The headlines — the sheer number and timbre of them — look horrifying. Britain is leaving the European Union (aka “Brexit”), which apparently is tantamount to the entire island plunging into the ocean, never to be heard from again.
The Brexit isn’t just a Britain thing, though. As is the case with most countries, the U.K. has trade ties all over the globe, including the United States. If Britain hits a self-induced economic headwind, then that also means U.S. companies could find weaker demand for their products and services. Never even mind the adverse impact on the U.S. dollar.
That’s why the S&P 500 is down more than 3% today in the wake of the Brexit vote.
What if, however, the potential economic pitfalls of a Brexit have more bark than bite?
Brexit Reality Check
The intricacies of the Brexit vote need not be rehashed. What does need to be made clear, though (because it hasn’t yet), is the proverbial rest of the story.
In a word, no — this isn’t 2008’s subprime lending crisis again. Nobody cared to believe 2008’s meltdown was coming, even when the signs were clear. Once it started, we were powerless to stop it.
The Brexit, in contrast, is more than manageable.
First and foremost, the country’s economic leadership has at least two years to hammer out what the end of its EU-driven trade agreements will look like. That also gives Britain two years to piece together new trade agreements.
And that might be the most critical detail investors are overlooking.
Broadly speaking, investors and concerned professionals alike all over the world tout the importance of trade among the EU members countries. And to be fair, the organized union has facilitated lots of trade for Britain. Goldman Sachs recently pointed out of the total trade conducted by the companies in the FTSE 100, 80% of it was conducted with foreign partners.
That’s a lot… but it’s not as if it’s all going away. Those customers will still need supplies, goods and services. They’ll just arrange that trade outside the confines of the EU’s oversight and mandate.
Sure, some agreements may not be renewed. Some trade will be lost forever. But that’s not necessarily a bad thing.
Not that the United States isn’t in the same predicament, but Britain of late has been digesting a significant amount of trade imbalance. For the first four months of the year, Britain’s imports exceeded its exports to the tune of about £13.3 billion. And that number is getting bigger.
While not inherently problematic, in some regards (too many regards) such an imbalance unduly subsidizes trade partners by sending money earned in Britain elsewhere in Europe. To what extent the EU has mandated this “share the wealth” approach isn’t clear, but it has to be some.
By leaving the European Union, Britain now does its own deals, and walks away from ones it doesn’t like. That’s called free trade, and it’s an offshoot of capitalism. It works. Less interference is almost always better than meddling when it comes to finding the best way to make the most money.
It will work especially well for Britain and any other countries that follow suit too, for one simple but significant reason: That is, as much as the EUs leadership would like to believe that a country and a continent can share an economy but also maintain their respective borders — and that a common currency will work even while most member countries also maintain a national currency — is short-sighted.
The reality is, each member nation of the EU has its own economic policy, tax policy, trade policy and fiscal policy. Yet each member of the European Union is also largely subject to the bloc’s standards and requirements, and largely forced to trade with the euro even though the euro has a relatively different value from one country to the next. The overlap never worked great, but the intricate link become increasingly difficult of late.
Just ask Germany after the Greece debacle.
Spain doesn’t entirely disagree, either.
The EU, which was a noble, grand idea at one point, has become an overly tight collar in too many regards, stifling economic growth as much as encouraging it.
The Bottom Line
Regardless of all the political posturing we’ve already seen and the rest that’s sure to come, the reality is, most observers have presumed what has been lost by the exit of Britain from the EU won’t be replaced by any other means. It will be replaced; capitalists always find a way to trade. It happened before the EU existed, and it will happen after the European Union no longer exists.
So again, no, the Brexit isn’t going to destroy Britain or the global economy, just like the Fukishima nuclear meltdown was supposed to but didn’t, just like North Korea’s first missile tests were supposed to but didn’t, just like swine flu was supposed to but didn’t, and just like a few dozen other supposedly-horrible scenarios ended up meaning very little when all was said and done.
It will incite some volatility. In fact, it already has. The British pound has plunged between 4% and 8%, depending on the comparison currency. Thing is, that plunge alone has already made British-made goods 4% to 8% more affordable to potential trade partners.
We can afford to have a little faith that companies and country’s just won’t shut down because of a little uncertainty. It never has before.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.