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Given the fighting in Syria, anti-government protests in Hong Kong, the down to the wire vote on Brexit, the expanding U.S. impeachment inquiry, not to mention ongoing trade conflicts between the U.S. and China, the U.S. and the European Union and South Korea and Japan, it’s easy to understand why people are worried about the current state of the globe.
It’s pretty rare that I have a legit economist on the show. It’s even rarer when said legit economist is a woman -- WOOT!
On this episode we check both those boxes with Linda Yueh, an economist who holds senior academic positions at Oxford University, London Business School, and the London School of Economics and Political Science.
Linda joined us to discuss her latest book, What Would the Great Economists Do?: How Twelve Brilliant Minds Would Solve Today's Biggest Problems.
Since the days of Adam Smith, economists have grappled with a series of familiar problems – but often their ideas are hard to digest, even before we try to apply them to today's issues. In her latest book, Linda explains the key thoughts of history's greatest economists, how our lives have been influenced by their ideas and how they could help us with the policy challenges that we face today.
In the light of the post-Great Recession economy, where growth has not accelerated as fast as in previous expansions, Yueh explores the thoughts of economists from Adam Smith and David Ricardo to contemporary academics Douglass North and Robert Solow.
Along the way, she asks, what do the ideas of Karl Marx tell us about the likely future for the Chinese economy? How do the ideas of John Maynard Keynes, who argued for government spending to create full employment, help us think about state intervention? And with globalization in trouble, what can we learn about handling Brexit and Trumpism?
Linda is also an accomplished journalist, who has spent time as an anchor/correspondent at the BBC and Bloomberg TV. With a strong social media presence, she’s worth a follow so you don’t miss any of her smart blog posts.
“Better Off” is sponsored by Betterment.
Have a money question? Email us here or call 855-411-JILL.
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"Better Off" theme music is by Joel Goodman, www.joelgoodman.com.
Defying the polls and odds, Donald J. Trump won the Presidential Election. As the results became clear on the evening of November 8th, financial markets around the world reacted swiftly: stocks plunged (at one point during the overnight session, US futures were down 5 percent, indicating a more than 800 point wipe out for the Dow Jones Industrial Average), the Mexican peso cratered by 13 percent, the US dollar tumbled and safe havens like gold, US Treasury bonds and the Japanese yen, jumped. Then a strange thing happened: as Mr. Trump spoke in the wee hours after capturing enough Electoral College votes to win, markets started to reverse course, as investors seemed to take some comfort in his conciliatory tone. By the time they rang the opening bell on the day after the election, stocks had steadied and actually closed higher on the session. So much for predictions of stock market crashes, at least in the short term!
So what happened over the course of 18 hours? It could be that investors may have learned a lesson from the UK Brexit vote. After that unexpected outcome in June, US stocks were down 5 percent in the subsequent two trading sessions, but then slowly marched back up, as investors concluded that it would take a long time to figure the impact of Great Britain’s departure from the European Union.
While investors had been concerned about some of candidate Trump’s campaign rhetoric on trade and immigration, in the immediate aftermath of the election, it was hard to measure the impact on the US and global economy as well as what future policies could mean for corporate earnings. Still, hours after the results came in, I was inundated with reader/listener/viewer questions that went something like this: “What should I do with my retirement account?” The answer for long-term investors is clear: ABSOLUTELY NOTHING!
Unexpected events can create market volatility—both to the upside and the downside, which can lure you into feeling like you should do something. Try to resist that urge by reminding yourself that you are not investing for the next four weeks, four months or even four years--you are trying to build your nest egg beyond those time frames. And even if you were planning on retiring at the end of this year, you aren’t likely to pull all of your money from your account at once – you need it to last for decades in the future. In other words, you are not investing to retirement; rather you are investing through retirement.
That’s why you have created a diversified portfolio, based on your goals, risk tolerance and time horizon - because over the long term, this strategy works. Yes, the unknown is scary and can lead to market volatility, but you have to refrain from being reactive to short-term market conditions. It’s not easy to do, but sometimes the best action is NO ACTION.
