Pros and Cons of Brexit

On June 23rd, Britain people will vote to stay in or leave (Brexit) the European Union. The verdict matters a lot since it is a life-changing decision. I will briefly address some of the pros and cons of Brexit, but will further address it after the vote, especially if UK leaves EU.

Brexit Pros:

  • The European Union costs United Kingdom 350 million pounds ($503 million) a week. That’s $26.2 billion a year, 4.6 times less the UK education budget of $121.1 billion in 2015. That $26.2 billion is 1% of 2015 GDP of $2.63 trillion. That $26.2 billion is 2.45% of 2015 total spending of $1.07 trillion.

Note: That 350 million pounds a week cost is before “the rebate.” In 2015, Britain actually paid under 250 million ($359 million) pounds a week. But hey, UK does not control the rebates. The cost of membership has been increasing over the years, especially after the financial crisis.

UK Payments To EU Budget Since 1973
UK Payments To EU Budget Since 1973

What happened with Greece and is still happening, is a warning sign of more economic troubles to come in Europe. That possibly will continue to increase the cost of EU membership.

  • Under EU fundamental right of free movement, Britain cannot prevent anyone from another member state coming in to the country. This has resulted in a huge increase in immigration into Britain from Europe.

In 2015, 270,000 EU citizens immigrated to the UK and 85,000 EU citizens emigrated aboard. Net-migration was 185,000.

Migration By Nationality
Migration By Nationality

2.94 million people living in the UK in 2014 were citizens of another EU member country. Those people account for 4.7% of the UK population.

2.2 million citizens of another EU member country are in work, 7.02% of working population. Majority of EU member citizens are coming to the UK for work reasons. 61% of the migration who came for work reasons were EU citizens.

Immigration To The UK By Main Reason
Immigration To The UK By Main Reason

See how EU citizens coming to the UK for work reason started to accelerate in 2013. This can be related to economic difficulties such as Greece, Spain, Portugal and Italy. As I mentioned above, “What happened with Greece and is still happening, is a warning sign of more economic troubles to come in Europe.” That should lead to even more upsurge in migration for work reason, making it more competitive for UK citizens to find jobs and possibly lowering wages.

If UK decides to leave EU, the country would be able to reform immigration laws without input from the EU and increase jobs and wages for UK citizens (hopefully they have the skills).

Brexit Cons:

  • EU membership makes UK attractive for international investment and provides access to trade deals with more than 50 countries around the world (expensive makeup, isn’t it?). Because EU institutions have the ability to prevent the UK from negotiating its own trade deals outside Europe, it would have to re-negotiate some trade deals, with EU and non-EU countries including the US, China, Japan and India. It is extremely possible the Brexit will impair confidence and investment for few years.

In 2015, the EU accounted for (pdf download) 43.7% of exports and 53.1% of imports

In 2014, the EU accounted for 496 billion pounds ($712 billion) of the stock of inward Foreign Direct Investment (FDI), 48% of the total. Globally, the UK is the third largest country in terms of its absolute value of inward FDI stock ($1.7 trillion), followed by China ($2.7 trillion) and U.S. ($5.4 trillion).

Why is FDI so important? It has the potential for job creation and productivity, increasing both output and wages.

If UK were to leave EU, it would dampen FDI due to uncertainty of the future. Firms would reduce investment in UK, leading to lay offs and so on (domino effect).

3.3 million UK jobs are linked to UK exports to other EU countries. Auto industry would be particularly at risk. In 2015, 77.3% of cars built in the UK were exported, a record high. EU demand grew 11.3%, with 57.5% of exports destined for the continent. In 2014, the motor vehicle manufacturing accounted for 7.9% (pdf download) of total manufacturing, up from 5.4% in 2007. The end of free trade agreements would definitely hurt UK automotive industry.

If UK were to leave the Single Market (EU), locating production in the UK would be less attractive because it would become more costly to ship to EU members. 77% of members of SMMT (Society of Motor Manufacturers and Traders) – the voice of the UK motor industry – believes remaining in EU would be the best for their business. 9% believes Brexit is the best path. 14% doesn’t know, like economists don’t know the real impact of Brexit due to a large base of issues and views.

66% believes EU important to them because of its access to EU automotive markets.

Why The EU Is Important To SMMT Members
Why The EU Is Important To SMMT Members

Brexit would send a ripple effect. For the government (less tax revenue), for businesses (rising costs) and for consumers (lower income).

There’s also the issue of UK citizens in the other EU member countries. They have the right to live, work, vote, run a business, buy a property, and use public services such as health. Some, if not all, of these rights could vanish if UK leaves the EU.

