Brexit:  How will this “Divorce” Impact the Kids

By Dante Vitoria July 1, 2016

Stocks took a big hit last week after Britain’s “divorce” from the EU, putting MOST major (and many minor) indexes into a sea of RED for 2016.  But WHY?

The Vote to leave the EU was a surprise to most.  But not to me, or Donald Trump, to name two.

As we all know, markets HATE surprises.  It too early to know for certain just how Britain’s exit (Brexit) will play itself out – or even if it will be adhered to, or if a RE-VOTE will take place – but predictions range from a FULL RECESSION for Britain and all of Europe, a breakup of the EU as other countries contemplate leaving the EU, or a reforms to the overall EU policy and procedures of operation.

It’s anyone’s guess.

So how will Britain’s vote affect world markets?

Short and medium-term, investors will most likely see tremendous volatility and wild swings, both up and down. Investors will try (and inevitably FAIL) to predict just how Brexit will play itself out.

Long-term, without being too much of a “wise guy” (VERY difficult for me as you all know), the answer is crystal clear.

WHO KNOWS?!!!

There is the answer.  We do not even know if Brexit will take place.  A “VOTE” in itself is not enough.  It must be implemented.  (As an example, look at President Clinton’s impeachment.)

Look at recent past events:

Fiscal Cliff of 2011

European Debt Crisis of 2012

Stocks fell sharply initially, yet bounced back as stability (or at least the appearance of stability), was established.

Will this happen again? Great question.

I believe so.

As an old Grad School professor told me often “Slick, people are SHEEP …investing, eating, dressing, watching TV……PEOPLE ARE SHEEP…and Sheep are one of the dumbest animals in the universe”.

Simply said, small investors follow larger investors, institutions, and of course the “All Knowing Media”.

There is no general consensus from economists on what the backlash will be at home, here in the U.S.

Trade with Britain is really minuscule, (0.3% of U.S. GDP (Gross Domestic Product), so it will not even be noticed.

That is the good news.

The bad news is that the dollar has long been seen as a “safe haven” for the rest of the world in times of international turmoil or uncertainty. This drives up the value of the U.S. dollar vs. other currencies throughout the world.  This also weakens demand for U.S. goods and services, which is not helpful to our economy.

Let’s look at the Global Economy.

Britain represents 4.8% of the World’s GDP.  We can’t possibly know how negotiations regarding trade and/or finance will affect Britain’s overall economy.  However IF Britain’s vote to “divorce” the EU causes others to follow suit (Scotland, Ireland etc.) It will surely have a serious (and MOST LIKELY a NEGATIVE) effect on Europe’s economy, and soon after, on the Global Economy as well.

Brexit has already affected the Federal Reserve.  The general consensus was that a rate increase would be announced in the 3rd quarter.  NOW there is increasing doubt to this occurring at all.  Some are now predicting a rate cut.

I do not think Brexit is the “end of the world” at all.  Actually, Britain may come out on the other side of this a BIG WINNER, as they now do not have to be “Daddy ” to many European nations whose economies (or lack thereof) are either comical or tragic.

There are many who say the Bears are lurking.  But aren’t they ALWAYS?  In my not so humble opinion, “The Bears” are the same people who scream at the TV at Eli Manning, forgetting he has won two Super Bowls and two Super Bowl MVP awards!

No one can predict the future, and this “divorce” will make GREAT ENTERTAINMENT for our reading pleasure….

Let’s just hope it is not in the Obituary section of the paper.

Dante Vitoria is the Founder and CEO of The Vitoria Group in New York City.

8 Comments

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  4. Anne

    Interesting site! If Brexit occurs how long can it take for the UK to complete exit negotiations?

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    1. Dante Vitoria (Post author)

      Anne, GREAT question. I do not think there is a set “timetable”. It would depend on a number of variables, like the overall strength of the Euro, and where the UK “feels” they are economically and where they WANT TO BE.

      Reply

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