A synthesis of articles on Brexit in addition to my take. See below:
Oh blimey, the bloody British have done it again! If you have not heard yet, the U.K. citizens
voted to exit the European Union today.
For background, the European Union ( EU) is a common economic area that
allows all European participants to move and trade in other EU countries almost
the same as they do in their own. There
was a country wide vote yesterday, termed “Brexit”, to vote yes or no on
continuing to participate in this agreement.
Why leave? The
primary issue revolves around immigration. Immigrants have migrated to England
in droves comprising 25% of the population in some UK towns. In most cases, the locals have lost jobs,
while crime has increased. Of course,
this angers the average British citizen.
Why even have immigration?
It makes sense especially if you look at the demographics of
Europe. They are aging more rapidly than
the US, while birthrates have been declining.
They need young workers to replace the aging workforce and have babies.
If it were not for the Hispanic population in the US, we would be in the same
position.
Japan is the poster
child of what happens when a country prevents immigration when in this
situation. They have been in a recession for the past 25 years! Europe does not
want to be Japan, so they loosened immigration laws and decided to let some of
the Eastern European countries into the agreement, like Bulgaria and
Romania. Economist know in the long-term
this will pay off. However, the average
Joe, or Brit, is focused on feeding their families and today, not tomorrow. In
the long term, we will all be dead. In the short term, the immigrants flow in
droves, and take the jobs of the local citizens. In some towns in England, immigrants
comprise of 25% of the population!
What next?
Nothing immediate happens now. The UK will have to impose
Article 50, which basically says the negotiations to leave the EU have a
two-year timetable. This has only been
done once before when Greenland left the EU in 1982.
After this, there are basically two routes the Brits can go:
(1) Be like
Norway, which is not part of the EU, but part of the European Economic Area
(EEA). This still requires a country to pay into the EU budget and allow free
movement of people, but gives more flexibility.
(2) Operate
under the WTO rules like America. In
this case, no one really knows if Germany and other countries in the EU will
accommodate them.
Thoughts
There are really 3 unknowns here: (1) how much will
financial assets fall and what effect will this have on spending, (2) will the
U.K. maintain the same level of trade and investment with Europe, and (3) will
this cause unrest and fragmentation in Europe; Denmark or the Netherlands could
be next.
With all that said, let me reiterate; the world is not
ending! However, markets will be
volatile in the short-term and Britain will surely go into recession which
impacts anyone that exports to them, like German manufactures.
KEEP IN MIND, Britain accounts for just 3.9% of global
output. The collapsing pound will drive
up inflation up, crimping real incomes. Jobs will be lost. Hours worked and wage growth may fall.
However, the devaluation in the British pound could spur UK exports, which
happened in 1992.
What should an investor do?
Think you know what I will say from here. If you are younger
and still working, this is a great opportunity to invest. If you are retired, enjoy the antics from the
sidelines and take comfort in the fact you have a significant amount of money
in bonds which are up strongly today.
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