‘The inherent vice of capitalism is the unequal sharing of blessings; the inherent virtue of socialism is the equal sharing of miseries’ -- Winston Churchill
Britain is considered the birthplace of freedom with the Magna Carta. It is responsible for the spread of joint stock companies and capitalism with the East India Company, from which the United States is partly derived from in the form of the Plymouth joint stock group.
On Thursday, the feisty Brits decided to take history in their own hands yet again by voting on a referendum to leave the European Union. Bookies in the UK gave long odds on giving the rest of Europe the finger, laying up to 1-10 on a stay wager. Pollsters had ‘Remain’ winning by as little as one or two percent, but as much as seven or eight even on the day of the vote.
Nope, not even close, as the sentiment against the EU’s oppressive rules on trade, immigration, and for self determination overwhelmed whatever logic there was regarding the efficiencies of a large market of countries.
Churchill was one of the great leaders in the history of the world, and quite interestingly, incredibly funny and wise. Oh, I am sure Mr. Churchill is having a few drinks and champagne in pondering the result, bless his heart. For those of us who are looking at the ramifications, they are vast, front and center, and imminent.
First, regarding the implications for financial markets, the immediate questions revolve around currencies and the stability of the European Union. Volatility in the currency market was enormous on Friday, double what it was when the pound crashed when George Soros famously made a billion dollars many years ago.
The pound was down 8% on Friday, and fell to a nearly thirty-year low against the dollar. Some traders believe more pain is in store, and with leverage so extensive in the currency markets (up to 50:1), historically it has been a root cause of selling in other asset classes, like, of course, stocks.
It will take up to two years of negotiation for the Brits and Euros to decide on how to resolve their affairs. In the meantime, the other members of the European Union who are not necessarily in love with the current state of affairs are now lining up in different ways to challenge the existing structure. The Netherlands, France, Italy, Greece, Spain, and Portugal all are planning on following their good friends, the Brits, on the way out.
As such, while the pound is trading at historical lows, the euro currency may ultimately be facing its existential threat. Much of the reasoning for why Britain should leave was based on trade imbalances favoring the rest of Europe, and these conditions are pervasive in many of the other participating countries. Germany is the massive beneficiary of the EU, so Mrs. Merkel has the most to lose if the other members decide to take a hike as well.
The leadership in Brussels wants a quick negotiation with the Brits to set an example for the rest of the members. Good luck with that, as outgoing British Prime Minister Cameron indicated everything is on hold until October when new leadership is picked.
In the UK, Scotland voted by 62% to stay in the European Union, and now it looks like the Scots will want to leave the UK. Ladies and gentleman, we have a mess, pure and simple, and it will take time to get it sorted out.
Many well-known investors like George Soros and Stanley Druckenmiller have been long gold, and they benefited as it gained $50 yesterday. The dollar saw strength and oil fell a touch. With all the questions about what follows, it is hard to believe gold would not be a safe haven. I know, I know, now you tell me.
Here in the United States, one implication is that Janet Yellen and the Federal Reserve now have cover to do nothing on the interest rate front for the rest of the year. In specific company news, Elon Musk decided to bail out his cousins at Solar City as Tesla (NASDAQ:TSLA) made a bid for the debt-laden leaser of solar panels.
Investors hated the move, and any chance of an imminently cash-flow positive business for Tesla went out the window with the acquisition offer. In fact, the investment community realizes Tesla must now raise capital, resulting in more dilution for existing shareholders. You like Tesla, eh? Good luck with it. In retail, Bed Bath & Beyond (NASDAQ:BBBY) reported a poor number, as the pain in the sector is wide and deep.
In South America, Venezuela is turning extremely violent as food shortages and country-wide restrictions on all kinds of necessities have crippled the country. If oil does not turn higher quickly, it is not inconceivable to see some kind of badly needed leadership change. At the very least, a referendum for an election looks probable.
India decided to lift their limitations on foreign direct investment, which should help plenty of companies looking to control their destiny in that major country.
Finally, last week the Cleveland Cavaliers won the NBA world championship in a great seven-game series with defending champs the Golden State Warriors. After a fifty-three-year drought, the Lebron James made it happen. You have to give him a great deal of credit; he showed he is a man of great talent, and just as important, integrity, as he made things right for the city of Cleveland.
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