The long term economic and investment implications of the Brexit vote

While the short term ramifications of the Brexit vote on 23 June are still working themselves out, the likely long term economic and investment impact is arguably clearer.

Economic implications

Many prominent economists appear to agree that Brexit need not have a long-lasting detrimental affect on the UK economy.

Official trade statistics show that the European Union (EU) is the destination for about half of all British exports. Specifically, about 44% of UK exports in goods and services went to the EU in 2015 (£220 billion out of £510 billion total exports).

However, the UK also forms an important export market for Europe so there are commercial advantages for both sides in continuing a close commercial arrangement.

Moreover, economist Professor Steve Keen argues that leaving Europe won’t result in sky-high barriers to economic trade as overt discrimination would breach World Trade Organisation rules. He believes the UK is unlikely to end up with a deal much worse than that of the USA with Europe, where the average tariff is 2%.

This average disguises differences across a variety of products, where some products have no tariff (laptops), some have a 10% tariff (cars) and a few have a 30% tariff (clothing). Thus, the impact upon specific industries will naturally vary.

Given that most of world demand is generated outside of Europe, and the UK’s trade with other areas has been growing at a faster pace, Brexit could actually help British exports in the long run if the UK  is able to negotiate favourable terms with these areas.

Certainly, it is difficult to disagree with the assessment of macro economic consultancy Capital Economics, in a report examining the long-term economic implications of Brexit, when it states: “Although the impact of Brexit on the British economy is uncertain, we doubt that Britain’s long-term economic outlook hinges on it.”

In the long term, foreign inward investment into the UK need not suffer unduly as access into the single market is not the sole reason firms invest here. Being the fifth or sixth largest global economy (depending on the strength of sterling) is sufficient reason for overseas investors to invest, while ease of doing business here with the legal and financial expertise available may be further encouraged by tax incentives.

There are some concerns that the financial services sector may shrink slightly in the long term. While Professor Keen believes such fears are overblown, such an outcome might be no bad thing if it forces the UK to successfully rebalance an economy that has relied too heavily on credit creation and increasing private debt to fuel consumption-led growth.

He argues that it was an inevitable slowdown in the growth of private debt (see chart) that led to the ‘Great Financial Crisis’ (GFC), and considers that an unsustainable level of private debt, “is the main threat to the UK’s economic prosperity, not Brexit”.

Private debt

Again, Capital Economics is similarly sanguine in its assessment of the long term impact of Brexit:

“Things have changed a lot since 1973, when joining the European Economic Community was a big deal for the United Kingdom. There are arguably much more important issues now, such as whether productivity will recover. The shortfall in British productivity relative to its pre-crisis trend is still over 10%, so regaining that lost ground would offset even the most negative of estimates of Brexit on the economy.”

The panicked reaction of many will produce outstanding opportunities for patient investors with cool heads prepared to take a longer view.

As Warren Buffett famously quipped, “Price is what you pay, value is what you get”, and it’s a maxim to be borne in mind before investing in any asset. It’s vital to conduct thorough research, evaluating the risks before investing, while working to a sensible timeframe. Rushing in or out of investments driven purely by greed or fear in increasingly volatile markets is a sure recipe for serious errors.

Long term investors (in contrast to traders adopting a short term view) can be confident that the normal investing rules still apply post-Brexit. Indeed, careful portfolio construction matters in all market environments, especially during periods of increasing volatility. This is because an over reliance on any single asset class introduces the risk that investors may miss out on potentially attractive returns and increases the risk of losses.

European impact

The long term impact of Brexit upon the European Union may be profound if it leads to the eventual break-up of the European Union itself.

Given the economic problems and high unemployment levels faced by the citizens of Greece, Spain, Portugal, France and Italy a successful Brexit is likely to encourage similar moves by an electorate already disillusioned with failed EU economic policies.

A one-size fits all monetary policy for countries within the Eurozone, alongside a policy of austerity, appears to have benefited Germany at the expense of its economically weaker European partners. It’s quite likely that some of the disillusioned countries will eventually follow the UK lead, leaving a ‘core’ Europe centred around Germany.

That said, such moves might in the longer term lead to faster rates of growth for those countries leaving. For example, it is difficult to argue that the Greek economy could be any worse off if it were to quit the euro and leave the EU.

