference.

If we suppose there's substantially less international trade, then in a well-diversified international equity portfolio there will be no place to hide.

I don't know how the vote will come out, and I don't know what the economic result of either option will be. I do know that as a total market equity investor (with a mild US bias I've explained more than once) I'm on both sides of every transaction, and that's good enough for my purposes.

PJW

JCE66
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Re: Actionable advice in a Brexit scenario

Post by JCE66 » Sat Jun 11, 2016 6:51 pm

So.....summing up the various possibilities.

Don't just do something, stand there.
Short the pound.
Sell EU index holdings, hold cash and wait for the crash to buy back EU index funds at a huge discount (if Brexit happens)
Buy more EU index funds, regardless of Brexit.

HomoLudens....My personal time horizon is 15-20 years. I was a buyer last summer, and a strong buyer in Q1 of this year. Now you know my risk profile.

stm
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Re: Actionable advice in a Brexit scenario

Post by stm » Sun Jun 12, 2016 12:11 pm

Ug - I've got about 25% exposure in Vanguard European Stock Index, not to mention the other international funds.... Starting to worry a bit about this and have to figure out which the Vanguard bond fund is to hold.

magneto
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Re: Actionable advice in a Brexit scenario

Post by magneto » Sun Jun 12, 2016 1:03 pm

The UK represents about 8% of Global Stocks
Rest of Europe not too sure, but maybe something like 12-15%?

Most in UK are assuming Remain will win, but if the final outcome is tight, vote may hinge on arguments put forward or events occuring in the last few days.

In the event of Brexit, it is widely assumed UK will go cap in hand begging for trade entry to Continental Europe at a disadvantage.
However the UK Trade Deficit with Continental Europe is £65bn a year. It is Continental Europe that may need to do the begging!
So doom laden scenarios for the UK alone may be wide of the mark.
However longer term damage to the European Project is a possibility.

Suggest that as investors we wait and see how markets move, then rebalance accordingly, rather than try to anticipate movements. In the longer term perhaps not too much may change.
Plus ca change etc.
'There is a tide in the affairs of men ...', Brutus (Market Timer)

afan
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Re: Actionable advice in a Brexit scenario

Post by afan » Sun Jun 12, 2016 1:15 pm

JCE66 wrote:So.....summing up the various possibilities.

Don't just do something, stand there.
Short the pound.
Sell EU index holdings, hold cash and wait for the crash to buy back EU index funds at a huge discount (if Brexit happens)
Buy more EU index funds, regardless of Brexit.

HomoLudens....My personal time horizon is 15-20 years. I was a buyer last summer, and a strong buyer in Q1 of this year. Now you know my risk profile.



Almost.

Do all of the above.
1. short the pound.
2. buy pound futures
3. short the euro
4. buy euro futures
6. short the ftse 100
7. buy ftse futures

Repeat for every other British or European bet. Throw in some bets on the dollar and the S&P 500.

Some will do better than others.
Forget about the ones that lost
Come back and brag about the ones that did well. Maybe even start a newsletter.


If you cover all possible bets on good and bad outcomes of Brexit, you will have bet the market. The latter is the easier, cheaper but less exciting way to go about it.

If you have some inside information- a way of predicting the outcome that only you know about- then by all means use this to bet. But probably the best bet would be directly on the outcome, rather than trying to guess what others think it will do to markets.
We don't know how to beat the market on a risk-adjusted basis, and we don't know anyone that does know either | --Swedroe | We assume that markets are efficient, that prices are right | --Fama

Clive
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Re: Actionable advice in a Brexit scenario

Post by Clive » Sun Jun 12, 2016 2:01 pm

magneto wrote:However the UK Trade Deficit with Continental Europe is £65bn a year. It is Continental Europe that may need to do the begging!

