The Precedent to Brexit

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Before there was “Brexit” there was another painful economic divorce, when the British citizens of the American colonies decided to “Amexit” the British Empire in the 1770s.  The Economist magazine took statistics from that era, including long-term government bond yields and stock prices, to see what the “Amexit” shock looked like from an economic standpoint in Britain.

It’s usually bad economic news when government bond yields rise dramatically.  It means that demand has gone down or investors are uncertain whether they’ll get paid back, and (in this case) the British government had to pay more to entice people to invest in the British empire during the time when its army was fighting to subdue the pesky rebels overseas.  Similarly, when stock prices go down, it usually means investor confidence is shaken—or, in the case of the accompanying graph, from the year 1770 through the year 1790—apparently shattered.

You can see some of the seminal events noted on the graph, including a downturn following the unrest associated with the Tea Act and the Boston Tea Party, and then a significant downturn in stocks (and upturn in bond rates) after the American rebels commenced what we on this side of the Atlantic call the Revolutionary War.

Perhaps the most interesting thing about the graph is the fact that normalcy was restored roughly the same time the U.S. finally got its government act together and created the Constitution.  Despite the fact that the British had lost a huge amount of territory and a very promising piece of their future economy, bond rates returned to normal, and the stock market settled down to a few points above where they had been when the whole American independence mess started.  In the end, from an investment standpoint, the “Amexit” proved to be a tempest in a teapot.

About the Author: Bob Veres has been a commentator, author and consultant in the financial services industry for more than 20 years.  Over his 20-year career in the financial services world, Mr. Veres has worked as editor of Financial Planning magazine; as a contributing editor to the Journal of Financial Planning; as a columnist and editor-at-large of Dow Jones Investment Advisor magazine; and as editor of Morningstar’s advisor web site: MorningstarAdvisor.com.

Mr. Veres has been named one of the most influential people in the financial planning profession by Investment Advisor magazine and Financial Planning magazine, was granted the NAPFA Special Achievement Award by the National Association of Personal Financial Advisors, and most recently the Heart of Financial Planning Distinguished Service Award from the Denver-based Financial Planning Association. 

Source:

http://ritholtz.com/2016/07/amexit-sent-shockwaves-financial-markets/?utm_source=dlvr.it&utm_medium=twitter

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