There’s so many things that haven’t even been remotely thought out.
British Leavers are turning their back on European markets, so what fills that void? The US? What makes them think the US is going to be in any hurry to work out a new favorable trade deal with a UK that may not even exist in it’s current state in five years, especially if it’s going to antagonize much more lucrative EU markets? If Scotland wants to leave the UK and rejoin the EU, what does Britain do with the nuke warheads that are currently being stored in Scotland at RNAD Coulport? Is the UK now going to build a militarized border between Northern Ireland and the Republic of Ireland? If you’re French, you can travel freely in the EU into Dublin. Take a short bus into Lifford North Ireland … you’ve just penetrated the “Fortress Britain” with no border checks, no passport check, etc. Okay, so if you set up a hard militarized border … now, you’ve just stirred up all your old problems in Northern Ireland that have just recently settled down. Ready for machine gun checkpoints and daily car bombs again? What happens to all of the people who have become quite accustomed to living and working seperately in Northern Ireland and Republic of Ireland and traveling freely back and forth? Northern Ireland voted overwhelmingly to remain for exactly these reasons.
And what happens in 10-15 years when the older voters who voted to leave die off, and the younger people who wanted to stay in the EU are the clear majority? We got through the whole process of rejoining the EU again, and revisit all the same legalities?
Which brings up the point of “What’s next?” I think what’s next is a lot of empty gestures and symbolism of sovereignty that is gong to ultimately amount to nothing when the rubber meets the road, because people actually have grown quite accustomed to “globalism” whether it polls well or not. Are debtor countries prepared to leave the EU if it means no more cheap and easy ECB money to fund their pension plans? Are Americans willing to pay 2X more for their iPhones and flat screen TVs to implement protectionist trade policies? Things always sound better in theory than in reality, as many Brit voters are starting to find out. And the younger generations are not nearly as nationalistic and opposed to “globalism”. While Bernie Sanders did stake out a stake in trade isolationism, most of his voters are young people who wanted the US to be more like Europe.
On Brexit in general, given that most of yes votes come from old grumbling worker class people I’m not surprised how it ended up. But apart from irony, there is a sentiment of frustration across lower classes all over the world. The reason is quite simple: real incomes for low-medium skilled workers have gone nowhere in the last 20 years in the Us, even declined in Europe. Not exactly reassuring for equity valuation a possible shift to a less liberal agenda for policy makers. It’s more the dollar strenght to be a sign of flight to quality, I don’t see brexit to be any good for Us valuations.
The most striking thing to me is how little is Brexit affecting credit (for now): taking down equities and sovereign yield, reaping across currency markets, but leaving credit spreads (apart maybe banking HY) far from alarming levels. Implied volatility is also strangely subdued relatively to realized price movements. For now, at least.
@StockMarketStudent, my 2 cents on interest rates: well, early 1980 and early 2000 were perfect moments to invest in fixed income! Real interest rates were high and inflation coming down. In my view, it does not matter where the nominal interest rate are, but:
1) where REAL rates are. Cash is king during deflation, but apart for some periphery EU country, that is not the case worldwide. Central bankers are struggling to generate real negative interest rate, creating in the process tremendous distortions in financial markets. As long as these distortions increase risk premiums on risky assets, in an asset allocation framework pricey LT bonds are still nice. Though, I prefer leveraged intermediate term instruments to get duration (namely 5-10y T-bond futures+ short term bonds) to TLT. Much better exposure to positive sloped yield curve and rolling return.
2) inflation and debt figures. Inflation tends to be very much mean reverting in independent central banking fiat currency systems. We tasted a bit of deflation caused by oil and struggling banking sector. Of course as long as exogenous shocks keep coming (from UK, possibly China, etc…), nominal rates will keep coming down. But low inflation is terrible to pay out debt, and globally we have a lot of liabilities compared to historical levels. Default or, more probably, induced inflation will have to happen. Either case, rates will shoot up. Question is, when. And don’t tell me BOJ or others will ever shrink their QE balance sheets. We are in a deleveraging cycle, last one this big had taken 20 years to realize (1929-1949).
