6/26/2016
As of June 23, the popular vote says the Brits want to “leave” the EU. Aside from their small physical isolation from the continent, they had also retained their beloved currency, the now tarnished pound sterling. Apparently what rubbed the Brits the wrong way was having some social and financial decisions, restrictions, and regulations sourced from across the channel in Brussels. If we in the USA would think of some kind of analog to consider, maybe the the IMF or World Bank setting some widely felt rules would have rubbed us the wrong way. Or maybe if Canada would have issued some declarations for the US to follow in order to keep us all in compliance with NAFTA? And then we had a referendum to stay in, or abrogate NAFTA?
There are aspects to treaties that are bound to be irritations to the involved parties. After all, treaties are compromising agreements, and in a good compromise, it’s not ALL win-win … there is some sacrifice on the part of each treaty participant. Apparently, the majority of the Brits who voted on the referendum felt that they were sacrificing a bit too much for the EU, and not getting enough benefit in return. Emotional arguments, not necessarily based in actual fact, swayed enough people to vote for “Exit”, and now the globe has to deal with the repercussions. The Brits feel the keenest repercussions immediately, with the further devaluation of the pound, the clobbering of their stock market, and incurring the wrath or disdain from the global financial community in whatever forms that may take.
For us in the USA, we now have to deal with circumstances over which we had and have absolutely no control. The emotional responses of the entire European continent, and beyond, read “tail”, will be wagging the American dog for weeks, or even months, to come. Will the collection of global knee-jerk responses kick us into another recession? Unknown at this time! The US financial battleship has received one artillery round hit. Is the damage, real or imagined, serious enough to push the ship into a course change, or will it just be a “rock the boat” incident? Only time will tell. We have to see how OTHER economies respond to the disruptions, and how those disruptions reach into our own economy.
Our prognostications at this point:
1 – Short term interest rates will fall as flight to quality ensues for a few weeks.
2 – The Fed will not raise rates any time this summer, in order to not contribute to financial nervousness.
3 – Stock markets have a 50-50 chance of retracing back to the repeated lows set over the last 20 months, with nominal “return to the mean” for the S&P500 being about 1950. A full retracement to previous lows would briefly test 1850.
4 – Market index performance will then be decided by economic statistics feedback, over the course of the next 3-4 months. Specifically, what happens to the trajectories of jobs growth and leading economic indicators? (We’ll keep that at the forefront of our own monitoring of the US macroeconomy.)
5 – Look for the political opportunists who will be attempting to use this financial scare to advance their own agendas, no matter how skewed and unreasonable as their platforms might be.
AP