The party is over

This time it’s for real.

In a stunning result the United Kingdom has voted to leave the European Union.

British prime minister David Cameron has resigned.

Global markets are in chaos.

There are, of course, nearly endless ways to dice up the significance of this result for the global economy, global politics, international cooperation, and how the West general understands its own history in the post Cold War era.

Looking narrowly at markets and the central bank-fuelled recovery we’ve seen in the developed world since the 2008 global financial crisis, the UK’s vote to exit the EU ushers in a new era where a belief that what ought to happen will happen has gone out the window.

Animal spirits, or a market-based enthusiasm for buying risky assets on any signs of trouble with the belief that policymakers will correct course quickly, are no more.

In a note to clients on Friday morning, George Saravelos said simply, “Goodbye animal spirits.”


Beyond the UK and Europe, the impact of tonight runs beyond the geopolitical implications: yesterday the market was pricing a 90% probability of remain. The surprise of the result and the unpredictability of the political process will impose a big cost on the market’s self-confidence, ability and willingness to take risk. In a world already pre-disposed to secular stagnation, the hit to animal spirits and the market’s risk-taking capacity will be big.

As many would expect, the immediate reaction to this news is a massive sell-off in markets around the world with stocks in Europe getting uniformly annihilated. The British pound is also getting smashed, falling last night to a 31-year low as the entire foreign exchange market has been thrown into chaos Friday morning.

But Saravelos’ commentary is emphasising that while there will be some shocking dislocations in markets on Friday, and likely in the days and weeks to come, the long-run impact of this vote is only just beginning.

The world has changed, the market will need to re-adjust, and everything we thought we knew now needs to be re-examined.

In September 2015, I wrote that with the Federal Reserve looking to begin raising interest rates, the party, at least for US stocks, was over. And sure, Fed policy has ushered in a more unsettled era for markets.

But calling an end to parties is merely a market-speak way to say things are changing. It’s a familiar turn of phrase, though of course not all parties are created equal.

And in the wake of the UK’s world-order-shattering vote to leave the EU, this earlier call now seems quaint.

Brexit is the real thing.

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