For access to the "Free Market" the UK net contributes $12Bn/year. So a $100Bn/year UK trade deficit with the EU comes with a additional $12Bn fee. Trade tariffs might be expected to cost in lower than that current arrangement. Germany has said that if the UK leaves the EU it also leaves the Single Market, much to many German businesses anger, and some suggest that business demands may drive political threats to lighten up (Germany exports a large trade surplus to the UK). 30% of Irelands GDP is funded by inward investment from the UK. EU insurance premiums could sky rocket as likely they'll be currently sourced/covered via Lloyds of London. UK net EU contribution in effect flows in as a net beneficiary to Poland, the EU have indicated that in the event of Brexit that credit might be at risk. The Swiss recently had a vote to restrict EU migration and said yes to that. A more recent vote for whether technology advance benefits should be more shared out and proposed a $2800/month state payment to one and all citizens, they have rejected that however as the EU has insisted that if the Swiss impose migration controls then they wont even talk to them. Leaving the risk of $2800/month payments to all citizens at risk of being a migration magnet. 50% of non-EU businesses that trade in the UK are listed in London (London lists more than all the others put together), in the event of Brexit many of those might split HQ in order to retain access to both markets. Similarly EU HQ'd firms might opt to also list in London so as to retain access to the UK (which has a vast global trade network and other trade group membership such as the Commonwealth (50+ countries with a 2.6B population)).

There's a lot of flux and potential volatility, hopefully the above insight might provide some guidance as to what options might be available to you. The risk to Ireland seems one of the more significant and potentially most volatile (maybe short) if the UK is barred from access to the Single Market and pulls its investments. Lloyds insurance might be a beneficiary given reciprocating punitive trade tariffs. German car manufactures could be a reasonable short if the UK market drops German cars in favour of Japanese cars (that are built in the UK) - perhaps aided by further downside arising from recent emissions controls issues. Swiss Franc seems a reasonable choice of long.

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Taylor Larimore
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Re: Actionable Advice OR Stay the Course ?

Post by Taylor Larimore » Sun Jun 12, 2016 2:26 pm

Do nothing. Just stay the course on the theory that Brexit is market noise and not a fundamental change.

JCE66:

"Stay the course" sounds like the best idea to me.

Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle

Iridium
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Re: Actionable advice in a Brexit scenario

Post by Iridium » Sun Jun 12, 2016 5:55 pm

The best play in a Brexit scenario is a summer vacation to England. Chances are, hotels and the pound will be cheap!

Otherwise, stay the course. The market has already priced in the short-term impacts.

amarone
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Re: Actionable advice in a Brexit scenario

Post by amarone » Sun Jun 12, 2016 6:35 pm

Iridium wrote:Otherwise, stay the course. The market has already priced in the short-term impacts.

No it hasn't. The market has priced in the possibility of short-term impacts. It has not priced in a 100% certainty. So if Brexit occurs (or does not occur) the market will adjust to the actuality.

jmagi76461
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Re: Actionable advice in a Brexit scenario

Post by jmagi76461 » Sun Jun 12, 2016 7:31 pm

I never felt particularly comfortable with international equities, but had about 25% because prevailing theory called for it. I did what I thought was my due diligence...tried to learn everything I could about Brexit...long story short I'm more confused than ever! So, I went with my what was right for ME...I exchanged all international for total stock late last week. If the Brexit hits the fan and it goes down, I'll be buying with the church lady..if nothing happens, I feel much more comfortable with my 2-Fund portfolio. :beer

Alchemist
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Re: Actionable advice in a Brexit scenario

Post by Alchemist » Sun Jun 12, 2016 7:58 pm

jmagi76461 wrote:I never felt particularly comfortable with international equities, but had about 25% because prevailing theory called for it. I did what I thought was my due diligence...tried to learn everything I could about Brexit...long story short I'm more confused than ever! So, I went with my what was right for ME...I exchanged all international for total stock late last week. If the Brexit hits the fan and it goes down, I'll be buying with the church lady..if nothing happens, I feel much more comfortable with my 2-Fund portfolio. :beer


That's the problem with theory giving portfolio recommendations. It is always backward looking and only able to tell you what portfolio you should have had in the past. A portfolio should be designed to be comfortable to be held under worse-case scenarios. Anything else will cause you to feel forced into action as opposed to staying the course when faced with uncertain events like Brexit.

