Current Commentary

Global markets are reacting negatively to the results of Britain’s “Brexit” vote to pull out of the European Union. This came as a shock to the collective analysis around the world. We supported the exit, but expected the “remain” side to prevail just as virtually all others did. In fact most markets, including in the United States, actually rallied the day of the vote in anticipation of the “remain” side winning the referendum. British book makers placed the odds of Brexit failing at 9:1, so those guys are certainly licking some deep wounds now! As with most events where the effects of the resulting outcome are uncertain, over-reaction and panic drive markets initially. If there’s one thing financial markets hate – even more than bad news – it’s uncertainty. Bad news can be priced in allowing you to move on. But what do you do with the unknown? And, admittedly, with political, market, and economic uncertainty globally so heightened, this timing wasn’t ideal.

The first trading day after results were published wasn’t pretty. Asian and European bourses took hits ranging from around 6% to over 12%. Interestingly, the one country most affected by this, the United Kingdom, sold off the least. Our own markets open much later, but by the closing bell on Friday the S&P 500 had shed 3.6% and the NASDAQ declined 4.1%. The Japanese Yen and American dollar were the only major currencies to increase in value amid steep declines in other countries’ exchange rates, as a result of a flight to safety. More losses followed today, notably for our portfolios which have very little foreign exposure (thankfully, but by design), the S&P posted an additional decline of 1.8%. So that’s what’s happened so far. But what can be made of this going forward?

Our view is the doom-and-gloom prognostications are overblown for a number of reasons. It appears the main concern regards trade deals amongst the now-27-member EU and the UK, and other trading partners of the UK as well, like us. The fact is, the British economy is the second-largest in Europe and by some measures, it is in the best shape. The global community that trades with them now will want to continue to do so, and they will also want to continue trading with their partners. So trade deals will be made, and on terms likely not much different from those in place now, lest further restrictions reduce trading volume for both sides. Since the beginning the UK has maintained its use of the pound sterling, eschewing the euro as a currency. So nothing different there. The UK had already negotiated with the EU for more control of cross-border movement prior to this. So that’s little changed, but whatever changes on this front are in store, it should be better for Britain. And let’s not forget that the exiting provision of the EU agreement – article 50 – has flexibility as to when it’s invoked and only then does that start date commence the clock ticking for two years to accomplish the transition to complete removal. The EU itself has announced it is in no hurry for that invocation to start and has suggested it should be done by the next prime minister. David Cameron has announced he will step down in October, so they won’t even have a new government for a few months to even start the two-year process. So, there is plenty of time to hash out agreements and transition protocols. By then, President Obama, who crudely inserted himself in the British citizenry’s internal decision by threatening to move them “to the end of the queue” for trade deals with us, will not be the one leading our own negotiations with them, which is a positive.

To be perfectly honest, having analyzed European economics and politics for decades, we’re surprised it took this long for chinks to appear in the armor. Europeans are a wonderful but very diverse group, and for centuries haven’t really gotten along all that well. The divide between north and south, as well as east and west, has always been wide. The idea of fusing them all together forcibly, to be governed by a collection of rotating non-elected bureaucrats out of Belgium, who have made a slew of oppressive rules and regulations, bonding their finances together forcing the taxpayers of the more responsible wealthier nations to bail out the petulant profligacy of the economically-weaker more socialist nations, with each country enduring exploding welfare expenses, adding open-border policies that are now stressing the cultures of the individual nations to the brink especially with the influx of middle-eastern refugees and terrorists from a culture diametrically opposed to pluralistic western civilization, and all the while creating a weaker defense alliance as each nation thinks all the others will come to their defense so no one spends anything themselves on it, and expecting all of that to work indefinitely is really pretty unrealistic. We Americans wouldn’t want to live in an alliance like that, so it shouldn’t be hard to understand Europeans re-thinking this now that they’ve endured it for a while. We expect other nations will start to grumble about the union too.

Let’s also keep in mind that some European nations have never been part of this union and it hasn’t hurt them any. Norway and Switzerland have been sovereign all along and were never part of this system. Other countries, like Denmark, have maintained their own currency along side of using the euro, allowing them certain exemptions. Our opinion is that this is a good thing, certainly for Britain but also for the rest of Europe, even though it will cause some early pain. The citizens of mainly-free democratic countries need to control their governance by elected representation without interference. Free people need to chart their own destiny, not have it dictated to them, and be able to maintain their own unique cultural distinction. This applies to both political and economic liberty. We have every confidence the great people of the United Kingdom will prosper, and those of us who remain their allies will do just fine as well. It will take some time to bring equilibrium back to the world financial markets, but perhaps not even as much time as many fear. We will watch developments closely, but maintain our heads while those around us are losing theirs.

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