HUGH HENDRY: 'We fear a storm is coming'

The world watched in shock on June 23, 2016 when the UK voted to leave the European Union.

The pound plummeted and global markets plunged into turmoil.

But the vote for Brexit, it turns out, was just the beginning of the end.

“Our main conclusion is that by doing the unthinkable and actually voting to leave, Brexit substantially increases the likelihood that other members of the European Union will also seek to break away,” according to commentary from London-based Eclectica Asset Management.

Just two years after the UK similarly rejected the gold standard back in 1931, there were just 12 remaining countries on the standard versus the 45 that had previously been committed, the Eclectica team points out.

In a monthly report to investors, the team led by Hugh Hendry cited the collapse of the gold standard as an example of when the “defection of just one member from a currency union caused the system to unwind rapidly.”

He cites surging political uncertainty in countries across Europe, including France, Italy, Germany, and Spain. In those and other countries, nationalist, anti-immigration, and anti-European agendas are a major cause for concern in 2017. There is a “real and present danger” of more EU members replicating the British decision and leaving the Union as “mass fears concerning immigration, unemployment and inequality seem to define national elections in Europe.”

“The system simply isn’t working,” he said.

On top of political upheaval, the Bank Recovery and Resolution Directive makes it difficult for any European bank to be rescued in the event of a financial crisis. The resolution makes it illegal for any European bank to be bailed out until 8% of their total liabilities have been bailed in, blocking urgent capital repair that could save the system.

Combine present monetary policy and the upcoming end of the current term of ECB quantitative easing, in which the central bank buys bonds to keep interest rates low, and Hendry and his team “fear a storm is coming.”

“Without appropriate monetary policy, fiscal policy or bank rescue as an option, all the EU has left is fear to hold it together.”

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