At least many opportunities in markets are coming out of this.
Marc, regulation is fu**** up and there are no plans to reduce it. To give you an idea, last week some crazy bureaucrat submitted to EU parliament a proposal to tax robos for social security. The intention maybe is good, but all the regulation they use to protect indivual rights usually ends up being restrictive of general economic potential.
Riki - 1980s and 2000 are in the past and hence 20/20 hindsight plays a role. How about now? Real or unreal, is a decline in interest rates a contrarian position? Same for TLT?
All - first of all, there are two types of globalization. One is technology driven. We can facetime friends half way around the world. We can fly just about anywhere, provided we can secure a visa. The world is getting smaller, a lot smaller, due to technology. But lets not confuse technology-driven globalization, with monetary-driven globalization.
InmanRoshi - the UK of the 70s had riots and high unemployment. How does that stack up against the riots and unemployment today? I had a visitor from Spain two years ago, apparently the unemployment rate for youth in Spain was greater than 50%. Riots? It seems to me that there have been riots in France for years over immigrants. Am I wrong to say that most Europeans want control of their immigration policies?
I’m not sure how we can attribute European stability to the EU or globalization for that matter. From 1950-1990 we had the cold war, East and West Germany, keeping things under control. Since that time, we have managed to avoid global wars because the result would be nuclear destruction.
Europe is like marriage, when there is lots of money floating around, everyone is happy. But remember, most divorces are a result of financial problems.
I apologize for taking this thread off-topic but I would like to share some quotes from John Mauldin’s latest EMAIL:
“On average, across the continent, the debt-to-GDP ratio is about 90%. It is up to 135% and will soon be a 140% in Italy. Either Europe mutualizes all its debt and Germany says, “Ja, vee vill take it,” or the debt problem will continue to worsen. If they mutualize, they can put the debt on the balance sheet of the ECB, and then all the countries of the Eurozone will pinky swear to balance their budgets in the future, giving up their national sovereignty to Brussels.”
“A European treaty is actually what my teenage girls called a pinky swear. They mean it when they sign those treaties, but the problem is actually adhering to the treaty.”
“The Fed is not that different, by the way, from the Oral Roberts tent revivals of my youth. How many of you people went to a tent revival? There are a few of us, okay. The rest of you won’t admit it. Oral (or pick your favorite evangelist) would stand there and he would say, “You’ve got to believe!” And you believed.”
“When you become a central banker, they take you into the back room; they do a DNA swap on you; and you become genetically, viscerally, aggressively opposed to deflation. You do anything you can to make sure deflation never happens on your watch. If that means negative rates, you have to think the unthinkable. If that means more quantitative easing, you keep right at it: you keep printing. That is what is happening in Europe and Japan, and it’s what has happened in the US.”
“If we go back for the last 100 quarters with their (Fed Reserve’s) predictions, they are zero for 100. It is statistically impossible to be worse. They have changed their models in three fundamentally different ways over the last 40 years – and, dear gods, every time it made things worse, not better.”
Steve, et al., when I think of globalization, I think of the easy worldwide movement of money, material and human effort (including ideas). Not just money. And it is driven by open communication through technology. My view is that this is a double edged sword. It both lowers costs and it 'lowers costs". So if you are a beneficiary of lower costs, then it is great. But if your wages go down or have increased job instability, it is not. My guess is that if people really deeply thought about their own personal lives and what they now have access to, which globalization enabled, versus the instability in their lives now due to it, they would see it is a mixed bag. If you just lost your job in the UK because your steel mill was just transferred to Indonesia, then yes, that is huge. But if that same person’s spouse was working for an international company as an accountant, and was paid well, then that would be a plus. So I think that globalization creates both new opportunities as well as competition. Everyone loves the benefits of new opportunity but competition is a real test of character through adversity.