Clive
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Re: Actionable advice in a Brexit scenario

Post by Clive » Mon Jun 13, 2016 6:52 am

Alchemist wrote:
jmagi76461 wrote:I never felt particularly comfortable with international equities, but had about 25% because prevailing theory called for it. I did what I thought was my due diligence...tried to learn everything I could about Brexit...long story short I'm more confused than ever! So, I went with my what was right for ME...I exchanged all international for total stock late last week. If the Brexit hits the fan and it goes down, I'll be buying with the church lady..if nothing happens, I feel much more comfortable with my 2-Fund portfolio. :beer

That's the problem with theory giving portfolio recommendations. It is always backward looking and only able to tell you what portfolio you should have had in the past. A portfolio should be designed to be comfortable to be held under worse-case scenarios. Anything else will cause you to feel forced into action as opposed to staying the course when faced with uncertain events like Brexit.

Total stock is something like 50% US. I get it that, looked at one way, buying equal amounts of each makes sense, $100 firm value, buy $10, $10 firm value buy $1 type thing (10% exposure to both - but obviously scaled up much much more), but looked at another way that's a bet that one is expected to do better than the other, you're favouring larger firms.

One of the safest and mostly likely to be in the upper rankings is to equal weight buy and hold. viewtopic.php?p=2930688#p2930688

In the global economy country stocks, at least for the largest caps, typically have global presence/business. Such that buying more stocks listed in one stock market over another is a domestic bet on that countries tax and regulations - its ability to attract listings in its stock market over another, such that the firm reports to the domestic tax authority/regulator. In short many of the biggest firms choose to list in the US, but why, if global they might instead opt to list in London or Singapore or wherever. Presently the US has the lion share, but surely that could change, perhaps due to tighter regulation or increased costs/taxation.

A bet that a single will do better than the average, but where the average tends to be in the top quartile, has the single at a disadvantage. Yes that introduces currency risk, stock gain/loss +/- FX gain/loss, but FX generally is neutral, the only times its not is if the domestic is a extreme outlier, either relatively lagging a lot (domestic crisis) or relatively leading a lot (which tends to be infrequent/rare).

spectec
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Re: Actionable advice in a Brexit scenario

Post by spectec » Mon Jun 13, 2016 8:00 am

If I were planning to retire to the UK or Europe, there might be something I'd think about. But since my retirement is paid and spent in US dollars, I think holding the right AA and keeping the equities portion in VTI was and still is the only course of action. I'm sure the companies in VTI who conduct business internationally will make whatever adjustments are needed to adapt to changing market conditions domestically or internationally. Nothing about Brexit would change that approach. If I noticed after-the-fact that I could have done something differently to tweak a few extra dollars out of the arrangement, I'd simply remember that I didn't know what I would like to have known in advance and that the downside of any speculative action is probably more risky than the upside.
Last edited by spectec on Mon Jun 13, 2016 3:17 pm, edited 2 times in total.
Don't gamble; take all your savings and buy some good stock and hold it till it goes up, then sell it. If it don't go up, don't buy it. - Will Rogers

jalbert
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Re: Actionable advice in a Brexit scenario

Post by jalbert » Mon Jun 13, 2016 2:39 pm

We don't know if the Brexit referendum will pass, and for either outcome of the vote, we really don't know how capital markets around the world will react.

HomoLudens
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Re: Actionable advice in a Brexit scenario

Post by HomoLudens » Mon Jun 13, 2016 4:15 pm

Church Lady wrote:
Clearly, the negotiated exit will have great bearing on what the impact of the exit will be. When markets realize this, they will calm down. My reading of (3) is that in the absence of a successful negotiation, UK is out in two years in any case. To my mind, this gives the UK some leverage in negotiations, as it appears (from this side of the pond) that EU needs UK more than UK needs EU.

A lot can happen in two years. If you have an unbogleheadish appetite for risk and speculation, you can buy on the panic reaction and sell them when the media realizes this is just first inning of the game.

Of course, I'm just an American church lady. How can I know about such European things? I could be wrong. I am certainly more optimistic about brexit than others on this forum. I think I will buy the US panic reaction for sure.

Thanks for bringing this up!


