Until today, the average American probably thought Brexit was something you said after someone sneezed. After today, many Americans will have at least a vague understanding that the UK voted to leave the European Union – that there was a British Exit (Brexit). What are the implications? The short answer is, no one knows all the implications. However, there are some that are obvious. So let’s start by unpacking those together:
- 1. Disenchantment with Established Institutions is global. The rise of Donald Trump has highlighted that many Americans are willing to risk the unknown rather than keep the unacceptable known. Apparently our neighbors across the pond feel the same way. In spite of a host of economic opinions that warned of the negative ramifications of Brexit, many were willing to roll the dice because they are disenchanted with what the European Union is costing the UK. Part of this was financial, part of it was social. EU regulations led some to believe the UK could be more competitive and nimble on its own. Meanwhile, EU immigration rules led many others to believe the country would be safer from terrorism if they had the flexibility to decide who comes and who goes on their own. But the UK is not alone. You need look no further than Brazil and Venezuela to note that there is bloodless revolutions in the making in many parts of the world.
- 2. Interest Rates are unlikely to rise again soon. Janet Yellen and the Fed identified Brexit as the single biggest global risk this year. Now that it has happened, a possible rate hike in July may be pushed back as late as December, if even then. “Lower for Longer” becomes the new mantra for the Fed. This is good news for borrowers – not good news for savers.
- 3. Volatility is likely in the short-term. With so many unanswered questions, interest rates, currencies, and other markets are going to be bouncing around, trying to find the new normal. German 10-year bonds actually had a negative yield today as lots of money in Europe is looking for a safe haven from the storm.
- 4. The Democratic Experiment Continues. For better or for worse, the West has been characterized by people being able to speak with their vote. This vote may go down in history as the British people trading an undesirable economic arrangement for something even worse. On the other hand, this vote may be the beginning of Britain reclaiming its place as a vibrant, dynamic, innovative, global economic powerhouse. Only time will tell. Regardless, as David Cameron can attest, the will of the people has been made known. There are huge risks to the democratic experiment. But there are even greater risks to the alternatives. We are always watching history in the making. The questions for Americans is, “Will we learn anything from it?”