Let’s just get the obvious out there on the table…
The European Union, which is the world’s largest economy has failed! If you have the time we strongly suggest you watch this full length feature documentary which explains the situation in great detail. If not then please continue reading.
Yesterday Great Britain voted to leave the European Union which is likely the first domino of many to fall in the EU. Whether you agree with the move or not one thing is for certain, the British pound is in for a rough ride.
After initial reports of the final vote the pound plummeted 13%, it’s lowest level in 30 years. By the end of the day it closed at approximately 7%. To give you some perspective, the worst day in history for the British Pound was in September 1992, the Pound fell 4.02% in one day. Not only is this the largest one day drop of the British Pound in history, its one of the largest drops for a major global currency in history.
We’re not going to make futile attempts of predicting how this entire situation will play out, because the truth is nobody knows how this will play out. However, one thing is for certain, it will get a lot worse before it gets better. Our main goal today is to educate you on how markets and economies work in order to give you an idea of what could possibly occur. Additionally we want to dispel some myths.
How Do Currencies Work?
Most people don’t realize currencies are constantly undergoing price changes. The currency market is open 24 hours a day, 7 days a week.
We typically don’t notice these changes because we’re spending our money on everyday items such as groceries, gas, etc in our own country. But things change when we try to use that same currency in another country, because when we do the exchange rate becomes a factor.
Simply put, if you have a strong currency then you will be able to purchase more goods in another country. But if you have a weaker currency, then you will be able to purchase less goods in another currency.
Now take this principle on a global scale and apply it to imports and exports.
If your currency is weak, you now have to pay more for goods imported into your country. From an economic standpoint this increases costs for businesses, which will either lead to smaller profits for businesses or increased prices for consumers. In regards to exports, your country now receives less money for the goods it produces.
Conversely, if your currency is strong then you pay less for the goods imported, which leads to bigger profits for companies. In theory this should lead to cheaper prices for consumers but we have found businesses rarely lower their prices once consumers have displayed they’re willing to pay them. As for exports, your country now receives more money for the goods it produces.
One very important thing to note in regards to exports is competition. If you have a strong currency, you will in fact make more money for the goods you export however you run the risk of becoming non competitive in the global markets because another country exports the same product at a cheaper price point.
How Does The Brexit Affect The US Stock Market?
Short answer…. it doesn’t!
In times like this you have to remember that the stock market isn’t a casino.
The stock market is a place where two parties come together in order to sell and buy businesses. Instead of wondering, “How will the Brexit affect the US stock market?” You should be asking, “How will the Brexit affect US businesses?”
We like using McDonald’s as we believe it is one of America’s most iconic businesses.
- Will the Brexit stop people from eating Big Macs, french fries, or happy meals?
- Will the Brexit cause McDonalds stores to suddenly close?
Absolutely not! People will keep on spending money at McDonalds.
Furthermore, if the British Pound is now severely devalued then US imports from Britain will be cheaper. This is essentially a good thing for the United States. What you are seeing in the markets today is pure speculation.
But please make no mistake, the U.S. economy is in a lot of trouble but the Brexit has absolutely nothing to do with it.
What To Look For Next?
Again, we don’t want to engage in speculation, there are plenty of large news publishers who are doing that already. We believe nobody knows for certain what is going to happen and how everything will play out. The only thing we can do is remain vigilant with our analysis and act accordingly when an opportunity or situation presents itself.
We suggest you take this time to educate yourself in regards to investing and economics.
While our flagship indicator is the essential piece of our newsletter we pride ourselves with providing comprehensive investment education in each and every one of our newsletters. We believe education is the most important aspect of any investment strategy because it empowers the investor and helps eliminate one of the most detrimental elements of investing….. FEAR!
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Here’s to our Wealth!