SCOTTISH REFERENDUM IS A TRIUMPH FOR MARKETS

Drastic political change might appeal to nationalistic populists, but it is generally toxic to
global economic efficiency. Contrary to the opinion of Scottish First Minister Alex Salmond,
the 55% of voters who rejected a referendum measure which would have granted Scotland its
political independence from the United Kingdom acted in their nations best interest. Market
data suggests investors became significantly more confident in Scottish-based firms after vot-
ers defeated the referendum. The Royal Bank of Scotland plc, Lloyds Banking Group, Stand-
ard Life plc, Weir Group plc, and other firms rallied in the stock market after the referen-
dums defeat. This jump in market performance demonstrates that Scottish voters spared
their nation from a quagmire of uncertainty which would have stunted business growth and
disrupted trade.
The legal implications of Scottish independence would have forced sweeping changes in busi-
ness practices for U.K. firms. In order to remain in compliance with a European Union rule
that banks must be based in the same country as most of their business, firms like the Royal
Bank of Scotland and Lloyds Banking Group devoted resources to developing contingency
plans to move their headquarters to England. Moreover, Scottish independence would have
subjected an important trading partner, Northern Ireland, to two separate tax regimes and
regulatory systems. This would have been detrimental to bilateral trade, which currently in-
cludes 700 million of Northern Ireland manufacturing sales, according to PwC. Internation-
al trade could also have been disrupted by uncertainty regarding what currency an independ-
ent Scotland would have used. By taking these changes off the table, Scotlands rejection of
the independence referendum makes the U.K. a more attractive place to invest.
The U.K. should see more economic stability, now that the specter of Scottish independence
has vanished. Although an overnight spike which elevated the pound to a two-year high
against the Euro and two-week high against the U.S. dollar proved to be temporary, there is
reason to be optimistic about the future of the U.K. economy. Tom Stevenson, head of Corpo-
rate and Investment Writing for Fidelity Personal Investing, argues that U.K. stocks have a
significant valuation advantage over their U.S. counterparts and should thrive in a low-
interest rate environment. The market has rendered its verdict: the world is better off with
Scotland remaining in the U.K. It is time to reap the benefits of the electorates wisdom. JK
THE PENNSYLVANIA STATE UNIVERSITY ECONOMICS ASSOCIATION PRESENTS:
EDITOR: JOE KEARNS PRINT EDUCATION COORDINATOR
CONTRIBUTORS: MIKE CHUBINSKY, JOE KEARNS, SHAAN
PATTNI
FALL SEMESTER 2014: VOLUME TWO
SEPTEMBER 23, 2014
THE OPTIMAL BUNDLE
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How Catalonia Can Rock Our World
Divided we stand. That seems to be the motto in Europe lately, as the
Catalonia region of Spain prepares to fight for independence from Spain
through a nonbinding referendum on November 9
th
. For the sake of the
Spain and Europes economic stability their independence should not be
allowed. It is true that Catalonia is a wealthy and highly industrial region
of Spain that mainly speaks its own language (Catalan), maintains its
own culture, and operates under a large amount of autonomy. Thus, it
provides a large amount of economic growth, tax revenue, and positive
externalities (Barcelonas tourism industry) to the Spanish economy. If
Catalonia were to leave, then an already fragile Spanish economy would
be severely undermined and almost definitely enter a recession. The rip-
ple effects of this consequence would send negative ripple effects
through the Eurozone and global markets. Divided we all fall. SP
Reverse Repos: The Feds Next Weapon?
Last Wednesday, the Fed released a revised plan for how it intends to raise interest
rates for the first time since the Great Recession. Still relying on the benchmark
Federal Funds Rate as its main tool, the Fed is now also looking at a tool called
Reverse Repurchase Agreements (Reverse Repos). When the Fed uses Reverse
Repos, it takes cash from participating institutions in exchange for one-day loans
of treasury securities, on which the Fed pays interest. Fed officials believe that the
rate it pays on reverse repos can set a floor underneath short-term interest rates.
Fed Chairwomen Janet Yellen stresses that this method of raising interest rates
would be temporary.. Many experts do not believe the Fed will even begin their
plan to raise interest rates until next summer. Nevertheless, the message to markets
is clear: the green light for higher interest rates is on . Its just a matter of how
hard the Fed wants to hit the gas. MC
Biggest IPO Ever Recorded Begins Trading
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Catalonia votes for its inde-
pendence on November 9th.
Fed Chair Janet Yellen
stressed reverse repos would
be used just on a temporary
basis.
Alibaba recorded the big-
gest IPO ever.
Alibaba, the worlds biggest online commerce company began trading last
Friday. Its IPO generated impressive short-term results which overshadow
the reasons why the companys success is unlikely to extend to the long-term.
The IPO raised a record due $25 billion dollars, the company has a $227 bil-
lion market cap, making it larger than Facebook and IBM. Alibabas coveted
profit margin is an astounding 44% compared to Amazons mere 1%. Never-
theless, Alibaba primarily operates in China and therefore has not entered
the fiercely competitive U.S. markets. In other markets Alibaba will not have
the strong government connections it benefits from in China. With the world
moving to mobile technology, Alibabas ability to adapt to the changing envi-
ronment will be severely tested. Alibaba is about to enter a storm, and they
must face the mentality of its competitors like Jeff Bezos whose battle cry is
your margin is my opportunity. SP
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