What's With This "Brexit" Hoopla?

What's With This "Brexit" Hoopla?

June 24, 2016 Gil Baumgarten

Here are my thoughts on what's going on.

The citizenry of the U.K. voted yesterday to leave the European Union. The seeds of the EU were planted in 1973. It became more formalized with the Euro currency introduction in 1999 and the fall of the Berlin Wall a decade before that. This ushered in a period of more free trade and more freedom of movement across borders. These open borders have culminated in massive migrations out of areas of conflict, such as Syria.

These resulting refugee migrations have strained the cultures and social fabrics of these European countries who have strong regional cultural ties. Add in to the mix Muslim mores that conflict greatly with western culture. Throw in a few demonstrations and religiously inspired stabbings and rapes and you can see the political backlash ripen.

So the issue with today's markets is that speculation has been building that this election would go the other way and stability would reign. A poll last week confirmed a close race with leanings toward staying in the EU. The opposite result is what occurred and markets exhale.

Segment Wealth Management Blog BREXIT 3.png

Markets don't like uncertainty. It's not as though the UK is some dominant force in world GDP (less than 1%). So what's the big deal? Here's the big deal: it calls into question the survivability of the EU and the Euro currency.

With a questioning mind I have written before about the wisdom of a system with independent nations with very different social structures and no central bank governing currency. How can such a system exist without centralized taxation? It cannot.

Balance is maintained in a system where productivity, social program costs, and central banking rules, are coordinated with money supply and taxation in individual country ecosystems. This facilitates an orderly and disparate foreign exchange market. Balance exists in this "every man for himself and his nation" system. Harmony is an unlikely outcome with a hodgepodge of nations and cultures vying for equal treatment and unequal output.

I think we can expect similar referendums in other nearby nations facing similar immigration issues and resulting backlashes. If you pay attention to American politics you will notice a similar political upheaval underway here as well. My guess is the Euro won't survive and years of disintegration stands before us. Does this mean Kimberly Clark will sell fewer diapers tomorrow in Europe? No, but it raises the stakes in what investments they are considering and what the costs and uncertainty will look like. This will likely lead to volatility in markets and a surge in bond prices where the certainty of a particular outcome is virtually assured and extremely expensive. Prepare for zero interest rates to be the norm for some time to come.