David Merkel

About the Author David Merkel

David J. Merkel, CFA — 2010-present, I run my own equity asset management shop, called Aleph Investments. I manage separately managed stock and bond accounts for upper middle class individuals and small institutions. My minimum is $100,000. From 2008-2010, I was the Chief Economist and Director of Research of Finacorp Securities. I did a many things for Finacorp, mainly research and analysis on a wide variety of fixed income and equity securities, and trading strategies. From 2003-2007, I was a senior investment analyst at Hovde Capital, responsible for analysis and valuation of investment opportunities for the FIP funds, particularly of companies in the insurance industry. I also managed the internal profit sharing and charitable endowment monies of the firm, to the delight of employees there. From 2003-2007, I was a leading commentator at the investment website RealMoney.com. Back in 2003, after several years of correspondence, James Cramer invited me to write for the site, and I wrote for RealMoney on equity and bond portfolio management, macroeconomics, derivatives, quantitative strategies, insurance issues, corporate governance, etc. My specialty is looking at the interlinkages in the markets in order to understand individual markets better. I no longer contribute to RealMoney; I scaled it back because my work duties have gotten larger, and I began this blog to develop a distinct voice with a wider distribution. After three-plus year of operation, I believe I have achieved that. Prior to joining Hovde in 2003, I managed corporate bonds for Dwight Asset Management. In 1998, I joined the Mount Washington Investment Group as the Mortgage Bond and Asset Liability manager after working with Provident Mutual, AIG and Pacific Standard Life. My background as a life actuary has given me a different perspective on investing. How do you earn money without taking undue risk? How do you convey ideas about investing while showing a proper level of uncertainty on the likelihood of success? How do the various markets fit together, telling us us a broader story than any single piece? These are the themes that I will deal with in this blog. I hold bachelor’s and master’s degrees from Johns Hopkins University. In my spare time, I take care of our eight children with my wonderful wife Ruth.

Betting on Brexit

Investors need things to scare them, or they don’t have a normal life.  This is kind of like the bachelor uncle who tells little nieces and nephews about scary things that lurk under their beds, and only come out at night for mischief and mayhem.  (Then the parents pick up the pieces later, when they wonder why William or Elizabeth no longer sleep well at night.)

That’s the way I feel about US & international market reactions to the possibility of UK/Britain exiting the EU, otherwise called “Brexit.”  It’s overblown.  Quoting from an older article of mine:

Governments are smaller than markets; markets are smaller than cultures.

What I am saying is that almost everything affecting the needs of people will get done when there is sufficient freedom.  If Brexit occurs, the UK will negotiate some agreement that is mutually beneficial to the UK and the EU, and most things will go on as they do today.  Even with a subpar agreement,perfidious Albion is very effective at getting what they need completed.  This is especially true of their very effective and creative financial sector in the City of London without which most effective international business could not be done.

There are other reasons not to worry as well if you live outside the UK.  The biggest reason is that the UK is only a small part of the global economy, and the economic effects on non-EU trade and finance are smaller still.  And unlike the idea was small but “contained,” in this case, large second order effects aren’t there.  Yes, someday other nations may wise up and decide to leave the EU, but no major countries are likely to do that over the next decade, absent some crisis.  (Crises in the EU? Those aren’t allowed to happen; ask any Eurocrat, they’ll tell ya.)

A second reason not to worry is that leaving the EU ends a second level of regulation of UK economic activity.  This will enable better growth in the longer term.  Are there things that the UK will lose?  Sure, they won’t have as good of a trade deal with the EU, but they will have the ability to try to craft better deals elsewhere, like a Transatlantic Free Trade Area.

The Economist had a decent summary of the good and bad for the UK over leaving the EU.  Here’s their summary table:

Looking over this, the UK already depends less on the EU than most member states, making the exit less of a big deal for the UK and the EU.

My view is this: leaving the EU won’t be a big thing in the long run for the UK.  In the short-run, there will be some uncertainty and volatility as things get worked out.  For the rest of the world, it will be a big fat zero, so ignore this, and focus on something with more meaning, like bizarre monetary policy, and the twisting effects it is having on our world, or the global entitlements crisis — too many people retiring, too few to support them, especially medically.

So, be willing to take some additional risk if people mindlessly panic if the UK/Britain exits the EU.