I have examined many of the economic arguments about why Britain will suffer if they exit (including severe recession), and find few of these credible. It's not like trade between the UK and the EU will cease. In fact, the UK will be freer to negotiate trade deals than it is today under EU rules, and likely will end up with better ones. The only real short-term economic question is whether or not Brexit itself will have psychological consequences on the population and businesses which might negatively impact consumption and investment decisions. Let me be the first to point out that Brexit psychology may actually have a positive impact.
Due to the unexpected shock of Brexit, we can expect higher levels of market volatility, at least for a week or two, and a move toward safer haven assets, including the dollar and US Treasury securities. If there is a dramatic and permanent strengthening of the dollar as a result of the flight to safety, there could be a renewed negative impact on US manufacturing exports, but worse, it could start another round of currency devaluations (especially the Chinese yuan). Whether or not any of this occurs is highly speculative, and really not worth more than a mention so that we are cognizant of the possibilities. Once the markets accept Brexit as a reality, volatility will calm, and the move toward safer haven assets will likely reverse.Recognition shock at the Fed
Recognition shock also occurred at the Fed in mid-June. Economists have always relied on historical patterns when analyzing data or making forecasts. Not anymore! Since the recession, there have been epic changes in the way people move around, spend money, borrow money, get married, have children, etc.; and this, together with the aging population, has played havoc with economic modeling, expectations, and market volatility. We have had zero interest rates for eight years, and the Fed, using models based on historical data, has been consistently wrong about the future path of the economy. As a result, it has, of late, roiled markets with its threats of raising rates. Suddenly, in June, after seven years of faulty forecasts, they have finally recognized that future economic growth will be slower than what their models were predicting, and, therefore, interest rates will be lower for longer. Going forward, we can expect less volatility around Fed meetings, as it is more likely that Fed economic forecasts will more closely mirror what the market sees. It appears that the Fed and markets are now in agreement that 1 to 2 percent growth is the "new normal" for the US
Recognition shock is rare. Sometimes it roils markets and increases volatility, like Brexit. Sometimes it calms markets and reduces volatility, like the Fed's recognition of the new normal economic growth rate and the consequences for future interest rates.
Robert Barone (PhD, Economics, Georgetown University), an adviser representative of Concert Wealth Management, is a Principal of Universal Value Advisors (UVA), Reno, NV, a business entity. Advisory services are offered through Concert Wealth Management, a Registered Investment Advisor. Robert is available to discuss client investment needs. All inquiries welcomed. Call him at (775) 284-7778.
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