If you’re wondering what to make of the global panic over the UK’s vote to leave the European Union, aka Brexit, first understand that the referendum is not binding. It’s up to the British prime minister to invoke Article 50 of the Lisbon Treaty (voluntary withdrawal from the EU), and since David Cameron is resigning, who knows when that will happen.
Besides, there are trade and banking deals to negotiate with the EU first — nobody is going to pull the trigger until all that is in place to make for as orderly an exit as possible. Don’t get me wrong; I’m not saying Brexit will be overturned. It won’t. But as of today, nothing has really changed. Absolutely nothing.
So why are the equity markets in turmoil? Markets are emotional indicators of future events. They tend to overreact to fear, uncertainty, and surprises. Ironically, they often wreak havoc in the process, which makes them self-fulfilling prophecies. C’est la vie.
There will be increased near-term volatility for a while. Also bank stocks are getting hammered. That’s all to be expected since a lot of multinational banks have European headquarters in London and there’s fear of another financial crisis. There won’t be one … unless we create one out of shear panic.
Also the relentless 24×7 news cycle loves a crisis. Since the business media is overly focused on equity markets, global currencies, macroeconomists, and big banks, they love this sort of thing. They eat this stuff up. It’s a huge ratings bonanza.
Speaking of which, fear-mongering over Brexit among economists is ludicrous; they’re clueless. Global economics is ridiculously complex and it changes every day. There are too many variables and no control group. So theories based on past economic conditions and policies are just guesses.
In other words, nobody knows what will happen as a result of Brexit, least of all the economists. More on this in my latest Critical Thinking column on Fox Business: Brexit and the Growing Nationalism Movement.
My advice: Don’t panic. Remember the old British refrain: Keep Calm and Carry On.