If you were freaked out when you saw big numbers on the downside, maybe your portfolio has too much risk. If that’s the case, you may need to readjust your allocation to better align with your risk tolerance. If you do make changes, be careful NOT to jump back into those riskier holdings after markets stabilize. Conversely, if you were kicking yourself for not being fully invested as stocks swung back to the upside, you might need to hold your nose and get back in. Battling emotions is something every investor encounters-one way to help you out is to establish auto-rebalancing for your accounts, which can help take fear and anxiety out of the investment process.
Here are some (early) potential financial/regulatory outcomes that could arise from the 2016 Election:
The better than expected June jobs report was a much-needed shot in the arm for the recently sagging labor market. The economy added 287,000 jobs, including the return of about 30,000 striking Verizon workers, and the unemployment rate rose to 4.9 percent, but did so for a good reason: more people entered the labor force in search of work. Along with a terrible May (revised down to just +11,000 jobs, the weakest month of hiring since the job recovery began in 2010) and a mediocre April (revised up to +144,000), June’s numbers brought second-quarter average monthly job creation to 147,000 – that’s down from 196,000 in the first quarter, 229,000 last year and 260,000 in 2014. The big question now: is the recent trend portending weakness in the economy or is it a natural slowdown, as we begin the eighth year of the recovery?
Other parts of the report complicate the answer. The broad measure of unemployment U-6), fell to 9.6 percent, down 0.9 percent from a year ago, but more than a percentage point above its pre-recession level. Meanwhile, hourly pay increased by 2.6 percent from a year ago, matching the highest level of the recovery.
My guess is that the labor market is tightening and that something weird occurred in May. That said, more data is necessary to determine the direction of the labor market, which also means that the Fed is unlikely to take any action at its policy meeting at the end of this month.
Next question: Would a strong summer hiring season encourage the Fed to consider an increase at the September meeting? Maybe, but European politics may again force a delay in the Fed’s rate hike cycle. If you liked “Brexit,” you’re going to love “Quitaly”. In October, Italians will head to the polls to vote on whether to oust the current prime minister, potentially leading to a general election in which the anti-European Five Star Movement could gain ground and advance their call for Italy to withdraw its membership of the euro, though the party supports EU membership. As the vote nears, Italy is once again confronting the possibility of bailing out the world’s largest bank, Monte dei Paschi, which continues to hold nearly $400 billion of non-performing loans on its books, by far the largest in the EU.
According to Capital Economics, a survey in May “showed that 58 percent of Italians wanted a referendum on their EU membership. Granted, only 48 percent said that they would vote to leave. But the final UK opinion poll last week also suggested that only 48 percent would vote to leave the EU.” In other words, add you should probably add “Quitaly” to your summer lexicon.
MARKETS: Last week, the yield on the 10-year U.S. Treasury note touched a record low of 1.321 percent and the 30-year also checked in with its own record low of 2.098 percent. Yes, that means that if you lend the US government money for THIRTY years, you would receive a paltry 2.1 percent in interest. Meanwhile, stock indexes charged higher on the week, nearing all time highs reached in May 2015. As earnings season begins this week, investors will have to reconcile current prices with a likely fifth straight year-over-year quarterly profit decline.
THE WEEK AHEAD:
Mon 7/11:
Alcoa
10:00 Labor Market Conditions
Tues 7/12:
6:00 NFIB Small Biz Optimism Index
10:00 Job Openings and Labor Market Turnover
Weds 7/13:
8:30 Import/Export Prices
2:00 Fed Beige Book
2:00 Treasury Budget
Thursday 7/14:
BlackRock, JPMorgan Chase, Yum! Brands
The Bank of England interest rate decision (the first post-Brexit announcement)
8:30 PPI-FD
Friday 7/15:
Citigroup, U.S. Bancorp, Wells Fargo
8:30 CPI
8:30 Retail Sales
9:15 Industrial Production
10:00 Business Inventories
10:00 Consumer Sentiment
Global stocks have mostly recovered from the previous week's steep sell-off, so is the Brexit fallout over? History may or may not look back on June 23, 2016 and declare it “UK Independence Day”. Since residents in the United Kingdom voted in a non-binding referendum to leave the European Union, there is still so much unknown, including who will succeed Prime Minister David Cameron. Despite an internal Tory party horse race, the leading contenders are Theresa May, who half-heartedly supported the Remain camp and Michael Gove, who along with former London mayor Boris Johnson, was a leader of the Leave campaign. (Here’s an easy way to remember their names: Invoke the Clash and hum to yourself, “Should I May or Should I Gove?”) As the next Prime Minister grapples with how to leave EU, US consumers and investors are trying to understand the impact of the historic vote. Unlike the run of the mill correction that we saw earlier this year, the UK’s exit from the 28-member union is an “exogenous event.” That means that it came from outside the predicted modeling system that most economists utilize and as a result, can have significant, negative effects on prices.
