Last night when the market was closed on London’s and New York’s floors, the voters in UK decided… to withdraw the nation’s membership from European Union.
Obviously as we saw, GBP, stocks, and oil are in free fall; but what does this mean?
Here is a brief analysis of the risks in the current global economy, especially from a Brexit vantage point.
Brexit itself has little implication. Yes, it is a vote to leave the E.U. However, the single event surely will have little implication that will last in the global financial sector. However, as one of the strongest powers leaves the UK, many other countries looks to follow. The realistic ones are France and Germany. Le Pen has already promised a French referendum if elected. Germany has no immediate plans to leave the EU, but it has been less of a EU believer traditionally than France. It would not serve as a surprise if we start seeing more “-exits”. Furthermore, another great immediate risk is the break-up within UK. Before the vote, Scotland first minister has announced the intention to secede from UK if Scotland votes to stay within the EU but England votes to leave. That is exactly what happened. She has since spoken to confirm the plan to hold secession referendum as well.
As Britain leaves the UK, many countries’ exports will be cut short as UK was a key importer in the region. Similarly, the UK’s export sees uncertainty as it will have to negotiate a new set a trade agreements.
Why are the stocks falling? Is it because of the the Brexit? And are we in another recession?
We will be in another recession, but it will not be because of Brexit.
The fact of the matter is, Europe has had declining influence in the world’s economy. It should not be able to pull the world into another recession. However, it can serve as a catalyst event when the underlying of major economic entities is corrupted and eroded. In 2008, the bankruptcy of Lehman did not drag half of the world into a crash. Instead, Lehman’s bonds had already been trading at cents on the dollar for more than a year; that means the world already knew Lehman was in deep trouble. Lehman announcing bankrupt should not have been a surprise to anyone in 2008. The U.S. was already on the verge of a crash, Lehman was nothing but a catalyst to make it start.
Today’s world economy is extremely eroded. Countries across the world are either in recession already or propped up on the biggest bubbles in the history.
- The U.S. is in a financial crisis that is much worse than 2008. Three rounds of Q/E created bubbles of historic sizes and will have detrimental effect on its economy.
- China has shifted from a lender to a borrower. Its debt to GDP ratio is over 200%! There are reports claiming the actual debt may be even higher. The recent growth has been artificially funded by the central government and will not be sustainable.
- Oil will not be able to stay at $50. It will gradually go down to the 20s and may even go much lower. This will kill off a variety of industries. Oil, natural gas, solar, wind, and companies like Tesla will find themselves in some boiling water.
(I will explain these in a more specific manner in a separate article.)
Is Brexit the catalyst this time? It may be. But I don’t think so. I think that the market is reacting and will soon correct itself, & eventually will race to the bottom once the Fed raises rates. I think that will be the real catalyst.
But does it matter what the catalyst is? No. Anything of economic significance could be the catalyst. What matters is the underlying economic situation, which is ugly. The world economy is on the verge of collapse and it will be much worse than 2008. Is it today? Maybe, maybe not. But, no one cares about that.