Thursday, June 23, 2016

What is the Most Significant Aspect of the Brexit Vote To Watch For?

I have intentionally avoided the topic of the Brexit vote in the UK because most news coverage does not really relate to our topic here. The focus in most media I read is of course on whether or not it will pass or fail. Alongside that are many articles suggesting that a number of very bad things may happen (in the UK and/or EU) if the Brexit vote passes (see list below).

For the purposes of this blog, these are mostly side issues. This blog is attempting to monitor events which could lead to a major change in the global monetary system. Change so significant that all of us will know our lives have been impacted. While some articles come close to suggesting that the Brexit vote could trigger that kind of impact, the focus here is on what the vote might signal about confidence in the present financial and monetary system.

The current global financial and monetary system is dependent upon the confidence of the public to function. I don't know of anyone who would argue that point. So long as the large majority of people have confidence in the system, it can continue to function somewhat normally. If confidence is lost by a majority of the public for any reason, everything changes. This is why we have our monthly Crisis Watch update here on the blog. There really is no more important event we can monitor than whether or not events that could lead to a crisis of confidence by the public are taking place.

The Brexit vote is another marker that tells us the mood of the public. If a majority of the public in the UK votes for a Brexit, it amounts to a vote of no confidence in the EU system. Even if the Brexit vote fails, a close vote still clearly indicates widespread lack of trust in the present system and those who are running it (much as we are seeing in the US this election year). Here is a Bloomberg article that makes the same point.

I believe this is why we are seeing such an intense effort by the major global institutions to persuade the public to vote against a Brexit (see IMF links below). It probably is not so much about any immediate economic impacts on trade, pensions, etc. There may be impacts there of course, but the huge elephant in the room impact would be a clear signal from the public that they are losing confidence in the present system. We noted in a recent blog article here that a number of high profile fund managers and high net worth investors are recently making comments about lack of faith and confidence in the current system.

For our purposes here, this is the most significant aspect of the Brexit vote that we need to keep an eye on (whether it passes or fails). We need to watch to see if a clear signal is sent to the global markets that too many people are losing confidence. That is the very thing that could lead to the kind of crisis we have talked about here for quite some time (the "snowflake that leads to the avalanche"). The kind of crisis that could lead to major monetary system change that could impact us all. This kind of mood change is virtually impossible to predict with any of the economic models used by various institutions and economists. It's why we have no choice but to stay alert to the possibility and follow events carefully.

While the odds say it's unlikely a Brexit vote would triggger an immediate crisis, please keep this concept (that public confidence is critical) in mind while following events in the coming days, weeks, and months. I will try to monitor events as best I can here, but the reality is that events can always unfold more quickly than anyone can stay up with them. It's important to stay alert and informed and have some kind of idea what you would do if a crisis of confidence were to unfold at some point in the future.


It's pretty clear how the IMF feels about the Brexit vote:

Chicago Tribune - IMF Revives Recession Warning for UK economy over Brexit Vote - Uncertainty Clouds the UK's Economic Prospects

If that's not enough evidence for you of IMF concern over this, here is what a google search under the term IMF on Brexit vote turns up (the list of links goes on and on from major publications all over the world). 

News on the vote (2pm CST) - Weather may play a factor. Heavy rains may dampen turnout in some areas. Meanwhile markets traded today as if the Brexit vote will not pass.

Added note: Jim Rickards will debate Barry Ritholtz on gold on Bloomberg TV - (4:40 pm ET)

Some notes on Jim Rickards webinar today since he is talking about Brexit in real time (while voting is in progress).

- still too close to call even at this point in Jim's view
- Jim issued somewhat of an alert in case the Brexit vote does pass - he said to watch markets closely because it could trigger a sharp global selloff leading to contagion and and global liquidity crisis very quickly (he did not predict this, just issued an alert to keep a close watch)
- he bought gold in the last few days in case Brexit wins - he says if it wins gold will move sharply higher quickly - if it fails he still sees gold higher by year end
- on his recent trip to a Swiss gold refiner he confirmed in person that the supply of gold bars for large demand buyers is very tight - he says gold will move higher soon because of this regardless of what happens with Brexit

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