I'm not sure why these things always happen on Fridays ( thank goodness it's "Take Your Pets to Work" day!). As I write this, the Dow Jones Industrial Average is down over 475 points, erasing all its gains for the year. The price of oil is plunging below $50 a barrel, after spectacular (relatively speaking) gains for the year. The yield on the 10 year Treasury bond has fallen to 1.57%, close to its 52-week low. The price of the British pound versus the dollar is at a 30-year low after collapsing almost 10% overnight. Gold, always a favorite in times of trouble, rocketed up almost 5% overnight.
In almost an exact parallel to the market plunge last August (what plunge? how soon we forget!), a doctor friend asked me to explain what exactly had just happened - although she had been vaguely aware of the term "Brexit", she was unsure what it really meant, and why anyone cared.
I asked her to imagine the turmoil it would create if one of our states (let's say Texas), after grumbling for years about the restrictions of our federal government, held a vote to leave the United States. It happened once before, but that was a long time ago - how could Texas exist on its own today? Who would vote for that?
Then imagine that Texas DID hold such a vote, and lo and behold, a majority of the good citizens of Texas DO vote to secede. And now think of the implications of that vote. Texas, as a standalone country, would have to negotiate treaties and trade agreements with the remaining 49 states.
And with all the countries the US has treaties with!
No more "free passage" into or out of Texas. No more subsidies from the federal government (but no more federal tax either!). If you're a company based in Texas - what do you have to do? How will your products/services be affected? And if you're a citizen, how are you impacted - what are the effects on your job, your finances, your home? And you can imagine the US government (and perhaps the states surrounding Texas) won't be too happy. What if California got the same crazy idea? Or New York? And how does this affect poorer nearby states like Louisiana?
This is what Brexit means for Britain and the European Union - and then some! A contrivance meant to create the economic benefits of a larger community without giving up all political independence, the EU has been dysfunctional in many ways since its inception in 1993. That said, the economic ties that have been slowly built over many years will be difficult to untangle.
To repeat some of my advice last August:
Does any of this affect our fundamental advice of living below your means, saving aggressively, investing in a balanced portfolio, and enjoying life? No, it does not.
But although last August I discussed a "bright side" to the market drop, this time I am a bit more pessimistic. I can't exactly put my finger on it, but I sense a growing feeling of unease spreading across the landscape. Millions of people are being displaced in the largest European migration since 1945. Western economies, already struggling, are groaning as they try to accommodate these political and economic refugees. In turn, current residents blame these outsiders for a host of ills, both real and perceived. Democracy, as a fix for the eternal "Us vs. Them" dichotomy appears to be losing - at least democracy as I understand it.
What the long term consequences of yesterday's vote will be is anyone's guess. Britain existed long before the formation of the EU, and no doubt will continue to exist long after its exit. The fear is that now the barn door has been opened, other countries will line up to flee (the Netherlands has already announced they will also give it a vote), creating even further chaos in what is our largest trading partner in the world.
The implications and warnings for our own economy cannot be dismissed. And since markets hate nothing so much as uncertainty, I am afraid we are in for a very bumpy ride in both the near and intermediate term.
Please call me if you have any questions or concerns about your own portfolio.
With warm regards,