Eugene Grygo, Chief Content Editor, FTF News
The non-binding referendum by which the citizens of the United Kingdom voted to leave the European Union (“Brexit”) is by now universally recognized as one of the greatest blunders of all time. This monumentally stupid decision is creating utter confusion, and exposing lies, political incompetence and social and political rifts in the U.K. that are only compounded by the havoc it is creating in global financial markets.
On a more visceral level, I’m sure the operational and IT support staffs at many securities firms are wishing they had never heard of Brexit.
And, although the Brexit vote was only this past Thursday, the nonstop barrage of media coverage after the fact makes it seem as if the decision was made months ago. Where was this attention before the vote?
In any event, this column (which will add to the barrage) will provide you with perspectives that may not have gotten the attention of the mainstream media.
Tough Times Ahead
While the mainstream has veered away from doomsday predictions, the former chairman of the Federal Reserve, Alan Greenspan, told CNBC on Friday, June 24, that Brexit will bring “a period that’s even worse than the darkest days of October 1987” when U.S. markets tanked, signaling the start of the end of the go-go, kill-kill 1980’s. A rather vicious recession hit by 1989 and lasted into the early 1990’s.
“This is the worst period, I recall since I’ve been in public service,” Greenspan told interviewers on “Squawk on the Street,” a CNBC show covering the markets. “There’s nothing like it, including the crisis — remember October 19th, 1987, when the Dow went down by a record amount, 23 percent? That I thought was the bottom of all potential problems. This has a corrosive effect that will not go away.”
Greenspan argued further that Brexit is “far more widespread” than the October crash because Scotland may want to push the issue of departure from the U.K. and that the euro is “the immediate problem” because it is failing.
“Brexit is not the end of the set of problems, which I always thought were going to start with the euro because the euro is a very serious problem in that the southern part of the euro zone is being funded by the northern part and the European Central Bank,” Greenspan told CNBC.
Maybe the Regulators Will Save the Day?
There is a slim chance that separation can be avoided, argues an expert on financial regulation, Mary Kopczynski, CEO and founder of 8 of 9, a regulatory solutions vendor.
“The negotiation process with the E.U. will take years and it’s possible that in that time, the British people — seeing the impact on their currency and business prospects — may ultimately back out of the separation in the coming years,” Kopczynski says.
“If not, the operational challenge would be tantamount to any major regulatory initiative like CCAR [the Federal Reserve’s Comprehensive Capital Analysis and Review], FATCA [Foreign Accounts Tax Compliance Act] or the like,” she says. “The unbundling of multiparty financial contracts, the reassessment of currency, and the confirmation of collateral valuation will be challenges, for sure.”
Investors, Please Keep Calm
Nigel Green, founder and CEO of deVere Group, which has $10 billion under advice, is urging investors need to do three things in the aftermath of Brexit Bombshell.
“Against a backdrop of reeling markets and uncertainty, individual investors are, understandably, feeling nervous about their future financial security,” Green says in a statement.
“There are three things that investors need to do now as we enter into a new era. First, for the vast majority of investors the message is clear: Keep calm and carry on. Hasty decisions are typically not the wisest ones. There remains too much uncertainty around at the moment to take strong bets on any particular asset class, sector or region. “The market volatility may indeed be an indicator of storm clouds ahead, but equally, and perhaps even more likely, it will present a positive buying opportunity. But we need to wait for the fog to lift a little first. A buy-and-hold strategy of quality multi-asset funds is as valid a strategy today as it has ever been.”
Focus on the Longer Term
“Second, focus on the longer term,” Green says. “Yes, the political landscape has changed overnight, but your financial objectives have not. Markets are, by their very nature, turbulent but stock market performance is fairly predictable over the longer-term — they usually go up. For this reason, investing in equities is recognized globally as one of the optimum ways to accumulate wealth over long periods. All too often even experienced investors focus on the short term too heavily in times of market volatility of the kind we are now seeing, and there are many disadvantages to this. For instance, a short-term investment strategy involves considerably higher risks, compared to investing over a longer period. Other pitfalls of a short horizon include that investors can often sell a quality investment too early due to over focusing on short-term valuation metrics.
Keep an Eye on Other Factors
“And third, keep an eye on other important geopolitical factors that will influence markets and therefore impact your finances,” Green says. “These include China’s economic growth, the possibility of Brexit contagion as other countries seek to exit the E.U., the U.S. election, the failure of negative interest rates in Japan and the Eurozone to stimulate sustainable recovery, and the Fed’s nervousness over the U.S. economy.”
That’s a lot to keep an eye on. With so many factors in play, they may cancel each other out or combine to give us one hell of a ride.
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