The people of Great Britain decided to shoot themselves in the foot and punch the rest of us in the face by leaving the European Union (Leave: 51.9%, or 17,410,742 votes, versus Remain: 48.1%, or 16,141,241). The movie is dubbed Brexit. As a result, the pound fell to its lowest levels in 31 years and global markets are down anywhere between 3% – 11% on the first day of trading after the vote.
This “black swan” event is another reminder why I prefer real estate over stocks. In real estate, there aren't so many random exogenous variables that pound your investment to bits. Rental income is sticky and there are things you can do to improve the value of your property.
Real estate is clearly less risky than stocks too. Despite lower returns, you can ironically get richer off real estate given you're willing to investment more in real estate.
Unless you are a multi-billionaire, being a minority investor with no say in your investment is just the way of life for equity investors. In this article, I'd like to discuss why Great Britain chose to exit the EU, and what may happen next.
Brexit: Why Great Britain Voted To Leave The EU
* Less fees. Britain’s exit would mean the UK could save roughly $9 billion in annual EU membership dues. Countries such as Germany and the UK have been subsidizing EU countries like Greece, Spain, and Portugal for their excessive spending. Eventually, you get sick of taking care of people who are unwilling to take care of themselves.
* Less regulations. The EU has strict environment and labor regulations. Difficulty laying people off is one of the main reasons why unemployment rates are so high in many EU countries. Why risk hiring someone who might be a virus for years?
* More control over migration. Brexit supporters feel the EU’s migration policy plans pose a threat to the UK’s sovereignty and safety. They don't want to be forced to accept migrants that may hate British values.
* Lower consumer good prices. The BBC reports an exit from the EU could lower prices in the UK by roughly 8 percent due to BREXIT.
At the end of the day, the British people want what everybody wants: the freedom to choose. I respect this a great deal.
How Much Is The Freedom To Choose Worth To You?
Freedom to choose is why I left Corporate America to start my own company. I was tired of not getting paid what I thought I was worth. And I didn't want to subsidize underperforming departments anymore.
So instead of complaining, I engineered my layoff to get a severance package. I knew my income would suffer for at least two years, but it was a sacrifice I was willing to make to be free. Four and a half years later, I do not regret leaving the mothership at all. Perhaps the same will be said by Brexit voters in the future as well.
On the negative side of Brexit, unemployment will rise as companies, domestic and foreign, move out of the UK. For companies that decide to stay, there will be hiring freezes due to uncertainty.
People nearing retirement will either have to delay retirement or live on less than they expected. Meanwhile, investors who are long UK-denominated assets will all lose money. The typical reaction to shocking events is to sell first and ask questions later.
On the positive side, a weaker pound should help exports and lighten the cost of visiting the UK. My 2nd round Wimbledon center court debenture tickets cost $1,300 each back in 2014 for goodness sake! I've also been looking to buy a Range Rover Sport for a while now, although it is owned by Tata Motors of India.
A free-falling economy will also cause home prices to drop, enabling those who had been priced out to potentially buy at an affordable price if they can keep their jobs. Finally, less wealth equals less congestion.
Brexit Bottom Line
Overall, Brexit is bad for short-term investors and good for folks who believe freedom is more important than money. Big government has slowly squeezed away our rights. The people have spoken against globalism.
What's Next After Brexit?
Now that the vote is done, Prime Minister Cameron, who is resigning, can either ignore the will of the people, or invoke Article 50 of the Lisbon Treaty to begin the formal legal process of leaving the EU. Under Article 50, a two-year notice is required to officially exit the EU. During this period many negotiations and agreements will have to be reached. The consultancy PWC estimates that it will be about four years after invoking Article 50 before the UK can officially exit.
Given everything is rational, there's still a good chance the UK could change its mind if things get bad enough during this 2-4 year period of exit negotiations. If the UK ends up not leaving, then we could have one of the best buying opportunities between now and 2018 if the markets continue to sell off. If it turns out the UK economy gains during this exit grace period, all will be fine.
The knee-jerk reaction everyone seems to have is to buy the dip. But seldom do markets reverse course after only one day of correction. What investors should be thinking about is what will Germany do? Germany subsidizes Greece and Portugal even more than the UK. What will become of Spain, Italy, Ireland, and other EU countries if they eventually need a bailout? As the principle stakeholder in the EU's well-being, Germany's reaction will go far towards either calming fears or fanning flames. Let's hope other countries like France don't consider leaving as well.
The world is highly interconnected. The main fears are uncertainty regarding trade, currency, investments in Britain, British investments abroad, and what happens to the rest of the EU. All these issues will take plenty of time to work themselves out. In the meantime, we've got to review our investment game plan.
Brexit Forces You To Review Your Financial Game Plan
Brexit is a black swan even just like the global pandemic that began in 2020 was a black swan event. As a result, it's always good to review your finances and ensure you have proper asset allocation of stocks and bonds. You must also make sure you have proper net with exposure as well.
We've been aggressively saving our money, refinancing our mortgages (10-year yield now at ~1.7%), and paying down debt to prepare for a rollover.
I recommend everyone do the following:
1) Review your portfolio. Go through all your positions and ask yourself whether they fit your objectives. If they do, carry on. If they don't, rebalance your positions to fit your risk criteria by adding more or selling. It's important to assess your European, Asian, and US exposure as well. Europe alone went down 10% in one day the day after Brexit compared to “only” 3% in the US. Portfolios have a sneaky way of going out of proportion if you don't review and rebalance them at least once a quarter.
2) Review all your cash positions. During times of market volatility cash is king. You should not only review your cash positions in your pre-tax retirement portfolios (401k, IRA, Roth IRA, etc), you should also review your cash positions in your post tax portfolios (online brokerage, wealth management accounts) and your day-to-day savings accounts. Make sure you have enough fire power to take advantage of potential future sell-offs. Also make sure you have enough cash where you feel comfortable lasting for 6 – 12 months in case your income takes a hit.