I disagree with the point that the UK has leverage in the withdrawal process. On the contrary, the EU will try to discourage further withdrawals. Thus, it will play hardball and impose high costs of exist to discourage the unraveling of the Union. Being soft on Great Britain is an invitation to other countries to follow in its footsteps. In reality, we don't know because the withdrawal procedure is relatively new and it has never been tested in practice ( One point no one really noticed is the potential for lawsuits at the Court of Justice of the European Union in Luxembourg; these lawsuits are very likely because there are many parties interested in setting the precedent for withdrawals. The Court itself is very keen on preserving the integrity of the Union and its rulings will affect the withdrawal process. This will complicate the process and increase market volatility). I follow the European politics and the problem seems to be that up to now Great Britain has been trying to be "out" while it's formally "in". Should withdrawal occur, the British will try to be "in" while they are formally "out". Squaring the circle looks simple in comparison. But in terms of actionable advice, I will refrain from shorting the pound. But I will follow closely DFSIX. And I will wait for the secondary effects: the possible independence referendum in Scotland, the effect on Ireland and Denmark (both joined the EEC in 1973 alongside with Great Britain because of their interdependence).
"'Thoughts without content are empty, intuitions without concepts are blind." Immanuel Kant

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Re: Actionable advice in a Brexit scenario

Post by elgob.bogle » Mon Jun 13, 2016 5:32 pm

So, with all of the above in mind, should someone (such as I), who is approaching/or at a re-balance threshold for Total International,contemplate re-balancing on the day before the "Brexit Vote", or wait and see?

elgob

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Brexit and rebalancing

Post by Taylor Larimore » Mon Jun 13, 2016 5:55 pm

elgob.bogle wrote:So, with all of the above in mind, should someone (such as I), who is approaching/or at a re-balance threshold for Total International,contemplate re-balancing on the day before the "Brexit Vote", or wait and see.

elgob.bogle:

The record is clear. Market timing doesn't work.

Rebalance on the schedule you chose.

Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle

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Re: Actionable advice in a Brexit scenario

Post by Clive » Wed Jun 15, 2016 7:47 pm

HomoLudens wrote:In reality, we don't know because the withdrawal procedure is relatively new and it has never been tested in practice (One point no one really noticed is the potential for lawsuits at the Court of Justice of the European Union in Luxembourg; these lawsuits are very likely because there are many parties interested in setting the precedent for withdrawals. The Court itself is very keen on preserving the integrity of the Union and its rulings will affect the withdrawal process.

The polls have been pretty much level up to the last week or so, but recently having Brexit establishing momentum and seeing a progressively widening lead in many of the polls that previously had Brexit behind. Assuming a apparent more likely Brexit majority vote on the 23rd June then Article 50 submission to the EU by the UK is the formal method to kick of a 'resignation' process in the EU, however that's the trigger for the EU legal side of things. In the UK one of the first actions would be to pass a European Communities Act 1972 Repeal Bill. The European Communities Act 1972, is the legal basis for the supremacy of EU law in the UK, and once repealed has all EU Treaties cease to form part of UK law and the European Court's jurisdiction over the UK ends. On the EU's side of things the legalities are a lot more involved and protracted.

The EU is somewhat used to having its members having second referendum's, a 'are you sure?' type retry after a initial referendum that have had instances of the 'correct' subsequent outcome. I suspect that the EU might, quite wrongly, be anticipating such a case with Brexit.

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Re: Actionable advice in a Brexit scenario

Post by TomCat96 » Wed Jun 15, 2016 7:54 pm

I have no exposure to international markets, other than the multinational nature of various US firms.

I am doing nothing.

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Re: Actionable advice in a Brexit scenario

Post by HomoLudens » Wed Jun 15, 2016 8:51 pm

Clive wrote:
HomoLudens wrote:In reality, we don't know because the withdrawal procedure is relatively new and it has never been tested in practice (One point no one really noticed is the potential for lawsuits at the Court of Justice of the European Union in Luxembourg; these lawsuits are very likely because there are many parties interested in setting the precedent for withdrawals. The Court itself is very keen on preserving the integrity of the Union and its rulings will affect the withdrawal process.

The polls have been pretty much level up to the last week or so, but recently having Brexit establishing momentum and seeing a progressively widening lead in many of the polls that previously had Brexit behind. Assuming a apparent more likely Brexit majority vote on the 23rd June then Article 50 submission to the EU by the UK is the formal method to kick of a 'resignation' process in the EU, however that's the trigger for the EU legal side of things. In the UK one of the first actions would be to pass a European Communities Act 1972 Repeal Bill. The European Communities Act 1972, is the legal basis for the supremacy of EU law in the UK, and once repealed has all EU Treaties cease to form part of UK law and the European Court's jurisdiction over the UK ends. On the EU's side of things the legalities are a lot more involved and protracted.