Such changes naturally present risks and opportunities for long term investors, and again a diversified portfolio seeking out quality assets with a long term horizon would be key to reducing risk while seeking to maximise the benefits of a sound investment policy.

Global perspective

While news of Brexit did unsettle global financial markets, it will probably have a negligible long-term economic impact at a global level. After all, the UK gross domestic product represents only around 2.35% of the global total, according to the Institute of Economic Affairs.

In that respect long term investors can look forward to a continuing world of opportunity.

Lies, damned lies and Corbyn as a beacon of hope

There’s no doubt that the US Fed should be trying to normalise interest rates. However, as only very few commentators have pointed out, it can’t. The financial sector in whose real interests it runs policy are dependent on ‘accommodative’ monetary policy: whether that continued low interest rates or quantitative easing.

They are clamouring for the Fed to hold off, joined by the IMF and World Bank.

That isn’t to say that a token (0.25%) rate rise is totally inconceivable. However, whatever the Fed does isn’t going to stop a ‘deflationary bust’ as Soc Gen analyst Albert Edwards and Professor Steve Keen have been forecasting for quite a while now.

The big lie

The biggest lie that is generally believed (by journalists, commentators and the public) is that the Fed, Bank of England, European Central Bank run policy based on what is good for the economy as a whole. They don’t. They run in for the benefit of their financial sector; banks, hedge funds etc. The ‘1% mafia’ or ‘political-financial ‘complex.

It is a point made very well by economist Michael Hudson in the following video when talking about the US economy and recent stock market volatility.

Of course, this is all going to end in tears as soon as the penny drops. The question for the Fed is: how can it avoid that penny dropping and keep the Ponzi scheme running, despite the lack of a real recovery in the US economy. Any token rate rise needs to be set in this context.

Evidence

As John Williams’ Shadowstats has written, the real unemployment rate in the US is roughly 23% but has been calculated in such a way to define it in such a way that many long term unemployed workers drop out. Moreover, in his his latest newsletter he points out that real monthly median US incomes are still below the 2009 headline trough of the formal 2007 recession.

His explanation is that: “Discussed frequently here, actual U.S. economic activity has not recovered from its collapse into 2009; it is not recovering, and it is not about to recover. Despite all the gimmicked and upside-biased GDP reporting, underlying economic reality is weak enough to have begun to surface in recent, downside headline reporting.”

Among other factors hurting economic activity, US consumers remain constrained by currently intractable liquidity woes, which prevent sustainable real or inflation-adjusted growth in personal consumption and residential investment, areas that account for more than 70% of broad, domestic economic activity.”

This conclusion vindicates Professor Steve Keen’s analysis years ago that the US/UK recoveries would be hampered by high levels of private debt, leading to a Japan like scenario.

To avoid this stagnation Steve Keen recommended only last year that goverments should be: “Writing off much of the private debt, and changing laws relating to mortgages and share ownership would be a good start. A certain amount of debt-financed investment and consumption is actually desirable in a growing economy, but while debt levels are as high as they are now thanks to the Ponzi Schemes of the last four decades, that debt-financed investment and consumption will be weak. They should also realise that a government deficit is a sensible policy most of the time in a growing economy.”

With the election of Jeremy Corby as leader of the Labour Party, there now seems to be a realistic possibility that the voters of England will be able to hear the truth about what has been going on before the next election from a party that stands a chance of being elected through our present electoral system. (Although, they won’t get much help from much of the mainstream media).

Learn more

I’ve found the works of Professor Steve Keen, Mitch Feierstein and Michael Hudson invaluable in gaining a better understanding of what is really going on. Sadly, you won’t (yet!) see any of the them interviewed at length on prime time UK television.

A global stock market crash is coming

Those of you tempted to believe that this week’s ‘Black Monday’ was an aberration should note that a huge, global stock market crash is likely to be with us pretty soon.

China is exporting a tidal wave of deflation to the US (an economy already in trouble) and as it hits things are going to get very bad indeed.

Forget the market soothsayers employed to talk up the prospects of the stock markets. Their analysis is wanting, their predictive powers non-existent.

You’d be better off following the analysis of the three men below. Compared to the vast majority of commentators they are market oracles. The message they have to impart is sobering.

Professor Steve Keen

No less a figure than economist Professor Steve Keen, who predicted the 2008-09 Great Recession, explained in an interview last year that the US was headed for a long period of stagnation. It is due to the build up of private debt (among both corporates and the general public).

