Monthly Archives: June 2016

UK Citizens Vote to Exit the EU, Global Markets React

Much is happening in the international economy and global markets, but they all pale in comparison and effect to the decision of the citizens of the UK to exit the European Union. The exit of the EU’s most powerful, prosperous and highest financial contributing member, not only weakens the EU, but brings further into question the entire concept of the European Union. A month ago Switzerland and Iceland withdrew their applications to the EU by similar referendum votes and the Netherlands will be the next EU nation to hold a referendum to exit or remain in the EU. One month ago the EU was 29 nations and today they are 27. The real fear and likely outcome of this shift, isn’t that the UK is going to have problems, it’s that the EU will disintegrate and become irrelevant. Britain has operated as a world power for thousands of years, but has only been in the EU a few decades, so it’s hard to believe that it won’t do just fine on its own. The massive unelected regulatory and bureaucratic structure of the EU stifles innovation, limits economic freedom and high-jacks a nation’s sovereignty and ability to determine its own destiny.

The Brexit Referendum vote was about whether British citizens would identify themselves as British exercising democratic control over their own sovereignty, or as Europeans, ruled by an unelected European bureaucracy who answers to no one and ignores the history, culture and identity of individual nations. So why are some world leaders, international corporations and global markets reacting so strongly? It’s because a large nation and its people have opted out of a bureaucratic financial structure which had grouped 29 nations together, so that the rest of the nations of the world only had to deal with one organization (the EU) to buy, sell and trade, instead of 29 separate nations and governments. In essence, It’s easier and takes a lot less time, money and effort to go one place to trade with 29 nations, but now governments and international corporations are going to have to hire additional trade representatives and lobbyists in both the UK and Switzerland; it’s all about the money.

The EU is afraid that other nations are going to vote to exit as well, causing it to lose membership fees and lessening its power and relevancy to the rest of the world because now they have less to offer. The regulatory scheme and the size and scope of the bureaucratic structure of the EU eclipses most governments, however, unlike most governments, the EU is not controlled by the nations they oversee or by democratic election. In fact, the EU is one of the most undemocratic organizations in the world. The EU parliament cannot create, pass or veto a regulation issued by the bureaucrats running EU, they have no power; they are simply window dressing to create the illusion of democratic participation. World leaders and governments who believe commerce, trade and international corporations need to be controlled and tightly regulated, love the EU. Nations and leaders, who believe in free enterprise, unleashing innovation and allowing people the ability to make choices without government interference, don’t like the EU.

One of the main benefits of being an EU nation is getting more favorable trade deals, which allows for better import/export rates and terms than nations could negotiate on their own. There is also free trade, exchange, travel and immigration between EU member nations. Member nations do, however, have to pay hefty membership fees, obey all EU regulations and policies. The 19 nations that use the euro have had to give up their own currency, as well as control of their banks and central bank, to be governed by the European Central Bank (ECB). Nations like the UK and Switzerland, who still have their own currency and central bank, give up far more than they get to be EU members, and the regulatory burden is enormous. Immigration and open border regulations alone have pushed many EU nations to openly defy them and could push more nations out.

The drop in the pound and UK markets will be short lived, as the UK will no longer be tied to an over-regulated and over-indebted bureaucratic structure with a failing insolvent banking system, growthless economy, poorly preforming markets and over-burdening immigration policy. The UK economy and the pound are in far better shape than the EU and the euro, even with the recent drop the pound experienced. The UK is in a far better position to handle all the financial shakings that are coming than the EU. Britain, like the US, is a nation of consumers who have the financial ability to purchase goods and services at a time when other EU and world nations need to sell. No one is going to care whether or not the UK is in the EU or not. If global markets were sound and built on solid ground, then Britain leaving the EU would be fairly innocuous and have little effect, however, because most global markets are over-valued, have little or no growth and are relying on central bank intervention to keep them afloat, any major change rocks them and creates mass volatility.

Brexit A Very British Revolution (6-24-16) WSJ |
Why Britain Declared Independence (6-24-16) WSJ Video
Brexit a Reckoning for Europe (6-24-16) WSJ
UK Must Leave EU as Soon as Possible EU Foreign Ministers Say (6-25-16)
U.K. Backs Brexit as Cameron Resigns After Historic Rupture (6-24-16)
Brexit Sends US Markets for a Ride Without Overwhelming System (6-24-16)
A Quick Guide to Brexit and Beyond (6-24-16)
Brexit Upends Global Markets as Stocks, Pound Plunge Yen Soars (6-24-16)
Europe’s Plan for Brexit (6-24-16) Bloomberg Video
Bill Gross Talks Brexit, Bonds, and Central Banks (6-24-16) Bloomberg Video
Bill Gross on Bonds, ECB and Market Fundamentals (6-24-16) Bloomberg Video
The People Against the Establishment a Swiss Story of Inspiration (3-16-16) by Claudio Grass

