Wonderful to read an informed, local, knowledgeable, rational post! FC
The Brexit result has massive potential consequences and I don’t think this discussion has necessarily factored in the potential downside.
Leaving aside the fact that this could trigger a massive correction in an over-valued stock market (no matter how many Skechers shoes get sold or houses completed in Texas); the result has the capacity to:
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Produce risks of financial industry and capital markets chaos
London is the number 1 financial center in the world. Its place is now under threat and the pressure to shift market making to NYC, Frankfurt, Singapore, HK etc will be there potentially fragmenting an entire industry (which is the largest industry sector for many developed countries). GBP fell 10% at one point yesterday and the Euro fell 5%. Factor is some fear and greed and uncertainty then add in some predatory currency trading - things could get volatile and ugly. Plenty of financial mechanisms failed yesterday from stock market blocked trading to currency and money flows interruptions to retail exchange platform breakdowns. -
Generate investment uncertainty and starvation
Investments flows will be put on hold in UK and Europe as companies wait and watch what happens. No-one is going to be investing in UK or parts of EU not knowing whether that represents an EU market access strategy or not. This could go on for years. That will almost certainly produce a UK and EU recession and possibly a global recession. Why would Nisan and Honda want to invest in the UK as a springboard for Europe. Why would China or even US want to make UK their European hub faced with this? -
Create political instability
This threatens political stability in the UK - The Prime Minister has already resigned. Scotland will demand a new referendum then Wales and NI. Other countries in EU will demand their own referendum which risks a fairly important existential question mark now. If you thought Grexit uncertainty was affecting markets imagine what this will do. EU will have a massive hole in its finances without the GB contribution - they aren’t going to afford subsidizing Greece, Portugal etc carrying on the way they do. At some point that won’t be enough and Germany is going to have to ask France why it is paying for the French to work 35 hour weeks and reduce their retirement age to 58 - then it really gets interesting. If this produces a rise of inward looking nationalism then free trade and organized trading agreements will be threatened further hurting the global economy. Trump and Clinton are already against TPP. Trump seems to be against NAFTA and every other trade agreement. This threat to international collaboration could be disastrous if it builds a head of steam.
Even where I was in change alley in Singapore yesterday it was utter chaos. The place turned into one of those trading floor scenes from the 1980s for a while. Currency counters were caught completely wrong sided, the usual 1% spread went to 10% spreads and at times both ends of the spread were one side of the market. Eventually the counters stopped posting rates and stopped selling GBP and then just closed. Leaving that scene, dealers and brokers were hitting the bars and drowning their sorrows in a beer or 2 by lunch but in an unusually quiet and despondent mood. Most of the Brits abroad were commiserating the result. That evening catching up for a friend’s leaving do - one of our party’s other half was a no show. She works for a Swiss bank and basically had to work the night and the weekend clearing up the mess.
Ant
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On balance, I wouldn’t be surprised if this ultimately turns out well for England. It wasn’t long ago that I was reading that the EU was mandating that Greece needed to reform its markets and get rid of some of its bureaucratic rules. Why is that so good for Greece but bad for England? I don’t think its a stretch to say that burdensome regulations are a hidden tax.
bulwnkl
PS I am pretty sure the sun will rise tomorrow.
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Sadly or humorously I’m not sure which, Many British may have had no idea what they were voting for:
https://www.washingtonpost.com/news/the-switch/wp/2016/06/24…
David
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Alex and Denny are correct. Unfortunately, on the whole, Americans know very little about the workings of the EU and how dramatically it differs from the wonderful Constitution laid down by the founding fathers of America. But to the points contested:
Laws are made by the Commission. It is unelected and therefore unaccountable. The function of the parliament is to rubber-stamp them.
So corrupt and wasteful is the EU that no firm of accountants has been found willing to sign off the annual accounts.
‘Pooling’ of sovereignty is not some benevolent abstract but very real in terms of outcomes. For instance, if you have a directly-elected parliament and you ‘pool’ it with an unelected politburo, you no longer have a directly-elected parliament. If you ‘pool’ the right to trial by jury and ‘innocent until proven guilty’ with a regime which does not hold with such things, you no longer have trial by jury and ‘innocent until proven guilty’. If you ‘pool’ the Separation of Powers, one of the great bulwarks of the American and British (unwritten) constitutions with a project where the function of the highest court in the land (the ECJ) is to enable and enforce the wishes of an (unelected) executive, you no longer have the Separation of Powers. Etc.
