On Our Way to the (Fr)Exit?

This year is our 25th wedding anniversary and, to celebrate, we are heading over to Europe. A big trip to celebrate a big anniversary. And, a trip that’s quite interesting in the timing, in that we are heading over to a continent that during our 25 years has, like us, united themselves financially. In our case it was through a joint bank account, in Europe’s, through a joint currency.

This similarity in having joint economic unions might be due for a rude departure, however. Because, unlike the Carlsons, who I’m 100% convinced will jointly celebrate our actual anniversary on June 25th, I’m not positive that the Euro will remain intact much past that date.

First Brexit, now Frexit, or Nexit, or even back to Grexit…

When the British referendum to leave the EU passed, it caught everyone off guard. Most “experts” predicted a solid victory by those wanting to remain in the EU. Yet, the nationalist fervor ruled the day, and now Britain is on the verge of imposing Article 50, which formally marks their intent to exit.

Investors would be naïve to ignore this nationalistic movement that is taking place, first in Britain and then here in the US, as marked by the Trump victory. There is a groundswell of support for policies that are anti-liberalist in terms of trade and immigration. This trend is about to be put to its biggest test yet when the French go to the polls on April 23rd.

Once again, the experts are saying that the nationalists, in this case represented by Marine Le Pen, will lose. The polls show her winning the first round vote, but losing the run-off which takes place on April 7th.

But, what happens if they’re wrong again? What if Le Pen wins? This is something that is quite certainly possible and, even if it doesn’t happen, will affect markets leading up to the election. So, here’s some things to look at as we head towards the showdown.

  1. The biggest loser, on the surface, would appear to be the Euro…it will likely go away as a currency, if France backs out from it. But, does that mean you sell the Euro? Hell yeah. Why would you own a currency that might lose all backers? Germany would come out and support it, but after a decision to leave there would immediately be just as many Euros in existence with the 2nd largest backer gone.
    If every country were to go back to their own currency, what would the Euro be? Worthless. This is a nightmare scenario and would be incredibly difficult to unravel. So, stay away.
  2. The next biggest loser would be France. This is a quasi-socialist country that has scraped along the last few years due to its proximity to Germany. Don’t expect this to continue. I would suggest that France would be in for a world of hurt going forward and you should avoid it. This applies particularly to French bonds, which would be priced immediately into Francs and that value would drop rapidly.
  3. I’m rather neutral on gold as relates to this scenario. Gold is a store of wealth in times of turmoil, so it should go higher. Except, it trades opposite the dollar which would be very strong. So, if you live in Europe, particularly France, buy gold. As a trade from your office in NY, not a big opportunity around this event.
  4. The big winner in my mind is Britain. Having no clue how the EU would unfold and the direction of future events post a Frexit, let me just say that Britain would suddenly become a hot place again. They would be a big player in the outcome of any unraveling and the Pound would suddenly not be the bad investment it has been since Brexit.

That’s how I see things playing out if France moves towards a Nationalist vote in the upcoming election, and then decide to exit the EU. Not saying it’s going to happen, but there is a good chance it does. So, don’t be caught off guard and position yourself such that any likely outcome provides an opportunity to make money, not lose your beret.

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