We saw how negative on the first two days of trading following the vote: the British pound sterling tumbled to its lowest level against the US dollar in more than three decades and global stocks fell sharply. Meanwhile, bastions of safety like US treasuries, German bunds and gold saw big inflows. Despite the magnitude of the surprise, large financial firms said that even in the hours after the vote, there was no liquidity crisis and markets functioned well. And by the end of the first full week after the vote, the damage was fairly contained and most global markets recouped their initial losses.
So is the Brexit fallout over? It would be great to think so, but that might be a case where optimism clouds a realistic assessment of the situation. Consider this: nine years ago, another unexpected June event occurred: investment banking firm Bear Sterns (BS) had to bail out two of its hedge funds that were collapsing because of bad bets on subprime mortgages. At the time, there was no mystery surrounding the risks that were emerging, though 15 months later, the world seemed shocked to discover what seemed clear in the middle of 2007: something very bad was brewing.
In June 2007, the New York Times said the Bear Sterns hedge fund debacle stemmed “directly from the slumping housing market and the fallout from loose lending practices that showered money on people with weak, or subprime, credit, leaving many of them struggling to stay in their homes. Bear Sterns averted a meltdown this time, but if delinquencies and defaults on subprime loans surge, Wall Street firms, hedge funds and pension funds could be left holding billions of dollars in bonds and securities backed by loans that are quickly losing their value.”
While at the time, the event did seem small and well contained; here is the timeline of what occurred next:
This is not to suggest that Brexit will cause a financial crisis, but we should carefully consider what dangerous spillover effects could occur. While US banks are better capitalized than they were leading up to the fall of 2008, the UK and European banks do not look nearly as healthy. In the two trading sessions after Brexit, the European Bank index lost about a quarter of its value and UK based banks did even worse.
And if European growth slows, its weaker economies (Greece, Italy, Spain) will once again be at the heart of sovereign debt questions. Additionally, as the dollar rises, emerging markets like China could come under pressure, echoing what happened in the first six weeks of the year, when global stocks tumbled and US stock corrected.
In terms of the US economy, analysts at Capital Economics say the UK and the EU account for 4 and 15 percent of US exports, respectively. If both regions go into a recession, Brexit could shave 0.2-0.3 percent from the current annual US growth rate of about 2 percent.
But estimates can be rocked by emotions. A US-based multinational may hold back on hiring everywhere to see how things shake out post-Brexit. For US exporters, the rising US dollar will create a drag on competitiveness in overseas markets and could potentially trigger lay offs at home. And if non-affected businesses and consumers start to feel unnerved, they too might pull in the reins, causing the US economy to slow down more than anticipated.
This week’s June employment report may go a long way to soothe nervous economists and investors. The May report was a dud-only 38,000 jobs were added, the worst month since September 2010. This year, the economy has added 149,600 jobs per month on average, the worst start to a year since 2009. Economists are hopeful that the job picture improved in June. The consensus is that 180,000 jobs were added during the month, including the return of 35,000 striking Verizon workers, and that the unemployment rate will edge up from 4.7 percent, the lowest since November 2007, to 4.8 percent.. Stronger than expected summer job creation may force the Fed to at least consider a hike at the September meeting (July is likely off the table due to Brexit), though the market is still betting on December as the only quarter-point increase for 2016.
MARKETS: Brexit uncertainty may test the third longest bull market in history, but in the first full week of trading, investors took the news in stride. Bond yields hit all-time lows around the world last week. The yield on the 10-year U.S. Treasury note touched a record low of 1.385%, breaking its previous intraday low of 1.389% set on July 24, 2012, when it also set a record closing low of 1.404%.
