Just to be clear, there was probably never a particularly “good” time for the UK to vote to leave the EU.
Any way you slice it, it’s a tail event and evaluating the fallout of a potential Brexit was well nigh impossible ahead of time. Sure, economists could guesstimate the likely impact on the UK economy and analysts could speculate on just how far the pound would fall, but the questions that really matter couldn’t be answered prior to the vote. Questions like this one: “would a UK exit lead to calls for similar referendums in other EU member states?”
In short, a vote in favor of “leave” would have been hard on markets in the best of times because of the uncertainty that comes with the breakup of the EU. But these are far from the best of times. And that makes the vote that much more dangerous.
Global growth and trade are still in the doldrums. Here’s what OECD Secretary-General Angel Gurría said earlier this month:
“Growth is flat in the advanced economies and has slowed in many of the emerging economies that have been the global locomotive since the crisis. Slower productivity growth and rising inequality pose further challenges. Comprehensive policy action is urgently needed to ensure that we get off this disappointing growth path and propel our economies to levels that will safeguard living standards for all.”
Meanwhile, central banks are out of ammunition. At best, QE is proving to be subject to the law of diminishing returns:
(Chart: Citi)
And at worst, it’s becoming counterproductive (here’s inflation in Japan with the country’s various QE programs annotated, for example):
(Chart: Barclays)
Meanwhile, markets aren’t exactly cheap in either the US or in the EU: 
(Charts: Goldman)
So the Brexit shock comes at a time when the global economy has already hit stall speed, central banks have run out of counter cyclical slack, and valuations are stretched. It’s a case of very bad timing.
Worse still, the type of isolationist, protectionist fervor that prompted a majority of Britons to support an exit from the EU is sweeping the globe. If it’s allowed to embed itself via the election of the candidates who propagate it, the whole thing will become self-fulfilling. That is, global growth and trade will continue to slow as globalization and economic integration begin to move backwards rather than forwards, hurting, not helping, living standards in the process.
“The real elephant in the room is not the U.K. vote or a Trump presidency,” HSBC’s head of fixed-income research Steven Major told Bloomberg this week. “The real elephant in the room is we’ll have low and negative rates for a very long period of time.” Here’s more from BBG:
“While the Brexit vote roiled financial markets and caused a surge in haven demand, Major says investors in the $100 trillion bond market need to look at deeper structural problems plaguing the world: demographics, the explosion of debt globally and the disparity in wealth between the rich and poor.”
“Low rates are also a natural consequence of too much government borrowing after the financial crisis. While it gave economies a much-needed boost, the debt burden robbed many countries of their spending power, which could have supported growth over the next decade. And without a pickup in growth, there’s every reason to believe that investors will continue to seek out the safety of government bonds.”
Government bonds that are already at record lows:
(Charts: Deutsche Bank)
In sum, this was a bad time for a black swan to land in Britain.
And things only got worse Monday afternoon at 1:40 ET when S&P stripped the UK of its AAA rating. “The downgrade reflects the risks of marked deterioration of external financing conditions in light of the U.K.’s extremely elevated level of gross external financing requirements,” S&P said, adding that “GDP growth [will] average 1.1% per year (compared to April forecast of 2.1% per year) for 2016-2019.”
Risk did not like that very much as futs leaked lower with GBPUSD and gold popped:
Finally, here’s a look at UK default risk:
Coming full circle now to the global economic conditions against which Brexit is set, we’ll close with a colorful analogy from BofAML:
“In Greek mythology the Teumessian fox’s great power was to always be able to escape its hunter. Laelaps the dog, on the other hand, charged with catching the fox, had an equally great power: to always catch its prey. And with such simplicity a great paradox was created: how can one who catches everything catch something that can never be caught? The answer? It can’t. In the case of Laelaps and the Teumessian fox, Zeus turned both into stone. We find great meaning in the story … what happens to an economy that can’t grow or generate inflation when it is met with a central bank that, although has made mistakes in the past, seems to always right the economy eventually? Like Zeus, who turned our main characters to stone, do the modern day fox and dog effectively become paralyzed in their current states of low growth and accommodation? And if so, what does this mean for markets?”
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