The Housing Bubble Jane Jacobs Built

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When Jane Jacobs died in 2006, her Annex home sold for a reported $3,000,000. A lofty sum, but a fitting metaphor for the career of a woman so central to how we’ve come to understand cities and urban growth.

Cities, almost everywhere, are under a crunch to meet the needs of growing populations and affordable housing. In Canada two cities stand out as being places to go when you are looking for work, Toronto and Vancouver, and notably they have both been beset with rapidly inflating housing prices. And while I have covered this topic many times (many, many, many times), recently various governments have seen fit to try and wrestle the housing monster to the ground before it explodes and does long term damage to the economy.

First, a BC law was passed on foreign buyers. Totalling 15%, early signs are that it has worked in Vancouver and Victoria. Sort of. In late October several news outlets published the startling result that “Home Sales Plunge 38.8%”, which is helpfully misleading. The gross number of home sales on a year over year result (that is October 2015 vs October 2016) was 61.2% of what it had been in the previous year. 3646 homes were sold in October 2015, and 2233 were sold in October 2016. A corresponding decline in price for the same two periods was non-existent. Prices were actually up year over year, by 24.8%, though the average price had dropped by 0.8% from September.

The next set of laws has come from the federal government, which is trying to improve the financial health of those seeking mortgages by setting higher thresholds for banks and CMHC insurance qualifications. More recently imposed than the BC foreign buyers tax, we’ve yet to see what kind of impact these new rules will have, but I’m willing to posit a guess.

Like the BC law, the new national rules will do more to curtail the supply of property than it will reduce price and limit demand. The reason for this is that governments are attempting to tackle the part of the housing problem they feel most comfortable in, taxing and regulation. And while we know fundamentally very little about how many foreign buyers there are and what impact they are having on the Canadian market (among other obtuse aspects of Canadian realty, you can read about these issues here.), regulation and taxation are well understood tools that most politicians feel comfortable using even when the problem may still not be well understood.

What governments are loath to do though is tackle the part of the problem they could have the greatest impact on, which is supply. Governments, municipal and provincial, have a big say in what can get built and at what speed. But cities like Toronto frequently challenge their own growth, trying to straddle the boundary between their future needs while obsessively preserving some idea of a perfect version of itself.

 

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Proposed highway construction for Toronto

 

The efforts the city and province have made, to try and “densify” urban corridors while leaving the neighbourhoods of detached homes in between them untouched, is probably failing in some measure. First because the neighbourhoods themselves aren’t super excited about 20 story buildings going up within the line of sight of their homes. Second because many people don’t see themselves raising families in condos, leading to an abundance of 500 – 700 sq-ft spaces that only serve first time buyers, but not growing families.

The resistance that neighbourhoods put up to growth can be almost comical. From petitions to “Stop Density Creep” to city councilors objecting to condos not being “in keeping with the community” in our most urbanly dense sectors, citizens and their representatives can be almost hysterically opposed to any changes that might affect them.

tumblr_mtxtnjdxzb1s9jvclo1_1280And so we come back to Jane Jacobs. There is unlikely anyone more influential on how we think of cities than Jane Jacobs. She’s responsible for many great ideas about livable spaces, about how sidewalks and cities need people to thrive, the benefits of cities for bringing different people from different socio-economic backgrounds together and the importance of making cities for people, and not cars. When she lived in New York she fought against the likes of Robert Moses, and the push for more highways (frequently built at the expense of poorer neighbourhoods). When she brought her family to Toronto to avoid the Vietnam war (her kids were of drafting age) she moved into the Annex and fought against plans for the Spading Expressway (now Allan Rd) and campaigned so that its southern portion was never built.

But Jacob’s legacy has born some strange fruit. Though Jacob’s herself did seem to support growth of cities and solid development, the movement she helped birth and guide has become paranoid, myopic and NIMBY-istic. Here in Toronto we both benefit from her insight, and are hobbled by it as well. We have learned to love cities as places for people, but have grown suspicious of the development needed to accommodate our growth.

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Against those challenges, stricter regulations for new home buyers and a tax on foreigners seems to do very little to solve the one problem we do have, not enough supply. While tightening the lending restrictions is important to stemming the growing debt burden saddled on Canadians, the goal should still be to restore a healthy real estate market to our major cities, both a certain way to avert a massive housing bubble implosion and a way of making homes more affordable. That seems to be a challenge our elected officials aren’t up to yet.