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the massive scare campaign from the largest tabloids:
Looks to me like they were just reporting the news.
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Talking about irrational: SBNY is a bank lending to small to medium size businesses in the NY City area…
Banks thrive in a high interest rate env. Brexit could postpone any further rate hikes by the Fed and that hurts the prospects of all US banks, SBNY included.
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Ant’s point is solid. There is a chain reaction. This creates fear u certainty and doubt and unintended consequences.
Would not be the first time Britain shot itself on the foot. Britain forced itself back onto the gold standard in the 1920s and suffered a severe recession years before the Great Depression. But seems like a nice idea at the time.
This Brexit movement is more cultural than anything else. It is not racist in regard to anti immigrant, anti Muslim, but rather anti masses of immigrants who will refuse to assimilate, refuse to become
“British” unlike previous waves of immigration. The same sentiment is behind Trump in the US,and being seen in Germany. As such economic consequences are of less importance in this conversation.
I feel the panic is over done, and exaggerated as it is as much a cultural and political issue with hyperbole on both sides that creates the FUD on both sides of the issue.
As such, this to shall pass. This is not the global housing mortgage crisis. Great Britain will recover.
I saw a recent brokerage report that precisely outlined as a decent age of GDP just how Brexit will affect the US economy. It had precise numbers on multiple categories for loss, and then fewer, but equally precise numbers for benefits. In the end the net was a loss of 0.4% to American GDP. A wash. No one really knows.
Now trump and Clinton… Sigh, far more damage potential there.
Tinker
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The risk of a global recession is now more than 50 percent after Britain voted to leave the European Union, according to asset manager T. Rowe Price Group Inc., which oversees more than $765 billion in assets.
“Those who believe Brexit is a U.K. problem are misunderstanding the impact it will have globally. They’re forgetting the impact that Greece had – and Greece is much smaller than the U.K. and not a financial center,” said Arif Husain, head of international fixed income at T. Rowe Price in e-mailed comments. “The vote to leave could result in a global recession.”
http://www.bloomberg.com/news/articles/2016-06-24/global-rec……
http://www.moneycontrol.com/news/market-outlook/brexit-china……
http://www.newstatesman.com/politics/staggers/2016/06/brexit……
http://www.independent.co.uk/news/uk/politics/brexit-eu-refe……
I wonder if any of these guys will ever say: “Gee! How did I ever get it so totally and completely wrong. I’m really sorry I misled you.” Or, as I suggested previously, were they simply doing a hatchet job for their employer who was short the market indices.
Saul
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They ONLY remind us that they got it right on the rare occasions that they actually did get something right.
They also rely on the fact that many people won’t remember what they said last week.
But they are very good at telling us what DID happen… and what is happening NOW…100% on those metrics.
Frank
As I have mentioned, the risk does not lie with Brexit. Indeed, if the UK plays its cards right (properly leave the EU, declare free trade with everyone, slash corporate taxes, cut other taxes, cut government expenditure except on infrastructure etc.) it may do very well.
The question on the table is not Brexit. Brexit is just the catalyst for a reaction: the increased likelihood of the break-up of the Eurozone, or even the EU.
The show ain’t over until the fat lady sings. The show has not yet begun. The fat lady, probably Italian, is still in her dressing room, waiting to go on stage. There are more fat ladies singing after her.
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(properly leave the EU, declare free trade with everyone, slash corporate taxes, cut other taxes, cut government expenditure except on infrastructure etc.)
Sounds like The Magic Kingdom or FairyLand. LOL
Sorry!
Denny Schlesinger
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The show ain’t over until the fat lady sings. The show has not yet begun. The fat lady, probably Italian, is still in her dressing room, waiting to go on stage.