3) Review your net worth allocation. Once you've gone through your portfolios and cash positions, it's time to take a holistic view of your overall net worth. Do you have at least 5% of your net worth in risk-free assets like cash, CDs, and Treasury bonds? If not, better get going. Are you risking more than 60% of your net worth in any one asset class? If so, try and diversify more. You don't want to be the typical American who lost their shirt when the housing market collapsed or the dotcom bubble burst. Make sure you have a mix of offensive and defensive positions that also provide an income stream.
4) Run your financials through a retirement planner. It's important to make sure your assets and income projections are on track. Good retirement planners are great at highlighting your income shortfalls or spending excesses because it uses your real data. It's harder to fudge your numbers as people so often like to do. Once you know your shortfalls, you can take steps to improve your situation.
I've spent time reviewing my investment portfolios, cash positions, and retirement cash flow projections. The results have me deploying 35% of my cash holdings into US index ETFs like VYM and DVY from my rollover IRA, SEP IRA, and Solo 401k.
My retirement portfolios have ~30% cash weightings on average. I won't be deploying any of my cash sitting in my bank account before 100% of my retirement cash is invested. Amazingly, Brexit is still going on almost 5 years later. You can follow moe detailed news about Brexit via the BBC coverage.
But now, we have to deal with new Democratic policies that may or may not hurt the rebound.
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97 thoughts on “Great Britain Votes To Leave The EU: What’s Next After Brexit?”
Hey Sam. Italy is a net contributor to the EU budget. It pays nearly as much as the UK.
Italy is not subsidized by Germany in any way, shape or form. It was never bailed out, like Greece or Spain were. Every year it puts into the EU budget more money than it gets back.
I reiterate: Italy and the UK spend about the same. Just look at the stats.
Granted, Italy is a mess anyway (high youth unemployment, rampant corruption, falling wages, declining living standards, huge state debt, almost no GDP growth, etc.), but in terms of its relationship with the EU, things are not nearly as bad as American media and commentators erroneously report.
The Germans and the other “northerners” don’t hate on Italy nearly as much as they do on the likes of Greece and Portugal. Which makes perfect sense, considering we are NOT a burden of them (yet).
However, anti-EU sentiment is getting stronger and stronger in Italy. I estimate 1/3 to half of the population wants to leave as of now.
Thank you for the correction. Appreciate your perspective.
No, the vote to leave EU doesn’t surprise me. A country is made up of 2 classes, workers and the rich. I live in Michigan and have watch auto plants, solar plants close up and travel to Mexico. Mexico opens up new plants and employ 1000s of low wage Mexican employees at each plant. Meanwhile every plant that closes in the USA (lays off) fires 1000s of medium wage American employees. My city is dead with little activity and little spending. Lots of for sale signs on houses and buildings.
The rich are:
Professors (>$200,000 annual salary) get more dumb 17, 18 year old kids enrolled because the kids think a university degree will get them a medium wage job (especially when no more Big 3 automaker plants, solar plants exists in the city). Politicians (>$200,000 annual salary) switch careers into working for the big companies later in their lives, and corporation are all too eager to hire them. Rich business men (>$300,000 annual salary) know that there is no difference in physical work performance in 8 hr shifts coming from a white American or Mexican. The only difference is the hourly salary paid.
The law making politicians always put themselves ahead of the workers. It’s only human nature to put oneself before others.
The workers are:
jobless because only fast food, restaurants, supermarkets are hiring for 30 to 35hrs a week so no employee benefits or overtime is ever paid out. The plants have all closed down 5 to 10 years ago, and moved to Mexico.
How is Brexit a “black swan” event?
In the two-week run-up to the vote it was a close race between Remain and Leave, with a difference of only several percentage points.
This just goes to show that a large majority of “professional market participants”, who somehow were sure that Remain would prevail, don’t know that they are talking about and are subject to the same biases that a regular Joe Shmoe is.
Because the FTSE 250 dived 12%. If it wasn’t a “black swan” or shocking event, the market would have traded in a normal range. A 12% dive is a 2+ standard deviation event.
Were you shorting the market before the vote? I’d love to know your investment background. Thx
I’m unsure I would consider brexit a black swan event. The Flash crash of 87, crash of 29, credit crisis etc would be closer to the definition of a “black swan” as these events were very hard to predict and the causes leading up to the event were largely unknown. Only research after the event really exposed the causes.
Brexit on the other hand was closely monitored by the world.
“An event or occurrence that deviates beyond what is normally expected of a situation and that would be extremely difficult to predict”
I’m trying to keep an open-minded view of Brexit, but it’s difficult to see how this isn’t a self-inflicted gunshot wound. This deliberately spins the country into a recession, and with Scotland and Northern Ireland now threatening to secede, it undoes 2000 years of English conquest, reducing the UK to basically the size of my desk.
That being said, I think everyone’s missing the part where Article 50 hasn’t actually been triggered yet, yet all the economic effects are already being felt. When the next general election gets called, it will act as Brexit Vote 2.0, and the Leavers who now realize what they’ve done will switch and call the whole thing.
First off, splendid post and very thorough. You really touched on some things here that I hadn’t considered, such as all of the positives behind the exit.
I’ve got two questions for you after reading this post.
1) I’ve noticed in some of your other comments you’ve said “Britain is almost certainly going into recession.” With all of exotic monetary policy being deployed worldwide right now (NIRP, ZIRP, QE and people even talking of helicopter money), do you think the Bank of England is going to be creative in their approach moving forward?
2) With the US election coming up so soon, do you think that the dramatic political mood behind Brexit will fuel the fire of Trump supporters? There are lots of people here (Canada) that think this may be the case.
Looking forward to hearing from you and again, great post.
1) All the Bank of England can do is lower interest rates or institute aggressive fiscal expansion. The problem is who is going to pay for the spending now that a recession is inevitable? Tax payers who are going to lose their jobs? Interest rates are already so low.