As others have pointed out, the US has had a free ride pretty much from our founding hundreds of years ago. We are now seeing (economic) adversity. Are we up to the challenge? (same goes for the EU, UK, Canada, Greece, Russia, Saudia Arabia etc, etc)
That kind of loops back on my original question about investing in US markets now as the ‘exits’ potentially occur. If the US is perceived as being more stable, then we will take a hit but recover. If we freak out too much, our markets could really start to tumble as well. I hope nothing too astonishing occurs in November. We could have our own version of Brexit if it does…
I have given this thread very little thought, so take the comments with a grain of salt…
Having said that, it seems to me that if you are an equity investor with a fairly long time frame, now might be a time to start looking at companies (indexes) in Germany. They are getting punished as well, but if some good news starts coming out of UK (markets tend to overreact in the short-term), they will likely rebound, and if it gets worse and UK eventually leaves, a lot of the finance, etc. will likely move to Germany - and Germany will likely prosper. So, seems like the country is now poised to do relatively fairly well either way (with lots of volatility and pain) - with PE’s down in the 14 range. The best play here might actually be in real estate in the cities most likely to absorb the tech & finance and fintech companies (does Germany have a 'startup hub, and what city is it) and in the ‘service’ companies and industries that will support a population influx. So, still might be best to play this locally. The broad market will likely get cheaper, so wouldn’t do a huge position- and wouldn’t do anything if you don’t want to hold it long-term.
I am not really the above type of investor.
I would also consider real estate backed asset lending to real estate developers with conservative loan-to-value in these cities. It’s likely that corporate, multi-family and service based real estate developers will do very well if this exit materializes and still be fine if it doesn’t, and going in at the senior debt level is fairly safe way to play this (although limits upside). So, if anyone knows of companies with this thesis in Germany that US investors can access, I’d love to take a look (or funds or ETF’s doing this?).
The ‘best outcomes’ market wise are going to be long-volatility short-term traders most likely (this is mostly managed futures short-term trend followers or pattern trading systems). I have allocations (about 10% or port) to these types of systems. They have been going up this year and doing fairly well - so have been good hedge.
Some currency traders (more short-term pattern based) should also do very well over the next 3 months. There are many based in Switzerland who trade Europe.
There’s still a good chance Pound and British stocks will be good play as when this gets worked out it may be a big non-event still (reversal, second vote, the terms of the leave, etc). But no real ‘option like plays’ here that pop to mind initially… apart from long-term call options if you can find any that don’t cost ridiculous amounts due to vol spikes.
May actually be a good time to start ‘selling vol.’ on Pound and some British stocks if you are willing to endure a ‘wild ride’ - likely will have some very good exit points on this trade. Not for me, but should have places to make money here.
I am surprised by the amount of the bitcoin rally. This is not what I would consider a stable world currency. I have followed many of the angel investors in the space (like Fred Wilson at USV ventures) and agree it will probably survive and could end up an amazing investment. But too risky for me to allocate any large amount to.
The great real fear is that we are going to continue to see rising nationalism, more tarriff’s and ‘populist’ candidates, more extreme politics, and more and more of the conditions that historically have led to large civil unrest, major wars and tend to depress growth over time. I agree that with what’s coming in AI and machine learning and capitalism, countries have a lot of BIG things to figure out - likely the most since pre-World War 2 - or this is going to get very ugly - and it could happen fairly quickly (not to mention likely battles over economic and natural resources). Economic growth and trade are still the two best forces we have (so long as their is some realistic shot at gaining entry into the ‘haves’) - to maintain some level of cooperation and peace. But the rise in income disparity between and within nations has made current societies fragile - more so than any time since most likely right before WW2.
The Working and middle classes are now being hit hard (and likely to grow worse) over next 20 years.
I can’t say this will happen, and hope it won’t, but it feels like the most dangerous time in many, many decades.
The biggest difference now is the speed with which entire industries will be automated. We have never seen anything like this coming change in human history. People won’t be able to retool skills fast enough (worst case) and more and wealth is concentrating more and more in the hands of the ‘winners.’ Best case is new industries will evolve and older workers will somehow be ‘protected’ in the rapid transition by enlightened companies and governments. But, the ‘bad case’ feels more likely.
