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The Brexit Vote: The Outcome and What Happens Next

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The Brexit Vote: The Outcome and What Happens Next

What comes after the Brexit Vote?

The Brexit vote that took place on Thursday has left the world in a state of uncertainty. 

Investors have begun raising questions. 

Speculations have been made about whether or not the Federal Reserve should reverse its strong plan and start cutting interest rates.

However, to fully understand the situation, you need to know the Brexit Vote first. 

You should also understand the factors that weighed into the decision and how the decision impacts the global economy.

What is Brexit?

Investopedia defines Brexit as an abbreviation for “British Exit.”

The nickname refers to the British leaving the European Union after the referendum that took place on June 23. 

The referendum asked voters whether or not the United Kingdom should leave or stay within the European Union.

The European Union is a combination of both a political and economic union called a politico-economic union. 

It is made up of 28 members, most of which are located in Europe. 

Below is a diagram showing which countries/states make up the European Union:

j28.3

Those who fought for this move framed the act as one that was necessary. 

They said that the culture, independence, and even the identity of the United Kingdom relied on its exit from the Union. 

You’ve probably heard this same argument in a debate surrounding immigration issues.

On the other side, those who fought for Britain to stay stated that the Union was better for the overall economy of the nation. 

They further argued that concerns about migration, and other issues surrounding the move to exit, were not important enough to equate the consequences to the economy if they left.

Why Did they Leave?

According to the financial times, Britain has not left the EU. 

Despite the fact that many believe otherwise, they state that the referendum that took place was not legally binding. 

They further report that the UK has made no moves to leave.

However, it is stated that the majority of Britons did vote to leave. 

The majority of politicians have even stated that the vote should be honored.

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Why Did the Vote Turnout How It Did?

The truth is that Britain has never been fond of the EU. 

If you have ever visited the United Kingdom, you may have noticed locals referring to the rest of Europe as a separate entity. 

Their displeasure with the Union was reflected in the referendum that took place on June 23, 2016, as demonstrated by the following chart:

j28.4

Britain initially refused to become part of the European Economic Community in 1973, when it was founded.

However, two years after joining a referendum lead to a similar exit by 67% of the vote.

Afterward, an opposition of Europe followed. 

One example of this opposition is found in Britain’s refusal to use the Euro for their currency. 

Another is in their refusal to participate in the Schengen Area open borders agreement made by the Union.

Brexit and the U.S. Economy

A 6% probability that the Fed’s policy rate could potentially fall by .25% by July.

This was shown by interest rate futures.

Interest rates are a popular tool used by money managers and hedge funds to place bets on the policy moves the Fed will make in the future.

The futures showed a 17% probability that the September contracts would feel a rate cut. 

At the same time, the contract coming up in December also finds itself facing a 16% chance of reduction before it comes to pass.

This mirrors the anxiety that investors are feeling over the impact Brexit may have on the U.S. economy.  Many believe that Brexit will undermine the growth momentum of the U.S. economy.

This will cause the Fed to shift policy. 

The Fed raised interest rates in December for the first time in nine years.

Brexit and the Global Economy

James Athey stated that the biggest risk at the moment is the negative impact this will have on the global economy.

He further stated that if growth does not continue at its current speed, it will cause central banks to step in likely and stimulate economies.

James Athey is employed as a money manager for Aberdeen Asset Management. 

The company currently has around $420.9 billion under management.

Highly sensitive the outlook of the Fed’s policy, the yield on a two-year Treasury note fell from .653% on Friday and .779% on Thursday to .594%. 

This percent is barely over the .25-.5 percent Fed Policy rate range. 

Because of this, many investors are not expecting rates to be raised by the Fed any time soon.

Ward McCarthy stated that the rate normalization has currently fallen low on the priority list of the Fed. 

He further states that it will remain low on the list until things settle within the financial market and around the economic consequences caused by the Brexit vote. 

Ward McCarthy is a chief financial economist at Jefferies LLC.

Brexit and England

It is also being said that England might have to cut rates if their growth outlook begins to deteriorate. 

The current yield on the two-year government in the U.K. recently was at .153%. 

This is below the .5% rate of the BOE.

The following chart from the Bank of England shows that the OIS curve suggests rate cuts in the future:

j28.5

What’s the Final Word?

Mark Cabana stated that expectations for any rate cuts from the Fed taking place near-term are “overdone.”

Mark Cabana is a U.S. rates strategist employed at the Bank of America Merrill Lynch located in New York.

Cabana further stated that growth uncertainties mean that the Fed needed to take another look at and reassess its current rate policy. 

He said that it made sense that the Fed would be “more cautious” faced with the current environment. 

Cabana’s bank was able to push back the Fed’s rate increase from September to December of this year.

Todd Colvin stated that the Fed had other options available to them other than cutting rates. 

Todd Colvin is senior vice president for Ambrosino Brothers. 

Ambrosino Brothers is a futures brokerage firm.

