Trust is on the Ballot

As expected, despite Monday’s pop in pricing and flurry of excitement, US and global equity markets glided into a rather uneventful pre-referendum close yesterday. The Dow Industrials (-0.28%), S&P 500 (-0.17%) and Nasdaq (-0.22%) all lost modest ground on diminished volume. The NYSE’s volume slipped 2.29% and the Nasdaq’s volume dropped 1.47%. From a sector standpoint, only Health Care (+0.29%), Materials (+0.11%) and Consumer Staples (+0.06%) managed to close positive on the session. Energy (-0.56%) and Utilities (-0.48%) were the leaders lower. WTI crude closed at $48.85/bbl – lower by 1.05% while Brent crude gained 0.44% to close at $50.10/bbl. In short, it was a mixed session with a downward bias. As you know from Monday’s note, all the major US equity indices are in precarious shape.

The single most ambitious effort to consolidate a fractured European political landscape since the Holy Roman Empire may be on the verge of fracturing. I have been writing about today’s fateful referendum on Great Britain’s membership in the European Union for months as Senior Market Strategist of the Global Markets Advisory Group and along with any number of strategists have called for a deliberate and balanced approach to investing in these uncertain times as a result. The fact is, that regardless of the outcome of today’s vote, and for many of the same reasons I had before the referendum, I will remain cautious, very cautious.

Britain’s referendum today is only the opening salvo that will lead to further nation state examination of the EU, its composition and very survival in coming years.

The British vote is in many ways a referendum on what many in Europe have begun to feel is an invalid and non-representative political system run by non-elected officials that are largely focused on their own agendas at the expense of the common man. There is a palpable sense of anger and resentment being directed at EU officials, local officials that are perceived to have sold out to the EU agenda, and the status quo and not only in Great Britain.

This narrative comes down to an issue of trust. Trust is the glue that holds the human contract together – whether it is between two people, an organization, a country or a union of countries. Trust, or the lack of it, is what is being voted on today.

Even if the British referendum ultimately results in a “Bremain” vote, in many respects the contract of trust has been weakened. You can force a people to abide by a majority rule but if the majority is paper thin, it lacks a mandate. The British populous, or roughly half of it, no longer trusts that the EU ideology and centralized authority represents their best interests or the best interests of a broader Europe.

If on the other hand British voters elect to leave the EU, they have been warned that the consequences are dire. There has been a long list of world leaders, economists, international organizations and politicians all exhorting the British voters to remain in the EU. From the looks of it, many British voters don’t trust those that are attempting to scare them into remaining in a union that is run by those appearing to do nothing more than consolidate their own power. I would go so far as to project that the impact of foreign opinion has emboldened the British to run in the opposite direction. For example, President Obama’s efforts to offer veiled economic threats to the British if they vote to leave the EU have played into the hands of those calling for the very Brexit that would thwart the world order that he and so many of his predecessors domestically and internationally have been working diligently on for decades.

The British are not alone. A recent survey held by the Germany based Bertelsmann Group has indicated that if a referendum were held today in Italy, Sweden or France, the results would closely mirror the nearly even split we are likely to see in today’s vote in Britain.

Simply put Europe is deeply divided. That division comes at the tip of a spear called trust.

Trust is a uniquely human trait and unlike any other. Trust can be earned through observation, non-verbal assessment and by experiential learning. Trust is most easily given to those that are perceived to be similar. The British and most other nationalities in Europe all feel different from one another. The lack of a “trust” factor has been on display for centuries. All the good intentions in the post WW2 world won’t magically dispel that. The funny thing about trust is that once lost, it rarely is regained. In summary, regardless of today’s referendum results, one thing is abundantly clear, nearly half of the citizens of Britain don’t trust the EU and don’t believe those who are exhorting them to stay.

We will likely know the final outcome of the referendum soon enough. You can be certain, markets have begun gauging the results this morning at 3:00 AM EST when currency markets opened for trading in Singapore.

flickr photo: hang_in_there