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Why Global Markets Haven’t Been Troubled By Brexit

March 13, 5:00 pm EST

We haven’t talked much about the Brexit drama.

Why? Because it has been noisy, yet unlikely to create any shock-waves through the global economy.

Even the knee-jerk reaction to the Brexit vote in 2016, didn’t have staying power. The uncertainty that was quickly manifested in global stocks, was just as quickly reversed. You can see it in the S&P chart below …

Why the sharp reversal? And why isn’t Brexit a big shock risk?

We had seen a similar movie before: Grexit. Greece’s EU and EMU partners talked tough about a “my way or the highway” bailout plan, which included harsh austerity. But when push came to shove, the Greek’s stood their ground, resisted the harsh austerity measures that came with the bailout, and it quickly became clear that Europe had more to lose, than did Greece, by the Greeks leaving the EU and (most importantly) leaving the euro. The Greek’s had negotiating leverage. And they got concessions.
In the case of Brexit, the EU partners started with tough talk too, promising a dark and ugly future for the UK. But the EU had/has plenty of risk (i.e. others following the lead of Britain … ex. Italy, Spain). Clearly they both need each other to thrive. The UK loses if the EU implodes. The EU loses if the UK implodes.

The populist movement that gave us Grexit, gave us Brexit and then the Trump election, and recently a new government in Italy with an “Italy first” agenda. It’s a movement of reform. And reform is now becoming the norm, not the extreme. We’re hoping to see reform in China now too.

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Fewer And Fewer Reasons To Doubt The Stock Market Bull

May 8, 2017, 4:00pm EST Invest Alongside Billionaires For $297/Qtr

For the skeptics on the bull market in stocks and the broader economy, the reasons to worry continue to get scratched off of the list.

Brexit. Russia. Trump’s protectionist threats. Trump’s inability to get policies legislated. The French election.

The bears, those looking for a recession around the corner and big slide in stocks, are losing ammunition for the story.

With the threat of instability from the French election now passed, these are two of the more intriguing catch-up trades.

may8 eur ibex

In the chart above, the green line is Spanish stocks (the IBEX). U.S., German and UK stocks have not only recovered the 2007 pre-crisis highs but blown past them — sitting on or near (in the case of UK stocks) record highs. Not only does the French vote punctuate the break of this nine year downtrend, but it has about 45% left in it to revisit the 2007 highs. And the euro, in purple, could have a dramatic recovery with the cloud of French elections lifted, which was an imminent threat to the future of the single currency.Next … Japanese stocks. While the attention over the past five months has been diverted toward U.S. politics and policies, the Bank of Japan has continued with unlimited QE. As U.S. rates crawl higher, it pulls Japanese government bond yields with it, moving the Japanese market interest rate above and away from the zero line. Remember, that’s where the BOJ has pegged the target for it’s 10 year yield – zero. That means they buy unlimited bonds to push the yield back down. That means they print more and more yen, which buys more and more Japanese stocks.

The Nikkei has been one of the biggest movers over the past couple of weeks (up almost 10%) since it was evident that the high probability outcome in the French election was a Macron win.Again, German, U.S., and UK stocks are at or near record highs. The Nikkei has been trailing behind and looks to make another run now, with 25,000 in sight.If you need more convincing that stocks can go much higher, Warren Buffett reiterated over the weekend that this low interest rate environment and outlook makes stocks “dirt cheap.” Last year he made the point that when interest rates were 15% [in the early 1980s], there was enormous pull on all assets, not just stocks. Investors have a lot of choices at 15% rates. It’s very different when rates are zero (or still near zero). He said, in a world where investors knew interest rates would be zero “forever,” stocks would sell at 100 or 200 times earnings because there would be nowhere else to earn a return.

Buffett essentially said at zero interest rates into perpetuity, the upside on the stock market (and any alternative asset class with return) is essentially infinite, as people are forced to find return by taking risk. Why you would buy a treasury bond that has no growth, and little-to-no yield and the same or worse balance sheet than high quality dividend stock.

This “forcing of the hand” (pushing investors into return producing assets) is an explicit objective by the interest rate policies of the Fed and the other major central banks of the world. They need us to buy stocks. They need us to spend money. They need economic growth.

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First Trump Hiccups, Now Brexit Flare-Ups Coming For Stocks

March 27, 2017, 4:00pm EST Invest Alongside Billionaires For $297/Qtr

This will be an interesting week. We had almost three months of optimism priced into global markets following the November 8th elections. And then the tide turned when Trump gave his speech to the join sessions of Congress.

This is the buy-the-rumor sell-the-fact phenomenon we’ve discussed. People bought on anticipation of a big policy shift. And now they’re taking profit (raising cash) waiting to see it all executed — the prove-it-to-me phase.

I think we’re beginning to see the same phenomenon unfold in the Brexit saga. Brexit came before Trump, but the cycle has been slower and longer. Much like the Trump trend, the Brexit news started with an initial “sell everything” on the fear of the unknown, but soon thereafter, the “buy on anticipation of something better” prevailed. But it’s looking very vulnerable now to a turn in the tide.

On Friday, we looked at this next chart. This trend higher in UK stocks looks much like the Trump trend in U.S. stocks – a nice 45 degree climb from June of last year.

mar 24 ftse

But as we discussed on Friday, the “prove-it-to-me” phase looks set to arrive this week in the Brexit story. With that, here’s what the chart looks like today …

mar 27 ftse

This nine-month trend line in UK stocks gave way today – in part because of the softening in expectations about Trump policies, but largely because the UK Prime Minister is expected to officially notify the European Union on Wednesday, of the UK’s exit from the EU. Again, this would start the clock on the two year wind-down of the UK constituency in the EU. And the official negotiations will begin, on what the UK/EU relationship will look like – namely, on trade.

Expect the negotiations to be ugly in the early stages. Why? Because there is a lot to lose if it looks too easy. The future of the European Union and the common currency (the euro) hang in the balance on these negotiations. The most important job of EU officials, at this stage, is keeping other EU members from hitting the eject button, following the lead of the UK. A domino effect of exits would kill the EU and it would be the end of the euro. And that would have huge, destabilizing global ramifications.

With all of this in mind, it’s very likely that after long period of ultra-low volatility in markets, things will be a little more dicey in the months ahead. That should keep pressure on yields and should keep the correction in U.S. stocks intact.

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