The WSJ reported that a group of notable British economists countered claims that the UK would become poorer if it left the European Union, a move that follows a barrage of gloomy forecasts for the British economy.. In a report published Thursday by the eight “Economists for Brexit,” the group said the UK economy would be better off outside the EU and could be as much as 2% larger by 2020 if it left—and as much as 4% larger after 10 to 15 years. Proponents of leaving the EU say quitting would free Britain of burdensome regulation and costs, and leave it freer to deal with faster-growing parts of the world. Patrick Minford, professor of applied economics at Cardiff University in Wales and one of the authors of Thursday’s report, said that prices on products such as food would probably fall if Britain were outside the EU, because the UK wouldn’t be subject to the EU’s tariffs on imported goods. “Consumers pay higher prices within the union,” Mr. Minford said. Roger Bootle, founder of economics consultancy Capital Economics and another of the report’s authors added that those arguing in favor of remaining in the EU have overstated the benefits of membership, especially given the bloc’s weak economic performance in recent years relative to other advanced economies. “The EU makes some very bad economic decisions,” he said. Even in Germany, the economic leader of the EU, resistance to EU membership is growing. The Alternative for Germany party (AfD) emerged in 2013, advocating Swiss-style democracy with a stance of mild euro-skepticism. Since then its popularity has increased and it has pushed back further against the EU, inter alia advocating the dissolution of the euro-zone.

Pro-‘Brexit’ Economists Make Case for U.K. Exit From EU (4.28-16) WSJ
EU Red Tape is Suffocating UK Economy and Brexit Can Set Us Free (4-29-16) London Telegraph
The EU Exists Only to Become A Superstate Where Britain has no Place (5-2-16)

On Dec 31, 2014, the Dow closed at 17,823 and in 2015 it finished at 17,425. After the Brexit vote the Dow closed the week at 17,400, 423 points lower than the end of 2014. At the end of the first quarter, $1.2T of US corporate bonds were downgraded by rating agencies. Had it not been for the unprecedented stock buybacks by US corporations in the 4-Q of 2015, and the 1-Q & 2-Qs of 2016, there would have been far greater a losses. On May 10 of this year, Federal Reserve Chairwoman Janet Yellen said, the Fed wouldn’t rule out using negative interest rates to boost the economy, but she cautioned such a move would have to be carefully studied. On June 6th, she indicated the Fed planned to raise interest rates at their June 16-17 meeting, however, on the 17th she testified that they would not be raising interest rates in the near future. What the Federal Reserve says they’re going to do seems to change from week to week.

Yellen Says Fed Does Have Legal Basis to Pursue Negative Rates (6-21-16) Forexlive!/yellen-says-fed-does-not-have-legal-basis-to-pursue-negative-rates-20160621
Yellen Says Forces Holding Down Rates May Be Long Lasting (6-15-16)
Parsing Yellen’s Speech at World Affairs Council (6-7-16)
Yellen, in Letter, Does Not Rule Out Negative Interest Rates (5-12-16) WSJ
Buyback Surge Is Finally Losing Steam (3-28-16) CNBC
Why the Next Move Is Down the Q1 Corporate Buyback Blackout Starts Now (3-21-16)

US Markets
Earnings have dampened the appeal of global equities markets. The world’s three most valuable companies — Apple, Alphabet Inc. and Microsoft Corp. — have all released disappointing results in the past month, weighing on investor sentiment amid ongoing concern that global growth is slowing. U.S. corporate profits weighed down by the energy slump and slowing global growth are set to decline for the third straight quarter in the longest slide in earnings since the financial crisis. Revenues will have declined for five quarters in a row, outstripping even the four-quarter slide in 2008 and 2009. U.S. gross domestic product rose just 0.5% in the first quarter. Ultimately, despite the resilience of the U.S. consumer, economic growth is likely to remain sluggish given continuing woes in emerging markets, sizable inventories, a still strong US dollar and still weak capital investment, says Joseph LaVorgna, chief U.S. economist for Deutsche Bank. “It’ll be hard to get a whole lot of corporate profit growth,” Mr. LaVorgna said. “It’s hard to get really bullish.” On June 10th the WSJ & Bloomberg reported that George Soros started actively trading and moved most of his equity holdings into gold, in the next day and half so did many others.

