On Brexit

Since Thursday’s “Leave” vote emerged as the British people’s desire, most markets have dropped. The S&P 500 is down 5% as of this writing, and the FTSE 100 is down around 5.5%. The Euro, GBP and Yen are down, while the USD has gained. Ratings agencies have reduced the credit ratings of the UK, and given the uncertainty and fear in the markets, gold is up. Headlines have emerged today calling the Brexit the long awaited black swan, implying inevitable recessions.

This is the second or third time this year that economic bears have predicted recessions due to a large market drop. In terms of the S&P, so far we are still above the 2016 First Quarter Crash levels, though we may test that bottom this week. I would be surprised if that happened. The First Quarter crash had a lot to do with an anticipated poor earnings season, as well down consumer spending. In other words, it was tied to poor US corporate performance in the present. The consequences of the Brexit on US markets will be felt in the future.

Ignoring the possibility of a second referendum, which is likely to be a bad idea in a democratic society, the major effect of the Brexit will be to force the UK into a long and tedious review of its relationships with Europe, and then with the rest of world, though perhaps not in that order. In terms of economics, the UK seems to have been around breakeven in terms of benefits from being in the EU vs not being in the EU. The UK remains as one the world’s leading economic powers, and barring any severe cold shoulder’s from the remaining EU members, it should remain so. If Scotland and Ireland secede, there could be larger consequences for London, but this is unlikely to cause contagion. The effects of a London crash will have long been priced into global markets as these political machinations are slow moving and generally unsurprising events.

The market uncertainty has more to do with the future of the EU then with the future of Britain. With the success of Brexit, the French Nationalist Party will be emboldened in their own platform of a Frexit. And if that succeeds, the EU will essentially become the German Confederation, and the experimental union will be unlikely go down in history as a success after that. Fortunately for proponents of the EU, the looming doom that is Russia has been very active lately and the fear of Putin may ice further desires to break up the union.

The Spring 2017 elections in France will prove to be more interesting to many than before the Brexit, but until then, we will likely return to the mean, even if more warily than before.

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