Posted by: Michael Williams on Friday, June 24, 2016

If you live in the states and are not in the financial markets or pay little attention to international news and politics, you are probably hearing for the first time this morning about BREXIT. No, it is not some new German healthy cereal, it is short for a British Exit from the Euro Zone. The citizens of Britain voted to LEAVE the European Union. Additionally, if you have only been listening to your statist politicians and a handful of ignorant celebrities that for some reason have opined on Britain leaving the Euro – you would think it is a horrible thing. Unfortunately the truth is a little more complex.

BREXIT - A good thing?

Immigration To be fair the fervor over the BREXIT and the vast majority talk and votes are around immigration. There is certainly a concern with the massive exodus of those leaving Syria and the recent rise in terrorist activity in France and Belgium. Brits look across the Channel and see tent cities and terrorism and don’t want that coming to their shores. Courtesy of wikipedia It is important to note the immigration issue that has been brought to a boil is not Italians moving and working in France or Germans moving to Spain. The concern is really the Arab immigration that is sweeping across Eastern Europe and now trickling into Western Europe. The Syrian crisis and the subsequent exile migration has been a catalyst. Followed by the terrorist attacks, were some have been suspected to have moved into Europe during this Syrian crisis, and has only brought those concerns to a head. Britian has NO control or say over HOW MANY immigrants can move into Britain. This is SOLELY determined by the EU, not the UK. At one time, prior to the EU, the UK would decide, based on; economic conditions, housing, jobs, and other data - how many immigrants that year they would allow to move into their nation. No longer, the EU allows for 100% open borders, if 1 million EU citizens want to move to the UK, then they can - the UK can't stop them. Those for a BREXIT are not opposed to immigration, they just want their country (like all other nations in the world) decide HOW MANY per year can move in. Based on 2015 statistics over 333,000 immigrants moved into the UK. Data suggests that a house needs to be built every 4 minutes to accommodate both current population and immigrant growth. Housing prices are rocketing in London and a flood of immigration is creating both labor and housing issues. Yet - the UK has no say or control in the matter, under the EU - if you have an EU passport and you want to live in the UK you can.
Refugee? There is a difference between immigration and refugee asylum seekers. The EU did created the Common European Asylum System (CEAS), which member nations are supposed to have adopted, but few have implemented these standards and what exists is really individual nations and their own refugee policies. Courtesy of wikipedia One of the CEAS rules allows one EU country to send the asylum seeker (refugee) to the first EU country reached by the refugee, so long as that EU nation upholds the rights of the refugee. However, some argue that the system allows those nations from the North and further West to send back the refugees to the Eastern EU member nations where the refugees have first arrived. Actually only a very few refugees have been moved this way. Several nations have court decisions blocking these types of transfers back; Greece and Italy have blocked them already. The immigration problem has been muddied by this distinct difference and both are worthy of discussion and debate. One must separate the immigration issue and refugee issue - both are important. The problem is the spin doctoring around this issue. If you listen to politicians or celebrities, they have turned the entire thing into an immigration debate ONLY and if you are for BREXIT you must be a racist or a bigot. The motivation behind politicians supporting it is about Statism and central planning, they are just fueling the fear and hatred by making it is something it isn’t. The celebrities, truth be told, are ignorant for the most part and because they are given a platform to speak, regardless of their knowledge or expertise, they spout subjective ideological opinions not based in reality. Clearly the celebrities can't be bothered to educate themselves before uttering media talking points. What's the saying about publicity again? Listening to some of them, you would think that without the EU there would be no immigration. Well, for those that remember life before the EU – Paris and London were two of the most diverse cities in the world. Immigration works with or without EU interventionism as it had for decades before. The problem is not amount of immigration or refugees, the problem is WHO decides. Do you let the UK decide on their nations immigration and refugee status and limitations or do you have an open-door with no control?
Trade? The other silliness is trade. Sure there are trade agreements with the EU and it has certainly made trade AMONG member nations easier and in some cases with outside nations as well. Yet again those that oppose the BREXIT act as if it is the end of the world and trade would lose serious money and perhaps stop all together. Currently, under EU trade agreements the UK is NOT ALLOWED to negotiate any trading agreements - the EU does it for them. In fact in one story by a representative of the UK at the EU stated he was along with fellow UK representatives ASKED to leave a trade agreement, as the UK was represented by a Belgian as part of any EU trade agreements. That's correct - the UK are not even able to negotiate ANY of their nations trade agreements - it is all left up to an elected official, who happens to be Belgian, to represent them. Who wants a foreigner negotiating on your nations behalf? The reality is an independent Britain has more flexibility to make their OWN trade agreements and compete. The more likely scenario is that Britain could become a more aggressive trading nation as they compete with EU member nations. Is not competition good? Does it not drive down prices, reduce fees/taxes/fines, increase choice? Of course it does. Courtesy of wikipedia Again – much like the immigration fears peddled by central planners (government). Central planning governments (of which the EU is one) does NOT want competition among nations because they lose control of regulations and more importantly their revenue (tariffs, VAT, taxes, fees, and fines). There is certainly an argument for “collective bargaining” and the EU as a whole being able to negotiate for price, fees, taxes, etc. However, that usually only serves the more powerful in those collections. Germany can certainly monopolize any decisions in EU trade when it comes to Autos - as they are one of the largest producers of autos in the EU zone. France, Spain and others produce autos – but not to the magnitude of Germany – so in the past they acquiesce to Germany’s “suggestions” under what supposedly is best for the EU. Ask yourself how many SEATs and Renaults do you see driving around the States? FIAT only managed to gain better traction in the States with their merger with Chrysler, which ironically was frowned and made difficult by their member nation’s friend, the Germans. What is good for the goose is NOT always good for the gander. You need to know what goose you are talking about. By the way – trade will continue like it had before the EU and for some it will be better and most likely for consumers it may be cheaper and perhaps more choices. Neither side knows for sure the outcome, but we do know that trade existed for decades and centuries prior to the EU, it will continue again.
