Tag Archives: Brexit

BREXIT is a political crisis, not a financial crisis

We have a tendency to take a dispassionate view of world affairs.  It helps us avoid getting caught up in the hype that the media sells when things happen.  When the unexpected happens, as it so often does, the initial reports and the initial reactions are often the opposite of the truth and have little relationship to reality.

We have some insight into European affairs for personal reasons and have always felt that the EU was an artificial construct in a continent that is home to so many disparate cultures.  So we are not surprised that the whole rickety structure is showing signs of coming apart.  But Europe has been the home of little countries and big countries for millennia and has thrived over that time.  There’s no reason to think that the EU is either critical or even necessary.  It has its uses but it also has its failures and it’s the failures that have grown larger over time.  So finally, when put to a vote, the people on an island off the coast of Europe has decided it was time to declare its independence from the EU and reclaim their heritage.

We also found the commentary from  Jenna Barnard of Henderson Global Investors compelling and wanted to share it.

While the result of the referendum “Brexit” last week may be the biggest political crisis in the United Kingdom since the Second World War, this is not a financial crisis in our view.  Credit markets are not suggesting systemic risk at present as the banks are in a relatively healthy place due to rigorous regulation and stress testing over the last few years.

Clearly the result is a significant blow to confidence / “animal spirits” in the short term and will put a least a temporary break on growth in the UK and perhaps Europe. Bank share prices have also been hammered and their willingness to lend remains muted. European companies are therefore likely to remain relatively conservative – more about dividends and conservative balance sheets than share buybacks /M&A.

The Bank of England is planning to cut rates to 0% from 0.5% but the central bank doesn’t want to take them negative.  We expect further credit easing – free money to the banks for mortgage lending (“funding for lending”), more QE possibly.  We believe another central bank heading to the zero lower band fuels the global grab for yield.

The issue at stake as of today is HOW the UK exits. There are soft and hard version of exit with soft (maintaining access to the free trade area) being the preferable version for the economy. Today the leading “leave” politician in the UK (and likely the next Prime Minister), former Mayor of London Boris Johnson, has written his weekly column for a national newspaper that suggests a very soft form of exit; along the lines of Norway and Switzerland i.e. retain access to the free trade area. To do this the UK would have to agree to free movement of labor (to be clear, not people, but the labor market; new migrants would need a job to come to the UK).

We will continue to watch and advise you to events as they unfold.  As we write these comments on Tuesday morning the US stock markets are up over 1% and the European markets are up over 3%.  Reality is overtaking panic.  If you have questions, don’t hesitate to contact us.

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BREXIT! A Rational View

Today’s markets are roiled by the decision of voters in Great Britain to exit the European Union (EU), which has been dubbed “BREXIT.”  As with most events in the investment world, there are people out there who make a living scaring you.  Rather than panic, we recommend you step back and think rationally what this means.

KEEP CALM

First, why did the British people vote to leave the EU despite the unified opposition of both of Great Britain’s major political parties?  The answer is that more than half of their voting public was tired of being told what to do by un-elected bureaucrats in Brussels (the capitol of the EU).  The people wanted to have a say in how they were going to be governed.  In effect, BREXIT was a revolt of the masses against the classes.

Polls prior to the election indicated that the vote would be against BREXIT, opting to stay in the EU.  The result surprised much of the big money which led to today’s panicked selling at the open.

As we prepare these comments we see a small rebound from the opening bell but the day is young and we don’t know where we’ll be at the end.  But if we step back, we think that Brian Wesbury of First Trust has some worthwhile thoughts:

The bottom line is that investors should ignore scare stories about what would happen if BREXIT wins.  Great Britain runs consistent trade deficits with the rest of Europe. Regardless of what foreign leaders say before the vote, if the British vote to leave, the rest of the EU is going to chase them to the ends of the earth.  No way will they allow one of their biggest export markets to become more distant.  They will beg the UK to sign a free trade deal.  In addition, and this is actually great economic news, it would free the US and UK to sign a free trade deal that the EU is now holding up.

Any market volatility would be short-lived and any swing to the downside would be a buying opportunity.  BREXIT is not a reason to sell.  In fact, freedom is a good thing

Have questions?  Ask us.

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The View on Brexit

Britains will soon be voting on whether to stay in the EU (the European Union) or leave.   Polls are divided on exiting the EU, or “Brexit” for short.  The British establishment is all for remaining in the EU but a lot of people are for getting out.  Voters are being deluged by scare stories about what will happen if they exit the EU, everything from loss of jobs to depression.  There has even been a claim that Britain leaving the EU will cause the climate to change even faster.  Some have labeled the tactics “Project Fear.”

The issue driving Brexit is that people are fed up with an unelected European bureaucracy making important political decisions for them.  People are seeing many of the decisions that were once made through Parliamentary democracy delegated to strangers in foreign capitals.

People are also becoming wary about a massive influx of refugees what under EU rules can move freely throughout Europe.  People who do not share the cultural or political beliefs of the British and who have no wish to assimilate.  We will undoubtedly be hearing more about this as the vote nears.

Brian Wesbury of First Trust has this take:

The bottom line is that investors should ignore scare stories about what would happen if Brexit wins. Great Britain runs consistent trade deficits with the rest of Europe. Regardless of what foreign leaders say before the vote, if the British vote to leave, the rest of the EU is going to chase them to the ends of the earth. No way will they allow one of their biggest export markets to become more distant. They will beg the UK to sign a free trade deal. In addition, and this is actually great economic news, it would free the US and UK to sign a free trade deal that the EU is now holding up.

Any market volatility would be short-lived and any swing to the downside would be a buying opportunity. Brexit is not a reason to sell. In fact, freedom is a good thing.

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