THE WEEK AHEAD:
Mon 7/4: INDEPENDENCE DAY-US MARKETS CLOSED
Tues 7/5:
U.K. Conservative Party lawmakers begin balloting to elect a successor to David Cameron as prime minister
10:00 Factory Orders
Weds 7/6:
8:30 International Trade
10:00 ISM Non-Mfg Index
2:00 FOMC Minutes
Thursday 7/7:
U.K. Conservative Party leadership holds second vote
8:15 ADP Private Sector Job Report
Friday 7/8:
8:30 June Employment Report
3:00 Consumer Credit
Saturday 7/9:
Group of 20 trade ministers meeting in Shanghai
Since voters in the United Kingdom decided to leave the European Union last week, US consumers, investors and even travelers are trying to understand the impact of the historic Brexit vote. The question I continue to field is" “What does Brexit mean for MY money?” Unlike the run of the mill correction that we saw earlier this year, the UK’s exit from the 28-member union is an “exogenous event.” That means that it has come from outside the predicted modeling system that most economists utilize and as a result, can have significant, negative effects on prices. For example, the British pound sterling tumbled to its lowest level against the US dollar in thirty years and global stocks have fallen sharply. Meanwhile, bastions of safety like US treasuries, German bunds and gold are rising. Still, large financial firms are saying that so far, there is no liquidity crisis and markets are functioning well.
While that is indeed good news, let’s not repeat old mistakes. Consider this: nine years ago this month, June, 2007, an unexpected event occurred: investment banking firm Bear Sterns (BS) had to bail out two of its hedge funds that were collapsing because of bad bets on subprime mortgages. At the time, there was no mystery surrounding the risks that were emerging, though 15 months later, there were complaints that the financial media had failed to sound the warning alarms.
In fact, the New York Times said the crisis at BS stemmed “directly from the slumping housing market and the fallout from loose lending practices that showered money on people with weak, or subprime, credit, leaving many of them struggling to stay in their homes. Bear Sterns averted a meltdown this time, but if delinquencies and defaults on subprime loans surge, Wall Street firms, hedge funds and pension funds could be left holding billions of dollars in bonds and securities backed by loans that are quickly losing their value.”
Let’s put that seemingly small BS event from nine years ago into context:
I am not suggesting that Brexit will cause a financial crisis, but we should carefully consider what dangerous spillover effects could occur. While US banks are better capitalized than they were leading up to the fall of 2008, the UK and European banks do not look nearly as healthy. In the two trading sessions after Brexit, the European Bank index lost about a quarter of its value and UK based banks did even worse.
If you are traveling to the UK or Europe or you enjoy imported cheese and wine, you might be delighted to see the US dollar strengthen. But as the dollar rises, emerging markets like China could come under pressure, echoing what happened in the first six weeks of the year, when global stocks tumbled and US stock corrected. And if European growth slows, its weaker economies (Portugal, Italy, Greece, Spain) will once again be at the heart of sovereign debt questions.
In terms of the US, analysts at Capital Economics say the UK and the EU account for 4 and 15 percent of US exports, respectively. If both regions go into a recession, Brexit could shave 0.2-0.3 percent from the current US growth rate of 2 percent. But estimates can be rocked by emotions. A US-based multinational may hold back on hiring everywhere to see how things shake out post-Brexit. For US exporters, the rising US dollar will create a drag on competitiveness in overseas markets and could potentially trigger lay offs at home. And if non-affected businesses and consumers start to feel unnerved, they too might pull in the reins, causing the US economy to slow down more than anticipated.
Amid all of this uncertainty, anxiety levels are rising, testing the third longest bull market in history. Some may feel butterflies and may even be tempted to sell. Remember that market timing rarely works because even if you sell and manage to steer clear of the bear by staying in cash, you will not be able to reinvest dividends and fixed-income payments at the bottom and you are likely to miss the eventual market recovery. There is clear evidence that when investors react either to the upside or downside, they generally make the wrong decision.
