Gleanings from Brexit: Recommended Links


More than half a century ago, the assassination of U.S. President John Fitzgerald Kennedy was so shocking that everyone remembered what they were doing when they heard the news. For many investors, the United Kingdom’s EU referendum results delivered a comparable surprise. And during the referendum, hardly a single inflammatory division was left unexplored by combatants. Three key post-modern fractures have now been laid bare: declining deference to experts, rising public rage, and a return of national self interest.

Deference to Experts Is Dead

The UK’s EU Referendum campaign was challenged by a failure of the public’s trust that professional experts can help us solve our most difficult problems. During the campaign, experts of every kind, a metropolitan media elite and a parade of City luminaries threw everything they had at persuading UK residents that their best interests lay inside the EU project, notwithstanding its unpopular structures and troubled currency. Instead, and despite a sympathy swing after the assassination of Jo Cox, a UK Member of Parliament and a popular Remain campaigner, the experts failed to win public trust by the day of the poll.

Experts are not indispensable. However, any profession claiming any kind of knowledge expertise, whether economists, financiers, central bankers or journalists, is under threat from things like automation, technologies that bypass gatekeepers, and new labor or business models. In their new book, Richard and Daniel Susskind argue that the rise of AI could reach a point where, to quote artificial intelligence (AI) pioneer Marvin Minsky, “the next generation of computers will be so intelligent, we will be lucky if they keep us around as household pets.” Speaking at a recent CFA Institute conference, Michael E. Kitces said, “The bad news is that those who do not adopt technology to improve their value proposition to clients really will be replaced by robots.”

The Age of Rage

Whether Brexit was about xenophobic natives protesting against immigration, or educated young voters versus older or less educated voters, or neglected provinces trading insults with an imperious capital, this referendum campaign, just like its US presidential counterpart, was a celebration of rage. Closely linked to the death of deference, widespread and unembarrassed departure from relevant facts — or ‘post-truth’ discourse — is a worrying new behavioral and psychological trend for the investment industry to reckon with, placing the field of behavioral finance in the hotseat for credible explanations.

That’s a heavy burden to carry, but behavioralists are rising to the challenge: According to Tom Brakke, CFA, insights from behavioral finance are essential to pick better investment managers. “We have to remember that investment professionals are people,” says Brakke. “They make decisions just like the rest of us do, and we should turn to psychology and behavioral finance for insights in understanding them.”

Inequality and Nationalism

The Brexit vote was immediately interpreted as a cry for help coming from those believing themselves to be victims of income and wealth inequality, especially after the 2008 financial crisis. Opponents of the dominant Chicago school of thought in finance have long been warning about growing inequality of both income and capital, an effect worsened by the asset-inflating mechanism of unconventional monetary measures.

One notable French economist, Thomas Piketty, has produced ever more popular (and lengthier) works of scholarship exposing the woeful increase of inequality, albeit overlaid with a somewhat Marxist tenor. The UK, to a slightly lesser extent than Europe, boasts an elaborate system of welfare benefits, universal state pensions, and universal free healthcare; it is not an obvious place for any kind of revolution against unrestrained capitalism to occur. But, whilst outright confiscation of ‘excessive’ wealth, tax haven reform, and repressive measures were not explicitly on the Brexiteers’ agenda, the direction of travel now seems to have been reset toward more equality.

The natural bedfellow of economic discontent is nationalism. Geopolitical strategist and former Stratfor mavin Peter Zeihan has welcomed the prospect of Brexit, pointing to a long list of post-war internationalist institutions which he regards as in decline: the IMF, World Bank, and of course, the EU. Instead, he argued in favor of a geopolitics of self sufficiency and self-interest: each nation for itself. “Even if the Americans were convinced that their economic and physical security required international engagement, they are about to step out to lunch and it’s going to be a very, very long lunch,” Zeihan said.

Adapting Approaches for New Models, New Mindsets, and New Markets

A deeper understanding of the tensions that have driven these clashes will be essential for investment professionals looking to adapt their approach to the global economy in the face of new models, new mindsets, and new markets. Speakers at the 2016 European Investment Conference will consider different facets of these issues and the ways in which they influence the investment profession: Muhammad Yunus, Nobel Laureate, professor, and founder of Grameen Bank will discuss redesigning economics to redesign the world; Virginie Maisonneuve, CFA, former managing director and chief investment officer of equities at PIMCO, will examine the future of the investment profession; and Tomas Sedlacek, chief macroeconomic strategist at CSOB, will consider the economics of good and evil.

Learn more with these selections:

  • The Future of Financial Planning in the Digital Age by Michael E. Kitces
    The future of financial planning in the digital age will bring good news and bad news. The good news is most of us will not be replaced by robots. The rise of “fintech”—that is, financial technology—is going to improve the ways that we engage with and deliver services to clients, including investment and wealth management and financial planning.
  • Book Review: Europe’s Orphan
    The European Union (EU) contains only 7% of the world’s population but accounts for almost a quarter of the global economy — even after the epic losses it sustained during the financial crisis. Global investors, whether they have euro-denominated assets or not, continue to be transfixed by the calamitous eurozone and the politico-economic failures in the EU, of which the impending “Brexit” referendum in the United Kingdom is but the latest ugly manifestation.
  • Rethinking Due Diligence and Manager Selection by Tom Brakke, CFA, Due diligence in manager selection has become too much of a standardized documentation process. It should be an investigative discovery process. Rather than focusing on past performance of individual managers, the focus in due diligence should be on the defining characteristics of the investment management organizations where the managers work. In the long run, organizational structure, not past performance, is likely to drive future performance.
  • Central Banking, State Capitalism, and the Future of the Monetary System by Ann Pettifor The role of commercial and central banks in the process of providing credit may seem to be clearly understood by economists, bankers, and policymakers. But there are common misunderstandings about money creation, equilibrium, public money, central banks, and interest rates. The outlook for the global monetary system is not overly optimistic in the absence of overcoming these misunderstandings and altering the philosophies of bankers.
  • Webcast: The New Middle East with Peter Zeihan In this engaging presentation, Peter Zeihan discusses the changes in global perspective: The United States’ need for the Middle East have changed; Russia sees the Middle East as a means to other ends; and a new contest is shaping up between a rapidly normalizing Iran and a Saudi Arabia that is terrified of this new Iran. Zeihan also speaks on global stability and the future of terrorism: A global energy crisis will soon draw many countries into the Middle East, and a simultaneous political crisis will erode local state authorities, unleashing violence and terrorism. “It is both far worse and far better than it sounds.”

Keep up with information and updates about this event by subscribing to the European Investment Conference blog.

All posts are the opinion of the author. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute or the author’s employer.

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