Generational Dynamics World View

[John J. Xenakis]

*** 25-Jun-16 World View -- Fallout from Brexit: Impact on geopolitics, economics, and stock markets

This morning's key headlines from GenerationalDynamics.com

• Successful 'Brexit' referendum vote throws UK and EU into political chaos
  
• Global stock markets plummet after Brexit surprise
  

****
**** Successful 'Brexit' referendum vote throws UK and EU into political chaos
****


Rock of Gibraltar with Spain the background (AFP)

Few people doubt that the surprise passage of Britain's "Brexit"
referendum, directing that the United Kingdom of Great Britain and
Northern Ireland should withdraw from the European Union after being a
member since 1975, will cause a great deal of political chaos in the
next few weeks and months. Pro-Brexit politicians claim the chaos is
only temporary, and it will soon settle down, and the result will be
better for the UK.

Nigel Farage, leader of the right-wing pro-Brexit Ukip party, said
exuberantly, "Let June go down in history of our independence day!"
Others pro-Brexit politicians shouted, "We've taken our country back!"

From the point of view of Generational Dynamics, the wish that the
chaos will end is fantasy. The "financial crisis" of 2007-2009 set in
motion generational forces that have caused the chaos to increase
every month, every year. That's true in Europe, with the euro crisis,
the migrant crisis, and the Ukraine crisis; it's true in the Mideast,
with the Arab Awakening, the Syria war, the Yemen war, the rise of
ISIS, the collapse in Iran-Saudi Arabia relations, and the meltdowns
in Libya and Egypt; and it's true in Asia with China's belligerence in
the East and South China Sea. This is worldwide trend that's been
growing for a decade, and in this generational Crisis era, it's
literally impossible for the growth in chaos to stop.

As I've been writing for years, nationalism, racism and xenophobia
have been growing in countries around the world, as they do in every
generational Crisis era. All these factors played into the surprise
Brexit vote, in the form of anti-German, anti-French and anti-migrant
sentiment. Furious voters wanted to get revenge against the élite in
both the UK and the EU and "send a message" that they're not going to
take it anymore. There have been some reports of "buyer's remorse" --
that at least some of the pro-Brexit voters wanted to send a message,
but didn't really want to leave the EU. Nonetheless, the deed appears
to be done.

So the pro-Brexit people who expect the EU and the UK to settle down
into a non-chaotic "new normal" are making major misjudgments.
They're especially overlooking the following: Just as they were angry,
just as they were expressing their nationalism, racism, and
xenophobia, just as they wanted revenge, the people who lost are also
angry, and also will want to get revenge by expressing their
nationalism, racism, and xenophobia.

The question really is not WHETHER they're going to seek revenge. The
question is HOW they're going to seek revenge. Here are some
possibilities:

• Many in the EU are furious that the UK have dumped them. Some
  leaders say that they want the UK out of the EU as quickly as
  possible, rather than wait two years.
  
  
• In 2014, Scotland held a referendum on the question of whether
  Scotland should leave the UK and become an independent country. This
  would have dissolved the 1707 union between England and Scotland that
  came out of the War of the Spanish Succession. Scotland voted to stay
  in the UK, on Thursday they voted overwhelmingly for the UK to remain
  in the EU. Now Scotland's politicians are furious that they're being
  screwed, and they're talking about a new Scottish referendum to leave
  the UK and join the EU.
  
  
• Northern Ireland's indigenous Gaelic Irish people (usually
  Catholic, republican, nationalist) have been at war with the
  descendants of invading English and Scottish people (usually
  Protestant, loyalist, unionist) off and on since the 1400s. Britain
  has governed the Gaelics ever since the extremely bloody Nine Years
  War (1594-1603). ( "23-Jun-2011 News -- Sectarian violence in Northern Ireland grows again"
  )
  That war may be renewed if the UK is not part of the EU. There's a
  special irony to this situation. The border between Northern Ireland
  (which is governed by the UK) and the Republic of Ireland (an
  independent country) is open because both countries are in the EU, so
  there's free travel between the two regions. If Northern Ireland is
  no longer in the EU, then there may be border closings.
  
  
• Gibraltar has governed by the UK ever since Britain won it from
  Spain in 1714, following the War of the Spanish Succession. The UK's
  vote on Thursday to leave the EU is a disaster for Gibraltar
  residents, who are almost all British, because it has reignited
  dispute over the 1714 settlement. Spain has threatened to take
  control of Gibraltar if the UK leaves the EU. At the very least,
  Spain may close the border between Gibraltar and Spain.
  
  
• There have been far-right parties in other EU countries that have
  been demanding that their countries leave the EU. These include
  France, Sweden, Italy, the Netherlands and Denmark. These demands
  will now be renewed, raising fears of "contagion" from the UK
  vote.

If you were to ask a UK or EU politician whether any of the events in
the above list are likely to happen, he would tell you, "No, no chance
whatsoever!" However, if you had asked a UK or EU politician a few
months ago (or even a few days ago) whether the UK would leave the EU,
you would have gotten a similar response.