The best way to avoid falling into the trap of letting your emotions dictate your investment decisions is to remember that you are a long-term investor and do not have all of your eggs in one basket. Your diversified portfolio strategy, based on your goals, risk tolerance and time horizon should help you fight the urge to react to short-term market conditions. It’s not easy to do, but sometimes the best action is NO ACTION. And don’t forget that if you are still contributing to your retirement plan or funding your kid’s education fund, take comfort in knowing that you are buying shares at cheaper prices.
If you are really freaked out about the movement in your portfolio, perhaps you came into this period with too much risk. If that’s the case, you may need to trim readjust your allocation. If you do make changes, be careful NOT to jump back into those riskier holdings after markets stabilize. Finally, if you need access to your money in the short-term (within the next 6-12 months), be sure that it is not invested in an asset that can fluctuate.
It’s official: UK voters decided to leave the European Union. Brexit was a seismic and unexpected result, which caught global investors off guard (more on that later). The big question: What happens next? As noted in Brexit Q&A, the “Leave” win means that the UK government must decide when to invoke Article 50 of the Treaty of Lisbon, which outlines the legal process by which a state can withdraw from the EU. Prime Minister David Cameron announced that he would step down in October and suggested that the next Prime Minister should initiate the Article 50 process. Once it does, the withdrawal negotiations would begin. At a minimum, it would take two years, but that time frame could be extended by unanimous agreement among the remaining 27 member nations. During the process, the UK would obey EU treaties and laws, but not take part in any decision-making.
The biggest issue is how trade would be handled between the EU and the rest of the world. According to law firms Davis Polk and Sullivan and Cromwell, two powerhouses that advise multinational corporations, there are three basic options for the UK’s exit, based on existing models. Leaders of the Leave movement did not advocate a specific alternative during the campaign, so it is unclear which model they will follow.
Total exit: the UK leaves the EU and does not continue to benefit from any part of the single market. The UK either relies solely on the rules of the World Trade Organization (which include rules governing the imposition of tariffs on goods and services) as the basis for trading with the EU or negotiates a new bilateral trade deal with the EU.
The Norwegian model: the UK leaves the EU but joins the European Economic Area (EEA). The EEA is made up of 28 EU member states and three countries, which are not EU member states (Norway, Iceland and Liechtenstein), and extends the free movement of goods, services, capital and persons beyond the EU to those three countries. Under this arrangement, the UK would not benefit from or be bound by the EU’s external trade agreements. It would have to make significant financial contributions to the EU and continue to allow the free movement of persons, two of the Leave camp’s main criticisms of EU membership.
The Swiss model: the UK leaves the EU and does not join the EEA, but enters various bilateral agreements with the EU to obtain access to the internal market in specific sectors, rather than the market as a whole. Switzerland has negotiated a large number of sector-specific bilateral agreements with the EU and has access to some parts of the single market, but is excluded from the single market in some major sectors (for example, the financial services sector).
BREXIT impact on US companies: The choice of model will impact US companies that have a large presence in the UK. One sector in particular that is left hanging is financial services, because under the “Total Exit” or “Swiss” models, there would be no right for UK-authorized firms or individuals to provide financial services in the EU on a “passported” basis. This is critical because most US financial institutions currently use a UK-authorized person and/or entity to provide financial services elsewhere in the EU. Without passporting, the companies would need to obtain authorization from a EU member state by either establishing an authorized branch or subsidiary in that state.
Loss of passporting would create legal, compliance and infrastructure headaches, not to mention steep costs to US firms. Additionally, many US banks make London their hub across the pond because of the access to talent, support services and the use of English as the global language for financial services. So while many Wall Street operations and legal departments are scouting locations in Dublin and Frankfurt, they are hoping that they will not have to move the majority of their people and offices.
MARKET REACTION: At 1:00am Friday morning, when the referendum results were becoming clear, the first thing I did was to look up when US stock market circuit breakers are triggered. At that time, the British pound sterling tumbled to its lowest level since 1985, US stock futures were getting crushed and the mad dash to safe assets like US treasuries, German bunds and gold was under way. The news from trading desks across the globe was that unlike in 2008, there was no liquidity crisis and markets were functioning fairly well.
