Brexit Results are the Red Flags We Pretended Weren’t There – by Duvi Honig
British voters shocked the pollsters and betting markets by voting to “Leave” the European Union. The resulting economic repercussions are only beginning to rumble and they’re already widely described as an “earthquake.” At the time of this writing, the Dow is down about 500 points, and other major indexes around the world are down by significant margins as well.
It should be hard to believe that just recently, while Britons were at the polls, the markets were rallying. The Dow closed over 250 points higher on Thursday and oil rose to above $50 a barrel. The major players in our economy were convinced that “Remain” would win, and they priced that into their investments. Lots of everyday investors followed suit and risked capital, many with margin loans, on this outcome.
Needless to say, that turned out to be a very costly decision. What is most concerning about this investor “consensus” is that it was based on very shaky ground. Although most polls predicted a Remain result, the margins were tight. It wasn’t hard to foresee the possibility of a Leave win. Investors just wanted to believe that all is good, and all will be good, so they predicted and invested accordingly.
That is precisely what I was worried about early this week, and published a column entitled “Brexit: Our Economy May Experience Serious Volatility – Let’s Plan Now
.” We need to be honest with ourselves and recognize how vulnerable the economy is to a variety of potential happenings – and surprises. The fact that so many people aren’t being cautious and aren’t protecting themselves is a major weakness of our economy, leading to losses like the ones we’re seeing now.
It was nearly one year ago – the “Flash Crash” on August 24th – that the market also saw a historical drop; the Dow fell approximately 1,000 points. Then too, there were significant weaknesses related to China that were ignored until they had a devastating effect. Just one day prior to that crash, I felt the need to publish a column articulating some of the dangers the market was ignoring. Unfortunately it was all too prescient.
The fact that we believe what we want to believe and ignore all the red flags in front of us, is the greatest “red flag” of its own!
Most of all, the Brexit saga is far from over. We have to wait and see exactly what the long term impact of the UK decision will be. In addition, several other European countries are now clamoring for a vote on leaving the EU, which can obliterate the current structure of the entire continent. That can have inestimable economic repercussions.
What is particularly worrisome is how many people, especially in real estate, have their profitability contingent on low interest rates. The low rates we enjoy now won’t last. With the British Pound falling in value versus the dollar, the Fed may respond by keeping interest rates low for longer, or even reducing it. This may once again lull people into relying on these rates, which is very unhealthy for the long term economy.
The bottom line is this: All markets – stocks, real estate and everything else – have ups and downs. When you work or invest in a particular industry, you need to fully understand what drives it; be honest with yourself; and prepare for all eventualities. If you just ride a wave, you go down with it as well.
To clarify, my point is not to predict anything definitive, or preach gloom. As always, there is likely to be some mix of positive and negative economic news ahead. However, knowledge, honesty and caution are certainly called for in our uncertain times.
This is the perfect time to do so.
Duvi Honig is the Founder and Chief Executive Officer of The Orthodox Jewish Chamber of Commerce / J Biz Expo – a Parnassah Network company.