How so, Nirvana? Well, for a small subset of humanity it is a state of bliss. That subset is the media — general, political and financial. CNN, FOX, MSNBC and CNBC were all over it with a cornucopia of expert/pundit testimony adding to the panic of the day. Rachel Maddow, geopolitical/economic expert that she is, opined, “The referendum he (David Cameron) decided to hold has become a global economic disaster.” Admiral James Woolsey, former CIA Director, posited on the Fox News Network that what really worried him was NATO, conflating Great Britain’s “Brexit” vote with a possible pullback in its commitment to the alliance. (Amazing!!!).
One other fact that MSNBC ran with all day Saturday was that the average 401k lost $3114.00 in Friday’s market .. more fear, please. If the average 401k is invested in the S&P 500, it declined 3.6% Friday. Doing the requisite math the average 401k has approximately $87,000.00 in assets. Now, if you want to worry about something, that is something to worry about! No one took the analysis that far. Barron’s (to its credit) contained one of the few positive articles on the subject vs. the U.S. market, “Brexit Selloff Highlights Strength of U.S. Market” (you need a WSJ or Barron’s subscription to read it).
Importantly “Brexit” will be a continuing source of grist for the mill, a great source of rumination, speculation, sensationalism and fear-mongering. It will be the gift that keeps on giving, as it could take years to complete this complex separation, ergo years of headlines to obsess upon … NIRVANA.
Let the UNCERTAINTY begin!
“Brexit” is a ‘murderers’ row’ of Ifs, Whys, Wheres and Whens. The surprise “leave” vote spurred a 3.6% drop in the S&P 500, a ten-year US treasury yield decline to a low of 1.406% (before recovering and closing at 1.5616%–still down from a previous close of 1.7%) and a decline in the British pound from $1.50 to $1.37 to the pound. The rally in the 10-year plus a $100+ rise in the price of an once gold, which closed up $59.30 ($1319.10/oz) represented an incredible flight to safety.
It is important to note Monday morning, June 27, that the sun will still come up in the east, life will go on and the rules and policies of the European Economic Union will still be in operation. All the referendum did was to inject another uncertainty into a an already uncertain world. What it did do for certain was open the flood gates for the media. It gave them something to talk about and obsess on … the uncertainty of it all. As the markets hate uncertainty, it is possible we will see a continuation of Friday’s rout on Monday. It is also possible we may have seen the worst of this.
Importantly, as it pertains to the fundamentals surrounding our economy and the equity and financial markets, very little has changed. Yes, if you were in a levered position betting on the UK remaining in the EU, you are hurting at best and broke at worst. If you’re broke, your creditors will lose money. Of course, there are some that might point to this as a potential source of systemic risk — this plus the downtick in rates gave the financials a shellacking in Friday’s collapse. As a counterpoint, the Fed just published the results of its most recent stress test on the top 32 TBTF (To Big To Fail) banks. They all passed with flying colors. In other words it will probably take more than this referendum vote to lay them low.
There is another concern about the continued viability of the EU, which was a concern long before “Brexit.” Undoubtedly there are many member states where there are strong voices calling for separation. Of course, those departures would be vastly more difficult as those countries, unlike Great Britain, are all in the currency union.
Three last items on timing and complexity
When British Prime Minister David Cameron announced Friday that he would tender his resignation, making way for new parliamentary elections, he stated that it would be up to the next government to act on the referendum. Those elections, by law, cannot happen until October. Ergo, no application for withdrawal under article 50 of the Lisbon Accord can be made until the new government is in place. That is when the negotiations on the divorce can begin. Another wrinkle has just popped up. An on-line petition requesting Parliament to authorize another referendum has just garnered over 3 million signatures. This is 15 times the number of signatures needed to petition their governing body. It seems there are a lot of “leave” voters claiming either that they did not understand what they were voting for or that they were merely making a protest vote. Again we see the importance of a well-informed electorate. Finally, Scotland really wants out of the UK now.
