It should come as no surprise that the first foreign leader to grace the Trump Administration will be the U.K.’s Theresa May. After all, the two nations have always had much in common. And now, with Brexit and the Trump triumph that have the left reeling, these old allies have even more reason to get together and chew the fat.
Perhaps it proves once again that the younger sibling always copies the older -- U.S. voters surprised the world with Trump just after the United Kingdom made shocking the world “great again” with Brexit. Make no mistake, Donald Trump’s victory and the decision by the British electorate to leave the European Union represent seismic shifts in the world order.
Wouldn’t you love to be a fly on the wall to hear what these two have to say to one another?
Events an ocean away usually impact the news cycle more than they do the day-to-day life of the average citizen, but to discount Brexit as just another dash of salt in the global stew of geopolitics and finance would be imprecise. Leaving the EU and the process that Theresa May puts into motion this year will have effects which trickle down in subtle, yet meaningful, ways. And they are likely to impact almost everyone where it counts: their wallet..
Markets are simply collections of people (albeit operating alongside several million lines of code and algorithms), and people behave differently when uncertainty enters their lives. The most powerful, wealthy, and famous all allow doubt about the future to modify their behavior. Then they take actions which have consequences for those outside of their elite circle.
Of course, those in positions of power -- people like Janet Yellen or Donald Trump -- factor uncertainty into their governing decisions. Specifically, the Fed Chairwoman herself admitted that the lack of clarity she experienced before the UK referendum vote caused her to wait for the results before making a decision to raise interest rates. Although the day of the poll has long since passed, an even greater number of important choices await resolution. Several potential outcomes for these decisions might result in a recession for the UK, which could then spread to other parts of the world.
The citizens with the greatest amount of wealth, titans of industry like Elon Musk or Tim Cook, also rely on a clear picture of the future when making important decisions. Large investments, risky ventures, and aggressive expansions are all potentially perilous activities on their own. Executed in a tumultuous market, even the best business plans may succumb to forces outside of their developer’s control. While a few mavericks or contrarians may buck the trend, the average blue-chip company will shift into a fiscally conservative mode when faced with the prospect of financial market instability.
The media will cast the events surrounding the Brexit process - the talks, the feints, the failures to compromise - as signs that the sky is falling. Month after month, subsequent forecasts of impending doom will spew forth from the press. These prognostications will further cement the frugal decisions of the people pulling the strings behind the curtain of the economy.
For an example of how this feedback loop works, we can look at the recent financial crisis in Greece. Quarter after quarter, deadlines loomed ever closer while a path out of the situation seemed more and more impossible. Each time the Greek government ran up against the clock, markets would go into panic mode.
For the average citizen, these alarm bells meant nothing. So what if a government half a world away was about to fail to meet an obligation? It didn’t mean anything to the worker stuck in rush hour traffic, right? Not so, for the ripples created across the pond caused several things to happen back at home. The ripples caused by Brexit will likely be no different. Doubt and panic and the actions they inspire in the world’s elites contribute tangibly to the experience of almost everyone.
When uncertainty looms, stocks generally go down in the short term. This can impact retirement account balances and spook investors who fail to see the temporary drop coming. Fear sways the market day to day, but ambiguity is always priced in over the long run. Hold fast, stay the course, and don’t click sell.
Interest rates also tend to head lower and remain there during times of uncertainty. The historically low interest rates of today, long thought to be on the verge of rising back to traditional levels, may remain suppressed. At the very least, they will rise more slowly than they would have otherwise in a world where Great Britain had decided to stay in the European Union. This is great for borrowers but hurts savers.
Money has to be parked somewhere, even if that place is under a mattress. The proverbial mattress for the world’s money managers is the safe-haven asset class. It includes treasury bonds, precious metals, and stable currencies. US Treasuries, viewed as one of the safest investments out there (in spite of losing their AAA rating), generally overperform when money flies out of risk and into safety. Gold generally gets a boost as well, and strong currencies like the Swiss Franc soar.
In this environment of fear, the choice of one company to halt plans for growth can have a domino effect which spreads across an industry. Canceling an expansion plan means a second company loses out on potential business. If that second company starts to struggle financially, they may cancel orders of their own. This chain reaction can continue into recession. There is a small potential that Brexit may trigger such a recession, resulting in the associated downsizing, freezes on hiring, and even bankruptcies.
Because of Brexit, neighbors discussing their finances over the next two years may have more pessimistic discussions than they would have otherwise. Stock portfolios being down, retirement accounts underperforming, and worries about layoffs may be common topics. Pay attention to the talking heads, though. When the majority are predicting doom and gloom, it can be a self-fulfilling prophesy.
In the meantime, we’ll be monitoring Mr. Trump and Ms. May over a cup of tea.
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