Recessionalert.com just raised the odds of US recession within six months to 60%. Present day economic data may look good but trend is more important than current status.
RA data is as of the end of May and doesn’t include June or Brexit at all.
I wonder if Brexit could turn out to be the thing that ultimately keeps the “bad case” scenario at bay.
Perhaps the biggest silver lining is that inequality, haves vs. have nots etc. is finally being discussed in a serious way and in rational reputable places. As long as the tin-foli-helmet crowd was taking the lead, nobody seemed to care. But when the respectable crowd talks about it, as is now happening (an FT article pinned a lot of Brexit on inequality), well, who knows.
I view your view as technology-driven globalization. Bitcoin allows easy worldwide movement of money. Ideas via the internet etc. This globalization is unavoidable and natural. It will result in job losses which will occur no matter what path is taken…
My real objection is globalization by monetary policy. There is absolutely no reason for a “new world order”, where there is essentially one world government. This is what the elite are aiming for. Essentially all countries will be controlled by non-elected central bankers. Anyone with a brain can see how much of a mess the EU is right now, on every front. The EU central bank is promising to open up the purse strings as if there is an infinite supply of money at their fingertips. And there clearly isn’t. So the question is, when the music stops, who is going to be footing the bill for the huge debt being amassed by non-elected bodies?
The Brexit is a blessing in disguise, but only if the EU top brass admit the current arrangement is deeply flawed.
If the EU was only about free trade, then the UK would still be in. But Germany and other countries vision of the EU is for political and legal integration as well. From my understanding, the Brits had made it clear all along they only wanted more free trade. So the Brexit was bound to happen given what the EU was pressing for and what the (majority) of Brits had wanted all along.
The irony of Globalization is that it actually furthered equality (in my opinion). It helped raise up many more (from a population standpoint) Chinese and Indian workers than it hurt workers in the West. So if you just look at it from the effect it had on the average workers income around the globe, the median income (including all workers) (probably) went up. The problem of course, is that this improvement in Chinese and Indian workers came directly from the highly paid workers in the west. I don’t see workers in India or China rising up right now and complaining about globalization…at least not to the extent in the west. Everyone here in the West is focused on the inequality with the hyper-rich but if you look at it from a global standpoint, my guess is that equality has improved with globalization. (But it stinks for the typical western worker). My guess is that taxes on the hyper-rich will start going up to pre-1980s levels again. And the tax policies will be coordinated internationally so no one can hide. But taxing the rich won’t solve the fundamental movement of capital/work from high to low cost areas. Only protectionism can affect that and it proved to be a loser in Brasil, China, Russia, others already. I don’t know what the answer is.
I’m not sure why the EU is a “liberal international state” as opposed to “conservative”. It gives an indication of the author’s biases.
“The free trade agreement has been increasingly opposed by Mexican and U.S. farmers, with many groups and the political left presenting that it hurts the interest of traditional, small and local farmers in both countries. Allegations of violations of labor and environmental laws have been considered by the trilateral institutions. The Bush Administration argued that NAFTA had had modest positive impacts on all three member countries, but Mexican farmers have strongly criticized the effects of the agreement as they have become overshadowed by the large corporations benefiting from NAFTA.” Foreign relations of Mexico - Wikipedia
This article presents the vote for leave argument quite well:
We should all be interested in Fair Trade, not Free Trade.
I listed many things I might buy if I was in the buying mood - (although, again, I am not buying any and haven’t put all that much thought into them). I could likely add senior debt in banking stocks for the best UK / European banks, many of which are now at .5 book /value. I am not buying any of those because my portfolio has stayed roughly flat through all this and I am happy with my positioning.
What are you buying specifically? I would look at Value / Quality screens for UK and Germany based stocks and look to buy now - either with or without a currency hedge (I’d likely buy without right now).
