As America woke up and stumbled to the coffee maker investors on the other side of the Atlantic were—and are—in absolute shock. It was early this morning on the East coast when the BBC called the Brexit win and resoundingly defeated Prime Minister David Cameron immediately announced he would resign. The news splintered Britain’s ruling Conservative Party and shattered world markets.
Those who follow financial news might have tuned out early Thursday night when exit polls showed the “Stay” camp with a comfortable lead and even the leader of the “Leave” campaign said it didn’t look good. In fairness the vote was heavily partisan. If you lived in London or Scotland, the overwhelming public opinion favored staying in the EU. Outside of London and Scotland the vote was heavily in favor of the “Leave” side. Since most of Britain’s big media outlets are headquartered in London, it’s easy to see why they didn’t have a clear picture of public sentiment.
World Markets Go Nuts
Apocalyptic adjectives only dimly convey the chaos that’s ripping through world markets today. Words like “panic” and “bloodbath” only distantly communicate the reality. The DAX was down seven percent, the FTSE 100 was off five percent and the CAC 40 was down nine percent. To put those numbers in perspective, that means European stock markets reached correction territory within just hours of the news. The Japanese stock market dropped by eight percent and markets all over Asia were down by similar percentages. Dow futures are down 500 points…yes, you read that right, 500 points and the S&P 500 is down a similar percentage. The only thing saving world markets from a complete disaster is that it’s Friday.
England and Scotland Split
Scotland, which got a better deal from the EU than the rest of the U.K., voted overwhelmingly to stay. People tend to forget that the U.K. is a loose confederation of England, Wales, Scotland and Northern Ireland. The question that comes next is whether Scotland and Northern Ireland are going to stay in the United Kingdom? The Scots will likely have another referendum to decide whether they’re going to stay with the rest of the U.K.
Immigration Was the Spark for a Long-Simmering Resentment
What really got the “Leave” camp motivated was the EU government dictating how many Syrian refugees each member country was going to take. Then, to really grind it in, EU courts ruled that nations moving immigrants against their will could be held financially liable. If any one Brexit issue sealed the vote, it was immigration.
In a master stroke of political timing, Donald Trump happened to be in Scotland when the vote results were announced. He held an impromptu press conference which was mainly focused on immigration, ensuring he would be appearing on every morning news show.
Government Overreach Was the Fuel
Immigration may have been the trigger but real fuel under the Brexit fire was the massive overreach of the joint European government, headquartered in Brussels. European nations were saddled with hundreds of thousands of pages of regulations and, if there was one thing Europe didn’t need, it was more government. The Brexit vote should be a lesson on this side of the Atlantic that there is such a thing as too much regulation.
Beyond anything else, the Brexit vote is a wake-up call to anyone who thinks that the world economy follows any kind of a playbook. The vote results shocked world markets and there is no bottom in sight. Hopefully, you took our advice in the weeks prior to today to convert part of your cash to liquid hard assets like physical gold which is on a rocket ride this morning.
What we’re seeing today is just the warm-up act. There’s more panic ahead as the rest of the European Union decides whether it’s worth keeping the wounded federation going.