But What if He Wins?

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You may not respect him, but have you ever seen someone with more luck than Donald Trump? I put it to you that you haven’t and I would wager that neither has Hillary Clinton. Three debates and a decade old video of Donald Trump lewdly discussing how he likes to grope women seemed to have moved him from a better than outside chance of winning to a massive and decisive loss. His obituary had practically been written and pundits were getting comfortable that they were never going to have to say “President Trump” with a straight face.

snifflegrabapussThe reopening of the email investigation by the FBI has breathed second life into Trump’s campaign, reinvigorated a dejected base and rekindled the seemingly pathological hate many have for Hillary. Trump’s candidacy is still a long shot, but not as long a shot as it should be.

The question that has lurked in people’s minds since Trump actually won the nomination for the Republican nominee is “what if he wins?” Normally it would mean very little, much of America’s budget is spoken for, in the form of military, social security and domestic payments as well as interest on debts. But Trump’s promises have people scared. Beyond the impractical (build the wall) and unlikely (make Mexico pay for the wall) Trump has promised to change the economic landscape in a big way. He wants to tear up trade deals and have a trade war with China. To Wall Street and other hubs of investing this sounds insane, and people who understand these agreements know that trade deals can not simply be torn up without serious repercussions. These promises make investors heads reel with fears of economic collapse.

But asking “what happens if he wins” is really several questions stacked on top of one another. The first question is “What happens tomorrow?”, the next is “how likely is Trump to follow through on his agenda?” and lastly “What should investors do?”

The Day After Tomorrow

Predictions about the market impact of a Donald Trump win range from apocalyptic to the more mundane, but a sudden sell off wouldn’t be surprising. In fact given the time frame between the election win, the time it takes to assemble a new government and the ability to pass legislation, its unlikely the much would happen policy wise initially, and a sudden sell off would be met with growing confidence in the market as investors and market makers bought cheaply sold companies and economists saw economic health remain steady. That might amount to a phony war while real changes remain over the horizon, but the events following BREXIT might provide a useful guide: an immediate sell-off followed by a market bounce, but with a large amount of uncertainty looming.

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How likely is Trump to follow through on “the greatest wall you’ve ever seen”? Probably not that likely. A lot of Trump’s plans rest on other people helping push his agenda, and while he holds the bully pulpit that role is only effective so long as he’s popular.

In Toronto, Rob Ford’s election stunned a lot of city councilors and led to some hasty changes of allegiance, but as time wore on and Ford was seemingly more unreliable, his opponents were emboldened. Trump may not even get the same grace period and early support, having won a highly contested election in which all the guardrails came off the political system, lots of people will feel better about challenging his success than making him great. But given the uncertainty of power and how craven many politicians seem to be, its likely some of his ideas will find their way into action. While he’s unlikely to actually end trade agreements, spending increases on defence and border control and new tariffs on countries like Mexico won’t be surprising.

What Should You Do?

To start with? Nothing. America’s economy looks strong and competitive. Job growth has been fairly consistent and GDP continues to rise. The standard approach for politicians is to denounce your opponents accomplishments and them claim them as your own after a certain time. I can only assume that the temptation will be for whatever president/congress to declare victory and say that not every aspect of a Trump’s agenda is needed. Whether that satiates his followers has yet to be seen, and if Trump finds political appetite in pushing his agenda, that may ultimately lead to a more insulated, poorer nation; one less appealing to invest in.

The most likely scenario?

Trump loses.

Trump loses and nothing goes back to normal.

Trump’s most damaging language may yet be his view that the election is “rigged.” Initially meant as a shorthand for media bias, it has morphed to be an accusation of actual vote rigging, and is coming dangerously close to demanding voter intimidation to “preserve democracy”. The outcome of this election may leave us much of where we were before, with Republicans comfortably in opposition to a democratic president who they feel no need to work with.

Politicians are public servants, but ones frequently given to bouts of moral cowardice. This is a result of being elected and needing to satisfy an ever more diverse group of people to hold on to power. The easiest way of holding on to power is to grab whatever tent pole groups the largest number of people together. In 2009 that tent pole was the tea party, which opened the door for a number of savvy politicians to take seats away from older and more principled people, even as the language became more extreme. For at least several decades it has also been quite popular to say that one “isn’t a politician”, a line so tired that it practically begs to be called out on live television.