My statement that the world economy is, and will continue to see huge challenges (in my mind the largest since WW2) over the next 20 years has nothing to do with Brexit (or very little). It has to do with the extreme potential for massive dislocation due to rapid technological change. I have had this feeling for at least 5-6 years, and there are dozens of papers and academic studies and white papers on all of this. And it’s definitely not a timing signal for buying or selling stocks. Just a concern for the world my children will inherit. I have talked with or read articles from many tech entreprenuers in the US with the same feeling - their companies are ‘taking value’ by automating jobs that used to provide livings for millions of workers - only now the benefits are all accruing to a dozen or fewer people (or 90% of the gains). The current ‘best solutions’ to this problem being talked about in the US revolve mostly around a ‘guaranteed basic income.’ Which, a) will be very, very hard to pass and b) isn’t that great a solution. Most people want to work and want to feel that they matter.
As far as the ‘have’s’ giving up what they have easily, that’s hard to see happening without some real social unrest and ‘fear’ and instability - that’s usually what drives concessions historically.
So, my ‘investing’ outlook is very short-term (2-5 years at a time), and has little to do with the macro trends I see making life increasingly volatile and hard for lower and middle classes.
Tom - the idea of basic income helps people get out of the welfare trap, and also allows people to take entrepreneurial risk (i.e. start a small business). That being said, the basic income I’ve seen being tossed around is a pittance and I’m not sure anyone could live on it.
Also I see huge challenge in the massive debts ALL governments are piling up. This is as much a challenge as technological change.
Steve obviously there is hindsight, but if we look at them as standalone investments their expected returns after inflation are very low unless we fall in permanent deflation. Core inflation is not pointing to that.
I fear Brexit it’s adding pressure, through another spike in risk premiums, to the most important economical dynamic since the financial crisis: deleveraging.
Technology plays its part, but I think it is more a supply/demand imbalance. The richest segments of the population are going to retire soon and saving accordingly. PERCIVED interest rates are so low that savings rate is going up for even other segments because people are worried about not having a decent retirement income. Companies are still shrinking their balance sheets in Europe (debt2ebitda from 8 in 2007 to 4 today) and Japan, not to mention banks all over the world for regulatory purposes. Technology makes less money necessary for investments (each Facebook engineer created $500M mkt cap!) and central bankers are adding a tremendous force to the demand of fixed income.
Repercussions are evident and who knows how long will the current envivroment last.
A drastic example of discrepancies are super long maturity bonds for currencies under QE: for instance, if you look at 30yr German inflation linked bonds, implied breakeven inflation went breifly below 0 yesterday.
I’m pretty sure that holding ultra long term bonds now is definitely not a contrarian or value play, it’s a momentum one. I like momentum, just be sure to use it appropriately. In addition, they are still a very good hedge.
On piles of debt, the aggregate deleveraging cycle (in developed markets, but probably even in China soon) it’s a tough issue because of its drag on potential growth. Stable growth and inflation are needed to get rid of debt. After all UK managed to bring down debt/gdp form 240% to 40% after Napoleonic wars with average growth and inflation around 2%. It took almost a century, but after all that wasn’t a bad period.
I’ve heard some podcasts on this. When talking about technology they often wonder why the growth in productivity is not so good now and whether technology will lead to increases in productivity in the future. They often say Twitter is great but we are not more productive because of Twitter; or say that having your car drive for you will not lead to more productivity. Mostly speculation or anecdotes in the podcasts.
I think this might be an important piece. Seems like there will be more to go around if new technologies do lead to productivity increases. It will be easier to figure out how to divide a pie if it keeps increasing in size.
Alan Greenspan recently said the problem in western economies is that productivity is not growing as fast as entitlements. That gets into a political debate (sorry about any previous political debates) and Alan Greenspan has not been perfect in his predictions and analysis–to be sure.
But, perhaps, this translates into a discussion about compensation for workers displaced by technology-especially when you hope that some of that technology might increase productivity.
What have you read much about productivity when you read about this?
As far as productivity. The main proponent of the ‘growth is going into more and more ‘trivial things’ or leveling off’ is Peter Theil. Marc Andreeson has taken the other side. They debate on You Tube around this.
