West Oak Capital, LLC
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July 2016

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Byron, Lisa, Jerry, Tony, Darin and Ian
In a surprising turn of events that rocked global markets, the United Kingdom voted to leave the European Union.  Stock prices initially ran for cover, before regaining their composure.  Interest rates slipped, gold surged and the British pound plummeted on foreign exchange.  Details and consequences of the British exit (“Brexit”) are expected to take years to unfold.  At a minimum, we believe it will present a drag on already sluggish global economic activity, which will delay efforts by the Federal Reserve to raise interest rates here in the United States.  It was a tumultuous end to a bumpy first half of the year for investors. 
The British move toward independence poses a dramatic setback to decades of work designed to weave the various European nations together into an integrated economic territory.  Immigration appears to be at the heart of the decision.  The debate over protecting national borders has been intensified by the cost of maintaining public benefit programs, lethargic economic conditions and the threat of terrorist activities.  It is a plight confronted by other western nations, including the United States, for which immigration has become a contentious political topic. 
There is a broader issue regarding the role of government.  Support for free-market enterprise seems to be on the wane, as the policies of socialism and protectionism are gaining favor among a growing segment of the voting public.  Politicians propose more social benefit programs, rules, tariffs and even walls.  It is becoming increasingly difficult to find public servants willing to champion the capitalist system that made the United States the world’s most prosperous economy.  How to best govern a nation is a topic that has been around for a long time.  Modern political philosophy has been strongly influenced by the work of two men who articulated contrasting views on how to safeguard society’s need for safety, freedom and prosperity.
The noted English philosopher Thomas Hobbes published Leviathan in 1651, on the heels of the English Civil War.  Given his experience with the violence and upheaval caused by war, Hobbes advocated for a powerful sovereign authority to maintain civil order.  He called it a “social contract,” in which people give up their personal rights in order to secure their safety.  Hobbes believed that people in peril are not able to pursue business interests, so personal safety is a prerequisite for commerce. 
More than a century after Hobbes’s Leviathan, the Scottish philosopher Adam Smith penned An Inquiry into the Nature and Causes of the Wealth of Nations (typically referred to as Wealth of Nations) in 1776.  Smith argued that people in a community will cooperate with one-another, because they realize it is in their own best interest to do so.  Rational self-interest and competition motivates economic prosperity.  He believed that centralizing power, whether in industry or in government, leads to corruption that detracts from the good of society.  Open competition drives innovation, which benefits consumers and creates wealth for the nation.
Hobbes and Smith are like bookends to a debate that also invokes some real-world experiments.  The division of Germany at the end of World War II provides one of the most dramatic tests of the policies of free-market enterprise versus authoritarian government control.  In 1945, West Germany was aligned with capitalist Europe, while communist Russia took charge of East Germany.  The economy was centrally managed and generally owned by the government.  While West Germany recovered in the post-war period, East Germany suffered from poor living conditions, food shortages and bleak prospects that motivated young, educated people to emigrate to the west.  By the time the “Berlin Wall” came down in 1990, more than four decades of authoritarian rule had rendered the economy a shambles.  After reunification, rebuilding the ramshackle East German infrastructure cost an estimated two trillion euros (roughly $2.3 trillion), and the region continues to struggle with deficits in lifestyle, wealth, and productivity.
Looking at the United States, one can see the philosophies of both Hobbes and Smith.  We have a powerful federal government that we count on to protect our safety, as well as public programs that provide K-12 education, unemployment benefits, medicare and social security.  Yet, people are free to pursue their education, training and professions according to their own interests and abilities.  Most businesses are privately owned.  The ability to own a share of a growing business provides opportunity to investors.  While much of the current political debate seems focused on policies of isolation and greater government control, we would prefer to hear a bit more appreciation for the free-market solutions that have proved so successful at building our nation by giving each individual an opportunity to realize the potential of their own ideas and dreams.
Economic growth worldwide is struggling.  Our nation’s gross domestic product grew at a modest annual rate of 1.1 percent in the first quarter of 2016.  While U.S. interest rates are plumbing historic lows, they compare favorably to rates in foreign markets that are experimenting with unprecedented negative interest rate policies.  Given this uncertain environment, the Fed is likely to maintain its dovish course and postpone efforts to raise rates here at home.  We continue to monitor portfolios, maintain asset allocations and advise patience during periods of volatility in the capital markets.

Past performance is not indicative of future results. The information contained in this report is based on internal research derived from various sources and does not purport to be statements of all material facts relating to the items mentioned. The information, while not guaranteed as accuracy or completeness, has been obtained from sources we believe to be reliable. Opinions expressed herein are subject to change without notice.
West Oak Capital, LLC
2801 Townsgate Road, Suite 112
Westlake Village, California 91361
Ph. 805.230.8282, Fax 805.230.8283
Copyright © 2016 West Oak Capital, LLC, All rights reserved.

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