Question: Will you explain Brexit?
Answer: The United Kingdom voted to exit the European Union. Now everything from trading to exports to immigration has to be renegotiated and put into the law books. This process could take as long as two years. Naturally, no one has any clue what the post-Brexit U.K. is going to look like or what kind of agreements are going to govern trade or immigration. As a result, I don’t see investors lining up to invest in the infrastructure in the U.K. in the foreseeable future.
Q: What changes for the U.K. if it is no longer a part of the EU?
A: By being a member of the European Union, the United Kingdom enjoys free movement of goods, services, trade, people, etc. with the rest of Europe — an advantageous arrangement, as long as they’re willing to live with the EU’s regulations.
The U.K. comprises 4 percent of all global economic activity. Because of the factors above, we’re probably looking at the very real possibility of a recession in the U.K. later this year. Perhaps that spreads into the eurozone and ultimately the United States.
Q: How does Brexit affect the U.S.?
A: A Fed rate hike in July is pretty much off the table and quite possibly off the table for the remainder of 2016. We’ll have to see more data before solidifying our stance on that last point, but keep in mind that economic data we’re going to see over the next few weeks will be pre-Brexit vote and stale.
Q: What happened to the global markets after Brexit?
A: The vote caused a “flight to safety,” which is when investors sell equities and exit appropriately called risk-on trades, then buy bond and mortgage back securities because they are lower-risk investment vehicles.
The central banks take notice when equity prices collapse, like they have in the past couple weeks, and are already discussing how to provide additional economic stimulus to ease the market’s fears. That will most likely come in the form of providing cheap financing to European and British banks, ensuring there isn’t a continued runoff in asset prices.
In the U.S. it’s likely that the Federal Reserve won’t be able to continue with further rate hikes until 2018 or so.
With cheap funding for the foreseeable future and a Fed backstop likely on the table, equities have regained most of their post-Brexit losses. Bond prices aren’t suffering, either, likely because the central banks will also beef up bond purchases with rumors that they will also include corporate bonds now.
Q: What is happening with London?
A: London has been the financial center of Europe for centuries. That’s over. Think about the potential political chaos in Europe. Perhaps we see a “tea party for Brexiters” in the rest of Europe, further increasing the instability in the region.
Q: What is happening with Scotland?
A: There’s the very real possibility that Scotland has their own referendum to leave the U.K. and stay in the EU. That would have a massive impact on the U.K.