See:
( I actually found Marc Andreeson’s arguments a little more compelling here as I recall - neither was great though).
I agree that ‘growth’ is a good goal (within reason, and ideally in productive sectors of society). But, there will need to be some rethinking of the basic social contract in many countries and globally - whether on the left or the right.
It’s not really growth that’s the whole of the issue, it’s the rate of the change and the ‘time needed to retool skills’ and get hired. As long as there are enough ‘young people’ with tech skills coming in and new tech jobs, an economy can keep growing - but the more instability created and pockets of unemployment and underemployment, the harder it gets to hold that society together. Look at cities or demographics where employment has been low for decades and you will see major problems - where it becomes entrenched and hard to escape.
Papers are those like the attachment. (the oft-sited Oxford paper).
There are many others. I also work with many entrepreneurs in tech companies weekly. See other comments like this:
Here is a pro-con listing by Pew (more or less jobs):
Yes, technology will also create new jobs - like mechanics servicing the robo-cashiers that are replacing some % of the staff at supermarkets and movie ticket lines. But - having looked at this, I think there will be huge pockets of social disruption and instability. There will be large swaths of older workers who can’t ‘transition’ into something new. When there is / are large amounts of economic instability, people start to call (maybe rightly) for protections and political instability grows.
Large sections of Philadelphia (where I lived for 12 years) and Detroit and the industrial northeast have never recovered from the loss of manufacturing jobs. But in total, these losses for the US were fairly small. Nevertheless, for the neighborhoods hit hardest, they were devastating. Poverty, crime and failing schools have been entrenched for many, many decades. When these massive changes hit regional economies and much larger social groups, there is likely to be much more societal level volatility and pressure. The initial ‘call’ will be for much higher taxes on the ‘rich’ and other legislation. But the rich are highly mobile and at least equally very well connected politically. They can leave the city, state or even country, and they can and will fight back.
Or look at San Francisco and the tensions between the ‘natives’ and the ‘silicon valley immigrants.’ In many cases, the natives are simply being displaced do to ‘inflation’ from rising rents, cost of living, etc. They are moving to Portland, Austin, AZ, etc. But when the amount of displacement grows, so does the instability.
So, my argument is not that that ‘investors’ will do badly. For those at the ‘top’, these may be the “best” decades in history. There will be great opp’s for investments and players in VC and early stage tech. There will be great opp’s for entrepreneurs. But for those ‘at the bottom’ and the ‘middle’, they will face some of their toughest decades in a long time, likely since the 1930’s. Especially for people in America who have had a relatively easy run since 1950. There are two major forces to fight now - ‘The world is flat’ and the forces of cheap global human labor and ‘technology and automation.’ There are also likely potential rising environmental challenges - and growing instability in terms of storms, etc - and rising dangers from non-state actors who can access more and more powerful WMD’s and whose ideologies grow in pockets where there is economic displacement and lack of opp’s.
The whole ‘gig economy’ is touted as a blessing, and may be for some, but it also looks to me like a stripping away of the labor movement and unions that took decades to build - and had many flaws (don’t get me started on the problems in education that the teacher’s unions cover up and prevent people from fixing). But the labor movement also serves a necessary purpose and only arose because unfettered capitalism tends to abuse workers.
I am still a guarded optimist overall and believe in the power of people. But, I do think we are facing major strains that are new and unique and not just ‘business as usual’ - but these will play out over decades, not weeks or months or years.
Brexit is part of the earliest innings (maybe even the warm up) to all this.
But I hope I’m wrong.
@Steve
I have little idea about the problems of global debt right now. It really will likely depend on economic growth rates. If they flat-line or crater, problems will likely be much larger. At some point, do have to expect some real, significant levels of global inflation. But, I’ve been thinking that for 8 years and it’s still not coming due to low money velocity. So, who knows when? I am still not a real holder of TIPS, gold or real estate. Maybe I should be, but not doing it really for a variety of reasons.