The EU is somewhat used to having its members having second referendum's, a 'are you sure?' type retry after a initial referendum that have had instances of the 'correct' subsequent outcome. I suspect that the EU might, quite wrongly, be anticipating such a case with Brexit.



Lord Denning would have been pleased with the outcome "No longer is European law an incoming tide flowing up the estuaries of England. It is now like a tidal wave bringing down our sea walls and flowing inland over our fields and houses—to the dismay of all." The tidal wave is retreating I suppose. But I was talking about the EU side as you correctly pointed out. Denmark rejected the Maastricht Treaty 1992, but approved it in 1993 ( after winning the Euro Cup the previous year which apparently influenced the Danish voters and cheered them up). The upshot is that the Remain side will have to hope that England will beat Wales and pass the group stage at the Euro Cup tournament. Personally, I don't expect that apocalyptic scenarios will materialize. But the exit will be messy. Prime Minister Boris Johnson will have a steep learning curve.
"'Thoughts without content are empty, intuitions without concepts are blind." Immanuel Kant

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Re: Actionable advice in a Brexit scenario

Post by Valuethinker » Thu Jun 16, 2016 12:55 pm

HomoLudens wrote:
Clive wrote:
HomoLudens wrote:In reality, we don't know because the withdrawal procedure is relatively new and it has never been tested in practice (One point no one really noticed is the potential for lawsuits at the Court of Justice of the European Union in Luxembourg; these lawsuits are very likely because there are many parties interested in setting the precedent for withdrawals. The Court itself is very keen on preserving the integrity of the Union and its rulings will affect the withdrawal process.

The polls have been pretty much level up to the last week or so, but recently having Brexit establishing momentum and seeing a progressively widening lead in many of the polls that previously had Brexit behind. Assuming a apparent more likely Brexit majority vote on the 23rd June then Article 50 submission to the EU by the UK is the formal method to kick of a 'resignation' process in the EU, however that's the trigger for the EU legal side of things. In the UK one of the first actions would be to pass a European Communities Act 1972 Repeal Bill. The European Communities Act 1972, is the legal basis for the supremacy of EU law in the UK, and once repealed has all EU Treaties cease to form part of UK law and the European Court's jurisdiction over the UK ends. On the EU's side of things the legalities are a lot more involved and protracted.

The EU is somewhat used to having its members having second referendum's, a 'are you sure?' type retry after a initial referendum that have had instances of the 'correct' subsequent outcome. I suspect that the EU might, quite wrongly, be anticipating such a case with Brexit.



Lord Denning would have been pleased with the outcome "No longer is European law an incoming tide flowing up the estuaries of England. It is now like a tidal wave bringing down our sea walls and flowing inland over our fields and houses—to the dismay of all." The tidal wave is retreating I suppose. But I was talking about the EU side as you correctly pointed out. Denmark rejected the Maastricht Treaty 1992, but approved it in 1993 ( after winning the Euro Cup the previous year which apparently influenced the Danish voters and cheered them up). The upshot is that the Remain side will have to hope that England will beat Wales and pass the group stage at the Euro Cup tournament. Personally, I don't expect that apocalyptic scenarios will materialize. But the exit will be messy. Prime Minister Boris Johnson will have a steep learning curve.


The murder in the last couple of hours of Jo Cox, MP, by a white male assailant who allegedly yelled "Britain First", has at least temporarily clouded the picture.

If you read the London Review of Books, latest issue, you will find an article by an experienced criminal barrister, a QC, pointing out how much of our law is now written with reference to EU directives, etc, and therefore that it would take years to fix that- -the government legal services probably could not cope with the amount of drafting that would be needed, nor Parliamentarians adequately consider it.

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Re: Actionable advice in a Brexit scenario

Post by Valuethinker » Thu Jun 16, 2016 12:56 pm

jalbert wrote:We don't know if the Brexit referendum will pass, and for either outcome of the vote, we really don't know how capital markets around the world will react.


The banks in London are laying on 24 hour shifts.

SocGen has warned that it may not be able to deal on behalf of clients in markets at screen prices due to volatility and limited liquidity.

There will be a lot of false pricing in the lead up to the 23rd, and then a lot of disruption after-- at least if it's close, and all signs so far are that it will be close.