Streina, that doesn’t really make much sense if you think about it. The fat lady always gets to sing: a recession ALWAYS comes along eventually. But it clearly isn’t going to be an end-of-the-world-as-we-know-it recession the way the doom and gloomers were predicting. And it probably won’t even be because of Brexit. The UK takes only 5% of our exports. That’s not 5% of our economy — that’s 5% of only our EXPORTS. If the UK had a recession, it doesn’t mean they will disappear. If they take 10% less from us in their recession, our exports will be down by 0.5%. That’s not GDP, its just exports down 0.5% from what they would have been. And I’m sure our exports to Italy are a lot less, and to Greece are minuscule. Sure the fat lady will get to sing, but if it’s in 5 years and the market is already up 40 or 50%, some people will still say “I told you so all along”.
Saul
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“Those who believe Brexit is a U.K. problem are misunderstanding the impact it will have globally. They’re forgetting the impact that Greece had – and Greece is much smaller than the U.K. and not a financial center,” said Arif Husain, head of international fixed income at T. Rowe Price in e-mailed comments. “The vote to leave could result in a global recession.”
I think this guy misses an important point. I don’t think the issue Greece caused was do it it potentially leaving the EU or not but that they would default on the money they borrowed from the EU and banks.
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Honestly Saul - I think it is too early to tell and looking at the US to UK trade only is under-representing the issue. UK is the 5th largest economy in the world - actually since Brexit it is now the 6th. We haven’t had a single piece of economic data since Brexit so it is too early to say whether we are facing recession - which takes 2 quarters of data points anyhow. UK could well still go into recession, if that happens then there’s a probability Europe will go into recession - if that happens then there is a much higher contagion rate with the US than the 5%.
That’s not to say that Wall St hasn’t over reacted and the worst case scenarios were justified but it is too early to tell.
We have already seen Brexit have a massive impact on fiscal policy - pretty much everyone in UK and European central banks already to start talking about stimulus. Brexit is having an impact - perhaps less so in the US but the GBP is down 15% in 1 week, in the UK we have the 2 leading parties in leadership turmoil, half a dozen property investment funds have been locked up, there’s talk of another European banking crisis and the rhetoric between European politicians is getting really nasty. On a personal note - this has caused huge division between friends, families, generations and regions.
All in all it might be fine for you guys in the US to dismiss but where this is taking place it is affecting a lot of people in real ways.
Ant
(Yes I would say this anyway since I’m a Brit).
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Ant,
Thanks for your comments. You are like our reporter on the ground out there. Please keep us up to speed with what you are hearing from time to time. I enjoy your posts on the market and am sure your insight on the ongoing impacts of Brexit would be great too.
AJ
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Sure Phoolio - thanks.
Maybe one of the reasons this board isn’t too concerned with Brexit is that there isn’t really any international banks or investment banks in our high growth low valuation approach. If there were then I am sure we would be paying more attention to concerns like this…
http://www.cnbc.com/2016/07/11/former-fdic-chair-sheila-bair…
By the way if you want to step into the Brexit cage fight you can see how much it concerns people from these 2 boards on fool.co.uk (you will have read access with your US accounts I believe).
Bert’s Investor Sanctuary
http://boards.fool.co.uk/berts-investor-sanctuary-51788.aspx…
Banking Sector
http://boards.fool.co.uk/banking-sector-50033.aspx?mid=13403…
A
Yes I would say this anyway since I’m a Brit
Ant, I see Brexit as the 21st Century version of “No taxation without representation.” The original was also by Brits, Colonials but Brits all the same. What started as a good idea, political union and free trade, became a tyranny by Brussel Sprouts! People just don’t like to be dictated to.
I have no idea what the economic consequences will be but the market and my stocks think it’s a non-event. Take ARM, the ADR has not been affected by the change in value of the GBP. This two month chart does not tell you when Brexit was voted on, it was just another day at the market!
http://softwaretimes.com/pics/armh-07-12-2016.gif
As an investor, Brexit turns out to be a non-event.
Britain has a lot of mixed race immigration but it’s mostly from the Commonwealth (or so I assume) which means that these immigrants are already accustomed to British ways. But the new influx of war refugees from the Middle East is much more difficult to absorb so I can see where this creates problems.
I’m waiting for the day we get rid of our dictators!
Denny Schlesinger
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You are like our reporter on the ground out there.
As perceptive as Ant is, one might note that he is out there (west), not out there (east, aka UK).
As perceptive as Ant is, one might note that he is out there (west), not out there (east, aka UK).
He is FarEast… not West. and due for a beer soon