Colvin further stated that open swap lines and liquidity measures could found between both the Fed and other central banks could increase. 

Colvin isn’t sure that a rate cut is the answer. 

He stated this was especially true because the Brexit effect would not, at least not right now, be directly under the Fed’s mandate.

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US Housing Sales Boom Will Last Until 2021

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top view of houses at daytime photo-US Housing Sales Boom-us-featured

Redfin CEO Glenn Kelman told CNBC on Thursday that he sees the US housing sales boom will last until 2021. Total US Home sales increased 9.4% in September, surpassing estimates. Meanwhile, median prices went up 15% year over year. This is according to data provided by the National Association of Realtors.

RELATED: Biden Is Latest Dem to Support Ridiculous Free Housing Proposal

Shares of Redfin, a real estate brokerage firm, were higher by 1% Thursday to $45.60. The stock more than doubled during this year. It now has a market cap of $4.5 billion. 

Why do people buy houses during a recession? 

During this time when the economy is reeling and jobs are tight, people buy homes. Why? There are a couple of reasons.

The bigger acceptance for remote work freed many people from living in the city. The opportunity to leave cramped apartments and expensive city living. The pandemic gave enough reason for workers to pack up and head for greener pastures. Next, interest rates are going down hard. From 3.7%, 30-year mortgage rates are now 2.9%, the lowest rates ever. Despite higher prices, people know this is the best time to buy on the cheap. 

The intent is there. The pandemic allowed you to work anywhere. And interest rates allow you to pay the lowest interest rates. People are taking the plunge and buying. So what’s the problem? We’re running out of houses to buy. 

Demand coming from the rich 

Rich professionals who can work from home are the reason for the uptick in housing demand. Kelman said that many remote workers moved from major cities to distant suburbs. Kelman said these workers began “taking a permanent vacation where they’re working from those homes.”

People are taking advantage of low-interest rates to snap up homes. Kelman noted that “part of what is fueling this boom is that the economy has just split into two and rich people are able to access capital almost for free.” The opportunity to buy homes for cheap may be too much to resist. “Of course, they’re going to use that money to buy homes,” he added.  

Meanwhile, there’s another group of people who would like to buy but can’t. Kleman said:  “There’s just another group of Americans who are still struggling, who can’t access the credit because we’ve raised credit standards, and you have high unemployment. I just think those two trends, at some point, have to collide.” 

Kelman foresees demand to continue until 2021 at least. Many undecided buyers will buckle down next year and take the plunge. He said: “There’s no way it can last forever. This level of demand is absolutely insane. I would expect it to last into 2021, at least.” Why 2021? “There are so many people now who have decided they’re not going to be able to buy a home by year-end,” he said. Kelman expects them to buy next year, “as their kids shift school districts. I do think we’re going to see this for some time.”

Shrinking inventory of houses for sale

With homes fast disappearing from the market, higher purchase prices are coming back. Based on data from the National Association of Realtors data, only 2.7 months’ supply of houses is available last month. This represents the lowest level since 1982 when the NAR began tracking data. 

Kleman expects supply to increase after the elections. Uncertainty will decrease after voters elect a new president. Listing and selling a home can take months to process. That’s why sellers have a lower risk tolerance than buyers. “Buyers, when they see a house they love, they pounce,” he said. “I think the sellers are just looking long term in the economy and still feeling some anxiety. Many of them are going to put their homes on the market in January and February.”

Demand won’t last forever  

The Wall Street Journal’s Justin Lahart thinks not everybody can live outside the big cities. A remote job in a vacation spot may pose difficulties for some. Winter conditions may also make some remote workers rethink their strategy. He also believes that the housing boom now made people buy houses sooner than later. He thinks many of the workers who moved to the suburbs would’ve done so in a few years. When the pandemic subsides, a smaller group might follow the exodus out of big cities. 

The number of people who can afford houses will shrink as well. Many workers’ careers derailed during the year. Many millennials got burned during the financial crisis in the early 2000s. Now, a new career-threatening crisis is in full swing. The post-coronavirus landscape may depend on how well the economy rebounds. We’ll have next year to find out.

Watch this as CNBC reports on the US housing sales boom. Redfin CEO Says “people are buying vacation homes, then taking a permanent vacation:

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Are you house hunting right now, or have you already bought a house this year? Why are you doing so? Let us know why buying a home is a good idea right now. Share your thoughts in the comments section below.

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Biden Plan Could Mean 60% Tax Rates, But Here’s Who Will Get Stuck With Higher Taxes

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Biden Plan Could Mean 60% Tax Rates, But Here’s Who Will Get Stuck With Higher Taxes

New York and California may start losing high-income residents by the droves next year if Democratic nominee Joe Biden wins the election in a few weeks.

That’s because the two left-leaning states would have a combined federal and state rate over 60% under Biden tax plan.