These trends only exist because they resonate with enough of the public to facilitate getting elected. If Trump fails he will have still demonstrated how much more effective one can be ignoring the (now very few) niceties of politics. If you thought we had seen the last of people literally talking about penis size and advocating war crimes in an election cycle, think again. A number of junior and potential politicians will see this as a path to higher office and getting media attention, two things in short supply for any ambitious politician.

In the end, I expect more of the gridlock that has defined the past eight years, and for some reason I don’t think that will bother Wall Street one bit.

Down With Universities, Up With Education!

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Let’s say I had an investment that cost around $100,000 to be a part of, and after a fixed period you would be left with debt in the area of 25% of your initial purchase. Also there is less than 50% shot at having any ROI at all. If that sounds like a bad deal that’s essentially the proposition of going to university; an expensive 4 year party that leaves many young Canadians in debt with little chance of landing a job that even requires a degree in the first place, let alone one in the chosen field of study.

In some ways universities have it tough. They have become an outlet for millions of Canadians expecting a good future; the final stop for middle class social mobility. They carry with them all of the unexamined concerns we have about class and status in our lives. They are the primary gateway to white collar high paying jobs. They hold the simultaneously contrarian positions of bastions of independent thought and radicalism while also being expected to turn out thousand of grads ready to work “in the real world.” The demand for this type of schooling is so great and has become so expected that parents begin saving from the minute their kids are born, sometimes at the expense of much needed retirement planning.

Universities don’t always help their cause either. While the number of Canadians (and Americans, Brits, Australians, or anybody for that matter) struggle to both pay off their student debt and can’t seem to find gainful employment, some of the major schools themselves have become sources of ridicule as they deal with less serious, or trumped up issues. Students have had their way at college campuses, objecting, protesting and winning arguments that seem pointless, silly or ridiculous. Halloween costumes were deemed to “triggering” at Yale, and statues of Canadian Prime Ministers were called too offensive at Wilfred Laurier.

But if we look past silly controversies and focus on university attendance as an investment, we can see that returns really are low, and its hard to imagine any other investment we would make that carries with it so much speculative risk. Being smart about secondary education requires a similar mindset akin to being smart about investing. Where can my investment yield me the best return? And while universities can show that simply having a degree does improve earnings compared to those with only a high school diploma, it doesn’t make up for the fact that costs remain high and students are still saddled with too much debt after they leave school.

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Saving for education is but one part in an ongoing series of financial life goals. The purpose of that education is to help set the stage for a productive economic life (so to speak), where an education provide options for meritocratic growth and allow for economic milestones like home buying and raising families. As the education system becomes both too expensive and largely pointless, the knock on effect has been young people deferring other stages of their lives.

For now there is no quick fix for the question of higher education. Since before I was in university, students have complained about the rising costs of tuition and the weakening job market. But the absence of top-down solutions doesn’t mean that parents and students are without options. Education is an investment and it should be treated like one. Parents who take the time to open RESPs, collect the Canadian Education Savings Grant dutifully and invest wisely should not consider their due diligence over once their children begin going to school.

Entering higher education is an ideal opportunity to begin expanding children’s entry into the world of finance, and is an excellent way to reframe the education conversation from one about “passion” to understanding that school is an investment akin to a home. A bad investment will end up yielding a negative return, will cost large sums of money and leave the owner feeling helpless. A good investment is one that will provide both comfort and security, allowing for future ambitions to be fulfilled.

Is your financial advisor at your table, or are you at theirs? We’ve been helping families for nearly a quarter of a century one kitchen table conversation at a time, and we’d love to help yours. Plan for your children’s education, and have us join them and you to discuss their educational options. Give us a call or send us a message today!

 

Investing in the Age of Brexit Populism

There is going to be lots of news around Brexit for the next while, and we have many other things to look at. So until more is known and more things are resolved this will be our last piece looking at the In/Out Referendum of June 23rd.