U.S. Corporate Profits on Pace for Third Straight Decline (4-28-16) WSJ
U.S. Stocks Pare Drop, Treasuries Rise Before Fed as Oil Gains (4-26-16)
Global Profits Recession Leaves Investors With Nowhere to Hide (4-5-16)

Negative Interest Rates
Negative, zero or very low interest rates encourage people to buy much more expensive homes than they normally would, which is to their benefit until interest rates rise. Despite stagnant economies, many European cities are experiencing a rapid rise in home prices, largely because of low interest rate policies. This real estate bubble cannot be sustained, so at some point it’s all going to come crashing down.
The proponents of more government spending often refer to their spending plans as investments that will pay for themselves, but many government expenditures not only do not pay for themselves but actually reduce growth and job creation. If the proponents of more government spending really believe their rhetoric that spending has a positive rate of return, then they should be in favor of more government borrowing and less taxing when interest rates are very low or negative. If government spending on average provides a positive 3% rate of return to society and the cost of borrowing is near zero, why tax at all?

Stan Druckenmiller, billionaire investor with one of the best long-term track records in money management, said the bull market in stocks has “exhausted itself” and that gold is his largest currency allocation. Druckenmiller, speaking Ira Sohn Investment Conference in New York., said bankers experiment with “the absurd notion of negative interest rates,” but he’s wagering on gold. “Some regard it as a metal, we regard it as a currency and it remains our largest currency allocation,” he said, without naming the metal. Druckenmiller warned that this moment reminds him of the period before the 2008 financial crisis, “negative interest rates are the definition of deflation,” he said.

The Bavarian Banking Association in Germany advised its member banks to hold physical cash instead of reserve deposits with the European Central Bank (ECB) at negative interest. Some major insurance funds are also jumping on board, choosing to hold physical cash instead of bank deposits earning negative interest. In its effort to avoid negative interest rates, the Canton of Zug in Switzerland asked its citizens to delay paying their taxes. Now even the political and media establishments in Germany are rebelling against the ECB, saying that negative interest rates chip away at the savings of pensioners.

The Madness of Negative Interest Rates (5-2-16) by The Washington Times
Bull Market Exhausted, Buy Gold Says Stanley Druckenmiller (5-5-16)
Billionaire Trader Stanley Druckenmiller Cites Similarities to 2008 Crisis (5-4-16) WSJ

The more governing and regulatory structures can be decentralized, the more economic freedom and opportunities there would be. Central banks and governments are trying to exercise more control and are slowly making holding cash more and more difficult. The EU just eliminated the 500 euro bill and the US is discussing eliminating the $100 bill. As negative interest rates spread, cash creates a problem, if people withdraw and begin to hoard cash. If cash is eliminated, banks and central banks could go as negative as they want and there would be little people and businesses could do about it. Crypto currencies (computer generated currencies) are an option and there are many individuals, companies and even nations who are using and looking them as alternative currencies. At first, governments were against crypto currencies, but negative interest rates have caused them to slow their condemnation, as this may be an option or vehicle to eliminate cash, but they want to centralize and control it. It is uncertain how this will all play out, but as long as we have cash, silver, gold, a non-government form of a crypto-currency or some other type of cash; we maintain a degree of control and freedom. If we were to lose the ability to transact in cash, free enterprise and personal economic freedom would be over.

There is little stability and much volatility; Puerto Rico is about to default again, Italy’s banks are in trouble, the AIIB new world bank just announced their first set of loans, US Federal Courts & the SEC have found Dodd Frank to be dysfunctional, unenforceable & fatally flawed, central banks and global markets are floundering, and European governments & leaders are changing at a rapid rate. Analysts are saying it’s looking like 2007-2009 all over again, but worse. The Brexit vote was unexpected and could potentially unravel the EU which was already on shaky ground before Switzerland and Iceland withdrew their membership applications. Next week the markets will continue to experience volatility, the Dow fell 512 points Friday and according to opening market orders it’s already 668 points down as of Saturday. One thing is for sure, next week there’s “gonna be a whole lot a shaking going on.”

The Subprime Mortgage is Back It’s 2008 All Over Again (6-14-16) SMC

The subprime mortgage is back: it’s 2008 all over again

Puerto Rico Governor Warns of Another Default (5-6-16) WSJ
China-Led AIIB Announces First Loans in Xi Push for Influence (6-24-16)
Italy Must Choose Between the Euro and Its Own Survival (5-12-16) The Telegraph
Global Corporate Debt Now Far Exceeds Pre-Lehman Bubble (5-8-16) by             International Business Times
America’s Earning Recession Just Got Worse (4-29-16) By Patrick Gillespie at CNN
9 Signs That 2016 Looks Ominously Like 2008 Just Before the Crisis (3-17-16) SMC