Voters in the United States should consider the above when casting their ballots in 2016. There are no do-overs here. The vote is good for four years –protest vote or not.
The “Brexit” is a mess for the Brits!
The only winner here seems to be the media. But that only happens if you lend your ears or eyes to their relentless negative blather. In the past three and one half years since beginning to blog about the media and the market, I cannot think of one time when they began to hyperventilate to the negative that they were right in their concerns or conclusions. In the meantime, given the facts, the media freakout and the negativity surrounding the “Brexit,” I’m convinced this is probably more of a buying opportunity than the end of the world.
What do you think?
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Bill,
I believe that I enjoy your blog because I share your point of view. The bad news there may be that at least to me you are preaching to the choir. That said I think there are a couple of things in this vote are far more interesting and potentially impactful. I for one would have loved to see the media focus there. One doesn’t have to do a deep dive into the current world to uncover two facts. First, globally there has been a growing and now very large trend toward nationalism in all countries across the globe. Second, the Brexit vote broke out with older non college educated Brits 60+% in favor of leaving and young college educated Brits 70% in favor of remaining in the EU. Divided in this way, only the large bolus of “baby-boomers” could account for this result. The older uneducated population (around the world) has never been this large and may never be again. This is not about Britain or the EU. This is not about the media fear mongering or the economy. You are clearly correct here. The world will survive this vote and whatever follows nicely. But it may be about the future of the world. It is difficult for the west to understand Putin’s hold on Russia. The nationalism behind this vote helps explain it. And other similar examples throughout the world. These same trends are strong in the upheaval currently taking place in the Republican Party and potentially the USA. My view is that this should not be and probably would not be an event at all except for the baby-boomers and the aw of unintended consequences. For me, that is the real take-away here, and is not to be passed over lightly.
Marty, thank you for your very thoughtful and thought-provoking commentary. In the larger picture it is very scary to watch the rise of nationalism, which historically has led to many bad outcomes. Then you pile on the baby boom generation, that pig going through the python. What is even scarier is the fact that many of the boomers who made the vote to exit the EU had no clue about the implications that which they were voting or that their vote was even binding. This represents a total lack of critical thinking among the general public. Every generation has thought the world was going to hell in a hand basket. I hope we, the baby boomers, are not going to be the ones that were correct in that assessment. Thank you for your continued Readership.
Marty’s points are partly right. But before nationalism I believe that the real issue is economic inequality and the continuing extreme widening of income and wealth gaps. Absent extreme inequality, the ‘leaves”,the “tea party” folk and all of the other discontents would be less threatening. But leadership shows little signs of hearing them or feeling their pain. And that it what frustrates and angers them.(That invisible isolation is what the Trumps and leave advocates use to muster support). They want to be heard, i.e. it follows that we need leadership that listens. Nationalism is the response, often manipulated response, not necessarily the source of the problem.
Bill, right on target once again. Thank you.
In response to the older population not being well educated. Aside from educational levels, I read in a scientific article that IQ scores have been going up by several points per person per decade during the past 3 decades. If I recall correctly that measured the US population. This bodes well for the future, I would think. (I wonder if mine is going up, staying flat or going down?)
George, this science flies in the face of much empirical evidence to the contrary. My opinion is fortified by my personal experience as a resident of Kansas and events on the national presidential political scene. They must have screwed up on the tabulation of their IQ statistics. I hope I’m wrong. Nonetheless I appreciate the observation, commentary and your continued readership.
Thanks Bill,
I cannot attest to the validity of the article. And, I may have misstated what I read… I think it referred to people in the 20 to 30 year old cohort.
In any case, with technology increasing at a faster pace… just as the printing press led to more widespread information available, the internet has led to more and more information available to the mass of people, it seemed to make sense at first glance. Plus more college education being consumed per person in the US compared to the 1950s. If younger people are getting smarter, it is a good thing, unless I am competing with them for the same employment opportunity.
Plus, we would not have been able to have this conversation, I likely may have never met you without the internet. The interactions available to us now (especially in isolated areas) have increased very much. More exchange of ideas and so on.