At the end of the trading day, the damage was not too bad, considering the magnitude of the news. US stock markets were down 3.5 to 4 percent, Treasury bond prices jumped and yields fell; and gold added 4.6 percent. The action in the UK and Europe was instructive: the UK FTSE 100 index fell 3.1 percent, boosted by export-driven companies that would benefit from a weak Pound. The larger FTSE 250 index fell 7.2 percent, its worst one-day drop percentage fall since Black Monday in 1987.
Meanwhile, European exchanges also slumped. The German DAX fell 6.8 percent and the French CAC-40 fell 8 percent. Investors are clearly worried about the impact of the BREXIT on the European economy and likely understand that a protracted and nasty divorce could push the EU into a recession.
CENTRAL BANK TOOLBOX: Over the past eight years, amid the financial crisis, worries about Greece and a generally sluggish economic recovery, global central banks have been able to soothe markets with interest rates cuts (sometimes going negative) and unconventional tools like bond buying (“Quantitative Easing”). This time around, though, the central bank toolbox may come under pressure. Global interest rates are already close to zero and bond buying may not do the trick if the BREXIT shock causes individuals and businesses to shut down and do nothing for a while.
That said; the next Federal Reserve occurs July 26-27 and if the cloud of EU uncertainty has prompted a further sell off in stocks, a rise in the US dollar and general mayhem around the globe, don’t be surprised if Janet Yellen and company reverse course and explicitly say that the central bank is not going to keep raising rates and would consider undoing last December’s hike and launching QE IV, if conditions worsen.
Frexit, Italeave, Czexit: Some economists and traders are concerned that because the world was not prepared for BREXIT, there could be a domino effect, whereby other nations will choose to leave the EU. Even a coordinated central bank intervention could not fight off the power that a fraying EU might create throughout the world.
And now, the weather: After talking to a number of traders, economists, bankers and analysts, it is clear to me that very few of them thought that BREXIT would occur; as a result, they are still in a bit of shock. While Friday was not terrible, the short, intermediate and long-term implications of BREXIT are simply unknowable. Like the weather in London, it looks we will be forced to live with lots of clouds, occasional storms and hopefully, a ray of sunshine.
MARKETS:
THE WEEK AHEAD:
Mon 6/27:
8:30 International Trade in Goods
10:30Dallas Fed Mfg Survey
Tues 6/28:
8:30 GDP
8:30 Corporate Profits
9:00 S&P Case-Shiller HPI
10:00 Consumer Confidence
Weds 6/29:
8:30 Personal Income and Spending
9:30 Janet Yellen on panel at ECB central banking conference in Portugal (Panelists: BofE Gov Mark Carney, ECB Pres Mario Draghi, Brazil Central Bank Gov Alexandre Tombini)
10:00 Pending Homes Index
Thursday 6/30:
9:45 Chicago PMI
Friday 7/1:
Motor Vehicle Sales
9:45 PMI Manufacturing Index
10:00 ISM Mfg Index
10:00 Construction Spending
What is Brexit? Borrowing from the mash up “Grexit,” which referred to the potential exit of Greece from the eurozone, “Brexit” is used to describe the referendum ("Should the United Kingdom remain a member of the European Union or leave the European Union?"), to be held on June 23rd. British, Irish and Commonwealth citizens who live in the UK, along with Britons who have lived abroad for less than 15 years, will determine whether to “leave” or “remain” in the EU. What is the European Union? In 1957, the Treaty of Rome created the European Economic Community (EEC), or "Common Market," which was the basis of what is now known as the European Union, or “EU”. The idea behind the EU was that countries that trade with one another become economically interdependent and more likely to avoid conflict, a pressing concern in the shadow of two world wars on the Continent.
There are 28 member-nations in the EU: Austria, Belgium, Bulgaria, Croatia, Republic of Cyprus, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, Netherlands, Poland, Portugal, Romania, Slovakia, Slovenia, Spain, Sweden and the UK.
What is the Eurozone? The eurozone is a subset of the EU that shares a common currency, the euro. The Treaty of Rome, the Single European Act of 1986 and the 1992 Maastricht Treaty all paved the way for the Economic and Monetary Union (EMU) and a single currency -- the euro.