As I like to point out, almost every day, something new happens that a
few years ago you would have to have been crazy to believe would ever
happen. Whether it's in America, Europe, Africa, the Mideast or Asia,
things that could never happen are happening.

In fact, every one of the items listed above is quite reasonable, once
you realize how angry, how nationalistic, and how xenophobic people
have become in many countries. That anger could be translated into
anything from an election referendum to a war in a matter of days.

The European Union was formed after two world wars and the Great
Depression. Institutions were put into place with the specific
purpose of preventing a new war between European nations, and
preventing the financial abuse that led to the Great Depression.
Today, with the survivors of World War II gone, anger, nationalism,
xenophobia, and stupidity are back in full force.

I can't tell you which of the above events will actually happen, but I
would be very surprised if none of them happened. At the very least,
expect more chaos, and one new crisis after another. Guardian (London) and Reuters and BBC and Vox and TRT World (Istanbul)

****
**** Global stock markets plummet after Brexit surprise
****

A global stock selloff occurred on Friday, following the Brexit vote.
The plunge began in Asia, spread across Europe, and then to North
America. The Dow Jones Industrial Average fell over 600 points.
Britain's sterling currency fell 10% against the US dollar, to its
weakest value in 31 years. Money poured into safe havens, notably US
Treasury bonds. The demand for the bonds increased their prices,
which therefore lowered their yields (interest rates) dramatically.

The question is: What happens next? Will stock prices continue to
fall when the markets open again on Monday? Are we in a stock market
crash?


S&P 500 Price/Earnings ratio at 24.22 on June 24, indicating a huge and growing stock market bubble (WSJ)

First off, we have to say that it's possible. As regular readers
know, Generational Dynamics predicts that we're headed for a global
financial panic and crisis. According to Friday's Wall Street Journal, the S&P 500 Price/Earnings index (stock
valuations index) on Friday morning (June 24) was at an astronomically
high 24.22. This is far above the historical average of 14,
indicating that the stock market bubble is still growing, and could
burst at any time. Generational Dynamics predicts that the P/E ratio
will fall to the 5-6 range or lower, which is where it was as recently
as 1982, resulting in a Dow Jones Industrial Average of 3000 or lower.

Second, let's take a look at the 1929 stock market crash. The DJIA
fell 24% on October 28-29, but then regained 18% on the next two days.
That would more accurately be called a "panic" rather than a "crash."
The actual crash continued for years, until mid-1932, when it had
fallen to 90% of its peak value on September 3, 1929.

So when we say that "it's possible," we mean that there might still be
some sort of panic next week, but a real crash would take place over a
longer period of time.

The way it works is through forced selling. What happened in 1929 is
that investors had borrowed money (on margin) to purchase stocks.
When the price of stocks bought on margin start to fall, then the
stock broker gives the investor a "margin call," which means that the
investor has to come up with more money. This usually means selling
some stock, and if a lot of investors are forced to sell, then stock
prices fall again, and there's a vicious cycle of stock prices
falling, margin calls, stock selling, stock prices falling, and so
forth. This can go on for years, and it did from 1929-1932.

To this day, nobody knows what triggered the panic of 1929, and
there's certainly no way to tell what will trigger the next panic, or
whether Brexit will do so.

What we do know is that the current stock market bubble will burst,
because every bubble in history always has, despite claims that "this
time it's different." So it's possible that Brexit will be the
trigger that causes the current global stock market and credit bubble
to burst.

What's important about the current situation is that thousands of
investors were caught completely by surprise by Brexit referendum
win. Many of them had invested heavily in sterling currency and the
stock market, expecting that the values of these investments would
increase when the Brexit referendum lost. So many investors were
forced to sell when the Brexit referendum won in order to service
debts that they'd incurred to make the investments in the first place,
just like the 1929 margin calls.

So it's possible that enough investors were caught by surprise and a
new vicious cycle will occur. It has to happen sometime, and it may
or may not be now.

However, there's one other thing we know. Central banks around the
world are well aware of this vicious cycle possibility, and reports
indicate that they're "printing money" and pouring into the markets in
order to head off exactly this kind of vicious cycle. The Bank of
England, European Central Bank and the People's Bank of China have
already said they were ready to provide liquidity if needed to ensure
global market stability. However, one sign that they're running out
of the ability to do that is the huge amount of debt based on negative
interest rates. ( "15-Jun-16 World View -- German 10 year bund yield goes negative, as deflationary spiral continues"
)

So maybe the central banks will succeed this time or maybe they won't.
We'll have to wait until next week to find out. Reuters and Washington Post and CNBC and AAP


KEYS: Generational Dynamics, Brexit, European Union,
United Kingdom of Great Britain and Northern Ireland,
Nigel Farage, Ukip, Scotland, England, Gibraltar,
Ireland, Gaelic, Nine Years War, War of the Spanish Succession,
panic, crash, forced selling, price/earnings ratio,
Bank of England, European Central Bank, People's Bank of China

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John J. Xenakis
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