“…It is clear that there would be an immediate and profound shock to our economy. The analysis produced by the Treasury today shows that a vote to leave will push our economy into a recession that would knock 3.6 percent off GDP and, over two years…”

—David Cameron and George Osborne, “Brexit Would Put Our Economy in Serious Danger”, The Telegraph, May 22, 2016

By now it is clear that the world ending predictions ahead of the Brexit vote did not materialize. Much of it was political rhetoric, disconnected from reality. Firstly, we should keep in mind that Brexit is a process that was only started by the vote, it will take some time and there might well be surprises along the way. The vote itself did trigger a selloff that was promptly reversed by central bank action, but the process of Brexit is just starting. The actual dislocation from the Brexit will be felt throughout 2016 and 2017. Theresa May, new British PM, announced that negotiations on Brexit will not even start in 2016. Secondly, there is this question. Given the situation in the global economy, should the stock market really be making historic highs against the backdrop of such shattering displays of public’s discontent, such as the Brexit vote? Let’s consider those points.

Brexit Is A Process, Not A Vote

Brexit is a process that will go on for years. Despite rebound in equities, but the negotiations could present some serious dangers along the way. Especially given the fact that Theresa May has appointed the likes of Boris Johnson, a staunch EU skeptic, to lead those negotiations. This process will not be helped by Claude Juncker, the head of the EU, who said of Brits, “I am sure that deserters will not be welcomed with open arms” and “The United Kingdom will have to accept being regarded as a third country, which won't be handled with kid gloves.” I cannot imagine Brits with their proud history succumbing to such treatment.

And sure enough Nigel Farage, the person most responsible for Brexit, announced a European ‘tour’ to stoke the flames of anti-EU referendums. So, we are in for a long game of political brinksmanship with serious effects on the economy and financial markets.

Brexit As A Catalyst?

Most astute observers point out that the real importance of Brexit is in starting the process of referendums creatively titled such as Grexit, Departugal, Italeave, Czechout, Oustria, Finish, etc. The age of global popular discontent is upon us and it is hard to imagine why investors are not discounting it in the price of equities today. And this is happening against a backdrop of weakening earnings around the world and a looming financial crisis in Europe with Italian banks leading the way and a Lehman-like Leviathan Deutsche Bank basically disintegrating. Add to that dropping Treasury yields and trillions of negative yield debt (including corporate) around the globe.