In my last post, I said that political events like the Brexit usually don’t result in long-term share price declines. In spite of all the negative, even hyperbolic rhetoric you’ve been hearing in the media about Brexit, the fact is that in the end all it amounts to is a nation trading with the rest of the world under a somewhat different set of treaties and other agreements than it did before. Even then, the rules change won’t happen for two years, soonest, and maybe never if the Brexit vote is recalled. So, basically it amounts to paper shuffling, and the world will go on. Markets are quick to recognize this and are already showing signs of reversion to ‘normal.’ When will prices be back at or above Brexit vote levels? Well, that’s hard to predict because there are a million and one other short-term influences on the markets on any given day, but, on the basis of the Brexit vote alone, well, I’ve never seen a non-trajectory-changing political event depress prices for longer than a month, and usually much less. As of the date of this publication, some markets are already ‘fully recovered’ from the turmoil of 8 days or so ago.
More important than short-term market gyrations is what the vote says about a real systemic risk rising in the world: anti-elite populism and other forms of social and political instability that arise as a result of ever-widening wealth, income and representative inequality. Brexit is not the problem, it is a symptom. What I’d really like to convey to the world about Brexit is that, in freaking out about it, we’re all focusing on the wrong risk.
Brexit unmasked a growing economic inequality that has given rise to anti-elite populism in the UK – a situation that is mirrored in countries through Europe, as well as the U.S. In Spain, there was no populist Podemos Party five years ago, but today has finished third in national elections with 21% of the vote, and now assumes real power as part of a coalition government. In the U.S., Trump and Sanders are having huge success with the message that they are going to finally do something about a rigged system that is destroying everyday people. Anti-status quo and anti-inequality sentiment is what has driven the Sanders campaign, the Trump campaign and the ‘Leave the EU’ campaign, and these are just the first of many more to come if as a global economy we don’t begin taking steps to create a fairer world where everyone doesn’t feel so powerless and disenfranchised all the time. If we fear the economic fallout of social and political instability, we can future proof by stemming inequality.
Economic inequality, together with climate change, represents the most significant systemic risks that long-term investors face. Widening inequality is a symptom of concentrated power among “oligarchs,” and is a sign of anti-capitalism in the UK, the U.S. and around the world. Remember, capitalism is supposed to encourage the flow of investments to the best ideas, not the most entrenched ideas. As investors, we need to focus on solutions-based investing, paying attention to investments that offer innovative sustainability solutions, and avoid stocks that contribute to resource scarcity, global warming and other systemic risks, including inequality. Governments need to address issues of economic inequality and free capitalism to let the marketplace reward the best ideas and investments, and stop doing things like using policy to thwart renewable energies at the behest of their fossil fuels paymasters.
It’s not Donald Trump’s candidacy or the Brexit we need to worry about. Rather, it’s the day (inevitable unless we start actualizing solutions) when a scarier, more destructive candidate or referendum, capitalizing on the same anger and despair becomes victorious.
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