Brexit – Now What?

Did you miss Adrian’s brief commentary about Brexit on WBBJ? View it here!

Well, the people of the United Kingdom (UK) have made their voices heard and voted for Brexit. As you are likely already aware by now, Brexit is the decision of the United Kingdom to leave the European Union (EU). And, Brexit is not the only European upheaval on the horizon. In case you missed it, I wrote over two weeks ago about keeping a watchful eye on several European issues to be mindful of in the third paragraph of the “May Jobs Report and the Fed” blogpost. If you’d like more detail on the logistics of Brexit, BBC News has a good piece on the UK’s referendum, but despite calling the piece “All you need to know”, there is a great deal left untold.

What we know:

The first step in a series of steps for the UK to leave the EU: It is important to keep in mind that the“referendum” vote by the people was merely the first step. No official exit has actually taken place yet. While I anticipate the UK to leave officially, it is still not absolutely certain as the politicians could choose not to act on the will of the people. There is already some resistance, but I find it likely that should politicians delay too much, you’ll find the people of the UK ready to replace them to make this happen. Assuming Brexit moves forward without delay, it is still estimated that it may take as long as two years for Brexit to be completed.

Uncertainty yields market flights to safety: There is significant uncertainty not only about the ramifications of the Brexit vote, but even more so regarding how the markets will react years into the future regarding those ramifications. However, that uncertainty could yield positive or negative outcomes depending on what actions are taken from here. Keep in mind that what we have seen in the markets thus far is not based on what investors know; rather it is based on what investors don’t know. I encourage you not to assume that Brexit means doom nor that Brexit means boom!

More on the horizon: Spain, while shadowed by the Brexit vote, had a major election on June 26^th that adds the European uncertainty. Despite claims by the People’s Party Mariano Rajoy to have “won”, the vote leaves in place political stalemates because the Party is short of a majority to take actions without consensus from opposing leadership. Furthermore, Greece faces major debt payments of over ~$11 billion over the next several weeks. And finally, France is having major issues with strategic fuel reserves. In mid-May, the French government estimated it had 115 days of reserves left, but the issue is more about logistics and as summer fuel demand increases, this could be another major economic issue to contend with.

Media, government and sales fearmongering: One thing which is already occurring from the Brexit vote is fearmongering. The media is one place where you should expect such to occur.  Here is about 60 seconds of media fearmongering if you already haven’t had enough. There’s no doubt that most major news sources will be playing up the worst aspects for news ratings for some time.

Another source which I anticipate to continue with the fear tactics will be governments. There may or may not be as much coming out of the UK, but certainly expect any other country entertaining an exit to have its leadership use every tactic possible. In particular, I don’t expect Brexit to be completely smooth sailing. Watch for political leadership to seize on any negative Brexit issues for all they’re worth.

Finally, those selling financial newsletters or certain investments such as precious metals will certainly use this to their advantage. And, while I’m not completely opposed to a small holding in non-traditional investments as some advisors may be, I recommend not becoming overzealous just because of fear tactics.

Now, I’ll make some broad speculation. Keep in mind, this is speculative conjecture. Please, do not attempt to make investment decisions based on my musings; consult your investment professional.

What we don’t know:

Euro Demise: First, I think Brexit spells the eventual end for the Euro as we know it. The UK is the first of several nations that will likely exit. It is still undetermined if the EU will place trade sanctions on the UK, which have already been threatened. If the EU does, other EU countries may be more hesitant to exit and the UK will likely see some negative economic consequences. Despite sanctions, I think other nations will still eventually exit, it may just take longer. Of course “receiver” states, those which benefit more economically than they contribute may continue to try and hold the EU together. One must also consider that the UK kept the Pound as their currency in addition to the Euro, whereas other currencies such as the French Franc would have to be reintroduced, which would be more complex. Exits by stronger economic states means that if the Euro does continue to exist, it certainly will not be the currency which some thought would supplant the dollar.

Good for the UK: Economically, I believe it could be very good for the UK to exit the EU, especially if sanctions are not imposed. The UK is better positioned financially than most of the rest of the EU, and if the Pound’s value stays lower in comparison to the Euro and/or the Dollar, it will make business investment more attractive in the UK. But, not only will the UK have more economic independence, it will also have more socio-political independence. We’ve seen time and time again throughout history that more freedom means more economic prosperity. It may take years, or even decades, however I do believe that this is a good first step towards helping the UK re-establish greater financial strength and prosperity. We’ll have to see what other steps are taken by the UK to see how impactful this may be. Keep in mind that for a year or more, this could have the opposite effect. As I said before, uncertainty usually yields a flight to safety and there is a lot of uncertainty in the UK at the moment.

UK Immigration Reform: I believe there were many factors which drove the Brexit vote, not least of which were economic independence and Brits seeking smaller governance closer to home. Certainly, there were numerous socio-political and economic factors of influence. One factor not to discount is the European refugee crisis. Regardless of your personal thoughts on the refugee relocation throughout the world, one cannot deny the fact that it is putting financial strain on receiver nations and influencing the cultural landscape through Balkanization.

The Fed: I still believe the Federal Reserve Bank will raise rates as much and as fast as they feel they can. However, Brexit no doubt puts a hold on rate increases for a while.

The information provided in Eddleman’s Economic Insight is not intended to be used as investment advice; rather it is provided as general economic news and information for your awareness or for discussions with your investment professional. Our views may change at any time based on the constantly changing conditions that influence finance and economics. Please consult your investment professional or CPA for advice specific to your situation! Past performance is not indicative of future results.