Sure, UK will try to protect them. Since one of the main goals of Brexit is stop the inflows of immigrants into UK from EU, EU might retaliate against it.

UK (the wife) has been married to EU (the husband) for 43 years (UK joined EU in 1973). Part of her wants to get out of the cage. Other part of her wants to keep some of the benefits. If Brexit, it will be very expensive and messy divorce, but may be for the good.


There are so many views on this “monumental” and “out-of-focus” complicated issue. Not every issue is covered in this article. If UK is the first country to leave EU, I will do much more research and analyze it.

If you have any views, I would love to know in the comments below. If you have any questions about any issues related to Brexit, I would be happy to answer them ASAP. Don’t be surprised if the answer is 5 paragraphs long. Thank you.

U.S. Labor Market Seriously Injured

Note: Also posted on Seeking Alpha. It can be found here.

April FOMC Meeting Minutes: “It likely would be appropriate for the Committee to increase the target range for the federal funds rate in June.”

Last Friday: 38K jobs created in May, the fewest since September 2010. Way way lower than 123K jobs gained (that number is revised….hold your breath) in April. Way way lower than 159K gain expected.

Labor market was seriously injured in May. The United States added only 38,000 new jobs, the fewest in almost six years. Things get worse. Prior two months reading were revised lower by 59,000. There were 123,000 jobs added in April down from initial estimate of 160,000. Nonfarm payroll for March was revised to 186,000 from 208,000.

Total Non-Farm Payrolls - Monthly Net Change (In Thousands)
Total Non-Farm Payrolls – Monthly Net Change (In Thousands)

Yet, unemployment rate surprisingly dropped by 0.3% to 4.7%, the lowest since November 2007. Hold on a second. How can unemployment rate drop so much if employment decreased so much? More people left the labor force, as confidence in the labor market is cooling down.

The labor force participation rate decreased by 0.2% to 62.6%, near 38-year low, unwinding about two-thirds of the rise between last September and March. A record 94,708,000 Americans were not in the labor force in May, 664,000 more than in April.

Unemployment Rate and Labor Force Participation Rate "Death Cross"
Unemployment Rate and Labor Force Participation Rate “Death Cross”

The report has evaporated the chance of a rate-hike this month from the Federal Reserve. Before the report, the federal funds futures were pricing in 55% chance of a rate-hike. Now, that is less than 5%.

Federal Funds Futures Source: @MktOutperform (Twitter)
Federal Funds Futures
Source: @MktOutperform (Twitter)

The next probable rate-hike prediction is December. As I mentioned in early January, the Federal Reserve will lower back rates this year. Let’s dig deep into the jobs report.

About 35,000 job losses can be connected to a 45-day Verizon strike, which began on April 13. The workers returned to work on Wednesday, June 1st, after unions reached a deal with the telecommunications company on compensation and job security.

Since they were not working and was on a strike, they were counted as unemployed. Without the “Verizon strike effect,” May nonfarm payroll would have shown 73,000 gain, still way below from the prior month and expectations.

Information services employment, which Verizon workers would fall under, declined by 34,000 jobs in May, the first decline since November 2015. The Bureau of Labor Statistics (BLS) even highlighted the impact of the strike, “employment in information decreased due to a strike.” “About 35,000 workers in the telecommunications industry were on strike and not on company payrolls during the survey reference period,” said BLS in the report.

This is not the first time Verizon workers went on a strike. In both 2000 and 2011, information services employment dropped as Verizon workers demanded more benefits. The month after the strikes, the sector’s employment numbers rebounded.

Verizon Strikes & Information Employment Source: @M_McDonough
Verizon Strikes & Information Employment
Source: @M_McDonough (Twitter)

These 35,000 Verizon workers will be added back to the June’s nonfarm payrolls.

The agreement between the unions and the company gives Verizon workers 10.9% increase in pay over four years (contract expired on August 3, 2019), as well as other benefits. That pay raise is way more than stagnant wages across the country.

Average hourly earnings rose by 5 cents (0.2%) to $25.59, following 9 cents (0.4%) increase in April. On a year-over-year (Y/Y) basis, the wage growth was flat for two months, growing by 2.5%.

Average Hourly Earnings and 12-Month Percentage Change "Death Cross"
Average Hourly Earnings and 12-Month Percentage Change “Death Cross”

Unemployment at 4.6% is within the range the Fed considers “full employment.” The average unemployment rate from 1948 (oldest data I could find) to last month is 5.8%. This leads me to believe the unemployment rate is below its natural rate, 5.8%. Then, why is not inflation higher?

According to Phillips curve, inflation should be higher. Inflation has been hovering around 0% and 1% since the end of 2014. So, why is the Phillips curve not really working?