Even New York resident and rapper 50 Cent tweeted earlier this week that despite his apparent dislike for President Trump, he said “Vote Trump” and “62% are you out of ya (expletive) mind,” when he learned about Biden’s tax plan.

According to calculations from Jared Walczak of the Tax Foundation, California residents earning more than $400,000 per year could face a combined tax rate as high as 62.6% under the Biden plan. New Jersey residents could see taxes reach 58.2% and New York would top out at just over 62%.

But somehow, it could get even worse.

Tax Rates Can Still Go Higher Under Biden

Walczak points out that if you include the contributions to the tax hikes by employers, which are often passed along to employees, the combined rates would jump to over 65% in California, 62.9% in New Jersey and 64.7% in New York City. They could still go even higher if California and New York raise taxes on high earners. This is something some legislators have proposed to try and close multibillion-dollar budget gaps.

“These rates would be the highest in about three and a half decades,” said Walzcak, “and imposed on a broader tax base than was in place previously.”

The Middle Class Will Suffer?

But Home Depot co-founder Ken Langone believes the wealthy won’t pay higher taxes at all – the middle class will.

“The middle class will not be exempt. Tragically, it will punish them. It isn’t going to punish us,” said Langone.

Appearing on Fox Business yesterday, Langone said due to Biden’s tax hikes, “the middle class will be in peril.”

He said that despite Biden saying the wealthy should pay more in taxes, the middle class will feel the effects of Biden’s tax plan. Langone said he is in favor of a tax code that is more progressive and equitable. This includes eliminating loopholes that favor the rich and large corporations.

“I don’t know if there’s any of us that have done well that will have a problem with paying more taxes, but it’s a ruse to think that hitting us and us alone is going to get the job done,” Langone said, adding ““It won’t and the middle class will be in peril and when you take money out of the hands of the middle class, you do a dramatic impact negatively on the economy.”
He said that increasing taxes on the middle class will lead to a recession.

“The problem is, when you go after the middle class, you begin to attack the backbone of the economy and we will have a bad recession. We will have a very bad recession,” Langone said.

“These are very precarious times and not the time to be screwing around,” he added.

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Market Volatility Rises As Election Polls Show Tightening Race

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Market Volatility Rises As Election Polls Show Tightening Race

The relatively calm markets earlier this month are giving way to more volatility as we approach the election. This is according to a team of strategists at JPMorgan.

“While it is perhaps true that during the first two weeks of October risk markets were supported by a widening of US presidential odds, which by itself implied a lower probability of a close or contested US election result, over the past week or so these odds have started narrowing again,” said a team of strategists at JPMorgan Chase, led by Nikolaos Panigirtzoglou.

According to recent polls by RealClearPolitics, in key battleground states, Democratic nominee Joe Biden leads President Trump by 3.9 percentage points, 49.1 vs. 45.2. That lead has shrunk from a 5 percentage point advantage for Biden about a week ago.

A general election nationwide poll by RCP shows a wider 8.6 percentage-point lead for Biden. However, there are many who feel those polls are not correcting for sampling bias.

Polls Inaccurate?

MarketWatch recently interviewed Phil Orlando, the chief equities strategist at Federated Hermes. There, he said he doesn’t believe the polls accurately reflect how close the race is. In relation to this, he pointed to the surprise win by Trump against Democrat Hillary Clinton in 2016.

“Our base case is that the polls are wrong, there’s an oversampling biased error that a lot of polls aren’t correcting for,” Orlando said.

With a tightening race for the White House, volatility has returned to the market. It will also likely increase in the final two weeks leading up to the election.

A report put out yesterday by SentimenTrader showed that the CBOE Volatility Index or VIX, jumped to levels last seen during the Great Financial Crisis, and tends to rise as stocks fall as it is typically used as a hedge against market downturns.

Market analysts use the ratio to measure how speculative traders are getting. A rise in the put/call ratio means that investors are expecting plenty of volatility between now and November 3.

The VIX, which measures investor bullish or bearishness on the S&P 500 for the next 30 days, is currently near 29, well above its historical average between 19 and 20. This week alone the VIX jumped 6.3%.

Source of Volatility

Jeffrey Mills, the chief investment officer at Bryn Mawr Trust, said some of the volatility likely comes from investors trying to position their portfolios based on who they perceive will win the election.  “There could be some front-loaded selling but I do feel like that’s a near-term phenomenon,” he said. But he says no matter who wins, there’s really only one place to invest, and that’s the stock market.

“There is going to be this continued pull toward equity markets — where else are you going to go when you need to earn a certain percentage to fund retirement, fund education?”

If investors are moving money today based on who they think will win the election, Daniel Clifton, head of policy research at Strategas Securities said each candidate will likely benefit different sectors.

A Biden victory will be good for stocks in the infrastructure, renewable energy and technology sectors, said Clifton.

If President Donald Trump is reelected, Clifton said there’s “huge upside” in some sectors. These include defense, financials and even the for-profits like prisons, education and student loan lenders.

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