 

So far the best thing that I’ve read about Brexit is an essay by Glenn Greenwald, who has captured much of the essential cognitive dissonance that revolves around the populist uprisings we’ve seen this year, from Bernie Sanders to Jeremy Corbyn and from Donald Trump to UKIP. You can read the essay here, but I think he gives a poignant take down of an isolated political class and an elitist media that fails to capture what drives much of the populism intent on burning down modern institutions. In light of that criticism, what should investors think about the current situation and how does it apply to their investments?

Let’s start with the basics; that leaving the EU is a bad idea but an understandable one. The Eurozone is rife with problems, from bureaucratic nonsense to democratic unaccountability, the whole thing gets under many people’s skin, and not just in the UK. Across Europe millions of people have been displaced from good work, have lost sight of the dignity in their lives and have come to be told repeatedly that the lives they lead are small, petty and must make way for a new way of doing things. The vast project that is the EU has been to reorder societies along new globalized lines, and if you live in Greece, Spain, Portugal or Italy those lines have come with terrible burdens of austerity and high unemployment.

It’s easy to see that the outstanding issues of the 21st century are going unchecked. Wealth inequality and increasing urbanization are colliding with the problems of expensive housing markets, wage stagnation and low inflation rates. The benefits of economic growth are becoming increasingly sparse as the costs of comfortably integrating into society continue to rise.

In response to these problems the media has shown little ability to navigate an insightful course. Trump is a fascist, Bernie Sanders is clueless, “Leave” voters are bigots, and any objection to the existing status quo that could upset the prescribed “correct” system is deemed laughably impractical or simply an enemy of free society.

This is a dynamic that can plainly not exist and if there is any hope in restoring or renewing faith in the institutions that govern much of our lives. We must find ways to more tactfully discuss big issues. Trump supporters are not idiots and fascists. Bernie supporters are not ignorant millennials. Leave campaigners are not xenophobic bigots. These are real people and have come to the feeling that they are disenfranchised citizenry who see the dignity of their lives is being undercut by a relentless march of progress. Addressing that will lead to more successful solutions to our collective woes than name calling and mud slinging.

For investors this continued disruption could not happen at a worse time. In some ways it is the needs of an aging population that have set the stage of much of the discontent. As one generation heads towards retirement having benefited from a prolonged period of stability and increasing economic wealth, the generations behind it are finding little left at the table. Fighting for stability means accepting that the current situation is worth fighting for. For retirees stability is paramount as years of retirement still need to be financed, but if you are 50 or younger fighting for a better deal may be worth the chaos.

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For anyone doubts that cities are the most important part of our society and economic wealth, here is the history of cities over the past 5000 years. – From the Guardian

 

Investors should take note then that this is the new normal. Volatility is becoming an increasing fact of life and if wealth inequality, an unstable middle class and expensive urbanisation can not be tamed and conquered our politics will remain a hot bed of populist uprisings. So what can investors do? They need to broaden their scope of acceptable investments. The trend currently is towards more passive investments, like ETFs that mimic indices, but that only has the effect of magnifying the volatility. Investors should be speaking to their advisors about all options, including active managers, guaranteed retirement investments, products that pay income and even products with limited liquidity that don’t trade on the open market. This isn’t the time to limit your investment ideas, its the time to expand them.

Do you need new investment ideas? Give us a call to learn about all the different ways that investments can help you through volatile markets!

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Let’s Undo Brexit! (Here’s How)

Brexit-2If there was ever going to be a moment to gain some clarity about what the Brexit would truly and ultimately mean, Friday was the day. Following the win by the leave camp, markets were sent reeling on the uncertainty stirred up by the referendum, and by the day’s end Britain had gone from being the 5th largest economy to the 6th, $2 trillion in value had been wiped from the markets, Scotland wants another referendum as Northern Ireland is proposing a unified Ireland, and embarrassingly the top google result in the UK following the referendum was “What is the EU?”

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The buyers remorse now swirling around the UK seems to have ignited a renewed “Remain” campaign. Already there is a petition to have another referendum, citing the quite reasonable objections that a 52-48 split does not indicate the kind of definitive turnout to, in good conscience, topple the British economy and break up the UK. In other corners some of the bloom has quickly come off the rose.

