This Week in Barrons – 6-26-2016:
For 2 years, I've been saying that our FED has been looking for anything to blame the ills of our economy on. Our FED has painted itself into a ‘credibility problem’ corner by suggesting that the U.S. economy was in recovery mode with great job growth – while not even being able to raise interest rates one quarter of one percent. Our FED was desperate. Week after week the economic reports were disappointing: rail shipments down, durable goods down, retail sales down, truck deliveries down, etc. Month after month they would preach: it’s the weather, it’s China, it’s the lack of inflation, etc. They were looking ‘so stupid’ that even CNBC’s Steve Liesman asked: “Ms. Yellen, do you think the FED has a credibility problem?”
Our FED has been desperate for some event that they could blame our ills on because job #1 at the FED is – ‘Keeping Your Job’. They know that cries for their replacements would have hit a crescendo if despite their entire lever pulling and button pushing – the economy still crashed. Why the heck do we need a FED playing God with our monetary policy if all of their policies fail to keep a deep recession away? We could easily turn their function back over to the Treasury, and terminate the UNELECTED heads of the PRIVATE banking cartel known as the FED.
But Friday their event came. The BrExit vote won't cover up the last few years of their bumbling, but it does take the pressure off of them concerning future interest rate hikes. Now they can say: “We were on pace to gradually hike rates, starting in July, but the BrExit vote has made the entire global economy more vulnerable, and considerable study will be necessary to gauge the monetary repercussions." In other words, "Thank you England, you saved us from looking like the incompetent jerks that we really are. Otherwise we would have to meet in July and talk about ‘data and dots’ again. Now we can simply point a finger across the Atlantic and say: Thank you England.”
Factually, NO ONE KNOWS what BrExit really means because it’s never happened before. All of the people writing detailed descriptions about what will happen must have a more expensive crystal ball than I do. I find it hard to predict because wild currency swings are in full force right now. For example: to download a song from Apple’s iTunes store costs $0.99 in the U.S. Come Monday, what will that same download cost in Germany, Britain, and France? Due to the various exchange rates it could cost anything, but it will definitely be a lot higher.
- At what point do people in Germany, Britain, France and the EU just stop downloading iTunes music simply due to the increased cost?
- And without that ‘previously predictable’ revenue stream, when does Apple go into ‘cash conservation’ mode and stop spending (including on hiring and on corporate buy-backs)?
I’m betting that BrExit is a fairly long, and drawn-out affair. I’m also betting that other nations just pushed their own SwExit, GrExit, and FrExit referendums to the ‘front burner’. Just today I heard about Scotland, Italy, and Hungary – on top of Sweden, Germany and France that were previously in the queue. Did you know that the EU laws regulate:
- The amount of curvature of a banana (otherwise you can’t sell it),
- The straightness of a cucumber (otherwise – no sale), and
- Eggs can no longer be sold by the dozen, but must be sold by weight.
The EU regulators have to know that it was this type of ‘over-the-top’ stupidity that helped the Brits and will help others to say ‘Goodbye’.
We won’t know the extent of the disruptions until we see how willing the EU is to compromise on their treaties and trade tariffs. The EU could try and punish the UK by increasing trade tariffs and becoming even more totalitarian. Or they could try and hold things together by negotiating fairly, and showing other member nations that they're not the bloodthirsty slime that they are accused of being. In any case, there’s plenty of blame being handed out this weekend, but at least our FED is off the hook until the end of the year.
Should Britain have left the Euro? Heck yeah. It is just business. How can any country survive with two diametrically opposed economic systems? On one hand you have each individual government running his or her own fiscal and monetary show, and on the other hand you have an all-powerful central planner running a roughshod monetary policy as he sees fit. It’s natural that the well-run governments will end up bailing out the irresponsible ones. When the EU was formed, all of the economists ignored the math, as they were enamored with the ideas of: unification, trade, and immigration. Unfortunately, you can ignore the math – you just can’t avoid it. Or said differently by Ms. Thatcher: “Eventually you run out of other people’s money.” After all, why does Britain have to absorb any of the debt that the EU is incurring due to the poor fiscal policies of a few of its members? It was only a matter of time before the strong nations started to leave, or the weaker ones invited to leave.
As for trading this week, I sat on my hands. I'm not trying to take a victory lap here, but I just saw too many divergent elements that kept me on the sidelines. At the core a single issue: Google and Facebook have their fingers on the pulse of BILLIONS of people, and both have become experts at predicting behavior. They were both suggesting that the UK people wanted out. I chose listening to social media over broadcast media, and kept myself on the sidelines with just my holdings in the precious metals. (FYI – Gold was up $56 on the day.)
So what do I do now? Many people are calling for ‘Buy-the-Dip’ – because that’s all they know. I don't think that ‘Buying-the-Dip’ is the wisest move – yet. Sure, we should get a bounce after loosing 610 points on the DOW and 76 on the S&P’s. But will the bounce hold, or will it be just a ‘dead cat bounce’ and we roll back over later in the week? I think that the market has a date with ‘lower’. I don't know if that means Monday or Tuesday, or over the weeks to come. The BrExit vote is going to cause a ton of questions over what’s next, and what everyone is going to do. Last weeks economic reports were lousy, and I don't suspect they're going to get much better. This feels to me like a sideways and down market because:
- In this type of marketplace (with the volatility futures being inverted), the algorithms will be selling into every rally.
- Margin calls went out on Friday, so there will be more selling on Monday.
- We are currently sitting at the 2037 level on the S&P. We hit a ‘lock limit’ low on Friday of 1999 which means everyone will have purchased hedges around the 2,000 area of the S&P’s. This virtually guarantees that the market will touch that range in the near future.
- Currencies are all over the map right now, and will cause every CFO to ‘clamp down’ on corporate spending immediately. That also means we should see a sharp decline in corporate buy-backs on Monday as well.
Please be careful out there – especially this week.
Here are some additional thoughts:
- First thing, eliminate your ‘good-till-cancel’, ‘market’, or ‘stop’ orders. With this amount of volatility, market makers will touch your stop intentionally.
- For Monday thru Wednesday, if you see a ‘Rip-Your-Face-Off’ rally, sell into it or SHORT it.
- The S&P is calculating a 140 point expected move this coming week. That means that the S&P could fall from 2038 to 1880 by this time next week. That type of move could cause a global recession.
I had a great week last week, and am keeping it fairly simple by being:
- Long various mining stocks: AG, AUY, CDE, FFMGF, FSM, NGD, and PAAS,
- And Long an oil supplier: REN.
To follow me on Twitter.com and on StockTwits.com to get my daily thoughts aand trades – my handle is: taylorpamm.
Please be safe out there!
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Until next week – be safe.