The currency was launched in 1999 for electronic transactions, and physical notes and coins were first issued in 2002. The 11 initial members of the EMU included: Austria, Belgium, Finland, France, Germany, Italy, Ireland, Luxembourg, Netherlands, Portugal, and Spain. Greece joined in 2001, followed by Slovenia in 2007, Cyprus and Malta in 2008, Slovakia in 2009, Estonia in 2011, Latvia in 2014 and Lithuania in 2015. Today, the euro area numbers 19 EU Member States.
Do all EU countries use the Euro? No. Three of Europe's largest economies -- Norway, Sweden, and the United Kingdom -- do not use the euro. Great Britain maintains its own currency, the Pound Sterling.
What is the “Leave” Argument? Those who are in support of leaving say membership in the EU has led to high levels of immigration (one main tenant of EU membership is "free movement", which means you don't need to get a visa to go and live in another EU country); too many rules and regulations; and high costs. UK Treasury figures show that net contribution to the EU (including a negotiated rebate and money that is paid but sent) is £7.1 billion or $10.2 billion. The Leave argument is that not only would the UK save that money, but as Europe’s second-biggest economy, it could negotiate a better trade deal as a non-EU member.
What is the Remain Argument? Trading with other EU nations, as well as an influx of immigrants is good for the U.K. economy, according to the Remain camp. Additionally, there is a fear that if the U.K leaves the EU, international businesses will flee the UK, in search of a home in another EU nation.
What’s Expected? Recent opinion polls have shown a dead heat, but bookmakers’ odds still point to a victory for “Remain”.
When will we know the results? Polls close at 22:00 GMT (6:00ET) Thursday, 23 June and most believe that it will take about 6 hours to get a clear picture of who won, especially if the vote is as close as anticipated.
If “Leave” wins, how long will it take for Britain to leave the EU? Following a vote to leave, the UK government would have to decide when to invoke Article 50 of the Treaty of Lisbon, which outlines the legal process by which a state can withdraw from the EU. Once it does, the UK and the EU would begin to negotiate a withdrawal agreement, which at a minimum would be two years.
During the negotiation process, the UK would obey EU treaties and laws, but not take part in any decision-making, as it negotiated a withdrawal agreement. That period could be extended by unanimous agreement, which is why many analysts believe that it could take four or five years to tackle the myriad of issues, the biggest of which is how trade would be handled between the EU and the rest of the world. If the UK wanted to rejoin the EU, it could, but it would have to start the process from scratch.
If “Leave” wins, would other nations, like Greece, follow? Brexit could potentially be the first step towards the break-up of the EU, or the exit of one or more countries from the euro. Additionally, many believe that Scotland would launch a second effort to leave the U.K. – the first occurred about two years ago.
What are the market implications of Brexit? A vote to leave would negatively impact the British Pound, UK interest rates and stocks. According to the IMF, Brexit would likely plunge the UK into recession and could spark a stock market crash and a steep fall in house prices. It could also potentially create spillover effects in global markets, as uncertainty, the enemy of investors, would dominate. If Leave wins, economists expect UK GDP to shrink by 1.5 to 4.5 percent by 2021.
What are the political implications of Brexit? A Leave vote could see the departure of Prime Minister David Cameron, who started this risky process after he won the 2015 general election. Cameron was responding to pressure from his own Conservative MPs and the UK Independence Party (UKIP), both of which had heard from disgruntled constituents about the issue of EU control.
MARKETS: It was a “risk-off” week, as the combination of loose global central bank policies, worries over economic growth and fear over Brexit pushed investors into the sovereign bond markets. On Tuesday, the yield of the German 10-year bond fell below zero for the first time ever. The S&P 500 and NASDAQ had their largest weekly drops since late April.
THE WEEK AHEAD:
Mon 6/20:
Tues 6/21:
10:00 Janet Yellen’s semi-annual testimony before Senate Banking Committee
Weds 6/22:
10:00 Janet Yellen’s semi-annual testimony before House Financial Services
10:00 Existing Home Sales
Thursday 6/23:
UK BREXIT VOTE
10:00 New Home Sales
Friday 6/24:
8:30 Durable Goods Orders
10:00 Consumer Sentiment
