Something by the name of Brexit has triggered enormous volatility in global stock markets over the past week, as well as sending the value of the British pound to a 30-year low. But what exactly is it? And why is it such a big deal?
In this clip from the Industry Focus: Financials podcast, The Motley Fool's Gaby Lapera and John Maxfield discuss the vote in the United Kingdom to separate from the European Union, digging into its historical and financial significance.
A full transcript follows the video.
This podcast was recorded on June 27, 2016.
Gaby Lapera: Brexit is the topic on everyone's minds. Just in case you somehow managed to miss the news, Brexit is a portmanteau of exactly what happened. Britain voted to exit the European Union. This was a referendum, so this isn't something that is actually pushed through yet, but this was completely unexpected.
John Maxfield: Yeah. It was completely unexpected from the perspective that nobody thought that actually anybody would win. We all knew that this referendum was coming up, they had announced it earlier in the year and all this kind of been agitating in the United Kingdom for a couple of years actually. What's important to keep in mind is that, first of all we're a financial show so a lot of you are probably investors, you're probably already seeing what's happening right now to stocks. In the United States, the S&P 500 -- which is our main large-cap index -- is down something like 5% since last Thursday's vote.
The FTSE which is kind of the analogous index, it's the large-cap index in the United Kingdom, it's actually down only 6%. That's a huge move for such a large index when you consider that those are the 100 biggest and most profitable companies in the United Kingdom, but that's still when you consider how momentous Brexit is that isn't that substantial of move. However, this being the financial show, there's actually a much more substantial impact on financial stocks.
If you look at, let's say, the KBW Bank Index, which tracks the 24 largest banks in the United States, it's down 11.2% just since last Thursday. These are very large moves that we're seeing in stocks. To just throw out one more number to bring home how big of an impact this is having on stocks, the FTSE 250, which includes not only the U.K.'s 100 biggest companies, but also it drops it down 150 more, so 150 smaller companies are included in that, that is down by 14.2%. This is a really monumental thing for stocks right now.
Lapera: Yeah. I don't know what people's backgrounds are when they listen, but you're maybe thinking Britain just voted to leave the E.U., I don't understand what the big deal is. It is a really big deal.
Maxfield: Yeah. This is, in my opinion, this is the most important thing on the global stage that has happened since World War II. The one other thing that really factors in there is China's opening up in the '70s and '80s and emerging into a superpower to really balance out the United States in the world.
Here's really why: You think Britain's just like a collection of a couple islands, why is its potentially leaving the European Union such a big deal? The reason it's such a big deal is because if you look back on the past couple hundred years, what we have seen is a movement toward global unification. As we have seen this movement toward global unification, we have experienced, particularly after World War II, one of the most peaceful periods in recorded human existence.
Lapera: Especially in Europe. I'm not going to say that all parts of the world are super peaceful right now, but Europe used to be one of the most war-torn areas of the globe, really. Now it's not. It was -- it is, I guess -- this confederation of states that have agreed to create an economic zone. That's what, I think, a lot of people miss is that the eurozone is primarily an economic zone. Yes, there's a lot of political benefits that come along with it, but the economic realities of it mean that those countries are tied together in such an economic way that it makes it politically unlikely that they would want to go back into war against each other.
Maxfield: Right. To your point about Europe, let's just go back a few hundred years. You had the Hundred Years' War. Who else has a Hundred Years' War? You had the Thirty Years' War, you had the Franco-German war, you had World War I, you had World War II. Then they decide, you know what, this isn't a good way to operate a continent. Let's get together, let's be peaceful, and it's turned into the largest collective economy in the world. The United States, singlehandedly, is the largest economy, but when you put all those countries together in Europe, this is an enormous economic might.
Now, just to give a little bit more historical context in terms of how all these things work, what's going on in Britain? Why would they be voting for something like this? This is how I look at it from a historical perspective. In the 1920s, we go back then, we had this huge boom that led to a bust that led to economic problems. Those economic problems lead certain people in certain countries to blame other countries or other types of people, other types of religion, for their problems. That leads to conflict. That conflict -- obviously World War II -- we then have the United Nations, we have the European Union. That settles all this peace.
Then, we have the financial crisis of 2008, which was the biggest economic event since the Great Depression. That leads to economic uncertainty, that leads to this movement toward nationalism and blaming immigrants and other people for problems, and that's where we're at. It's an almost exact replica of history.