I had to change my article for Friday at the last second. No one realized that the UK would be voting for the Brexit to leave the EU. Private traders hired prestigious polling firms to assure them that the UK would stay. The markets even rallied yesterday on the assumption that the matter had already been decided. Such is the danger when a highly unrepresentative and educated group of rich people in an urban bubble assure themselves of something. Perhaps some of you are freaking out about the parallels that exist between what just happened in the UK and what is going on in the US. I’m here to ruin all the fun and tell you what no one in the news will say today: it’s just not that big of a deal.
Markets Are Crashing, The Pound is Falling Everywhere Even Against the FREAKING Zimbabwean Dollar, What the Heck Do You Know?
As of Thursday morning, few people expected the UK to leave the EU. However, markets will still drastically overreact as if the sky is falling. Many of the areas that voted for the Brexit are in Labour party dominated areas, such as North England. These voters do not care much about free trade and open markets. They just want good jobs for their families and security. I would not expect drastic changes with the UK’s economy besides negative economic impacts from more restrictive immigration policies. The working class in Britain just wants to stop the flood of people from coming in and taking jobs.
They care about immigration and cheap labor. I went to the UK as an 18 year old eight years ago and sat in a cafe, where I overhead some Britons speak with disdain of the Polish workers in their town who were taking away the low wage positions (sound familiar?) The people who voted for Brexit do not care that much about destroying economic agreements as they do about tightening down the UK borders.
Understanding the UK’s Immigration Fears
Brexit was about limiting the numbers of immigrants who come into the UK. Islamophobia is probably also partly to blame for yesterday’s result. Britons want to prevent open borders that could allow mass migration of Muslim immigrants from Syria. Regardless of what the policy on refugees is now, Britain would not be able to restrict the free flow of immigration of Syrian immigrants from Germany once they establish permanent residency.
Think of all the anti-Muslim rhetoric we hear from Donald Trump. Our country is only about 1% Muslim. In the UK, that number is closer to 5%. Fears of an increasing Muslim population probably pushed many of these Labour voters towards Brexit.
However, even though Islamophobia probably played a role, it was by no means the decisive reason. The vote is a strike by the working class against the pro-immigration, pro-globalization policies that made Britain the economic capital of Europe over the past several decades.
When Britain Made Things, Then Started Making Financial Derivatives
Virtually all the heavy manufacturing left Britain over the past several decades. Under Margaret Thatcher, the famous conservative British Prime Minister, the UK eliminated many subsidies that kept inefficient state run businesses in power. The City of London (the equivalent of our Wall Street) became the center of the New Economy. Traders developed complicated financial instruments and traded them across the Atlantic with other traders in New York. Educated elites coming out of universities became kings instead of the raucous unions of steelworkers and miners.
Opening the UK to the EU Was Great for the Economy, But No One Asked the Left Behind Members of the Working Class
Then the elites decided to add insult to injury. They decided to take away the comfortable jobs in a protected economy by eliminating subsidies. They had to join the EU and open the floodgates so that any European could come and work in the country without much restriction. Hoards of low skill laborers from Eastern Europe flooded the UK. These immigrants pushed down the wages of low skill UK workers that lost their jobs with the elimination of subsidies.
These workers were told that the economic gains that would happen from joining the EU would more than make up for their lost wages from globalization. That did not happen. The wealthy in Britain got much wealthier, and so did poor Polish immigrants who made their communities better off by sending money back home. However, the hard scrabble man in construction with the famously bad British teeth lost his respected position in the UK economy. That man wanted to get the hell out of the European Union yesterday.
No Really, Wall Street Is Losing Its Mind, My Retirement is Down Multiple Percentage Points, What Should I Do?
I cannot comment on what is best for you personally, but I know that when markets open today, I will be looking for opportunities to deploy whatever cash I have on the sidelines into European, UK, and Emerging Market stock index funds.
When I wrote this at 2:00am Eastern, the pound is down about 9%. The FTSE, an index of large companies headquartered in the UK, is down about 6%. Did PricewaterhouseCoopers forget how to do taxes? Did GlaxoSmithKline lose its ability to make pharmaceuticals? Did Barclays suddenly become a second tier investment bank with limited global scope?
The answer to all these questions is no. Is there increased uncertainty as to the future of all these companies in the global marketplace? Yes. However, the British Parliament will not allow these giant companies to sink into the abyss because of the results of a single referendum.
The truth is the market will catch traders flat footed tomorrow. I used to be one in the bond markets. On non-Treasury desks, most of the sell-side will probably have hedged too much with treasury futures. On non-Treasury trading desks, the traders sell treasury futures in varying degrees to protect against the value of their own bonds selling off. In other words, if I own $1 million of Texas utility bonds and interest rates rise, I do not want to lose money as a trader so I sell treasuries.
These hedged positions perform horribly when unexpected events happen. Markets lose their minds temporarily and everyone sells everything besides treasuries, which rally furiously. Traders will lose a ton of money, and the risk off trade will be in full force tomorrow. The S&P will be down, Europe will be very down, the UK will be stunningly down, and China seems like it’s down everyday anyway.
Take a Breath People, Hogwarts is Still Hogwarts Even After Brexit
The value of British companies was immense before the EU. Their value will likely be immense after the EU. Short term traders have to react to shocking market disruptions. There could be opportunity for those willing to rebalance to international stocks tomorrow. You could also buy more stocks generally or use some play money to establish a position in British equities. I plan on doing some research and choosing some European equity funds this morning. Just because Malfoy and the Slytherins won doesn’t mean everyone needs to lose their minds.
What do you think will come from the Brexit? Are you terrified that the under-reporting in the polls of the ‘Leave’ vote in working class communities bodes ill for our own election? Worried about the tougher admissions standards at Hogwarts? Want to know how each of the Harry Potter characters voted in the Brexit election? You can find that here. For everything else, comment below!