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Nigel Farage, the UKIP leader who has been championing the leave vote while Boris Johnson (BoJo for short) has parading across the country with a bus emblazoned with the phrase “we give the EU £350 million a week, let’s fund the NHS instead” has said that was a poor choice of campaign phrase. In other words the NHS will not be getting an additional £350 million per week. JoJo on the other hand has said that there is no urgency in triggering Article 50 of the Lisbon treaty, and instead there should be preliminary discussions before actually starting the leaving process.

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Liars! Lying Liars!

In Cornwall, the picturesque seaside county with a crumbling and weak economy, it has suddenly dawned on the residents that they are hugely dependent on cash transfers from Brussels, an idea that had apparently not occurred to them when they overwhelmingly voted in favour of leaving.

It is worth taking some time to consider some underlying facts. The referendum is non-binding, merely advisory to the government. As the impact of a leave vote starts to set in and people begin to reject the emotional tenor of the campaign in favour of some hard truths, the next government will have time to try and potentially weasel out of the deal. The current front-runner for the next Prime Minister is BoJo himself, a man who had said that he sided with Leave (and became its very public face) because he didn’t think Brussels would really negotiate with the UK unless they knew the Britain might seriously leave.

So I’m going to go out on a limb here and say that Brexit will not happen, at least not like the worst case scenarios have made it out to be. David Cameron has said triggering Article 50 will fall to the next Prime Minister, which is months away. The chief proponents of Brexit don’t seem eager to start the clock on an official leave at all. Despite calls from within the EU to get the ball rolling on leaving, the real appetite to lock down a time table for a permanent withdrawal from the eurozone isn’t there. Instead it seems the winners are happier to let everyone know that they’ve got the gun, and that it’s loaded.

There are months to still screw this up, but the leave camp has had its outburst and now its time to look in the mirror and see the outburst for what it is; and ugly distortion of what the future could be. Nigel Farage and UKIP have had their moment, letting everyone know they are a serious force that needs to be addressed. But the stakes are far higher than I think many believed or thought could come to pass. The GBP fell dramatically, markets convulsed, Scotland and Northern Ireland might leave and starting Monday many financial jobs will start being cut in London. Now is the time to calm markets not with more interest rate cuts but with some measured language that could open the door to another referendum, or at least avoid the worst outcomes of an isolated and petulant Britain.

* this article had initially incorrectly identified Boris Johnson’s nickname as JoJo

The Robo-Advisor Cometh

 

roboadvisorAs proof that the robot revolution will spare no one, even our industry is feeling the intense weight of cheap human alternatives in the form of “robo-advisors”. Given some glowing press by the Globe and Mail over the last weekend, robot advisors now represent a real and growing segment of the financial services markets and are forcing many advisors, including us, to ask how they and we will live together and what our respective roles will be.

200To say that robo-advisors are a hot topic among financial advisers is to understate the collective paranoia of an industry that has come to see itself as besieged with critical and often unfair press. We haven’t been to a conference, meeting or industry event that doesn’t at some point involve financial advisors attempting to rationalize away the looming presence of cheap and impersonal financial advice. While there are some good questions that get asked at these events, there is a whiff of denial that must have given false hope to autoworkers in the 80s and 90s in these conversations.

For the uninitiated, robo-advisors are investing algorithms that provide a model portfolios based on a risk questionnaire that people can complete online. Typically using passive investment strategies (ETFs), these services charge lower fees than their human counterparts and offer little in the way of services. There isn’t anyone to talk to, no advice is dispensed and you won’t ever get a birthday card. But you can see your portfolio value literally anytime you like on your iPhone.

Looking past the idea of reducing your lifetime financial needs down to a level equivalent to a Netflix subscription, the concern around robo-advisors illustrates everything that our industry gets wrong about what services we provide that are most valuable. The pitch of automated cheap portfolio alternatives revolves entirely around the cost of the investments and has little to say about what it is that leads to bad financial self management.

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The distinguishing feature between what we do, and what a computer algorithm can offer extends well past the price of the investment. Time and time again investors have shown themselves to be bad at investing regardless of their intentions. Financial advisors do not exist because there haven’t been cheap ways to invest money, they exist because there is an existential struggle between planning for events decades away and the fight or flight responses burned into our most reptilian brains. When times get tough investors make bad choices. Financial advisors are there to stop those decisions before they permanently define or destroy an investor’s long term plans.

