First, is Great Britain’s vote to exit the European Union a surprise? Two days before the vote, I was in Spearfish, South Dakota, at a banking school where I told a banker the “Brexit” was unlikely. Then, on a red-eye flight to Denver, the news of the British vote was reported at 3:00 a.m. EST. I was surprised; and I believe this may be the beginning of major political discontent worldwide. There is such extensive unrest in many population segments against large government and institutions. The emotional explosion through social media can certainly accelerate the situation. Politically, as well as economically, this could be very volatile summer and fall throughout the world.
Next, does the British exit from the European Union matter? Well, first it weakens the euro and positions the dollar to be a safe-haven currency. Of course, a strong dollar continues to be a headwind to U.S. exports. Massive inventories of agricultural commodities, a strong dollar and weakened global demand are negative indicators for U.S. agriculture, energy and manufacturing industries.
Collectively, the economies of Europe are actually larger than the U.S. economy. This area of the world is important to international trade such as, China to Europe and the U.S. to Europe. The shockwaves of the “Brexit” will most likely place Great Britain in recession sometime in 2017. It is also likely to lower the GDP by up to 1 percent in the European region, where economies are already struggling. This decline could in turn, shave one-half percent off the global economic growth.
Next, the Brexit vote could become quite a process or something like a soap opera. One decision will lead to more discussion with drama and emotions running high. It will take considerable time to re-write regulations, policy and trade agreements. No doubt, the world will watch each turn with interest. Maintain a close eye on Scotland and nations in the European Union as talks continue. A total breakup of the European Union would be a major shock to a fragile world economy. Additionally, it will be interesting to watch how this situation impacts the immigration strategy in this area of the world and globally.
In the U.S., it is likely that policies will trend more conservatively regarding international trade and immigration reform. The Trans-Pacific Partnership (TPP) will be a forefront issue in debates. The outcome of this agreement will have major implications for U.S. agriculture, particularly the West Coast states.
Another variable to watch is the world equity markets. If markets continue to decline, this would create a wealth effect in reverse. Specifically, that is when the value of stocks, equities and other assets decline, causing investments and spending to decline, as well. With much of the wealth held by the senior demographic, this could potentially be devastating; changing the spending and investment patterns of seniors and others who then become more financially conservative.
Finally, this political tsunami is quite out of the Central Banks’ control. Stimulus policies of the past have limited available options. As a result, the world is starting to see the true impact of political dysfunction in rich nations across the globe. This is a classic 50-75 year cycle where economics and technology change the political arena. Consequently, this cycle creates uncertainty, challenges and a re-shaping of economic and political landscapes.
In summary, welcome to the wild world of global economics and politics complete with advanced technologies and constant information! This environment will create havoc and mayhem; but more importantly, opportunities for those who plan, execute and monitor.
Within two days after the British vote, world equity markets lost $3 trillion of paper wealth. In the U.S. equity markets, $1 trillion of paper equity was drained from the marketplace. At this time, over 50 percent has been regained in major indices through the globe.