Economics As I stated in my last post, the REAL issue and the most important issue of the BREXIT or really any member NATION exit from the EU is economics as it pertains to monetary policy vs. fiscal policies. While it is true that the UK manages their own currency and interest rates, decisions on money supply and interest rates are still linked to the EU currency and interest rates. The UK is one of the lucky and smart few member nations than maintained their own currency. In the 1990s the blind ideology focused on Unification. Many invoked harmony among nations with a long history of hostility is a great reason for the EU. That spilled into the idea of easier trade and allowing people to travel and work freely among member nations. It was subjective ideology that many hope would end forever any rise of hostilities among nations. The ultimate Kumbaya idealism. Sure – there are merits to that argument, as it co-mingles business, trade, travel – that one nation would certainly be less willing to bring hostile action against another in which it has so many ties. In the ancient world and among royalty it was always about “marrying” into families to avoid bloodshed and/or expand power. The idea of the EU has a similar vein. Courtesy of wikipedia Yet for all this idealism, math was ignored and forgotten. The basic tenants of fundamental economics was not even considered. Those economist that did argue for the EU, argued from a subjective view of unification. The problem is rather simple. First, Monetary Policies: the nations (prior to the EU) ran their own central banks and their own fractional reserve fiat currency. They printed their own money, managed their own interest rates, and managed their own money supply. Historically, we have seen several of these nations face (in some cases repeatedly) high and hyperinflation. A few even have seen total currency collapse and defaults. Second, Fiscal Policies: each nation has their own fiscal policies. How much they spend, how much debt they accumulate, their balance sheet, their deficits, their debt, everything. If you look at reasons why these nations had financial collapse it was not because of monetary policies, it was because of their fiscal policies. The EU concept and implementation decoupled monetary and fiscal policies. The EU would manage the monetary policies; primarily money supply and interest rates. While the member nations would manager their own fiscal policies. Now frankly this is absolutely absurd and for anyone that has taken any economics classes or read any economic books – these two things are NOT mutually exclusive. In fact, as much as I disagree in general with Lord Maynard Keynes and Keynesian economics – which ironically the Western world as adopted, he is made the point – adamantly – the need for monetary and fiscal policy harmony. Keynes made this point in his texts, as did Smith, Friedman, Hayek, Mises, and the long list of respected economist from all ideologies. Why, because it is an undisputed fact that in a fiat system (like it or not), is a co-management of fiscal policies and monetary policies. You can’t have one without the other. The expectation of allowing every member nation to run their own fiscal policies, many of them at complete odds with each other, with one central bank trying to make monetary policy over all of them is a recipe for disaster. Milton Friedman argued against the EU, primarily on this issue. He ignored the subjective idealism of a Unified Europe – sure that is a “feel good” story and a Utopian dream. His focus circled back to the math and the reality that strong nations will have to carry the weaker ones. He predicted that it would fail and we started seeing his expected failure with Greece and then other nations. The truth is, you can choose to ignore the math, and you just can’t avoid it. At the end of the day, you can’t manage a monetary policy with dozens of individual fiscal policies that are at odds with your monetary policy. The EU made winners out of losers and losers out of winners. Just look at Greece, a loser and should have failed – but received several bailouts and will need more if they are to stay in the EU. Meanwhile a winner like Germany is suffering because of a common currency and a bailout. Think about what would be happening without an EU right now, Germany’s economy would be strong, low rates, and stronger currency. Meanwhile, Greece would have a weak economy, facing high inflation or hyperinflation, but they could control their money supply and interest rates to try to solve their own problem. The Euro has only masked this problem for a long time and when it surfaced, Germany suffers and Greece is bailed out. You risk the WHOLE of the members to bailout the one.
BREXIT I am all for a BREXIT, giving a nation power and decision for what's best for it's people. These decisions impact jobs, economic growth, trade, currency stability, and most importantly safety for it's citizens. The Statist and Central Planners are certainly not happy, but when are they ever when some of their power and revenue (taxes, fees, and fines) has been removed. No one likes to give up power. The Celebrities – well they were ignorant to begin with and just parroted what the uninformed bias media uttered.
Market The market rallied into the vote, which I thought – whether or not if it would pass – the market was getting ahead of itself and should be sold in either case. The economic conditions in the West and US hasn’t changed, so the market was climbing a “Wall of Worry”. This morning people are panicking to get out and that is fueling margin sales. So we could see big sell-off into the close and how we close will determine what will happen next week. If the margin selling calms down after the opening we could get a rally into the end of the day or next week and here is why: 1. US will be considered a safe haven and you will have order flow coming from Britain and EU into the US markets. 2. Fed will certainly not be raising rates and even the most ardent believers will be forced to concede there is not rate hike soon. Now, this doesn’t mean I am generally bullish on this market for any fundamental reasons. I am bullish on this trade – only in so much as order flow will be driven by the above two perceptions. General speaking – the economy is weaker than expected and the Fed is certainly not going to raise rates and I believe we could see more easing, a stimulus, and even NIRP as possibilities – even before the election. All of which could boost equity markets – yet again. Of course this depends on how the Fed positions themselves.

