Transforming personal finance since 2011

#9 — Nothing to fear but fear itself?


June 27th, 2016

By Andrew Craig

Reading time: ~ 11 minutes

My fiancée might disagree but I think I’m generally a fairly even tempered kind of individual. These days it takes a fair bit to get me worked up or make me depressed. That said, negative emotions like fear, depression and rampant pessimism are horribly infectious (just ask Darth Vader), and I confess that I have had to work quite hard in the last 72 hours to keep my chin up when faced with the unfeasible deluge of misery, angst, pessimism and woe released by this Brexit vote. I have found it quite astonishing and more than a little depressing.

Often in life, when dealing with bad news or situations which threaten my peace of mind I find that writing helps enormously. Thinking about things in an unemotional, cool, calm, collected and dispassionate manner is helped by taking the time to write things down given the structure that this confers.

So this morning I have done my best to do just that, and below are some thoughts on why we really must not let Brexit bring us down. As the truly great Abraham Lincoln once said so famously: “Folks are usually about as happy as they make up their mind to be…” Or, as Mark Twain would have it: “I’m an old man and I’ve known many troubles in my life, but most of them never happened.”

When we reflect on Brexit and what happens next, how can we do our best to make up our mind to be happy and realise that many of the ‘troubles’ being so breathlessly articulated by so many people at the moment are troubles which truly may well never happen?

The Economy

Arguably the main source of woe for everyone - which seems to be bringing some folk literally to tears - is what is going to happen to the economy. "The stock market’s going to crash. The pound will fall. My house will be worth less. The four horsemen of the apocalypse are going to gallop across my front lawn."

It is perhaps hardly surprising people feel this way when you see headlines such as: "£120 billion wiped off shares in a day”. Wow. Big number. Oh no! But let’s just stop for a moment and put our ‘blue head’ on (as the All Black rugby team like to say). In other words, take a step back, take a deep breath and think rather than fall foul of the attention-grabbing copy that editors and journalist still seem to feel is required to sell papers.

Only two weeks ago I wrote:

“People who have taken no time to study it or really understand it, think that the stock market is horribly risky. This is perhaps unsurprising given that the media goes bananas every time there is a ‘massive crash’ and that is most people’s ‘reality’ when it comes to investment. The 99% of the time that a sensible, diversified portfolio will gradually and entirely effectively build your wealth doesn’t make front page news…"

Quite. "£120 billion wiped off shares in a day” you say? OK. But where was the headline the week before that said:

  • “UK stock market alone has created nearly £1 trillion of value since 2009”, or
  • “World economy as a whole has grown from $32 trillion to $85 trillion in the last fifteen years!”

“There is always a bull market somewhere” as Warren Buffett likes to say (one of the most successful investors of all time) and it has never been easier, cheaper or (as a UK-resident) more tax effective than it is today to benefit from this reality. Interestingly, that bull market has not been seen in much of Europe for a long time. A number of folks who are far smarter, older and wiser than me, think that this, and rates of youth unemployment that are truly horrible across much of Europe, might actually have something to do with Brussels and the whole Euro project given how it has shackled the whole of the ‘garlic’ belt to an interest rate made for Germany. I’m not saying I necessarily agree but it is certainly interesting when you think about it.

In much of Europe, the economy has already been absolutely dreadful for a number of years, yet the UK economy has been pretty solid to pretty marvellous depending on your focus. Here is what two French executives had to say in Friday morning’s CityAM (a free paper offered in central London that I happen to think generally contains a great deal of sense):

“Why are we so active in the UK? Because in the land of Excalibur, King Arthur and unicorns, the tech scene is just outstanding. This is where 40 per cent of the best startups across all of the EU are, with more billion dollar companies than Sweden, Germany and France put together. The top 18 UK startups are worth a combined $40bn…”

Source: City AM

In the UK, there may well be a great big recession ahead – it’s actually about time we had one in the normal run of things anyway – or at least a stock market correction - but one of Britain’s greatest living investors, Neil Woodford, says:

“In the longer term, it is my view that the trajectory of the UK economy, and more importantly the world economy, will not be influenced significantly by today’s outcome…”

Source: Woodford Funds

Unless you are Gordon Brown and think you can ban boom and bust, recessions are part of the normal functioning of an economy and, some would argue – just as a forest fire reinvigorates and renews the forest – in the longer run recessions are actually needed to rebalance the excesses of periods of irrational exuberance. I would imagine that plenty of the young voters who feel so disenfranchised right now by the Leave decision might actually welcome a big house price correction if it happens, for example?

There is no question that the current uncertainty could negatively impact foreign investment into the UK – and this is probably one of the things we might be most worried about – but, then again, no-one knows. Here is just one example of why even this fear could be overblown:

“Boeing has chosen Britain as home for its new European headquarters in a major boost to campaigners in favour of the UK leaving the EU. The world’s largest aircraft maker shrugged off Brexit concerns to select London as the base for its entire European operation…”

Source: This is Money

….and another one: Google has JUST finished its new £1 billion HQ for 5,000 staff in King’s Cross in London. Do we really think they’re going to up sticks and move somewhere else? Let’s take note of the fact that they have chosen to hire 5,000 reasonably highly paid staff and spend no less than £1 billion on a state of the art, brand new building knowing full well that it would be ready only days before Brexit. That’s a fairly positive indicator is it not?

