The market was essentially flat this month. For the quarter, everybody made money.
Brexit and the Stock Market
The market this month gave me an obvious topic for this newsletter. Fear. Or more specifically stark raving panic. The UK voted out of the European Union. Everybody then screamed and the market went down 900 points in two days. Of course, nobody understood what being in the EU meant economically. Also nobody understood what the vote meant. Of course, fear does not care about those things. The market crashed and the future looked black. What happened next is more interesting. The fear ran out. The people who were going to sell did so. Lord bless them because they are the people who always lose money. Because of them, other people make money. In three or four days, the market recovered everything it lost.
What you just saw is what I am calling a fear pit. The market has two emotions. Greed and fear. When greed goes irrational, it’s called a bubble. There is no established word for irrational fear, so I am going to call it a fear pit.
Advantages and Disadvantages of Brexit
The European Union provides certain benefits and disadvantages to the UK. The main advantage is free trade. The main disadvantage is excessive regulation. Because of the regulation, the UK was losing its independent power. Large movements of refugees into the country was the latest sign of that. The country staged a popular vote to leave the EU. In general, the political elites and the big cities voted to stay in the EU. Everybody else said get out.
What Happens Next
What happens now is that the government will stall and then notify the EU to start a two-year negotiation process to leave. The two-year period can be extended over and over. The prime minister has said he will resign in October. He said the next government would have to notify the EU. That means the two years will not even start until October or November at soonest. The political class does not want to leave. Do you have any doubt that a bureaucrat can stall for a long time? Eventually, they will leave and what will that mean? Most likely, The European Union will carve a category for the UK like they did for Norway. Not part of the EU, but with free trade.
The vote was non-binding. I repeat. It was advisory only. In short, the vote means absolutely nothing. Economic trade between the US and the UK will be unchanged. Trade between the EU and US, unchanged. I doubt there will be any change to the world economy.
More Effects of the Fear Pit
Fear does not think logically like what I just said. I received several emergency contacts to sell. Fear pretends to have a logically face, however. “Because international trade will collapse, we will go into a recession” is one of several things I heard. It is a fake logic. It is an excuse so that you can do what your stomach is already telling you to do. Every news report and talking head said “disaster.” I must really be stupid not to listen. I managed to stop these clients from selling out. You’re welcome by the way.
My game is played by following a long term plan. It is about discipline. The emotional swings either up or down are destructive. The talking heads are destructive. They amplify the emotions so that they can be relevant. Boring does not sell newspapers. The emotion leads you to rush into and out of the market. Always too late and always with lots of commissions. Follow the long term plan instead. I did rebalance, however. If the world is going to heck, it is a good time to pick up a bargain.
Sure, I was frightened. It felt like my entire future was at stake. What if I was wrong? I felt that, but knew that I was not wrong. My future was unchanged. Yours was unchanged also.
Always face into the wind my friends.
Daniel Dollinger CPA CFP®
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Questions for the comments
Did my explanation make sense? Do you agree or disagree with what I said?