Wednesday, June 29, 2016

The United Kingdom’s stunning vote a week ago to exit the European Union is still rocketing around the world, sending markets into upheaval as world leaders contemplate a fresh reshaping of Europe.

Serious questions continue to surface about the future of the EU and especially whether other countries — such as France, Italy, the Netherlands, even Germany — will decide to exit the EU. Scotland and Northern Ireland voted to stay in the EU, energizing questions of whether these populations will also break free from the U.K.

The “Brexit breakup” has even sparked American activists in Texas, California and New Hampshire to consider asserting their independence from the United States — social media has exploded with cries for #Texit, #Calexit and #NHexit.

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“This is just the tip of the iceberg,” Alan Greenspan, former Federal Reserve chairman, said in an interview on CNBC on June 24, after 52 percent of Britons voted to “leave” the EU.

“The global economy is in real serious trouble,” said Mr. Greenspan. “This is the worst period I recall since I’ve been in public service. There’s nothing like it, including the crisis — remember October 19th, 1987, when the Dow went down by a record amount 23 percent? That I thought was the bottom of all potential problems,” Mr. Greenspan told CNBC. “This has a corrosive effect that is not easy to go away.”

It is unclear when the U.K. will complete its disengagement with the EU; many believe it will take two years, until 2018.

But Europe’s way forward is fraught with opportunities and upheavals, analysts Steven Blockmans and Stefani Weiss said in a detailed June 27 commentary for the Center for European Policy Studies. Already people are using the hashtag, “Bregret,” now that they have seen “the dire consequences” of Brexit, including markets in a “nosedive,” and calls for more nations to “leave,” they noted.

Financial reactions

The U.K.’s departure from the EU will require some form of restructuring of all manner of alliances on foreign relations, security, trade, tariffs, investment, travel and immigration policies.

Such high — and likely sustained — levels of uncertainty reverberated through global markets: The Dow Jones Industrial Average fell 600 points on June 24, once the British “leave” votes accumulated past the point of no return, and European and Asian markets skidded south.

Later that Friday, several Group of Seven finance ministers promised to take measures to ensure that markets would “remain resilient” and function cooperatively. But on Monday, the pound fell to its lowest level in 31 years, and European banks had their worst two-day fall on record, Reuters reported. Moreover, on June 24, some $2.8 trillion was “wiped off the value of world stocks, the biggest daily loss ever,” Reuters added.

Meanwhile, gold prices soared to a two-year high of $1,362.60 an ounce after the vote, settling at $1,322.40 an ounce. Gold futures, at $1,324.70, were bullish.

“We reassert our forecast that Gold will go above $1,900 in 2017,” editor Ned Schmidt wrote on the Value View Gold Report. Gold is “easily touching” $1,500 by the end of 2016, Naeem Aslam, chief market analyst at Think Forex, predicted to MarketWatch on June 24.

Earlier this month, a commentator at Forbes magazine — whose editor-in-chief Steve Forbes backs a return to the gold standard — said the Brexit vote, plus the presidential candidacy of Donald Trump, could create a “perfect storm” for higher gold prices.

“Gold loves a situation like this,” Tim Treadgold wrote June 17, referring to the potential breakup of the EU, the potential economic policy changes a President Trump might make, and recent confirmation that U.S. interest rates would remain low.

Gold “is the ultimate fall-back investment for a time when everything else has failed, or when the yield on conventional investments makes zero-interest bullion look good,” Mr. Treadgold wrote.

Uncertainty ahead

Many “Brexit” supporters heard — and agreed with — arguments that said getting the U.K. out of its 43-year union with 27 countries would boost its economy: U.K. inventors, entrepreneurs and businesses would flourish if the U.K. freed itself from the stifling micromanagement of elite EU bureaucrats in Brussels.

These arguments had mass appeal: In many parts of the U.K., the open markets and open borders of the EU had decimated fishing and manufacturing industries and eroded salaries and benefits.

These arguments frequently entwined with the other core “leave” argument — addressing the surging tide of immigrants, especially those with little appetite to assimilate with U.K. traditions and values.

Moreover, EU leadership was seen as merely “muddling through” multiple economic crises and bailouts; keeping uneasy relations with an increasingly muscular Russia to the east; and botching the influx of millions of refugees, many of whom seemed unable or unwilling to adjust to European ways.

“Britain can never control immigration until it leaves the European Union because freedom of movement gives other EU citizens an automatic right to live here,” the London Telegraph said in a June 20 Brexit pro-and-con list. Other benefits of leaving would be a halt to British citizens being sent abroad and charged with crimes; fresh opportunities for the U.K. to craft its own trade deals with emerging markets such as China or India; and a return to legal “sovereignty” once more.

But the U.K. also has prodigious debt, and with its current leadership in disarray — plus likely separation battles with Scottish and Northern Ireland looming — the benefits of Brexit appear to remain on a distant horizon.

Globally, the economic picture is not rosy either: Officials from International Monetary Fund to the Bank of England have publicly suggested a bearish mood sweeping the global economy, which has already been struggling with massive debt held by governments, an economic slowdown in China, and falling prices in natural commodities, such as oil, natural gas and agricultural raw materials.

On June 24, Federal Reserve Chair Janet Yellen said the U.K. departure would have “significant economic repercussions,” while Moody’s Investors Service quickly downgraded the U.K.’s debt rating and projected slightly smaller growth for it.

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