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Re: Actionable advice in a Brexit scenario

Post by Valuethinker » Thu Jun 16, 2016 12:57 pm

elgob.bogle wrote:So, with all of the above in mind, should someone (such as I), who is approaching/or at a re-balance threshold for Total International,contemplate re-balancing on the day before the "Brexit Vote", or wait and see?

elgob


Liquidity is bad and will get worse the closer to the day unless there's a clear winner anticipated by consensus of polls. A lot of false pricing going on (screen prices which cannot be traded at in size).

This never strikes me as a particularly good time to rebalance.

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Re: Actionable advice in a Brexit scenario

Post by Valuethinker » Thu Jun 16, 2016 1:06 pm

Clive wrote:
magneto wrote:However the UK Trade Deficit with Continental Europe is £65bn a year. It is Continental Europe that may need to do the begging!

For access to the "Free Market" the UK net contributes $12Bn/year. So a $100Bn/year UK trade deficit with the EU comes with a additional $12Bn fee.


Inevitably that number ignores what the EU sends back-- it's not a net number?

Trade tariffs might be expected to cost in lower than that current arrangement. Germany has said that if the UK leaves the EU it also leaves the Single Market, much to many German businesses anger, and some suggest that business demands may drive political threats to lighten up (Germany exports a large trade surplus to the UK). 30% of Irelands GDP is funded by inward investment from the UK.


Yes and that will accelerate as UK companies seek a foothold inside the EU, which is culturally friendly with good infrastructure. Ireland fits the bill.

EU insurance premiums could sky rocket as likely they'll be currently sourced/covered via Lloyds of London.


That is extremely unlikely. Lloyds provides insurance to companies globally, that won't change. What might change is that more insurance business is done in other centres-- London loses the unique advantage of being inside the EU but also the global insurance centre.


UK net EU contribution in effect flows in as a net beneficiary to Poland, the EU have indicated that in the event of Brexit that credit might be at risk.


A more accurate way of looking at it is that UK money funds R&D, farming and many other EU activities. 1 person puts $1000 into a bank, another person withdraws $1000 at the same time, you can't say one person is funding the other.

The Swiss recently had a vote to restrict EU migration and said yes to that. A more recent vote for whether technology advance benefits should be more shared out and proposed a $2800/month state payment to one and all citizens, they have rejected that however as the EU has insisted that if the Swiss impose migration controls then they wont even talk to them. Leaving the risk of $2800/month payments to all citizens at risk of being a migration magnet. 50% of non-EU businesses that trade in the UK are listed in London (London lists more than all the others put together), in the event of Brexit many of those might split HQ in order to retain access to both markets. Similarly EU HQ'd firms might opt to also list in London so as to retain access to the UK (which has a vast global trade network and other trade group membership such as the Commonwealth (50+ countries with a 2.6B population)).


The Commonwealth is a talking shop-- it's not useful from a business perspective. India doesn't give British goods and services preference unless we happen to offer it to theirs.

You've sort of garbled several things in Switzerland. They voted for migration controls, the EU objected, they backed down. Even if you are *not* in the EU you have to play by their rules-- ask the Norwegians.

There's a lot of flux and potential volatility, hopefully the above insight might provide some guidance as to what options might be available to you. The risk to Ireland seems one of the more significant and potentially most volatile (maybe short) if the UK is barred from access to the Single Market and pulls its investments.


This will not happen. Physical investments in factories and property cannot be "pulled" like that. Financial investments Dublin will make arrangements so that products are still ownable by British investors, if that's necessary.

Lloyds insurance might be a beneficiary given reciprocating punitive trade tariffs. German car manufactures could be a reasonable short if the UK market drops German cars in favour of Japanese cars (that are built in the UK) - perhaps aided by further downside arising from recent emissions controls issues. Swiss Franc seems a reasonable choice of long.


Remembering of course BMW builds c. 20% of its total output in the UK.

If you look at something like Ford of Europe, it is totally regionally integrated. We have engine plants that supply Spain and Germany. So a trade war just hampers everyone.

The position of the UK economy wrt Europe is very similar to the position of the Canadian economy wrt to the USA. Production is integrated across borders.