2) Absolutely. Trump should is a ~25% favor to win. Brexit should help bump him up to 30% or more I would think. Still an underdog, but I wouldn’t count him out. And if he wins, the US stock market and probably global stock markets will plummet 10-20% as well. Hence, best to be conservative this year and save lots of cash.
I believe that Brexit is a fine choice for Great Britain, but it’s tough to see how the other countries will manage to stay in the EU long term. I’m particularly nervous about Germany choosing to leave because they have money, and powerful armed forces, and I think they may eventually choose to align themselves with Russia rather than the EU which would be bad news.
We can always hope that Britain decides to go for a “Norway” relationship, but I don’t know that it will happen.
I suppose that a new equilibrium in Europe will take at least 5 years to reach, and over a decade if war ends up being the result.
“I’m particularly nervous about Germany choosing to leave because they have money, and powerful armed forces, and I think they may eventually choose to align themselves with Russia rather than the EU which would be bad news.”
Just curious. Why would you think that?
“I’m particularly nervous about Germany choosing to leave because they have money, and powerful armed forces, and I think they may eventually choose to align themselves with Russia rather than the EU which would be bad news.”
No. Do you know what happened during world war 2?
The good news is that the perception of lower rates going forward should help our real estate investments.
Indeed. The 10-year has collapsed to 1.37%, yet the US stock markets have all rebounded back to all-time highs. Amazing!
The market found an excuse for a much needed correction. I don’t live in the UK so I don’t understand the issues involved except for what we hear on the news. That is no substitute for local knowledge.
I have always thought that the EU was a concept that looked great on paper but doesn’t work well in the real world.
My suspicion is that the UK will come through this well intact. I don’t think this is a harbinger of things to come in the US although our trade deals in the future are going to be much tougher no matter who is elected.
Great to read a voice from outside the UK Sam! For me, this was a vote against the politicians of both the UK and Europe for their complete failure to address anything that lies outside of the comfortable, liberal and affluent world they live within. In many ways, I think it’s similar to what many Americans feel and why Trump is doing so well, although it is pretty ironic that he’s seen as anti-Establishment. I feel America could vote him in as the next President for the same reason Brits voted for Brexit. Millions are desperate for change and see no sign of it. What are governments doing for them? So many people are absolutely fed up that the rich are getting richer while paying lip service to liberal policies that actually feather their own nests. In a perverse way, I’m proud that Britain has voiced a howl of rage against the machine that might make others pause and think about the route we’re heading down.
Hi Jim, nice to hear from you. In America, we call this limousine liberals. I really do not like politicians because their egos are so massive and their desire for power is all they really want.
Brexit is probably making Hillary Clinton really nervous. She is part of the dynasty and the establishment. I really wish you wouldn’t sound like a robot who is what reading from a script. She seems very qualified, but she also seems disingenuous.
What is happened in Great Britain is encouraging to all citizens who live in democracies. This whole issue is just the beginning, which is why I am going to save money like it’s a precious resource!
Voting for Hillary Clinton is voting for Bill Clinton’s third presidential term. The constitution prohibits a president from being elected to the office for more than two terms and at the time this was amended into law after Roosevelt, I doubt anyone foresaw scenario where a spouse of former two term president running for the same office. Trump’s campaign is race baiting, scapegoating and turning a blind eye to bigotry, but the Clinton’s have no problem with exploiting loopholes with existing laws and pushing the boundaries of ethics. What did America do to deserve these two most disliked candidates as their two choices in 2016?
Sam, found your article to be very balanced and reasonable.
The people have spoken against globalism indeed. Or rather, the people want the benefits of globalism, without having the globe in their communities. Much like in the U.S., the areas far outside the large cosmopolitan cities are terrified of an immigrant/muslim “menace”. The EU is not only a regulatory framework but also a symbol of the interconnectedness of the European continent. Very selfish for UK to pull out of the EU, but eventually we all make selfish decisions without considering how that might affect others and eventually ourselves as a result in the long term. The most likely result is Britain will lose influence and decision making power with it’s EU neighbors, but will still be able to execute FTA with EU provided they abide by EU regulations. Will be interested to see if N. Ireland and Scotland try to forcibly break away from the UK now.
It is interesting that the question of whether to be in or out of the EU is determined by majority vote. Imagine if American constitutional amendments were subject to ad-hoc elections every 4 or 5 years rather than requiring greater than 2/3 approval and multiple chambers of congress.
Populist movements are on the march in Europe, and Trump is 50/50 to be our president come November (!?!). Crazy things are happening and the world looks totally alien to me. This must be what approaching middle age looks like. Maybe I should put down the newspaper now and get myself a drink.
“Much like in the U.S., the areas far outside the large cosmopolitan cities are terrified of an immigrant/muslim “menace”. ”
You must mean smaller cities like Orlando and San Bernardino, Big cities like Boston know there is no need to fear radical Muslims.
They were us born citizens. Who legally purchased firearms for private use. Perhaps your criticism should be of the easy availability of high caliber weaponry and body armor that goes far beyond the intent of “a well regulated militia”.
Oh sure, and while we are at it, considering the Twin Towers in New York, let’s ban tall buildings and airliners. Oh, and no more funny shaped buildings like the Pentagon either, they seem to anger some folks.
US born means that US citizenship was “given” to them by virtue of the fact their parent was in the US at their time of their birth, it does not mean they have assimilated and embraced American values and way of life, or ever will.
My wife is a first-generation Afghan who fled the Soviet invasion in the 80s with her family. I suppose you could consider my infant son, like the Orlando shooter, a second-generation Afghan. I consider us all Americans.
I find your attitude particularly disturbing. Neither my wife or I are practicing Muslims but her family is. We are after all a nation of immigrants.
