Profiting from the Unintended Consequences of Brexit

On Friday June 24, 2016 I awoke to plummeting Dow futures and cries of “The British are leaving! The British are leaving!”

The mayhem can be pinned down to just one word, “Brexit”.

For those who tune out political posts on Facebook or have been too absorbed in packing camp trunks to watch the news, Brexit is not the first and arguably the most important meal of the day. According to my Facebook feed, Brexit is either a cataclysmic event that will lead to global financial ruin, a game that bigoted old people play when they are not stealing batteries or a British vote for sovereignty.

However it is defined, the mere mention of the term, Brexit, immediately sent stocks around the world into a tailspin. It made no difference that a company was domiciled on the other side of the planet or that it had no exposure whatsoever to the U.K. Not even record earnings were enough to prevent a company’s share price from falling in the wake of Brexit.

According to Worthy Financial, a rising peer investment app that will redefine how Americans – especially millennials – save for retirement, U.S. retirement accounts suffered an average loss of $3,305 on that fateful Friday alone. With the average retirement savings of all U.S. families at only $95,776[1] and median U.S. retirement balances for all U.S. working households at a paltry $3,000[2], the U.S. economy is simply unable to continue to withstand one day losses of such magnitude.

As an American, I don’t feel it is my place to critique Britain’s choice to secede from the European Union. Hence, I will not weigh in on its decision one way or another. Frankly, much more troubling than how they voted is why their vote should have any impact on my retirement portfolio at all.

The fact that Brexit was able to engender such widespread economic harm tells me that globalization is not quite the panacea we were led to believe it would be.

While globalization has indeed created vast amounts of wealth for some, it did so at the detriment of many. Hardest hit were America’s small businesses and its local communities. As the capital – once allocated to our neighbors – moved into offshore investments, regional businesses suffered immensely, and investors became increasingly disconnected from their investments. In my soon-to-be-released crowdfinance book I discuss how the geographical distance between the investor and investment is directly correlated to investment time horizon as well as the emotional value placed on the investment. Essentially, the farther away our money is placed, the less impassioned we are about the investment and the easier it becomes to dump it.

As globalization helped convert a nation of investors into a nation of speculators and apathetic stakeholders, America began losing its leading source of job creators – its regional small business. Consequently, local communities deteriorated – morally as well as economically.

While it is unlikely that they will ever admit it, the globalist ideologues got it wrong. Really, really wrong.

The Brexit fallout exemplifies the repercussion of a global financial system that is monopolized by traders and detached shareholders who – with complete disregard for fundamentals – prefer to value U.S. stocks based on the emotional response to a vote cast by strangers thousands of miles away on a distant continent.

As globalization continues to render fundamentals less and less significant, at some point we must ask ourselves, “Is this the foundation we really want for our capital markets? Does it make economic sense to hand our markets over to speculators and apathetic stakeholders?”

Instead of tickers, shouldn’t we be investing in one another or in companies that contribute to our communities, or – at the very least – in businesses that make products we are passionate about?

These are the very investment philosophies that fueled generations of American innovation and prosperity; that gifted humanity with some of the most significant inventions in the history of mankind. And they are also the very same principles which are enrooted in crowdfinance, Peer-2-Peer investing (P2Pi) and Locavesting.

Locavesting, a term coined by Amy Cortese, is very simply, “the method of investing locally”. Like “crowdfunding”, “locavesting” is a modern label for an old and familiar practice. For centuries, Locavesting served as the foundation for thriving neighborhoods, strong local economies, and a means for residents to build their nest eggs while contributing to their community. It was a system that proved effective – until it was shattered by the great globalism experiment.

Fortunately, civilization is a continuous succession of silver linings buried in lessons. Brexit is simply one more link in that chain. As was the case with Dodd Frank, I believe that one of the unintended consequences of Brexit will be a return to more community/peer oriented financing. As a result, Brexit will inadvertently be a big boost for crowdfinance.

As optimistic as I am about crowdfinance is as pessimistic as I am for traditional markets. I believe that, initially, the uncertainty surrounding Brexit will create a lot of volatility and big swings in both directions. But ultimately, I foresee the broader markets headed for a collapse – triggered not by Brexit but by manipulators, speculators and an ideologically flawed structural foundation.

Although Brexit won’t be the instigator, it will certainly be painted as the culprit.

It wouldn’t shock me to see monetary policy being manipulated with the intention of manufacturing a market crash just to incriminate Brexit. This way, globalists can have their, “I told you so” moment.

The only thing politicians loathe more than term limits, is acknowledging that they’ve erred. Some would probably even prefer an economic apocalypse to apologizing to their constituents.

Nonetheless, even during a financial Armageddon there is money to be made. This is because money never evaporates, it merely changes hands.

Here’s how I would play Brexit if I were a hypocrite, still in my twenties and didn’t vow long ago to never trade another index option again: With my “risk capital”, I would try to profit on the imminent volatility with long SPX straddles, and on a likely market slide by buying long term out-of-the-money SPX puts.

But, I am not a hypocrite. And, although I like to pretend that I still look 26, in reality I’m a middle-aged Mom who would never gamble her children’s future on index options. Instead, my post-Brexit strategy would simply be to reallocate more retirement funds to the promising alternative crowdfinance universe.

There are now multiple crowdfinance platforms that service retail investors and accept minimum investments as low as $25 – less than the typical weekly Starbucks tab. For the cost of a few lattes, anyone can start building their retirement portfolio with crowd-based retail alternatives.

I believe that the debt-based crowd platforms are the best place for investors to begin. Debt is customarily less risky than equity, the debt side of crowdfinance is more mature, and the debt-based platforms currently offer more ways to diversify with smaller investment amounts.

Retail-centric platforms worth checking out include: GROUNDFLOOR, StreetShares, Prosper, Worthy Financial, Folio Investing and American Homeowner Preservation Fund.

Not to sound too much like Alanis Morissette, but isn’t it ironic that the same crowdfinanced assets that regulators keep warning us against may actually turn out to be a safer alternative to traditional stocks and bonds?

Or perhaps the real irony is that people are becoming more confident in having their money backed by the full faith and credit of their fellow citizens as opposed to governments steeped in debt and miscalculations.

[1] EPI analysis of survey of consumer finance data 2013

[2] National Institute on Retirement Security (NIRS)

Disclaimer: Nothing in this article should be construed as investment advice or as a recommendation or endorsement of any security. Do your own research, draw your own conclusions and make your own decisions – and then take responsibility for them. Be self-reliant. The fact is, all investing is risky. As is giving or seeking advice of any kind, consuming raw or undercooked seafood and accepting candy from strangers. Come to think of it, I can’t imagine anything in life that doesn’t involve risk. But risk is part of what makes it so worth living. Tread carefully. But not too cautiously where you risk missing out on life’s enjoyments.