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Re: Actionable advice in a Brexit scenario

Post by JonnyDVM » Thu Jun 16, 2016 3:34 pm

My understanding (as a stupid American) is that a Brexit was looking very unlikely. So I would say I'm doing absolutely nothing.
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Re: Actionable advice in a Brexit scenario

Post by Epsilon Delta » Thu Jun 16, 2016 4:59 pm

Valuethinker wrote:If you read the London Review of Books, latest issue, you will find an article by an experienced criminal barrister, a QC, pointing out how much of our law is now written with reference to EU directives, etc, and therefore that it would take years to fix that- -the government legal services probably could not cope with the amount of drafting that would be needed, nor Parliamentarians adequately consider it.


That's a complete red herring.

It's only a problem if Parliament wants to make it a problem. Pretty much every ex-colony starts with a simple law that "Law of mother country as of date of independence remains in effect till we get round to changing it." Perhaps with a second clause empowering local courts. Usually followed (or accompanied by) explicit changes to the more objectionable bits. You don't want to accidentally forget to have a law against murder or such.

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Re: Actionable advice in a Brexit scenario

Post by magneto » Fri Jun 17, 2016 3:34 am

magneto wrote:Most in UK are assuming Remain will win, but if the final outcome is tight, vote may hinge on arguments put forward or events occuring in the last few days.


A totally unexpected and sad event has now occured.

The markets have drawn a conclusion and are responding accordingly.

These are troubling times.
'There is a tide in the affairs of men ...', Brutus (Market Timer)

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Re: Actionable advice in a Brexit scenario

Post by Valuethinker » Fri Jun 17, 2016 5:15 am

JonnyDVM wrote:My understanding (as a stupid American) is that a Brexit was looking very unlikely. So I would say I'm doing absolutely nothing.


"stupid" implies lack of intelligence. You mean "uninformed" :happy . And don't worry, for all the heat here there is very little light.

All the latest polls point to a victory by Brexit. The market probably hasn't quite come to terms with that, I don't think, but will have by next Thursday.

Either way, there will be a period of political instability post this campaign [Edited: too much politics].

Campaigning is suspended today due to Jo Cox's murder.

Let me go back to this Forum's basic advice

You cannot do better than the market in anticipating the effects of these things. They are unknowable.


I would add that trading during periods of high volatility is usually a mugg's game-- spreads are wide, no one is taking a risk, prices are not accurate reflections of value.
Last edited by Valuethinker on Fri Jun 17, 2016 6:54 am, edited 1 time in total.

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Re: Actionable advice in a Brexit scenario

Post by Valuethinker » Fri Jun 17, 2016 5:17 am

Epsilon Delta wrote:
Valuethinker wrote:If you read the London Review of Books, latest issue, you will find an article by an experienced criminal barrister, a QC, pointing out how much of our law is now written with reference to EU directives, etc, and therefore that it would take years to fix that- -the government legal services probably could not cope with the amount of drafting that would be needed, nor Parliamentarians adequately consider it.


That's a complete red herring.

It's only a problem if Parliament wants to make it a problem. Pretty much every ex-colony starts with a simple law that "Law of mother country as of date of independence remains in effect till we get round to changing it." Perhaps with a second clause empowering local courts. Usually followed (or accompanied by) explicit changes to the more objectionable bits. You don't want to accidentally forget to have a law against murder or such.


I'm not a lawyer. Are you? The piece said that things were tied together more significantly than that.

Note in the post British colony case, the Privy Council serves as the final court of appeal for many smaller ex colonies. Can't see them allowing the European courts to do that.

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Re: Actionable advice in a Brexit scenario

Post by Valuethinker » Fri Jun 17, 2016 6:53 am

elgob.bogle wrote:So, with all of the above in mind, should someone (such as I), who is approaching/or at a re-balance threshold for Total International,contemplate re-balancing on the day before the "Brexit Vote", or wait and see?

elgob


Prices will be "false" unless the outcome is very clear in the Polls (and after the General Election, when the Tory vote was significantly understated by the Polls, no one really trusts them).

I would wait a few days and see if the smoke clears *or* do some the day before and some a couple of weeks after ("split the difference").