Technically, all nations are a nation of immigrants if you go back on a long enough time line. For some reason, the only countries of the world that don’t recognize national borders for themselves are Western countries. Ironically, Mexico has VERY strict border secure along its southern border, for example.
Immigration is good, but it does need to be controlled, the people ultimately need to mostly assimilate (sounds like your wife has) and it does need to be people we want to be here in the US rather than just anyone (preferably those that are educated, those with wealth, and those with no criminal background). Islam to me seems to be about where Christianity was in the 1300 – 1500s. Largely peaceful, but still a large number of extremists who think murder in the name of God is fine that the majority of the non-extremists don’t find that particularly cringe worth or do anything/much to self-police.
Immigration is also a tougher sell when wages are so stagnant. In the 90s when the economy was booming and real median household income increased quickly, no one was particularly worried about immigration. After 17 years of declining/stagnant real median household income and record levels not in the work force, I think that sentiment has hit a boiling point. I actually think our free trade with China, etc has hurt median wages more than immigration but people see immigrants but not the factory worker on the other side of the globe so it gets disproportionate attention. Same with terrorism. It’s right in your face with the news media even though its just a very small fraction of murders, much less overall deaths in the US.
The polls say Trump only has a ~30% – 35% chance of being president. But what has happened in Great Britain should embolden the Trump campaign.
At the very least, establishment and whoever becomes president should wake the hell up and listen to the people. And hopefully the people will feel embolden to Vote and do something about all the shenanigans in politics.
And another point. Brits voted leave to preserve their national character. When you go as a tourist to Europe are you going to see the cultures of England, Scotland, Wales, France, Italy, Greece, etc or are you going to see “European” culture? What’s that??? They are not the same and leave Brits do not want to lose their history, language and culture.
As someone with British family living in the UK and other family members living elsewhere on the continent I can assure you that people thought long and hard before going in to cast their ballot to #leave. After months of intimidation, fear mongering and endless accusations of being racist or Nazis they voted their conscience and not necessarily their pocket book. They want a nation with borders. They want to walk the streets without fear. They want to be able to access the National Health Service without waiting like American vets at the VA. They were willing to watch their currency value plummet because they know it’s been in a bubble. The bottom line is people want to be free to decide their own affairs. Those crying the loudest over the leave are those, like accountants and lawyers, whose profits derived from the EU. There is likely to be more leave activity as there is deep dissatisfaction all over the continent. So buy low. And know that the Brits didn’t “punch you in the face” with their vote. They voted for a GREAT Britain, not a slave one.
I definitely don’t know whether leaving or staying in the EU would be better for Britain and the world, but it will be interesting to see what happens.
I pretty much agree this is a good opportunity to buy stocks, but I’m not going all-in. I think the big drop today was a bit of an overreaction, but I think we are due for a downturn, like you said.
As usual, it’s hard to say what’s going to happen.
Freedom is a powerful motivator. Nobody likes being ordered around.
I believe the financial fears of a coming recession in the UK are way overblown.
I also believe the EU will become much more flexible in negotiating with nation states.
That’s my two cents from a Yank.
UK has a Parliament composed of two Chambers: the Commons and the Lords.
The Lords is the chamber that reviews laws from the Commons and ammends them before ratifying them.
The Lords is a “by appointment only” Chamber, with 4 positions hereditary members(so if you’re born in the right family, you are part of the Parliament by default), 20 something members of the Church and the rest of 600 or so positions filled from among the peerage (lords and ladies) by appointment of the Queen, with input from the Prime Minister of the time. Their Prime Ministers have most of them been educated in just one college, Eton.
Rich people have tried/succeeded in buying their peerage with party donations for years. (https://en.wikipedia.org/wiki/Cash_for_Honours)
Until 2009 the Lords essentially filled the position of last court of appeal (like the Supreme Court).
It’s not Brussels that’s their problem and it’s not Brexit that will set them free.
Thoughts on both Johnson and Solange bowing out after leading their people to Brexit? Doesn’t seem very honorable not to do the hardest of work now, no?
Johnson and Farage are unscrupulous politicians that do not give a damn about “the common people”. They wipped up a frenzy of racist and xenophobia during the campaign. They now have won, they have no plan of how to deal with the whole shamble and so they have wisely (for their own skin) decided to p*ss of into the sunset, so that when the recession hits, they won’t be anywhere near it.
I was going to take my mother to visit the UK. It’s her 60 years aniversary this year and she has never travelled for pleasure outside her own country. It was supposed to be an adventure, fine dining, museums and all the good things in life. We are 2 women travelling alone. Racist attacks have been on the rise in UK after the referendum. I don’t think it’s safe for us to travell there anymore. I’ve paid for the plane tickets, but now that I have to pay for the accomodations, I’m really not entirely sure I can stomach going through with it. We will see.
I can’t quite believe you actually wrote this article mr Samurai.
1. Less fees – true overall but GB receives billions in subsidies from the EU as well.
Especially the lesser of counties which ironically voted to leave.
I blame media/politicians for failing to inform them.
2. Less regulation – LOL are you serious? Go ask the Norwegians/Swiss/Turks etc.
All of them including GB rely heavily on exports to the EU and guess what, in order
to export they need to meet all EU-demands but being ‘out’ have no say in these regulations
Do believe me? Read the interview with the Norwegian prime minister today.
3. More control of regulation – technically true. But they are not in Schengen in the first place.
Many of the ‘yellow/brown/black’ people the brexiters hated didn’t arrive from the EU.
These are people that GB will still have to take in because they are forced by International
Humanitarian laws. The only immigrants they will see less of are Poles/Bulgarians etc. but
instead of ‘taking UK-jobs’ they are actually taking UK-jobs that Britains are too lazy to do.
4. Lower consumer prices – would not be to sure about that. UK farming relies heavily on
EU-subsidies. A large amount of its oil supplies come from Scotland (which is now seriously
considering holding yet another referendum). Plus many of those consumer goods come from
the mainland which prices will increase due to costum-tarifs.