That multi-decade struggle between an advisor and their client’s most primal instincts is an intangible quality and takes many forms. Genial conversations about new investing ideas, gentle reminders not to overweight stocks that are doing well, trimming earnings and investing in out of favour sectors and sometimes just being there to listen to people as they make sense of their problems and financial concerns is an ongoing roll that we, and thousands of other advisors, have been happy to fill. These qualities can be difficult to quantify, but can be best expressed in two ways. First, by the independent research which has shown that Canadians who work with a financial advisor have 2.7x the assets of investors who didn’t and second, by the number of our clients who have remained clients for the near quarter of a century of our family practice.

Fees, by comparison, are very tangible and as a rule people hate fees. And while bringing down costs is a reasonable expectation in any service, there is a snarky cockiness to proponents of robo-advisors that see the job of financial management as both straight forward and simple. Robot champions are quick to say that financial advisors must adapt to the new world that they are forging, but it is unclear just how different and liberating this world will be. Far from creating a new utopia of cheap financial management for everybody, what seems more likely is that they will have merely created a low cost financial option for low income Canadians, a profitable solution for banks and other large financial firms but not for their investors.

The proof of the pudding is in the tasting, as they say. When the markets suddenly collapsed in the beginning of the year, bottoming out in mid-February, robo-investors did not sit idly by and let their robot managers tend to their business unmolested. Robot advisory practices were swamped with phone calls and firms relied on call centres and asked employees to stay later and work more hours to deal with the sudden influx of concerned investors wondering what they should do, whether they should leave the markets and what was going to happen to their investments. As it turns out, when times are bad people just want to talk to people.

Most Canadians started saving with an adviser when they had few assets. Start saving for your future now by sending us a message!

The Age of Breakable Things

With Brexit around the corner, the potential for a Donald Trump presidency and a host of other global problems (big problems), it’s hard not to talk about all the chaos and what it might mean to investors even when there is lots of other things to go over. For now, this will be our last article on the subject of Brexit until next week following the vote. I will take a look at some other issues later in the week.

One thing that jumps out at me about “Brexit” is how fragile much of our world is. Progress is most often thought of as making things stronger or better, but that is only true to a point. Progress also has the unfortunate downside of making things much more fragile. The more progress allows us to do, the more fragile each step makes us.

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Beautiful tall buildings like this remain a testament to our progress and how profoundly fragile it all is.

Historically that fragility can frequently be seen during times of war. Britain, undoubtedly the world’s most powerful empire at the outset of the first and second world war, saw how quickly its strengths could be overcome by the weaknesses of a far flung empire. The supply lines, the distant resources and the broad reach of the war all exposed the underlying frailty of the British Empire. Two World Wars was all it took to end an empire that had been 500 years in the making.

What we hold in common with the British Empire is the causal assumption that things are the way they are naturally, that we cannot change the inherent status quo in our lives. Canada, the United States and Europe are rich nations because they are naturally rich nations, and not the result of a combination luck, science, philosophy and culture that have conspired to land us where we are today.

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We live in a breakable society, one that doesn’t realize how fragile it is. In the past few years it has been tested in a multitude of ways, and this year is no exception. Brexit isn’t even the worst of how it can be. Syria has been reduced to rubble, Turkey has essentially lapsed into a dictatorship, with Russia having gone the same way. Venezuela, which I wrote about earlier, has moved from breadlines to mob violence.

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Progress isn’t just uneven, it also isn’t guaranteed. Nations, empires and great civilizations have all come and gone, each of them burning brightly, however briefly, before being extinguished. The speed of a decline in Venezuela isn’t just a result of bad management, it is a reflection to just how much support our civilization needs. The rise of the new introverted nationalism doesn’t see this, and has sought an imagined self sufficiency as a way to relieve temporary difficulties. If people thought that the EU was difficult to deal with when you were a part fo it, wait until you aren’t.

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Brexit is a choice that is both scary and appealing because it is scary. For an entire generation there may never be a choice like this again, a chance to permanently alter the geopolitical landscape, even with little understanding of what those changes can mean or do. Whether Britain will be poorer or richer over the next decade may ultimately hinge on the vote this Friday. Far more frightening is whether our ability to build something lasting, powerful but fragile will be permanently undone in the European sphere.