• Another view on why Brexit happened, and why central banks should be blamed
Article:

Another view on why Brexit happened, and why central banks should be blamed

13 September 2016

Dawie Roodt, Chief Economist |
Charl Celliers , Managing Partner |

It came and went, the UK is on its way out of the European Union (EU), or maybe not, or maybe only later, or maybe only gradually or kind of. What form Brexit eventually will take on is less important than the underlying reasons supporting such an obviously irresponsible decision. Why would any country decide to leave a union when other countries are queuing to join the EU?

And this is probably not the end of the political re-alignment taking place in Europe, and in many other places in the world. Chances are that the Scots will decide to exit the UK, and the Northern-Irish may also decide to leave the UK and join Ireland. Brexit may be the last chapter of the greatest empire the world has seen, from a small insignificant island called England, to the great British empire, all the way back to a small island called England.

But there is more. What about the Catalans, will they opt for independence from Spain, or the Basques or northern Italy? What if the Netherlands or France also vote to exit the EU? Geert Wilders and Marine le Pen both threatened exactly that if they should come to power!

The political re-alignment is everywhere. The Philippines voted for a foul mouthed radical, Rodrigo Duterte, as president – the Philippine version of Donald trump. Talking of Trump, isn’t Trump perhaps the American version of Putin, just without the muscles? And how on earth is it possible that Bernie Saunders, a socialist, made it that far in the American precedential race? America, capitalist’s hinterland!

Perhaps it is because the natives are restless. They are restless because the establishment has forgotten them. Trump is popular because he is anti- establishment. The mid-low classes, especially whites, support him because they lost their jobs to the Chinese, or to robots, or to weak growth. The same is happening to the Europeans. They were promised that bigger is better in the EU, they were promised peace and prosperity, they were promised freedom.

What they got was mass immigration, weak growth, unemployment, austerity, and, especially for the Brits, a political elite in a far off city called Brussels prescribing to them and threatening their sovereignty.

I think one day we will stand back and look at the past thirty years and ask ourselves, why haven’t we seen it?

The Chinese economic miracle drove commodity prices to dizzy heights as it sucked in all the commodities emerging countries could dig out of the ground. But they also sucked in jobs, away from the mid-lower classes of the West. But it was fine, initially, because property bubbles kept the West happy and kept demand strong for Chinese exports.

Until the financial crisis when the property bubble burst and left the West with a major debt overhang and weak economies. Fiscal authorities reacted by spending and borrowing like there is no tomorrow, yet economies remained fragile.

All that remain was for central banks to do their magic. Dramatic cuts in interest rates, to even below zero, running their printing presses overtime to create money with exotic names like quantitative easing, and using this money to buy state debt. The result was falling yields and rising prices of financial instruments.

Did it work? No! economies remain in the doldrums, unemployment remains high or of inferior quality (like in the US) and the natives were getting restless.

But are there any winners? For sure. Those with financial market exposure, the rich, the banks, large corporates, the well connected, the establishment. And the poor and the unemployed, those without exposure to the financial markets can see how the world is passing them by, how robots and “globalisation” are taking their jobs, and how their meagre savings shrink in an environment of low or negative interest rates. And for the Europeans, how their political power got eroded by some amorphous entity far far away, called the EU.

Of course, this is only part of a bigger story, some greater narrative. Many more forces and changes are happening and the world will always be in a state of flux. But, I do believe that we are experiencing unusually dramatic changes. Political, social, demographic, technological and much more. And Brexit is only the opening scene.

Incidentally, I am very much in favour of the EU. But I do think that the political elite, worldwide, have forgotten who they actually work for and I also believe that global macroeconomic policies have gotten us into the hole in which we find ourselves. But I also believe that amazing changes will continue to happen and that humankind will always find a way to better his living conditions. In the process some pain is inevitable.

What to do with your investments

I’ve written about it before, market risk is real and unlike other forms of risks we don’t have a choice, but to learn to live with market risk. I also do expect some market correction, unfortunately I just don’t know when.

A totally risk-averse person may want to take as little risk as possible, but by doing so, such an investor will in fact guarantee a loss on his investment, the money market is an example with interest rates so low that tax and inflation is not even compensated for.

The best any investor can do is to make sure not to take any institutional risk. Make sure your asset manager is reputable, registered and experienced. Don’t fall for unrealistic returns and don’t get seduced by technical analysis, complicated investments and hot tips. Know your asset manager, understand his investment philosophy and process and make use of a good financial advisor.

Do that and sleep sound.

Exiting news

We are in the process of finalising a very exiting transaction. The result will be a totally revamped private client division with a high-touch feel. Watch this space, I will make sure you are the first to know!

Dawie Roodt