Economies across the globe have been fuelled by the growth of private debt and, given the already high levels of debt, further growth cannot be sustained for very long. That is why the ‘recoveries’ in the US and UK are below trend and stop start.

Because of this reducing private debt not public debt is the issue that should be concentrating the minds of our politicians and economists. Hence QE for the people, which reduces this burden makes a lot more sense than QE for the banks.

Until now, all QE for the banks has done is:

  • encourage banks to continue speculating with cheap money from tax payers
  • created asset bubbles in areas such as property, stock markets and bonds where this money has been invested
  • encouraged ordinary investors to take on excessive risks in order to get decent returns
  • blinded the public to the way they are being fleeced by the political-financial elite that rule over us and finance this Ponzi scheme.

It is a pity that until the arrival of Jeremy Corbyn the Labour Party leadership failed to explain that the bank-bail out was the real reason the UK public debt ballooned. 

In any case, austerity in the present economic climate is madness, the wrong medicine at the wrong time.

Mitch Feierstein

Mitch Fierstein is the author of Planet Ponzi and a hedge fund manager. He knows the system from the inside out and is one of the sharpest commentators on the manipulation at the heart of our financial system. At the very least you should follow his twitter feed. The insights fly out of him like sparks from a Catherine Wheel.

Often only when going over his comments in detail do you become aware of the really deep knowledge he is imparting. For example, the most recent revision to US second quarter GDP, indicates that the US economy is doing fine growing fine with an annualised rate of growth of 3.7% revised up from 2.3%.

However, as Feierstein pointed out in a tweet yesterday (August 27th) US Gross Domestic Income (GDI) increased at an annual rate of just 0.6%.

This is what Shadowstats had to say on the matter in a note published yesterday: “Not only was that revision unbelievable, it also ran counter to the indication of stagnant economic activity seen in the initial estimate of second-quarter 2015 Gross Domestic Income (GDI), the theoretical and a practical equivalent to the GDP. The pattern of GDI stagnation for first-half 2015—not the faux surge in second-quarter GDP—is consistent with better quality monthly reporting seen in series such as industrial production and real retail sales.”

Albert Edwards

He’s been labelled a ‘bear’ by many bulls. Yet he accurately predicted that Chinese devaluation was coming months ago and that it would lead to a tidal wave of deflation heading West.

When it hits the US, it won’t be pretty. Forget cheaper gasoline prices and commodities. They aren’t much use when you’re out of a job because your economy has gone back into recession.

Okay, the US won’t raise interest rates. When it becomes clear that it is falling back into recession, QE4 may be unleashed. However, more bank bailouts (which is what QE is all about) won’t save the US economy from turning Japanese and stagnating.

This week, in a note published on August 27th, Edwards explained: “Despite deflation fears washing westward and US implied inflation expectations diving to levels not seen since the 2008 Great Recession, there remains a touching faith that the US is resilient enough to withstand further renminbi devaluation. And if it isn’t, why worry anyway, because QE4 will be around the corner. But let me be as clear as I can: the US authorities CANNOT eliminate the business cycle, however many QE helicopters they send up. The idea that developed economies will decouple from emerging market turmoil is as ridiculous as was the reverse in the first half of 2008. Remember Emerging Market and commodities had then de-coupled from the wests woes until they too also crashed. “

He also stated that we are already in a bear market. “While equities rebound investors are hoping things are quickly returning to normal. One of the many lessons from equity investing during Japan’s Lost Decade is that in a secular bear market hope is a killer. In a secular bear market hope should only be flirted with briefly during cyclical upturns, but it must be ruthlessly rejected as the cycle turns. In a secular bear market being wedded to hope destroys portfolios as the bear slashes to ribbons the hard-fought gains of the previous bull market. Gains that have taken years to accumulate are gone in months. One key measure we monitor informs us conclusively: we are now in a bear market.”

Time to be fearful

When men as smart as the 3 oracles above tell you that things are turning nasty it is time to listen. Far from being greedy it is now time to be fearful.

Certainly, it is time to take profits/hedge your winnings. Avoid leverage and take all money you need for the short term out of the market.

Even in a bearish environment physical gold and silver should do well and probably selective, innovative, small caps.

P.S. Please BBC put on a show like RT’s The Keiser Report and interview these 3 people. Their deep knowledge is desperately needed by a mainstream audience fed incoherent nonsense until now.