Our old model of how the developed world works is officially broken. Post-Brexit, the race is on to create the best new model for understanding – and predicting – what happens. Markets are still struggling to do so.
Friday’s plunges in stocks and the pound are continuing. This is unusual. Markets typically overreact on day one after big news. Traders then see opportunities, and the move reverses at least partially. Not this time. The biggest-ever one-day drop in the pound continued today, and the Dow opened sharply lower, even after its 611-point decline Friday. Obviously these markets won’t fall forever, but it’s significant that when investors who were panicky on Friday sobered up over the weekend, they decided the situation looked worse, not better.
Which raises the question of why a change in relations between Britain and the E.U. would cause U.S. stocks to drop like an anvil. Many people were puzzled by this. Think of the answer in three parts.
First, big U.S. companies are not necessarily big U.S. businesses. The S&P 500 companies got 48% of their revenue from outside the U.S. in 2014, says research by S&P Dow Jones Indices. Some got much more. Qualcomm was 99% non-U.S, Mondelez 80%, Exxon 67%, Boeing 58%. Events outside the U.S. matter crucially to the largest U.S. firms.
Second, the U.K.’s trade treaties will disappear along with its membership in the E.U., and no one knows what will replace them. Consider the potential effect on U.S. makers of autos and auto parts, which were among the hardest hit stocks Friday. All have major businesses in the U.K., and 80% of Britain’s total auto production is exported, says analysis by the Detroit Free Press and USA Today. Other countries, including the E.U., could unilaterally impose tariffs on those vehicles, and negotiating new agreements could take years; Britain on its own will wield less power than the E.U. does in negotiating deals with other countries. In addition, GM’s annual pretax profit in Europe would be reduced by $25 million and Ford’s by $48 million for each 1% drop in the pound’s value, says Barclay’s analyst Brian Johnson. The pound dropped 8.5% Friday.
Third, Brexit could prompt other E.U. members to bolt. France, for example, will hold a presidential election next spring, and National Front leader Marine Le Pen leads incumbent Socialist Francois Hollande by wide margins in polling. Le Pen has promised that if she wins, she’ll hold a Brexit-style national referendum on E.U. membership. The potential unraveling of the E.U., collectively the world’s largest economy, creates uncertainties that not even Google’s AlphaGo AI could figure out. Investors worry, rightly, that huge uncertainty will affect companies and economies the same way it affects people – by paralyzing them.
We all tend to predict the future by extrapolating current trends. A fundamental break like the Brexit vote leaves us groping, and all signs are we’ll be doing so for a long time.
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What We're Reading Today
U.K. Finance Minister: We're in "a position of strength"
Trying to calm reaction to the Brexit vote, U.K. Finance Minister George Osborne says the country and not the E.U. will decide when to start negotiations over leaving. He doesn't plan on doing so until a new prime minister succeeds David Cameron and the country's new relationship with the rest of Europe becomes clearer. BBC
Waldorf Astoria to become apartments
Wu Xiaohui's Anbang Insurance, which paid $1.95 billion for New York's Waldorf Astoria hotel in 2014, plans to shut the hotel for three years in order to convert up to 75% of the rooms into apartments. The number of hotel rooms will fall from 1,413 to between 300 and 500. WSJ
YouTube, Facebook to remove extremist content
Using automated tools, Mark Zuckerberg's Facebook and Sundar Pichai's Google (which owns Youtube) have begun to remove violent propaganda. The effort targeting terrorist and other violent groups is in response to pressure from the U.S. and other nations. Fortune
Building a Better Leader
This energy drink entrepreneur realized she feared working slow...
...while in a work-study program at Procter & Gamble. "I realized working in a big company, I could spend my entire career on something and have it not work out," says Tatiana Birgisson, CEO of MATI Energy. Inc.
Only about 1% of jobs listed on Monster...
…require an MBA. Specialized skills matter more these days. Fortune
Connecting with co-workers can lead to new opportunities
And that means celebrating their accomplishments and helping them get ahead. Huffington Post
New Spanish elections fail to break deadlock
For the second time in six months, Spain held elections to determine the leadership of parliament. The conservative Partido Popular party won the most seats, 137, which strengthens acting prime minister Mariano Rajoy's position. But 176 seats are needed for a majority, which leaves the possibility that other parties could form a coalition. The Guardian
Expanded Panama Canal opens
Yesterday a Chinese freighter was the first ship through. Panamanian president Juan Carlos Varela officially welcomed the vessel. The $5.4-billion expansion accommodates larger vessels, many of which will be carrying goods from China to the Eastern U.S. Los Angeles Times
Nikesh Arora speaks about his SoftBank departure
Arora says CEO Masayoshi Son's decision to stay on past age 60 prompted his resignation. SoftBank had previously stated that Arora would succeed Son, 58, when the current CEO reached 60. But Arora says that in a conversation about succession, Son mentioned he wanted to stay for another five to ten years. Fortune
Up or Out
Fresenius CEO Ulf Mark Schneider has resigned. He will be succeeded by Stephan Sturm. WSJ
Fortune Reads and Videos
Four states seek to replace the gas tax...
...with one based on mileage. Delaware, Pennsylvania, Connecticut, and New Hampshire propose a levy based on how far drivers go. Fortune
Citigroup tests paying your rent...
...through Amazon's Alexa. It's also testing facial recognition log-in. Fortune
Maine Governor's wife takes a part-time job
Ann LePage, wife of Governor Paul LePage, is working three days a week at a local restaurant in order to save up to buy an SUV. Fortune
Britons swamp Google...
…with searches for new places to live post-Brexit. Canada, Ireland, and Scotland drew the most interest. Fortune
Quote of the Day
"Generally Masa is a person with amazing enthusiasm. He’s an extremely positive person. Once he gets optimistic, I think sometimes he gets carried away. Part of doing things together is tempering some of that enthusiasm sometimes. You can call it disagreement, but we had some amusing conversations." -- Former SoftBank COO Nikesh Arora describing his working relationship with CEO Masayoshi Son. Fortune
|Produced by Ryan Derousseau|
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