What a crazy few weeks in world markets! The second quarter was shaping up to be a decent rebound from the sloppy start in January, but the markets made an abrupt about-face and sold off dramatically in the wake of the vote in Great Britain to leave the European Union. The “Brexit” vote was a surprise to most speculators/traders who had taken the consensus bet that it would never actually prevail. The consternation and teeth gnashing emanating from the “elites” in both Europe and the U.S. was so pervasive and fierce you would think the world as we know it was truly ending! In our view, it was another case of “here we go again.”
How many more tales of impending doom, which simply don’t come about, do we need to hear before the sober world of investors takes hold? Somewhat surprisingly, the market may finally be tiring of these pundits of pessimism since, as of this writing, barely three weeks after the June 23rd Brexit vote, the stock market averages have powered to new highs, ignoring the sirens of the elite class.
On the day of the Brexit vote results, we posted on our blog (entitled “Don’t Fear Brexit”) that we believed the vote was a significant positive step toward rebuking the decades-long degradation of Western Europe at the hands of “democratic Socialism.” A system that has resulted in perpetual sub-par growth throughout the European continent.
It was our stated belief in 1989, when the talk of a “United States of Europe” was taking hold and the stage was being set for the European Union’s formation, that it would be extraordinarily difficult to achieve monetary and economic union without political union. Essentially, without a U.S.-style constitution the project was destined to have major problems. While we certainly argued for the benefits of a common currency amongst nations so closely tied geographically and economically, it was that stubborn political and even cultural difference amongst these same countries that we thought would be at least problematic and potentially fatal to the union. If those political issues were not eventually dealt with (sooner rather than later) at some point a break would ensue. The beginnings of that break appear to be underway.
The lack of a truly “democratic” political structure, and, in fact, what turned into the equivalent of “taxation without representation” via the bureaucratic, unelected European Parliament in Brussels finally reached a breaking point as the British people decided they were tiring of having mandates forced upon them by people they had no say in putting into power. Worse, these same bureaucrats advocated a level of socialistic control over the Europe that has resulted in the weak economic growth, to which we previously described, and a series of financial train wrecks such as the Greece mess, which we have discussed at length in past commentaries.
To reiterate, it is our view that the events in Europe are a very positive step in beginning the healing process from decades of mismanagement in Europe. However, we would strongly emphasize that this in no way means that we are taking an “anti-globalist” view in our positive reaction to these events. It does not mean we favor trade protectionism in any form. We thoroughly endorse the free flow of trade amongst nations and would agree that a positive byproduct of the European Union has been the role it has played in keeping peace on the European continent for the longest time in world history. So it is imperative that one not misread our support of Brexit and a retooling of the order in Europe as support for those forces that would throw up tariffs and other protectionist obstacles in the way of economic progress, or use misplaced nationalism to allow for the rise of bad actors the likes of which caused two world wars in Europe.
However, as was our view in 1989, a U.S. of Europe, along with a constitution and bill of rights, is not going to happen across the European continent any time soon. Probably never. That being the case, in order for truly free enterprise to flourish, it is crucial that those forces propagating the exercise of freedom, in all forms, be allowed to flourish. If those forces emanate from places like a sovereign Great Britain, a country with a recent history of promoting free enterprise, then that is a step in the right direction. Perhaps it is enough to stem the tide and swing the pendulum back towards policies that are less intrusive on businesses and citizens alike, and promote economic growth through low taxes and easy access to capital markets across the globe. Maybe it will encourage a similar movement in the U.S of America, which is growing like Europe of the last five decades (weakly) under the weight of ever more regulation and taxation; a topic we have harped on in these commentaries for years. For while great companies can still succeed in spite of these intrusions, they would flourish all the more in an environment more favorable to business formation.