Phillips Curve (Inflation and Unemployment Rate)
Phillips Curve (Inflation and Unemployment Rate)

If there’s a recession later this year or next year (as some people are forecasting) and the inflation rate is the same as now, we will have a deflationary problem. This time, the deflationary problem will be much worse than they were before. At this time, I am not forecasting anything on recession. If there is one, it will be very interesting how the central banks react to the deflationary pressures, considering the fact that they are running out of ammunition.

I believe Phillips curve is not really working today due to unemployment engineering (like companies do with non-GAAP) and globalization. Workers should not be counted as unemployed because they didn’t look for work in the past four weeks. Instead, it should be three months or more. It gives them more time to think and flush out their savings, if they even have one. Such discouraged workers should be included in the calculation process of unemployment.

Mostly important, globalization has played a big part in the crisis of Phillips curve. Since the financial crisis and light-speed innovation of technology, many companies found ways and more ways to reduce the costs. Since they are battling for customers, they are reducing their prices, keeping inflation low. The trade agreement, Trans-Pacific Partnership (TPP), will keep or even lower inflation further.

The countries included in TPP (China is excluded) account for 36.2% of global economic output and 25.6% for world trade. By eliminating taxes on exports, companies with intense competition, will reduce their prices further. For example, TPP eliminates import taxes up to 70% on U.S. automotive product exports to TPP countries.

The prices of drugs, on the hand other, will continue to increase. TPP increases the protection of drug patents and copyrights, reducing the availability of cheap generics.

Back to the jobs report. Private sector added only 25,000 jobs, the fewest since February 2010. April’s private sector gain was revised down to 130,000 from 171,000. March’s gain was slightly revised down to 167,000 from 184,000. Constructions payrolls dropped by 15,000, the most since December 2013 and the second consecutive month of decline.

The goods producing sector, which includes mining, manufacturing, and construction, shed 36,000 jobs, the most since February 2010. Mining employment continued its downward trend as plunging oil prices penetrated the operations of energy companies, shedding 10,000 jobs in May. Mining employment have dropped by 207,000 since peaking in September 2014, with three-quarters of the losses in support activities.

Temporary-help service jobs shrank by 21,000 and are down by 64,000 so far this year.

Employment and Earnings by Industrial Sector. Percentage of Labor Force sorted: From the highest to lowest. Green colors: Highest in the column Red colors: Lowest in the column
Employment and Earnings by Industrial Sector.
Percentage of Labor Force sorted: From the highest to lowest.
Green colors: Highest in the column
Red colors: Lowest in the column

Retail employment rose 11,400 (Shopping for summer?) after losing jobs in April for the first time since December 2014. Health care added the most jobs, with 45,700. Over the year, health care jobs jumped by 487,000 (Thanks, Obamacare?).

Diffusion index – which measures the breadth of employment across the private sector – collapsed to 51.3%, the lowest since February 2010. A reading of 50 represents that as many industries gained employment as lost employment. If it’s 0, employment of all industries decreased. If it’s 100, employment of all industries increased. That is down from 53.8% in April and 56.3% in March and from the recent peak of 71.2% in November 2014.

Total Private Employment: 1-Month Employment Change and 1-Month Diffusion Index
Further, the number of people employed for part time for economic reasons (involuntary part-time workers), climbed by 468,000 to 6.4 million, the highest since August and the largest jump since September 2012. This level, in addition to other numbers above, suggests slack still in the labor market. It is still high by historical standards.
Part-Time Employment Level for Economic Reasons
Part-Time Employment Level for Economic Reasons

These workers are included in the alternative measures of underutilization (U-6) that remained unchanged at 9.7% in May.

There are nearly 1.9 million workers who have been unemployed for more than 26 weeks, down from 2.1 million in April. It’s the lowest since July 2008, but is still high by historical standards.

Unemployed over 27 weeks
Unemployed over 27 weeks

Three-month average of total nonfarm is down to 116,000 from 181,000 in April. It’s the lowest since July 2012 and is down from 203,000 three-month average during he same period last year. The three-month average of total private is nosedived to 107,000 from 173,000 in April.

The Federal Open Market Committee will meet on June 14-15. They will keep rates on hold, unless they don’t listen to the market like in December. Again, I continue to believe the Fed will lower back rates this year.

The labor market remains in hospital with serious injuries. 

Reactions to the jobs report:

U.S. Dollar (greenback):

U.S. Dollar ("/DX" on thinkorswim)
U.S. Dollar (“/DX” on thinkorswim)


Gold ("/GC" on thinkorswim)
Gold (“/GC” on thinkorswim)