Sunday, June 26, 2016

What Can We Learn from Brexit?

Now that we know that a solid majority of citizens in the UK voted to leave the EU, it's time to reflect a bit and see if we can learn from this event. So far all we have seen is some normal repricing in the markets, but it's early yet.

Below are some bullet points I think we can take away from this.


- this vote clearly illustrates how divided people are and that at any time a small majority can be formed and rise up that can radically alter events (this majority can be very fluid and unstable). I believe that years of leaders focusing on simply winning and gaining power has resulted in the "losing group" feeling completely left out of the decision making process. The leaders of the present system have attempted to pretend that they can just ignore dissenting voices with no consequences. This vote shows just how naive that approach is in the environment that exists today. Unless things change and sincere efforts are made to listen to other points of view (on both sides), whoever is in charge will continue to run into this same problem in my view. This suggests to me that instability is more likely than stability in the system.

- mainstream media sources (and public officials) mostly all got this completely wrong. Even after the voting was completed these sources were reporting that the polls indicated that the remain vote would win. Even the leader of the Brexit movement got it wrong. This was all based on polls that also got it completely wrong. Keep that in mind.

- the markets mostly all got this completely wrong. All day during the voting global markets traded as if the remain vote would win. Also, we were told that hedge funds paid for expensive private exit polling so they would know the outcome ahead of time. All of these people and the markets got it completely wrong (they misread the people). Keep that in mind.

- going forward, it will be important to see how market fallout from this is contained. We can assume the same people who got all this completely wrong will assure us that the fallout will be minimal and contained. Hopefully, they will be right, but keep in mind they got all this completely wrong. Larry Summers agrees that the people getting things wrong need more humility in this article. Here is an excellent point from his article:

"After Brexit, Trump, Sanders and the misforecast British and Canadian general elections, it should be clear that the term political science is an oxymoron. Political events cannot be reliably predicted by pollsters, pundits or punters. All three groups should have humility going forward."

- watch for signs of contagion. market corrections are one thing. the problem can come when too many markets move too fast. Keep in mind there are trillions and trillions of derivative contracts hidden out there all over the world tied to these markets. If unexpected market moves trigger derivatives defaults in too many places, we will have a more serious situation that just simple market corrections. Don't count on the people who got all this wrong to give you a heads up. They were clueless about the Brexit vote and likely will be clueless again about any possible contagion impact. 

- watch for unusual or emergency reaction by the major central banks. They will certainly be standing ready to intervene anywhere they think they need to in all kinds of markets which may cause even more surprises and disruption.

- watch for further indications that public confidence in the present system and its leaders (politicians, finance leaders, etc) is further eroding. The whole system depends completely on public trust and confidence. The Brexit vote is another big signal that confidence in the current system (and its leaders) is eroding all over the world. Once it's gone it is very hard to recover as "leaders" tend to just start finger pointing and try to deflect blame off themselves when something goes wrong. People see this and lose even more confidence in them and the system. I see this everyday all around me even though our leaders wish to ignore it or dismiss it.

- If you were not already convinced that it might be a good idea to have some kind of plan in mind in case unexpected events were to trigger a systemic crisis, this should be your wake up call. If and when that day comes, you will either have made a plan and some preparations or not. As you can see, you cannot rely on mainstream sources to alert you ahead of time about any such event (see Larry Summers quote above). They got this completely wrong and its reasonable to assume they may get it completely wrong again because they tend to dismiss views they don't see as "mainstream". I think this is one of the biggest problems we face which is why this blog supports listening to a variety of viewpoints on these important issues.

It is critical to understand that if and when a true systemic crisis arises, we are pretty much on our own. If no crisis comes you won't be hurt by having a plan in mind and by making some reasonable preparations (emergency fund, etc). If a crisis does come, you will be glad you did something rather than nothing to try and prepare. Clearly, the worst plan is to blindly trust mainstream sources to alert you ahead of time. They do get things wrong as we have just seen and may get it wrong again at the most critical point in time.

Added note:  Robert Pringle (The Money Trap Blog) has a very interesting article out on his blog about the Brexit vote. I plan to feature this article along with some thoughts from Dr. Warren Coats on the Brexit vote in a new blog article in the next couple of weeks.

Here are some quotes from the Robert Pringle article:

"The vote for Brexit is about much more than the UK and Europe. It shows that new rules governing globalization are needed.
The policies followed since the financial crisis have two major errors.
First, there is a failure to diagnose the true causes of the crisis. Second, governments have failed to ensure  that all sections of society paid their fair share of the cost.
Governments and central banks saw the problem as one of lax regulation and inadequate bank capital. They tightened regulation and raised capital requirements. It was all basically “business as usual”.

Governments attempted to deal with the recessions by stimulating demand through easy money.  Again, business as usual."
. . . . . 
"But as I argue in The Money Trap, the diagnosis used to justify these policies was always faulty. The policies have not cured the underlying liability to further crises.
They are not only insufficiently radical. They are just plain wrong.
Ordinary people sense this. They see that authorities do not have a real grip on banking and finance. They sense that banks have not been reined in. Ordinary people pay through their taxes for bank recapitalization and continuing subsidies to the finance sector.This is grossly unfair.
Economic recovery has been slow precisely because neither business leaders nor consumers feel the underlying problems have been addressed.
Meanwhile, Brussels, London and Washington have all become honeypots for corporate lobbyists securing special deals and favourable regulation for the interests they represent."

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