Darren walked around the school toting a small cassette tape player, an armload of books and a puzzled look gaze peering through his wire frame glasses.
The confusing thing to me was that the tape player wasn't for music, nor for recording obnoxious body noises, it was used to store electronic data. Somehow, in his computer science class, with a bunch of old boxy machines that had less capacity than the typical dollar store calculator today, Darren managed to program computer language, and store the information on the little cassette.
He was a gentle soul, friendly, and soft spoken, always ready with unusual trivia, or a kind word. But it was hard to take him seriously. His world wasn't like ours, but he saw something we didn't.
Today Darren, still a good friend, lives in California on a small rural estate dotted with avocado and citrus trees. When he occasionally works, he is a senior product manager for a large Silicone Valley firm. He speaks three languages fluently, and travels the world (on the company's dime) designing and implementing telephone software management systems. Okay, that part still sounds boring, but the life... pretty good!
Brexit - the pain and the mundane
Much like the study of history, economic realities typically draw our attention when we have something catastrophic or salacious to lay our eyes on. "If it bleeds it leads," as they say.
But the truth is, well... a fair bit more boring than all that. This leaves the sorting out of facts from Trumpisms to those with an appetite for (and in some cases, a genuine fascination with) the minutia. Enter the finance geek.
Bringing home Brexit
In a surprising and highly consequential turn, British voters have now opted to end their membership in the European Union (EU). However, we should stop short of deploying the words "shocking" or "devastating," as it had long maintained that the risk of Brexit was in the realm of 35 per cent to 40 per cent and the long-term economic and financial market consequences - while significant - are not as outsized as some imagine.
The immediate financial market response has been quite large, but these moves have already been partially unwound and we suspect the long-term market effect will ultimately prove smaller than that.
While there are very real economic and financial market consequences that emerge from this decision - mainly, the extent to which financial conditions tighten - the most important developments and risks are political in nature.
Parsing the results
From an accounting perspective, a number of explanations have been thrust forward for this surprising outcome. Weather in the heavily pro-EU southeast of England was quite poor, potentially damaging voter turnout. But turnout was similarly uninspiring in the pro-EU bastion of Scotland.
Meanwhile, the "leave" camp enjoyed a greater fraction of the vote than anticipated in areas generally expected to lean their way. In the end, it is simply the case that "leave" managed more votes than "remain."
Why have British voters opted out? There are a number of plausible explanations:
The "leave" camp has tended to focus on the allure of greater national sovereignty and the advantage of escaping the serial crises that have plagued the EU. These are legitimate reasons, even if the economy and financial markets are somewhat damaged by the decision.
To the extent that there has been a worldwide shift in sentiment - as also demonstrated by the U.S. presidential election and a host of other political developments globally - it may also have to do with the feeling that globalization has not been all it was made out to be, and that many have been left behind in an increasingly winner-take-all world.
This naturally manifests in a desire to up-end the status-quo.
Economic implications
The economic effects of Brexit can be broken into ongoing, short-term and long-term consequences:
The ongoing effect is that high policy uncertainty surrounding Brexit has already interfered with U.K. business investment over the last few quarters, undermining the rate of economic growth. This had been a key factor previously downgraded U.K. 2016 growth forecasts.
The short-term effect is that the U.K. is now at greater risk of a temporary recession. In response to the referendum result, British GDP growth, already modest, will likely suffer, at least temporarily.
Note that the U.K. will not actually leave the EU for several years, so this drag is not due to higher tariffs or diminished immigration but rather represents an anticipatory effect by businesses and households.
While the long-term effect is only moderate, it is not insignificant. The central tendency for economic models when modelling Brexit is that the British economy will be roughly two percentage points smaller than otherwise within a decade. Some models claim much more problematic consequences, but some argue that the impact could even be slightly beneficial.
Overall, the impact should be somewhat negative due to higher tariffs, less immigration and the slight diminishment of London as a financial hub. This means that Brexit hardly might shave about a quarter percentage point off growth annually over the coming decade.
Potential savings on transfers to Brussels and greater regulatory sovereignty are attractive, but do not constitute complete offsets. But the precise effect depends enormously on what sort of subsequent relationship the U.K. negotiates with the EU.
These are my comments and not those of RBC Dominion Securities. Statements are provided in good faith but without legal responsibility. A number of important factors could cause results to differ materially from those expressed or implied here.
Mark Ryan is an advisor with RBC Wealth Management, Dominion Securities (member CIPF) and can be reached at [email protected] or 250-960-4927.