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Re: Actionable advice in a Brexit scenario

Post by Valuethinker » Fri Jun 17, 2016 6:57 am

Church Lady wrote:
Clearly, the negotiated exit will have great bearing on what the impact of the exit will be. When markets realize this, they will calm down. My reading of (3) is that in the absence of a successful negotiation, UK is out in two years in any case. To my mind, this gives the UK some leverage in negotiations, as it appears (from this side of the pond) that EU needs UK more than UK needs EU.


We are 7% of their exports, they are 40% of ours. Services exports are relatively more important to us than them (and both France and Germany would like to see more financial services jobs in Paris/ Frankfurt).

And they have every incentive to "punish" us for Brexiting, to make clear the position for others.

So why do you think we would have a bargaining advantage? I'd say we'd be in a position of enormous weakness?

Of course, I'm just an American church lady. How can I know about such European things? I could be wrong. I am certainly more optimistic about brexit than others on this forum. I think I will buy the US panic reaction for sure.

Thanks for bringing this up!


You cannot time this stuff. Things may not be as bad as some think, or they could be worse.

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Re: Actionable advice in a Brexit scenario

Post by lostdog » Fri Jun 17, 2016 7:04 am

I'll just stay the course...
"Our life is frittered away by detail. Simplify, simplify." -Thoreau

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Re: Actionable advice in a Brexit scenario

Post by Epsilon Delta » Fri Jun 17, 2016 10:32 am

Valuethinker wrote:
Epsilon Delta wrote:
Valuethinker wrote:If you read the London Review of Books, latest issue, you will find an article by an experienced criminal barrister, a QC, pointing out how much of our law is now written with reference to EU directives, etc, and therefore that it would take years to fix that- -the government legal services probably could not cope with the amount of drafting that would be needed, nor Parliamentarians adequately consider it.


That's a complete red herring.

It's only a problem if Parliament wants to make it a problem. Pretty much every ex-colony starts with a simple law that "Law of mother country as of date of independence remains in effect till we get round to changing it." Perhaps with a second clause empowering local courts. Usually followed (or accompanied by) explicit changes to the more objectionable bits. You don't want to accidentally forget to have a law against murder or such.


I'm not a lawyer. Are you? The piece said that things were tied together more significantly than that.

Note in the post British colony case, the Privy Council serves as the final court of appeal for many smaller ex colonies. Can't see them allowing the European courts to do that.


It's the job of barristers to make their case whether they have the facts and the law on their side or not.

Really hundreds of countries have managed this. If the UK's legal establishment is not up to it maybe you can apply to become a colony of India.

The Privy counsel (and other judicial ties) were mainly a convenience for smaller countries that were too small to sustain multiple levels of appeals courts. Occasionally they were used as a political fig-leaf to reassure minorities. Neither is relevant in the UK. In any case the UK would remain in the European Court of Human Rights, which is not part of the EU.

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Re: Actionable advice in a Brexit scenario

Post by Valuethinker » Fri Jun 17, 2016 11:31 am

Epsilon Delta wrote:
It's the job of barristers to make their case whether they have the facts and the law on their side or not.

Really hundreds of countries have managed this. If the UK's legal establishment is not up to it maybe you can apply to become a colony of India.


Nice piece of sarcasm ;-). Doesn't strengthen the persuasiveness of your argument.

http://www.lrb.co.uk/v38/n12/francis-fi ... f-we-leave

The Privy counsel (and other judicial ties) were mainly a convenience for smaller countries that were too small to sustain multiple levels of appeals courts. Occasionally they were used as a political fig-leaf to reassure minorities. Neither is relevant in the UK. In any case the UK would remain in the European Court of Human Rights, which is not part of the EU.


I believe that it is the stated policy of this government to exit the European Court of Human Rights ie of Mr. Cameron and his Cabinet.

In addition, there is no possibility that if Michael Gove or Boris Johnson or Teresa May (I think we could agree that in a post Brexit vote change of leadership, the first 2 would be the most likely leaders of the Party?) were to succeed David Cameron as PM, that this would be changed.

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Re: Actionable advice in a Brexit scenario

Post by Epsilon Delta » Fri Jun 17, 2016 12:28 pm



Have you read that article? It does not say anything close to what you have represented it as saying.

In particular it does not say there is any large amount of work involved in simply adopting current EU law as UK law. What it says is that if you don't simply want to adopt current EU law there will be a lot of work.

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