The Underlying Reason For Brexit, And What To Do Now

|
Includes: COST, DTH, TSLA
by: ANG Traders

Summary

Humanity has been successful because people cooperated and shared.

The anonymity of large societies allowed selfish greed to be more prevalent.

The "Big Bang" trickle-down economics experiment skewed the rules in favor of the financial industry on a global scale, to the detriment of the wider economy.

Brexit is the start of the collapse of the top-heavy economic pyramid, but the collapse comes with the opportunity to create widespread wealth.

Most of human evolution, both biological and cultural, took place in societies containing between 50 and 100 individuals. The chances of one's genes surviving long enough to reproduce were greatly increased by cooperating as a group, and the differentiation of labor that resulted. A single individual was unlikely to bring down a mastodon, while a coordinated group of hunters had a high probability of success. The profits (meat) would be shared with all tribal members, even though the majority of the tribe did not participate in the hunt.

If one hunter, let's say the individual who convinced the others to hunt together, tried to take the majority of the meat, it doesn't require much imagination to think of how that particular act of greed would have been dealt with by his hunting buddies. As a result, everyone in the tribe shared in the spoils; the very old, the very young, the very depressed, and even the very dimwitted. Otherwise, the society itself would fail, and everyone's survival would be jeopardized.

Now imagine that one individual in the tribe gets their hands on a special technological tool that allows them to bring down a mastodon, all by themselves. That individual, would no longer require the help of the other hunters. How would that change things? There are two scenarios: share even more with the tribe since more meat will be available (higher productivity), or take all of the productivity for themselves and their immediate kin. If the latter is chosen, then the individual would have to leave the tribe and go it on their own. This means leaving all the security, both physical and psychological, that the tribe provides. In fact, this choice could turn the tribe into a liability, since they would be likely to try and take what they need from the now-solitary individual.

The increased sharing scenario, seems to have been the more frequent choice, since tribes (societies) continued to increase in size along with labor-saving technologies. That is, until societies grew to a critical mass where anonymity became possible. At that point, the tribe becomes incapable of identifying the sources of antisocial behavior. This lowers the risk/reward associated with self-interested greed, and increases the frequency of greedy choices among individuals.

The effect of anonymity on the frequency of anti-social behavior is painfully evident on the internet. Most of the anti-social behaviors found on the internet are a result of its inherent anonymity. This abhorrent behavior would never occur in a face-to-face, or smaller group encounter.

Organizing into a limited corporation, allows for the anonymity of capital and its mantra "it's nothing personal, it's just business," while at the same time maintaining legal personhood. This facilitates the unfettered extraction of value from the economy, while taking no personal responsibility for failures or damages that may result from any malfeasance. The corporation is a powerful tool with only one basic objective; maximize profits in the short term, on behalf of anonymous capital. The possibilities are truly frightening if a sociopath takes the reins of a corporation.

Equally frightening, yet far more damaging, has been the creation of rules that favor capital, while systematically removing the rules that protect humans from the power of capital. Reagan and Thatcher liberalized the financial markets and removed controls over the banking industry. This "Big Bang," as it was known, included privatization of most government controlled utilities, cuts in government social spending, significant cuts in the upper tax brackets, and an emphasis on the individual rather than society.

There was a massive increase in Cold War related defence spending that resulted in large budget deficits, US trade deficit expansion, and in order to cover new federal budget deficits, the United States borrowed heavily both domestically and abroad, raising the national debt from $700 billion to $3 trillion. The US moved from being the world's largest international creditor to the world's largest debtor nation.

The newly deregulated financial industry introduced a constantly expanding universe of new derivative instruments with which to gamble and extract value out of the real economy and onto its own bottom line. Global free-trade agreements which allowed the free movement of goods and capital were implemented, as were legal restrictions on trade unions (especially in Britain). This was good for capital, but not so good for the majority of the population.

In parallel with these organizational changes, we have had a technological revolution that has been as disruptive to the economic pyramid as the first industrial revolution was in the 18th century. By definition, technology is the production of labor-saving devices; we have saved so much labor that now we don't know what to do with it all.

This has been unfortunately timed to occur just as support for the individual was being methodically withdrawn. The idea that everyone should take care of themselves, and that the fat from the top of the economic pyramid will trickle-down to the destitute at the base of the pyramid, was sold as part of the American dream; 'you too can make it if you try'. How is that supposed to happen if technology and free-trade is eliminating the need for human labor? The asymmetric distribution of productivity gains is at the root of the revolution that we believe Brexit has started.

Click to enlarge

Click to enlarge

The last three decades of 'trickle-down' economic deregulation has been very good for the Global financial industry, allowing it to grow and efficiently extract value from the economy at the expense of human capital. Combined with the success of labour-saving technology and the refusal to distribute the productivity gains that have resulted from these technologies, the base of the pyramid (on which the entire economy rests) is now anorexic and starting to convulse. The pyramid is now top-heavy and starting to tilt into a revolution.

Every revolution that has ever happened, was rooted in economic inequality. That may not have been obvious by the time the revolution was affected, but inequality is the common soil out of which all revolutions grow. By the time they have begun, however, the blame will have been focused on two entities: the rule makers (who deserve the blame), and the 'other' (visible and convenient minorities) who bare no responsibility for the problem. The Brexit vote is a classic text book example of this.

By sharing the gains more widely in society, we can grow the economic pie, making everyone richer, even the already rich. A billion dollars in most billionaires' hands would become just another entry in some tax-hide-out somewhere, while every dollar that the bottom of the pyramid receives gets put straight back into the economy. This makes us richer, so why do we fight this?

Brexit marks the start of a long process where the rules of global free trade will be expanded to include globally harmonized tax codes, and uniform social spending in order to deal with the displacement of human labor. None of this will be easy, or even possible, without the insistent demands from the bottom of the economic pyramid. Brexit is the start of these demands.

How do we invest this knowledge?

The high level of uncertainty at the moment can provide opportunities for traders willing to play 'chicken' with the market, but for the majority of retail investors, it is best to stay away from most trading for the next while. And even when it looks like it's safe to get back in the water, we recommend owning companies that are profitable, provide a healthy income for their employees (this reduces the extraction of value from the local economy), pay reasonable dividends, and do not need to grow (not beholden to the financial industry). (Read our recent SA article on growth, here)

Costco (NASDAQ:COST) is an example.

Click to enlarge

WisdomTree International High Dividend Fund (NYSEARCA:DTH) is one of many high dividend funds that, once the present rout is over, will be priced very reasonably while maintaining its dividend rate.

Click to enlarge

Another sector that should be looked at is the makers of the labor-saving technologies themselves. Humanity has to find ways to deal with these technologies, precisely because they are here to stay. Even though it is nearly impossible to predict the future technologies that will be successful, it seems reasonable that a company like Tesla (NASDAQ:TSLA), despite all the recent hate in the investment media, has enough technology in development that it likely will have a future. We believe its best technology is in the area of batteries, and the fact that they bought a solar company makes sense when viewed from this perspective.

Click to enlarge

In conclusion, if Brexit is a wake-up call that starts the world down a path to more economic equality, then as investors (extractors of value) we will become even richer as the pie gets bigger and increasingly sustainable. All revolutions are messy and have uncertain outcomes, but with mess and uncertainty, comes opportunity as well.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.