Brexit - by Jerry Black
It seems as though we have a new acronym (and perhaps a few more will surface IE : Frexit, Itexit, IRexit etc) becoming more a part of our vocabulary over the coming weeks and months. Britain has chosen to “Exit.” The implications of the people’s decision will be both short term and long term. Certain British politicians will lose their jobs (ie: (MEP’s) those Members of the European Parliament). Prime Minister Cameron has resigned effective October. The transition will not happen overnight and the implications go well beyond just the economics. The UK wants to control its borders. Independence has its costs. The decision, though some 72% of the voters voted, carried by only a 4% margin. This means a large percentage of the people will go along kicking, screaming, fighting. This will create uncertainty as the world watches. This decision breaks the status quo of the last 20 or so years for Europe. It’s been fascinating listening to the British broadcasts.
Over the last 72-96 hours following the final tally resulting in the people of the UK’s decision to exit to European Union I have listened to hours of and read dozens of suppositions as to the by-product of this momentous decision. Nobody really expected it to happen. The people have spoken. This has intensified uncertainty.
When I first heard the results of the voting, the first word that came to mind was sovereignty. In this instance the people of the UK have determined to take back their sovereignty. Years ago they gave up some, if not most, of their sovereignty to those in Brussels who believe they can make better decisions for the people of Europe than the people and their duly elected representatives. A few years ago, while riding along the windy roads of Ireland I spoke with our van driver, who as it turned out was quite knowledgeable about how the EU system worked. Needless to say he was not a happy camper. He was concerned about the long term cultural implications for Ireland because of the decisions being made by those in Brussels. Open borders and the economic implications therewith have broad reaching complexities. The loss of their sovereignty, to him, was of grave importance and concern. He felt the promises of the EU were mortgaging his future and the futures of his children and grandchildren.
Having been educated in a Catholic School in his youth he had been taught certain transcendent biblical principles. Thrift, savings, charity, planning, taking care of one’s own family, personal responsibility, hard work. In many regards he felt the EU has made it more difficult to live accordingly. Perhaps the people of Britain have come to feel likewise.
What does all this mean for us as Americans who are investors in the world markets through our investment portfolios? Noone knows for sure, except God of course. Because he is Sovereign. The Founders of our great nation knew this and believed in a supreme being and they understand the rights of a sovereign people under the sovereignty of God, when governed by limited government by those who govern under the authority of The Sovereign.
In the near term this will likely mean greater uncertainty in the world markets. People are more concerned today in the almighty dollar than The Almighty One. The long term implications of that alone are not good. But back to the present. Uncertainty today seems more prevalent than perhaps the environment of the 40’s. Europe is going to have to adjust to this change. I cannot honestly say I know the depth of the implications. We have examples of countries in recent decades who have transitioned and the struggle has been a challenge. The UK is a country much older than ours. It is perhaps the 5th or 6th largest economy in the world and they send lots of money to the EU for them to spread around. In the recent decade some US companies have revoked their US domiciles and relocated headquarters to the UK. I think this will be good for the UK. I think the UK will become even more business friendly as it will have more to gain by virtue of its independence. Yet certain multi – national companies may struggle because in a strange sort of way they prefer a heavily regulated economic system. Incidentally it is reported the “remain” side of the agenda was being heavily financed by these multi-national companies. It’s interesting these large companies felt they had more to gain by “Remaining.”
If ever there has been a reason to embrace a transcendent principle of diversification – now is that time. The US dollar has increased dramatically against foreign currencies over the last 20 months and is likely to continue to do so as investors around the world seek stability. This will not bode well for China, for example. China sells a lot to Europe, more so than to the US. Events like Brexit are why we invest in broad global diversification, with nine asset classes and over 10,000 securities in 45 countries and 35 currencies.
In the long term I think this will be good for the UK and the rest of the world, something closer to a free market economy for the UK and the region will always be better. All kinds of negotiations will be taking place over these next 24 months, the time frame in which the initial phase of the transition will occur.
Let’s take a few minutes for perspective to help us see the present market events in a larger context.
The media chooses to exaggerate the point drop in the market not only as a loss, but also as a very significant point loss. It’s important to remember that you are not realizing a loss even if the value of your account drops. The only way to realize a loss, thereby actually losing money, is by selling out of your current holdings at a lower level than you originally bought in. Most people do this on an emotional whim rather than long term plan. We actually see these types of events as opportunities to rebalance the portfolio. We have every reason to believe our portfolio models are properly structured for the long term. We do not believe that there is reason to panic.
There have actually been about 30 or more times in market history the markets have declined a greater degree in a single day. That averages out to about once every three or four years. A 610 point decline represents a 3.5% drop. In the course of any given year we’d expect a 10% drop about 25% of the time. These type events get a lot of media time because fear sells well. On Aug 25, 2015 and again on Feb 11, 2016 the DJIA was at 15,660. As of Friday’s close the DJIA closed at 17,400 and the 52 week high has been 18,167. From a technical analysis perspective, the market has a way to go before we get back down to 52 week lows. At 17,400 the DJIA is only down 0.1% for the year.
As you know we routinely reinforce the concept - Know, Believe, Do. We do this because we know and believe it’s true. What we do is directly correlated to what we know and believe. I hope this commentary helps you know a little more about what is going on, as we see it here at LPG. We believe these events are in the “normal” course of human events. The history of mankind is replete with “unprecedented” events. While there is no way to have 100% expected this vote outcome, we have noted that year after year there are events that cause confusion and fear – which go to negatively impact the markets. In 2014 it was Ebola & the Ferguson riots, in 2013 & 2015 it was Greece. Mankind as a whole strives for security, comfort, happiness. Governments, in various forms promise this and usually do not deliver. Government leaders think they are sovereign, usually forgetting who they serve and or ultimately – Whom it is that they should serve under. A well known business leader, John Maxwell, says that in order for a leader to serve with authority he/she must be under authority. The Founders of our nation saw one of the purposes of government was to promote the general welfare. There is a difference between promote and provide.
At Legacy Planning Group we seek to serve you well, hopefully with servant’s hearts and humility. If you have further questions or concerns or perhaps insights you’d like to share please give us a call or drop us an email.
The views expressed are the opinion of the author, and should not be construed directly or indirectly, as an offer to buy or sell any securities mentioned herein. Due to volatility within the markets mentioned, opinions are subject to change without notice. Information is based on sources believed to be reliable; however, their accuracy or completeness cannot be guaranteed. Investing is subject to risks including loss of principal invested. Any strategy cannot assure a profit nor protect against loss. Inherent limitations and market conditions may affect the performance of the portfolios. Past performance does not guarantee future results.