Of course in the long term there are just too many variables to be able to say now that Brexit is a disaster/blessing but a thought you article needed in little nuance.
And please don’t call me a hater. All my comments so far have been grateful/positive. And just recently I offered to show you around during your stay in Europe. Just felt that this needed to be said, because your post felt a bit like the Fox news ‘UK leaves the UN’ article today.
I think you miss the overall larger point. GB (or at least more than half of its citizens) do not want to be controlled by Brussels. They would rather be in control of their own destiny. You are getting too lost in the weeds.
Yes I get that they had this political upperclass right? Guess what the GB-elite is no different from the one in Brussels.
Too bad I can’t “like” your posts because I like them all. Feelings are running pretty high.
Why thanks! But trust me, you will find a post of mine that you hate and will never want to come back again. But I hope that you do come back and share your thoughts :)
Does this mean you will no longer show me around town?
Why debate the reasons why people vote the way they do when the boat is already happened?
You ever read the story about a bully? He feels OK bullying some other boy, but as soon as some other boy bullies his boy, he becomes protective. It’s OK to get controlled and regulated by someone or set of people, so long as the people voted for them. The freedom to make our own mistakes is all we’ve ever wanted.
No how about them bank stocks?! The bank I used to work for is no trading at 45% less than during the 2009 financial crisis! Holy crap.
No of course not, you are welcome any time. Still think you blog is by far the best one I have ever found. Just wanted to make sure people knew I disagreed but was not hating.
1. Why debate the reasons why people vote the way they do when the boat is already happened?
The EU consists of 27 other members. Analyzing why the majority of GB has voted to leave it seems essential to me in predicting the future of the EU. Just like GB has UKIP many other countries, including my own, have EU-sceptic parties. I the EU wishes to survive this century it needs to find a way to reach out to the people it has lost on the way.
2. No but I like the bully-story. However it is not really applicable. Yes the European Commission lacks in democratic founding. However the EU-parlement doesn’t yet the UK voter turnout for it was below 35%. Brexiteers wanting out should have used the opportunity to influence EU-policy instead of staying at home complaining.
3. This will be interesting to watch in the coming years. Is London really going to lose its large financial position to Frankfurt. UK-banks have threatened to leave but we will have to wait and see.
For now what is really hurting GB is the uncertainty. Until GB invokes article 50 of Lisbon and the 2 years following that will be a volatile period. With a crashing pound a cheap holiday is an opportunity but investing in a business (not knowing how tough the EU is going to negotiate) not so much.
Clarification: all those who voted to leave realized the economic destruction leaving would cause right? If so, is it possible they all went into cash or shorted the market in anticipation and they really didn’t get negatively impacted?
Also, what are the chances this get so bad that another referendum takes place to vote “just kidding”?
Haha great questions. But given that ‘what is the EU’ and ‘what are the consequences of leaving the EU’ were both the highest searched questions on Google the first one doesn’t seem very likely. Although I’m sure there is some smart-money out there who did.
Regarding the second question – there is a petition with 3 million signatures in just a few days calling for a new referendum. GB-parliament is legally obligated to discuss the topic. However D. Cameron has already ruled it out.
Hope for the sake of the British people they will find a way to get back together again. I have a roommate from London who scans twitter every night. It is still not looking pretty. With arguments within families – and more scarier xenophobic acts against ‘foreigners’.
I have a strong belief that voters to Leave couldn’t be that stupid to not know what the EU is and the consequences! Everything is rational in the end. Or maybe politicians are brilliant at manipulating the masses to do what they want. Hmmm.
28 members, not 27. Croatia joined recently.
Unless you mean 27 now that the UK is out lol.
First of all, my congratulations to all friends in UK – freedom is the best you can have. Believe me, I came from a communist country.
As FS have said, this decision will hurt all of us in short-term, but for those, who are playing long term and has minimum debt, it will be blessing rather than curse.
A lot of my friends have started selling stocks, funds, everything; I’m not sure about this decision and prefer to keep my investment in place, just because I aim long term.
And the fact that I don’t have debt gives me peace in this situation
I haven’t really been following the Brexit, but the age differences in the voting is concerning. The only thing that I’ve really noticed in the news is that those that were most vocal in the Brexit look incredibly eccentric. I’m all for being eccentric, but if I lived in Britain and those were the people spearheading the movement, I’d think twice and really do my homework.
You should have a think about how Europeans perceive Trump!
Oh, I’m sure their thoughts are similar to my own! His hair alone makes me cringe……
How the different age groups voted sure is interesting. I was pretty surprised that Brexit actually came out winning. Typically when the vote is so close, people in the middle will vote to stay status quo.
Good time to visit UK I suppose. :)
@ Tawcan, the “middle” is tired of the status quo. Don’t you watch the news? Bernie is not status quo, Trump is not status quo, exiting EU is not status quo. Your world is going to be hurting in a few years after all the status quo is whipped away.
We are not too long from giving up on the “peaceful exchange” of power in this and other countries. There are many in the current administration, including the democratic nominee for President who actually belong in jail. Read history. If you do not think it can happen, you don’t know history.
The older generations decided the fate of the younger generations of UK regardless of the outcome. Youngsters, you need to really vote for change.
Well, the younger generation backed the ill fated campaign of Bernie Sanders, regardless of the outcome. Perhaps the younger generation doesn’t have enough life experience to make a wise choice or is it because they have not amassed much in the way of assets, therefore having very little “skin” in the game? Essentially nothing to lose.
Being a part time conspiracy theorist, I appreciate this news because I feel the closer we get to a single currency for the world the less control we will have over our lives. Even though the markets are generally unpredictable, they very predictably dropped this morning. I’m always amazed at how knee jerk the markets are. Great news for me since I invest at regular intervals for the long term. Stocks on sale!
you know who loves this uncertainty?…..the US Government and fed reserve because this event just allowed them to keep printing more money cheaply as this event just created large “slight to safety move” in buying up Treasuries(and people will buy hard assets in USA like real estate……Everyone wants their assets in USD…The USA stock market will keep moving up because of this
onward and upward to $20trillion in US debt
You are correct. The US dollar and US debt our big winners during global uncertainty.