Support & Resistance

INDU 17,400 Is clearly an important support point. We could see an intraday drop through there, which will be fueled by margin selling. What will be important is if we can close on strength, which will determine Monday’s action. NDX 4300 is support, again watch closely. SPX 2040 This is the low support, just like the other indices. Expect a sharp pop in the VIX as well. RUT 1140 I will be watching this closely to see if the broader market holds. If we break 1140 – we will head to 1120 and most likely 1100. That would mean a general continued sell-off in the other indices that could fuel more margin selling.
It is certainly hard to be objective, especially in this polarizing political climate. I can happily say I am neither of Republican or Democrat and I feel truly sorry for all my Democrat and Republican friends. I am pleasantly surprised to see more independents and while many remain misguided or for some strange reason have begun to embrace Socialism (seriously), some have managed to see the value of Liberty. The BREXIT is just another political fear mongering driven by empty rhetoric (from both sides). The further we engrain ourselves into party politics and media spin, the less objective we become. For now I remain in Puerto Rico and while today BREXIT is stealing the headlines, Puerto Rico is next up in the batter’s circle with the looming July 1st debt payment. In all my travels, I see Puerto Rico as a unique opportunity that is full of potential. I can only wish that Puerto Ricans both the private sector and government can see its potential, rather than being marred in the politics and bond crisis – all of which is far more easily solved than anyone is willing to admit. I believe, much like many situations that are self-manifestations – it is the lack of WILL coupled with Procrastination that are the worst enemies to solving problems. Sometimes decisions are hard and painful, but they still need to be made. I have always believed that Austerity is not a choice, but a result from the lack of will and focus. One doesn’t choose Austerity, it chooses you when you fail at making the hard responsible choices. I don’t envy politicians. To me, populism is a disease and that blinds one to making the right choices.


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Great preview, IMO.
Posted by: McRocket on June 27, 2016 at 12:45:15 pm