While we’re waiting for the outcome of the Spanish election, I am setting the stage for a larger piece on the market reaction to a high frequency political event. There is a continuing rebuff to the global elites that only reside in their own echo chamber, much of it promoted by the established media. It’s amazing how the policy makers want to believe that the people cannot see behind the curtain. BREXIT was first and foremost a Dorothy/Wizard of Oz result.
More will follow as we wait for a response from the BOJ and Prime Minister Abe about the one-sided currency move as the Japanese yen (for some unfathomable construct of the ALGOs) is the major haven currency. The Swiss/YEN cross should be watched as a barometer of the ludicrous overvaluation of the YEN. Again, more to follow as the fog lifts from the battle field of flawed analysis.
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.”