Everybody with the mortgage needs to refinance their mortgage. Everybody with credit card needs to call the credit card company and push for a lower interest rate. Everybody with student loans should also refinance down their loans.
People need to be in the habit of thinking what’s bad around the world could be good for us here in the US through lower interest rates. It should be automatic thinking.
I’m still scratching my head why investors run to the “safety” of the US Treasury when the printing machine is out of control and the FED balance sheets are ballooning.
It’s like having a mother addicted to shopping and entrust our credit card to her.
I carry on scratching my head.
Everything is relative in finance. We are relatively the more stable currency and more stable nation. Furthermore, it is exactly because we can print money that we can inflate ourselves out of problems. The world has excepted the US dollar more than any other currency in the world.
If you are an American who has never lived overseas, things will feel weird that other people see us so stable. But once you go to Asia, Europe, Africa and the Middle East and realize how unstable the world is, People will realize how incredibly amazing the United States is in comparison.
I haven’t been paying attention and I’m surprised it passed. The voting differences between age groups are striking. I’m also bearish, but I might put a little money in stock with the dip. I just sold some corporate bonds and have a little cash sitting around.
Good time to visit the UK? :)
I’m definitely with you on preferring real estate over the market, which is pretty much a house of cards. Unfortunately, I have an unlimited match on my 401(k) which is hard to pass up. But I’ve contemplated stopping contributions to my Roth and putting that extra money toward my real estate purchase fund.
That said, I do have some cash sitting in my Roth right now that I might be using if there are some good sale prices today.
The problem is that real estate is just as inflated as equities. There’s no good place to put cash at the moment.
I do hear ya… I’m using the opportunity to build up funds right now for the real estate market to drop which shouldn’t be that far out based on regular real estate cycles.
Sounds smart to me. After doing a thorough review of my investments and net worth, I am only deploying 25% of my cash and from my pretax investment accounts.
My cash sitting in the bank will continue to sit and accumulate to buy real estate in 2018 or just create one massive emergency fund.
This creates so much uncertainty. I feel bad for what Britain’s citizens just did to their economy, but I’m upset at what they’ve done to the world. I’m with you and think this is the harbinger of a few years (at least) of a global recession. The US will have to negotiate all our treaties with Britain (and maybe Scotland and N. Ireland) and our multinationals there are going to suffer. I hope it is shorter-lived than I fear, but I’m just going to keep my head down and continue with the plan.
As an amateur history buff, I find this story fascinating. If I had extra money just laying around, I probably would be investing more right now, but alas! I’m trying to use my money to build up my woefully small emergency savings fund and pay down debt. I’m not in a position to gamble right now, and I prefer known outcomes to unknown ones given my current situation (-81k in debt).
I will be keeping an eye on the markets today!
On another note I love how you are so quick to write and post about current events so quickly. Thank you!
The Green Swan
Is this more or less bad that the financial crisis of 2007-09? Everyone’s balance went down 40-50% during that time. If you sold, you were screwed unless, somehow, you timed the market right. If you stayed in, took it on the nose, continued buying all the way down and back up again, by the end of 2013 (and beyond) you were probably pretty satisfied with your balance.
This is another blip on the road towards getting off the merry-go-round. This will take place over years, agreement will be signed and the market will have ample time to digest this change and everyone to reassess. At the end of the day, this too shall pass and everyone will be fine.
This may be the beginning for a 2009 repeat for Europe. And because we are all intertwined, the US will go down with them.
And if this happens, we have the politicians to blame for their ineptitude for putting the welfare of our countries first before theirs.
Ironically, yesterday I took short term profits in my stocks (such as CTL, VOD, GSK, MSFT) in an effort to raise cash and reduce risk ahead of referendum. Today I’ll swoop in and purchase EWU, SNY, VOD, and TSLA.
I will be buying on the same intervals I normally do, should be interesting to watch everything unfold today (might expedite purchases in my Roth IRA if it gets bad enough though)
Looks like all the bets yesterday were wrong
The more worrying aspect is the domino effect that may result. Already signs of major grumblings in the EU countries. That domino effect will really cause long term uncertainty in markets and investors won’t benefit one bit.
A sad, sad day for half of Britian. They better find a way to unite themselves now they are set free.
I am most concerned about the years of uncertainty ahead. Just think back to the ongoing debt negotiations with Greece and the impact that had on markets on a daily basis. If the markets want one thing, it is predictability. The #Brexit is a Pandora’s Box of unpredictability. More counties will discuss leaving the EU and it may even become a negotiating chip in the future. I have even read that the odds of a UK breakup are now rising despite the failed Scottish referendum last year. The news cycle will be non stop for 5-10 years, maybe longer. For that reason I don’t like it. I am most angry at myself for seeing this possibility and not acting on it by moving to cash, even for a short while.
You are correct about uncertainty. And the great irony is that overseas uncertainty helps cement LOWER interest rates here in the US as investors buy US Treasuries. The Fed isn’t going to raise the Fed funds rate as aggressively as before. And US consumers will get to refinance our debt.
LOL I just refi’d 6 weeks ago…. We will not see 30y rates over 5% in our lifetime. And yes I know you are not a fan of the 30y :)
I don’t read this blog often but I do subscribe on my Yahoo news feed and read it a few times each year and I must say the writing is always superb, the explanations are crystal clear, and complex issues are broken down into easily digestable components. I just shared it with the rest of my family members.
Thanks for sharing! Why read Yahoo when you can read Financial Samurai? :)
I agree. We will do a deal with the U.K. quickly once they are officially out of the EU. The divorce will take a while though.
