The world has left the economic realm and is now heading into the political, which the Fed’s models cannot weigh because politics are too far complex and cannot be explained by six variables of a perfect free market system. There was a Financial Times article today, titled, “Bond Guru Jeffrey Gundlach: Brexit Not Going To Happen.” In a paradigm of static thought, Gundlach opine that Brexit will not pass in the U.K. for “the devil you know is better than the devil you don’t know. Look at what happened with Scotland. People aren’t going to pull a lever for Brexit, so I don’t even think that’s worth considering in the present time.”
The British pound rallied all day as others, besides Gundlach, weighed in on the need for Britain to remain in the EU. But Gundlach’s view seemed to garner the most air time because “when you are rich they think you really know.” But the static analysis of the devil you know is certainly not playing out in any other electoral outcomes. The recent Dutch Referendum of the EU’s Ukraine Treaty was certainly not expected by the pundits. The strong showing of the AfD in the German regional elections was enough to prompt German Finance Minister Schaeuble to provoke a very terse criticism of Mario Draghi and the ECB. The failure of Portugal and Spain to form governments after the electoral upsets several months ago should cause those with static analysis to be very cautious in their public forecasts. Certainly the popularity of Trump and Sanders provide caution for those invoking, “the devil you know” type static analysis.
The two month campaign period leading up to the Brexit vote will provide opportunity for political disruptors to impact the Brexit vote. Russia, ISIS and others have plenty of reason to try and drive the U.K. out of the formal EU.
In the FT today, Italy’s Finance Minister Pier Carlo Padoan said: “Brexit is a major threat to Europe. It would certainly damage the UK in the first place, but also the rest of Europe … particularly the political consequences.” This is the importance of Brexit and I have argued this point for many months. If Brexit passes, Europe will suffer from referenda contagion and the European elite will be under siege from many different places. Germany will certainly desire a referendum for a say in whether or not it wants to be the perpetual paymaster for the French, Italians, Spanish, Greeks et al. Padoan lays it out: “We need to rethink or strengthen the governance model of the EU and the euro area. Europe needs to have ambition, we cannot continue with piecemeal approaches.”
The ambition for Europe, of course, is defined differently in each individual nation. Recently, the Italians were rebuffed by the Germans over the creation of a EURO BOND to fund the refugees. It’s certainly a European-wide problem but the Germans are afraid that any EURO BOND is the proverbial camel’s nose under the tent. In tomorrow’s FT, there is an article titled, “Italians Fume After Germans Reject EU Migrant Bonds.” Chancellor Merkel’s spokesman Steffen Seibert is quoted: “The federal government sees no basis for a common debt financing of the migration expenditures of member states.”
The Germans know full well that the EU and the weak EURO CURRENCY have enhanced the success of its exports but Germany also is aware of the redistributionist tendencies of the Eurocrats in Brussels. The non-performing loans clogging the Italian banks would be a minimal distraction if the Germans would only acquiesce in allowing their European brethren full and unfettered access to the German credit card. Further complications arose for Chancellor Merkel when her mentor, Helmut Kohl, openly criticized her for the refugee problem facing Europe. In preparing to meet with Hungarian PM Viktor Orban, Kohl said: “The solution lies in affected regions. Not in Europe. Europe cannot be the new home for millions of people in need.”
The criticisms of Merkel are political as well as economic. With a wounded Merkel there is no genuine European leader. The Brexit vote could not be occurring at a more ominous time. Static analysis in a time of great uncertainty may mean that just because your rich doesn’t really carry much weight in the realm of 2+2=5.
***Immediately after the G-20 and IMF meetings in Washington, D.C., the People’s Republic of China, The Russian Federation and the republic of India held its 14th meeting of its foreign ministers. This meeting was held in Moscow and
issued a communique detailing issues of importance to all of the
EURASIAN AND ASIAN powers. Twenty-six points are mentioned but point 23 calls for the IMF to implement the governance reforms agreed to in 2010. It specifically states: “For the IMF continue to promote reform, emerging economies as soon as possible in order to increase and the voice and representation of developing countries,” (translation from the Chinese press).
Point 24 states: “Ministers are convinced that countries in the global economic, financial and trade matters should be of equal rights, equal opportunity and participation, reiterated its support for the establishment of an open world economic system, efficient allocation of resources, free movement of goods and fair and orderly competition to the benefit of all.”
