Brexit Drama –What Does it Mean for You?

By David B. Armstrong, CFA | Jun 21, 2016 | Weekly Market Commentary

I generally think of Yorktown in the fall of 1781 every time I hear “Brexit” on the news, but that’s just my military background…

For many others, it has stirred up some anxiety and consternation because this Thursday the 23rd, British voters will decide on whether Britain should remain or bolt from the 28-nation European Union (EU). It’s called “Brexit” – see what they did there with a “Britain” and “Exit” mashup? That’s some Kanye West action straight outta Club CNBC. Hot.

Okay, some background is in order. The EU is an economic entity as well as a political entity. While it allows for the free flow of goods across borders, it also transfers some political control from the UK’s parliament to powers in Brussels.

The two groups are broken down between “Remain” and “Leave”. Those in the “Remain” camp refer to economic uncertainty and the potential for a recession as a key reason for staying with the EU. The “Leave” group is based mostly on, well, national sovereignty. This group does not like the fact that in some instances, the European courts can overrule British courts and the EU rules allow anyone who becomes an EU citizen to live anywhere in the EU. Guess what Britain’s biggest worry is right now? Yup, immigration.

Now, it’s important not to confuse the EU with the Eurozone. The Eurozone is made up of the 19 nations which share the euro as its common currency. Britain uses the British pound, not the euro.

So now for the big question… What happens if Britain leaves the EU? For the U.K., their trade agreements will have to be renegotiated and much of British regulation, which derives from EU rules, will have to be redrafted. Additionally, about 40% of Europe’s major companies and 60% of non-European multinationals list London as their EU base. Why? Well because trade can move throughout the EU with little hindrance from tariffs.

A second order effect from companies leaving London is that it could produce substantial real estate problems and critically encumber consumer spending in Britain.

The U.K. makes up 17.6% of the EU economy, which makes it second only to Germany. If this touched off a recession in the U.K., it would create problems in an already delicate European economy, as British imports from EU nations decline (remember the whole “free flow of goods across boarders” thing).

Let’s not gloss over the political risks that may also exist. If Britain were to exit the EU, it could inspire populist and separatist movements throughout Europe.

Here are some things I read and saw…

From a Charles Sherry report:

The chairman of Germany’s Deutsche Bank called a Brexit “an economic disaster for the UK (Bloomberg).” Writing in the Washington Post, the financial columnist Robert Samuelson said, “Leaving the EU would be an act of national insanity.” And Fed Chief Janet Yellen frets about possible “consequences” for the U.S. economic outlook.

St. Louis Fed President James Bullard:

“…the next day nothing happens,” and the U.K. enters departure negotiations that are bound to go “very slowly.”

Finally, Warren Buffett:

“It wouldn’t change anything I did. I wouldn’t sell the farm I own. I wouldn’t sell the real estate I own… And I certainly wouldn’t change my investment in businesses. But, I hope they don’t do it (MarketWatch).”

What does it mean for U.S. investors?

No one has any idea…and that’s a problem for short-term focused investors. It’s really not a “play-able” event, since you have to guess what is going to happen. If they stay, we can see some rallying on top of what we have already seen over the past few days, but if they leave, we could see a pullback. If they leave, I think it’s a good time to put long-term cash to work if you have been waiting for an opportunity.

If you are already fully invested, I say you have to hold what you’ve got and ask yourself if this situation has made you nervous. If so, is it because you need money soon? You should fix that. Don’t wait for anxiety to prompt action. That usually signals a lack of planning.

Finally, Cleveland

The best tweet on Sunday night after the Cavs won comes from the Cleveland Police after there were unconfirmed reports of a fire truck being stolen. Live it up Cleveland…learn more here in this tourism video.

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