Revisiting Brexit and capital markets

No doubt most of the readers of this article are tired of the endless reports about Brexit and Boris Johnson. There is a level of fatigue with impeachment and Donald Trump and much hysteria about climate action and a certain Swedish activist by the name of Greta Thunberg. I am seeking to wade through the mire in a succinct fashion to stake my view on what the world might look like post 31 October which is now only a few short sleeps away.

Firstly, the articles written in Theresa May's time spoke generally about dire consequences for US banks such as Bank of America Merrill Lynch, Goldman Sachs and JP Morgan. Contagion was a term widely used when talking about the PIGS, being Portugal, Ireland, Greece and Spain and their debt levels within the EU. Hard border discussions in Ireland may reignite "the troubles" about English rule in the North coming back to the surface. Scotland and independance becomes another headache for London and the United Kingdom. I can already feel people drifting into a sense of blah, blah, blah but I have a bit more to go before I can bring it more local and what does it mean for us.

The existing status quo is not great. We have low growth, inevitability of lower interest rates flagged by the RBA, unemployment likely to rise, wage growth almost certainly remaining anaemic for the forseeable future, hostility toward government and authority in general rising and family units coming under pressure due to general uncertainty everywhere you look. There is a viciousness in politics and in social media despite actually having historically high levels of net worth and living standards.

I believe a "no deal" Brexit will see financial markets plummet by as much as a third. Price to Earning multiples of 18 and 19 are not sustainable in a low growth environment. As financial markets "correct", people will feel less wealthy. Spending will continue to drop. Retail which is already dire will see continued collapse and empty shopping centres will lead to lower yields on commercial property further bleakening the picture for retirees who will see term deposits returning nothing, commercial property returning less than desired for risk, capital markets representing elevated capital risk for the return and housing being stimulated by low rates and government stimulus which will surely come.

In this country, most people under the age of 40 have never known a really difficult economic period. Perceptions of risk are generally flippant as the good times roll as they have throughout their lifetimes. All that is about to change.

We have entered a period of rising nationalism. Blind Freddy can see that the US and China are engaging in a power struggle to rule the world with the Russians and the Germans not far behind eyeing off who can achieve what through the struggles to come. Australia is perilously placed with Asian trade and US military support. Both will use us as a pawn in their bigger games.

In my opinion, the US is rudderless with impeachment threatened, being governed by twitter and constant contradiction and generally losing touch with the realities of the rest of the world.

I predict it will get worse before it gets better and that all that remains in question is how much worse and for how long. Domestically, the petty politics of the ALP and the Liberal Party about who would have done better economically and who would have saved the planet better is garbage in the bigger picture of navigating globally troubled waters. Hope of the rhetoric raising to the level of the problem is probably naive.

The voting public isn't so poorly educated that we can't see that we are merely a small dot on the global map nor that we will inevitably suffer as the US suffers and as Europe suffers and as the UK crumbles if that is how it plays out. Distraction and hyperbole practiced by Mr Trump doesn't change the facts. The sun is setting on the US as a superpower and regime change rarely comes smoothly.

Investing in something you understand and have some control over is your best bet. Being kind to your loved ones and living a set of values complemented by positive behaviours attending to health and fitness and generally not getting ahead of yourself is clearly the micro goal at the individual level. At the business level, managing gross margins and cost structures for conservative growth outlooks will constrain capital investment. Retire debt where possible in a low debt environment unless tucking in long term assets at debt servicing levels that have been stress tested for adverse economic conditions.

The clock, quite literally, is ticking.