Or, just look at all these state of the art London buildings the fantastic US workspace company, WeWork now has in London, all of which are pretty recent additions and with more coming.

Or look at Nissan’s plant in Sunderland. It is the most efficient plant in Europe, producing more cars per worker than any other factory. It is precisely the sort of place that we might worry is now ‘at risk’ post Brexit if Nissan worry about selling their cars to Europe. But is this realistic? For Nissan and other firms like them, these sorts of facilities are an enormous investment and commitment over many decades and the costs of moving are very significant indeed – organisationally as well as financially.

There is a fair degree of natural inertia as a result. Equally, do we really think that a future British government of whatever stripe won’t be reasonably proactive in terms of pursuing an industrial policy that will keep these sorts of facilities right where they are (where the businesses are profitable at least rather than just a sink hole for good money after bad like certain other industries)?

Time will tell – and I think that is the other point. None of us know what will happen with any of this. There are just far, far too many variables and I for one think that working ourselves up into a frenzy about it is an inappropriate reaction to something that might happen and actually may very well not.

Peace and security

And this leads me into my next broad thought – that economic development and human progress in terms of health, happiness, stability, peace and prosperity are FAR more to do with a whole bunch of factors that are not politics or politicians (generally the less they are involved, the better).

Some of the more ridiculous concerns I have seen in the press and in social media over the last two days have centred on how the EU has been a ‘force for peace’ and how much more dangerous the world is now as if the UK leaving will result in another great big European war. It is here that I reach my point of maximum exasperation.

The EU certainly had a role to play in bringing European nation states and peoples together immediately after World War Two and played it rather well for sure. Just think of all those ‘twinned with’ signs you drive past every time you enter a new village or town. But to think that it has that much to do with it nowadays is to confuse correlation with causality.

The reason the world is factually more peaceful than ever before in human history (Syria, ISIS and so on are a micro-dot of misery set against what most of humanity went through for the last several thousand years) has to do with ubiquitous and inexpensive air travel and communication technology and the fact that you probably have at least a hundred Facebook friends from places your forebears might have gone to war with.

I have spent six months of my life in Japan and sat next to a number of German colleagues in various jobs with whom I spent a great deal of time laughing and of whom I am enormously fond. I know that these people don’t ‘eat babies’ as my great grandparents’ generation were told in first world war propaganda posters.

Leaving the EU will not suddenly mean that Germany is going to invade France again and to think so is frankly ludicrous and the worst of all the sturm and drang commentary of the last few days.

I don’t claim to know what is going to happen with any certainty – but I do think that the commentariat are significantly overplaying the risks – because that is what they always do – because that is what sells papers.

I do, however, feel quite strongly that technological development and human progress on a large number of fronts will be far more important for your day to day existence in the years ahead than anything to do with Brexit. There are going to be truly astonishing developments in agriculture, healthcare, transport, robotics, power generation and lots else besides in the reasonably near future.

Just this one chart will give you an idea of the phenomenal progress that human ingenuity can achieve (whilst the press bleat on about one-day falls in one stock market):

Source: National Human Genome Research Institute, NIH

…in just over 15 years, the cost of sequencing a human genome has fallen from $100 million to around $1,000 – and continues to fall. Yes, you read that correctly. From ONE HUNDRED MILLION DOLLARS to ONE THOUSAND DOLLARS in 15 years. Just amazing. This has far reaching implications for our ability to fight disease and this kind of phenomenon is being replicated across many of the areas I mentioned above (the cost of solar power, computing technology, engine efficiency, chip design and, and, and…) with far reaching and extraordinarily positive and powerful consequences for all of us.

“We are wealthier, healthier, happier, kinder, cleaner, more peaceful, more equal and longer-lived than any previous generation”

Source: Matt Ridley, “The Rational Optimist”

If you don’t think we are, then I can highly recommend reading “The Rational Optimist” by Matt Ridley, which is where this quote comes from and also “Abundance: The Future is Better Than You Think…” by Peter Diamandis and Steven Kotler - another book which will put a smile on your face.

This is entirely likely to get better not worse in the years ahead regardless of what just happened on Friday. We will continue to travel to Europe. We will continue to trade with Europe. We will continue to enjoy levels of peace, prosperity and leisure that previous generations could only have dreamt about even if there is a recession, a weaker pound and a house price crash (all of which I acknowledge aren't ideal).

In terms of the bigger picture - as Franklin D. Roosevelt said at the time of the great depression

We have nothing to fear but fear itself…

Next time, I will write more about how important it is to focus on your own ‘micro’ situation (the stuff you can actually influence) and stop worrying about the ‘macro’ situation (stuff that you can’t do anything about). It has never been easier to do a great job with the former no matter what is happening with the latter.