In the end, the fundamentals of the stock market won’t change. It is all about valuations. US equities are overvalued if you look at the indexes. If you peel the onion back a bit, there are some great deals out there.
Sam – first of all congrats for the very timely article, it’s very detailed and it’s one of the first I received on the topic this morning.
I am actually surprised the Leave side won the referendum. On my trip to Europe, a Brit told me “the best way to have influence in a club, is to be part of the club”. I found his analogy excellent and agreed that Remaining in the EU would be the logical thing to do.
This seems to be more of a sentimental vote than a rational one.
I am not buying the dip today, but I’m watching closely. Like you I have been bearish on the market since mid-2015 and I think the S&P should be around 1500 to return to normal levels, so we’ll see how this develops.
I don’t believe France, Germany or any of the founding countries will want to reconsider their membership, UK has been different since they have always been half-in (it kept it’s own currency, it still had border controls…). But maybe Greece feel the need to re-evaluate its membership?
One thing is for sure, now that a large developed economy has voted to Leave an economic block, this will be fuel for the nationalistic presidential candidates around the world (and in the US). Ouch.
Not sure this will be negative for UK’s economy. Mainland Europe is net exporter to UK and they have plenty of incentive to get a free trade deal in place with the UK more than the other way around. Obama, despite his blustering earlier this year, is not going to put the UK in the back of the line, although it will likely be his successor that actual does the trade deal with the UK and I think that will be quick and painless. There will be some very short term hiccup but I think within 5 years this will prove smart for the UK. The real reason markets are dropping isn’t as much as the UK leaving is the potential domino effect of some of the weaker Euro members possibly leaving.
Great Britain is just the beginning, which is why nobody should foolishly go all in and use up all their cash and buy right now. If the domino starts, it will take maybe 5 to 10 years to finish. We could have another lost decade in Europe.
You write faster than Bloomberg.
The event might be sad but I see opportunities. This year I review the Pound Sterling and noticed it’s at the weakest against the US Dollar for the last 18 years.
Now, with the Brexit, the pound will go down further offering great opportunities for investors to buy British stocks and hold for the long term.
Interesting the graph about voter’s age. May be their fighting spirit from second world war got the best out of them. I also don’t understand why they should suffer a recession while in retirement age.
I was reading an interview with Soros two days ago and predict a Brexit would trigger a Pounds to fall 20%, unfortunately this time around will not help the economy to export more and get out of recession like in 1992: https://www.cnbc.com/2016/06/20/george-soros-says-brexit-could-trigger-black-friday-and-a-recession.html
The funny thing is yesterday I was preparing my attacking plan to buy ETFs of mother Russia to take advantage of a record low Ruble and cheap companies heavily in Oil and Commodities.
However, now with Brexit, my dinner is going to be a buffet.
Excellent diversification opportunity.
It’s funny, because I had another unrelated post scheduled for the day of Brexit. It was 10:30 PM when I started this post, and all I wanted to do was watch some Netflix. But I felt it was my duty as a personal finance blogger to write this post and share my thoughts because all of us are probably investors and seeking financial freedom. What is going on in Great Britain will have important ramifications for our investments going forward. I knew that a lot of people would ask for my opinion on the subject, so I just went ahead and did it.
Besides, if I ever get fired from my own company, I could demonstrate to Big media companies with this article that I have the chops to be a journalist!
Wow Sam you beat me with the rapid response article. I’m definitely buying the dip. Everyone will freak out, the big businesses in the UK will lobby hard to keep most EU economic agreements, and low skill immigration will basically get shut down. Most other things will stay the same is my bet
As I understand it, leaving was the only solution to terminate the migrant (read Muslim maniac) influx. These simple-minded people refused to assimilate into the U.K. and build their own Sharia-minded enclaves erected around mosques. As their numbers increased, the rise in crime and unemployment bloomed. That includes mass rape and murder of (what else?) non-Muslims. Germany’s New Year’s Eve event was an eye-opener of 1,000+ “migrants” raping the population.
Wow, I was surprised to see them exit as well. It just goes to show that at the end of the day, people will vote with their emotions and not their brains. The “Brexit” folks did a good job of stirring up strong anti-immigrant fervor and pulling a few pages from the Trump playbook…let’s make Britain great again? I do respect their desire to be masters of their own destiny, I just don’t think it was economically prudent.
I hope it works out well for Britain and the EU as well, but I suspect/fear that this may be the tipping point for a global recession. Time will tell.
‘The “Brexit” folks did a good job of stirring up strong anti-immigrant fervor and pulling a few pages from the Trump playbook…let’s make Britain great again? I do respect their desire to be masters of their own destiny, I just don’t think it was economically prudent. ‘
Excellent point, Jon. In a developed country like GB, money is almost always the primary motivation behind decisions like this. The migration issue is surely tertiary to those expecting to line their pockets from achieving Brexit, yet it is leveraged to build public support.
I wouldn’t underestimate fear. Fear is what drives people to vote more than hope.
@Kendall “I do respect their desire to be masters of their own destiny, I just don’t think it was economically prudent”
What kind of an ignorant comment is that? Do you think someone who is NOT the master of their own destiny has a chance in hell of being economically viable? It is NOT prudent to be in the EU. Wake the hell up 20 year old.
I am suprised that the majority vote was from retirement age people. Wish I could just vote myself out of supporting welfare and paying taxes. Since you mentioned income streams how about an update on p2p lending?
Also surprised that Leave won, even though I voted Leave. It’s certainly lifted my spirits! I find it frightening that so many cannot see the EU for what it really is (Soviet Union Mark II, anyone?). I fail to see how we’ve shot ourselves in the foot or punched anyone in the face (except those few power hungry idiots in Brussels). The pound plummeting is great news. We need a weaker currency for a while (along with higher interest rates and lower house prices).