The IMF is in need of change as the economic power of the post-war world is undergoing a DYNAMIC change. Remain static in your analysis at your own risk. Again, the coming months will be loaded with LOW PROBABILITY, HIGH IMPACT EVENTS. Trade, don’t invest for every week, if not every day is the long-term. To quote Keynes: “Markets can remain irrational far longer then you and I can remain solvent.”
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Tags: Angela Merkel, Brexit, EU, Euro, Germany, Jeffrey Gundlach, U.K.
This entry was posted on April 19, 2016 at 7:46 pm and is filed under Europe, UK. You can follow any responses to this entry through the RSS 2.0 feed.
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April 19, 2016 at 9:01 pm |
Yra, you absolutely nailed it.
Any serious reform in Europe, or the US, must be preceeded by the death of the career politician. The EU is the establishment, and the sooner they are made extinct the sooner real reforms can begin. Hopefully, the Brits do not scare as easily as the Scotsmen.
The rallying cry must be “vote out EVERY incumbent EVERY election” to install de facto term limits.
April 19, 2016 at 9:11 pm |
Jeffrey Gundlach is a very smart guy but I think he may be wrong about the Brexit referendum failing. He is underestimating the anger of the Hoi Polloi against the “establishment”. Trump and Sanders are not an American only phenomenon but has suffused Europe as well. The anger against open borders does not end in Mexico but extends to Turkey and Greece. Cameron and Merkel are now being viewed as incompetent and the anger may start with the Brexit vote and move to the continent.
At this point I would put the odds at 60-40 for a no to the collapsing EU. Hedging is recommended.
April 20, 2016 at 5:25 am |
aherz—my point that this time the mood is anti-Davos all over the world.The emerging markets are also raising their voices against the atavistic remnants of the post-war world.Why isn’t Travor manuel or Augusten Carstens the IMF managing director.Do we recall how wrong the U.S. was/is about the Asian Infrastructure Investment Bank—oh yes maybe Cameron will recall how he didn’t do the U.S. bidding on the AIIB now that President Obama is coming to pull Cameron’s nuts out of the referendum fire
April 20, 2016 at 6:01 am
Right Yra. Just as Sykes Picot is falling apart all over the Middle East in contrived national borders, the cracks in IMF and World Bank domination is being challenged in the economic sphere. The AIIB is an expression of this. Davos will be relocated to another continent with a new cast of characters. Look for the dollar remaining the exclusive reserve currency to come to an end with the SDR or equivalent to make an appearance in the next decade, with important ramifications for the U.S. Brexit or Grexit or Germexit will spell the beginning of the end of the EU. Sykes Picot lasted a century. The EU will have a much shorter lifespan. The calm seas post WW ll with the US as world policeman politically and economically is heading for some turbulence.
April 20, 2016 at 10:20 am |
asherz–Excellent EU reference to Sykes-Picot.
April 19, 2016 at 10:00 pm |
I view with deep suspicion and serious trepidation the things told the masses through Madonna style headset/microphone appendages. It always feels like a strange hand in my pocket.
April 20, 2016 at 12:29 am |
Aaaa the rich and the media’s obsession with them. They used to hang on to each word of Ackman and Soros. Both with bold calls that went very sour but the media never learns because the rich sell. People are and always will be obsessed by them. Part envy/desire, part expecting them to be smarter without regard to the circumstances and luck that got them there.
April 20, 2016 at 8:49 pm |
The devil you know is the threat you face, for fear is the primary motivator.
How do you know if an elephant has been in your refrigerator? ans: Examine the cheesecake for footprints.
From my perspective, the FED’s analysis in the very best case, is based on garbage in garbage out. The reality I’m afraid, comes straight from Hellish angels toiling away at “God’s work”.
April 21, 2016 at 7:42 am |
[…] To be clear, I am not a Keynesian. I find the analysis that many of the Keynesians to publish almost juvenile at this point. Clearly, I have confirmation bias. So, I decided to check in with my good friend Yra Harris. […]
June 20, 2016 at 9:09 pm |
[…] status quo–exactly what Geoffrey Gundlach had predicted several weeks ago (SEE NOTES POST, IF I WAS A RICH MAN). Yra’s first law: Money is fascist and always seeks the highest return in a hoped for stable […]
June 26, 2016 at 7:00 pm |
Yra–the original date of this post was April 19th,2016.Read the original post and its comments from readers for its full flavor of over two months ago