market views

“I’m Going to Take My Ball and Go Home!” Oh, Britain.

Frank Trotter | June 29, 2016 3 MIN READ

Back in the sandlot days this was a real possibility. The kid with the one bat or ball would utter this line if they felt slighted, and then head out, leaving the collective remainder staring at one another. Game over. Modern kids would have a whole bag of balls and two coaches to fall back on, so I’ll use this phrase while there are still some of us who remember.

Well, Britain has left the other members of the EU looking at each other to discover who provided the critical insult. Was it immigration or just a result of the slowing economies? Is there fog in the channel and has Europe finally been cut off? Did the exit side simply have a better promoter and sell the majority a full bottle of snake oil? Even now the campaign leaders are heavily backtracking, a bit dismayed it seems that they have won and now actually have to deal with the mess they have helped create.

No matter what the main issues were in the campaign, or the trigger phrases that were used, I think it was the culmination of years of resentment of Brussels’s pronouncements. The British, especially the rural English, have never seen eye to eye with that particular version of socialism, while being relatively happy with their own. There are entire books filled with references to silly regulations (cucumbers must be straight). For whatever reason, this time, enough was apparently enough.

So where does this take us in the markets? The investing world has spent the last week in a tizzy attempting to calculate what the impact will really be. Clearly, it’s far too early to tell. Treaties need to be negotiated—and already the rhetoric is tough. Immigration and trade now have to be established with each country in the EU (or maybe not if a comprehensive one can be created) and renegotiated with the rest of the world. There are sure to be difficult issues inside these agreements.

Investors don’t require pure certainty, but appreciate understanding the foundations that business and economies are built upon. Somewhere in the back room of all large investing shops there are analysts with green eyeshades who plug numbers into equations. Right now they may have the numbers, but there is considerable debate over what the functions look like.

Without a good framework for analysis, investors sell. And sell they have for the first few days post vote. Today as I’m writing this, slivers of stabilization are appearing, but it has certainly been pointed out that when Article 50 is invoked and the break-up becomes a reality, there is likely to be further significant decline.

There are generally two points of view that have developed over the past week and neither paint rosy outlooks:

  • POV #1: While we have been concerned about the U.S. economy since the top of the year, other market commentators are forming a consensus that the probability of a recession in the U.S. is rising. The champion of doom, Bill Gross, suggests that the chances of recession are now 30% to 50%. In these scenarios, Britain is only hurt badly by the breakup, at least in the nearer term. Long term–as usual–is way out of sight.
  • POV #2: The second is dire and doesn’t bear a detailed telling here. Essentially it says that the divorce will drag out beyond the two-year deadline imposed by Article 50. Business and young people will depart England in large numbers as they did in the 1970s. Not pretty.

I’ve heard rumblings of a few people taking the earlier and unrelated advice of the Royal Bank of Scotland to clear out portfolios in favor of cash only. Seems extreme and reminds me of some who did the same in 2008, only to miss out on the rallies in 2009-2010.

At this point, and after the dust settles, I expect that the slow decline of the U.S. dollar will continue while the global economy bumps along in low first gear. Lower and longer, and now even longer.

Frank Trotter
Frank Trotter
Executive Vice President, Chairman Global Markets
Frank Trotter
Frank Trotter
Executive Vice President, Chairman Global Markets
Frank has over 35 years of experience in banking and global markets. When not in the office, you might find him speaking on the financial conference circuit, giving an interview on the latest world economic news, or at the nearest ice rink playing pick-up hockey.

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