I completely disagree with those who say there will be a stampede of companies leaving the UK. Complete nonsense. Oh, and I think France or Austria will be the next to follow our lead. It’s obvious they’ve had enough.
As for Brexit being bad for investors and good for those who don’t care about money… I care about money and pounced on the bookmakers’ (well, Betfair) unbelievable odds of 8.0 for Leave. Also, made just shy of 1400 pips on GBPUSD. Stocks? Never touch ’em. :)
Forgive me if I side with economists and investors over the guy who wants his own currency to plummet and chooses to gamble on a legislative decision affecting financial markets rather than the financial markets themselves.
The EU seems like any major collegiate athletics department. Revenue is grossly imbalanced between its members and two, maybe three, giants (football, men’s basketball and maybe a niche sport) subsidize the remaining members’ losses. Is this a complete failure to maximize revenue? Of course. From a business perspective, every major college athletics director would LOVE to cut rowing, women’s tennis and the rest of the sports not finishing in the black. But Title IX says they can’t, plus keeping those sports around creates jobs, scholarships, lifelong experiences for the athletes/their families and stronger alumni ties to the university. So while the revenue may suffer, it’s a greater net positive for more people to have these sports than to just have football and basketball. And it’s not just the small sports that are subsidized by big college athletic dollars. Academic scholarships, buildings and services are supported in part as well.
In my mind, the same principles apply to the EU. Brexit just removed men’s basketball from the equation so Germany, Austria and France (Football) are stuck supporting an even greater burden of subsidy. This is good for no one except GB, and even a large portion of their own citizens are going to feel the pain from this. Craziest of all to me is the demographic breakdown of the older generation nearing retirement being most in favor of leaving. That is what Sam is referring to when he talks about foot-shooting as these folks wanting to retire are going to see their portfolios shaken at a time when they want stable growth. I think the referendum has a chance at being reversed in the next few years once the true impact is felt.
Damn, I love women’s tennis.
I see the positives, I really do as someone who told Corporate America peace out in 2012. I suffered immediate income loss, and the city of SF and the federal government “suffered” from not collecting more of my taxes. But four years later, I’m so much happier being independent, and the community and my old company have moved on. I hope this will be the same for the UK four years later as well.
Much respect to the people who chose their own destiny. It’s not easy to take such massive short term pain for freedom.
I think your NCAA analogy is interesting, but is off the mark. Nearly all of the benefits of the EU is in free trade and that existed before the EU was officially formed. The EU growth hasn’t been great since its formation, which if it was positive for growth should have seen significantly higher GDP growth than the US but has mostly been lower. Brussels made regulations – making up I heard 70% regulations now in the UK – from un-elected bureaucrats – are really bad for business. Unlimited immigration isn’t very good for the rank & file (terrifically good for large MNCs, though, hence why they lobby for it), and I don’t think for two seconds the EU won’t do a free trade agreement with the UK still.
The main benefits to the EU were free trade and the common currency. Most of the rest is either neutral, bad or irrelevant. The UK already wasn’t on the common currency and I think they’ll get a Free Trade agreement worked out just fine – just like Norway, Switzerland and the US do with the EU. If I had to guess, I think they will probably model the agreements of Switzerland with the EU, which has done just fine and life will go on for all unless the EU purposefully makes a stink about it. In fact, if it wasn’t for 6 months of fear mongering by the “STAY” side, I don’t think the markets would have done much today.
The euro experiment failed.
A monetary union requires mobile labor. Opening borders was supposed to allow inhabitants to move to where the jobs exist, and ease business via the shared currency.
In reality, Greece has a 26% (!!!!) unemployment rate. Spain has a 23% (!!) unemployment rate. Labor mobility does not exist: The eurozone would rather import low-skill and culturally incompatible immigrants than hire their own neighbors.
This is a second shot at doing things right instead of slowly choking out while the ECB tries to find a single interest rate capable of keeping 20 different countries stable at the same time.
Yes, it will be painful in the short term. Sometimes you need to make short-term concessions to achieve long-term success.
If there is such a great net positive to having more than just a basketball and football team, why is it necessary to dictate such a result through a federal law? Wouldn’t colleges just do it on their own?
Why should Great Britain look out for anyone other than Great Britain? If it is good for GB, then they should do it.
You are forgiven, Kendall (as long as you don’t subscribe to George Soros’ line of thinking re: sterling).
Look at the current deficit: 7% of GDP for heaven’s sake! Where do we look for the root cause of Britain’s distorted economy? Shine a light over at that sign that reads “abnormally low interest rates”.
So YES, a weaker currency for a while is what is *needed*. Sure, it will leave a nasty taste in the mouths of many but better that than pretending what is happening isn’t happening. Analogy coming up: Britain needs a hefty dose of cod liver oil. (also needs more gold reserves).
If I didn’t have any investments as a UK citizen, i’d be much more pro leaving as well. I would hate to take orders from Brussels.
The key for young folks and less wealthy folks is finding jobs, and hanging onto their jobs now that the UK is most certainly going to go into a recession.
No job equals a depression, that may lead to a cycle of poverty for generations to come. So do whatever you can to bolster your other income streams now.
I’m surprised that the referendum actually went through. The majority of news outlets were predicting that they would remain in the EU, it’ll be interesting to see how the market reacts in the morning (It won’t be good).
I was following the polls for the referendum for the last several weeks and was glued to my screen watching the results come out yesterday. It’s crazy, yet understandable that Brexit passed and also rather unsettling as it’s gonna be rock times ahead. But I agree with you that we’ve already been anticipating a slowdown and we could very well have another recession in the coming 2-3 years or so.
I’m planning on buying some stock today but am not dumping all of my cash in by any means. I think this is just the beginning of a rough patch and things could get uglier. I will be very curious to see how Germany responds. It wouldn’t surprise me at all if they try to follow suit. I want to keep watching the Euro markets but I gotta get some sleep now in order to wake up before the US opens. Eeee!