Fed Lowers Growth Expectations, Rethinks Pace Of Rate Hikes; Why Britain Will Vote To Leave The EU, & What To Expect In Stocks/Currency/Precious Metals If It Does
First, let me wish all the father’s a great day today. Sadly, I do not have children and I deeply regret it. It is the worst mistake I made in my life. Consider yourselves lucky. I fight a fair amount of depression, and loneliness as a result.
As expected, last Wednesday, the Federal Reserve concluded its two-day June meeting without raising interest rates. Moreover, the Fed lowered its U.S. growth expectations into 2017 and 2018; and, signaled it may only raise rates once in the next 18 months or so. As the Wall Street Journal reported in its June 16 edition, “Wednesday’s moves marked a stark reversal from just a few weeks ago, when several Fed officials, including Chairwoman Janet Yellen, dropped strong hints that they might raise rates in June, or July.” “What you saw was the Fed capitulate” said Diane Swonk, of DS Economics. There is a perception among many investors and traders that central bankers as a whole, are out of bullets and are either helpless, or clueless — or both — when it comes to stimulating economic growth. These lower economic growth fears have some worried the U.S. could be heading toward a Japanese-style, stagnant economy, or a recession. A stagnant U.S. economy, along with what I think are overblown fears of what might happen should Brits vote to leave the E.U., Thursday, June 23 sparked some selling of equities, and a flight to safety in precious metals and defensive sectors such as consumer staples last week. As you might guess, precious metals have been on a tear all year.
For the week last week, the DOW closed down 190 points, or -1.1 percent, to 17,675; while the S&P 500 fell 25 points, or -1.2 percent to 2071; and, the NASDAQ was lower by 1.9 percent, to 4,800. Year-to-date, the DOW is +1.44%, the S&P 500 is +1.33%, and the NASDAQ is the weak sister, down -4.14%.
“That markets are nervous is clear from the first-ever drop below zero in yields on 10-year German bonds,” said Michael Sheldon, Chief Investment Officer at Northstar Wealth Partners. “The Fed;s in a pickle,” said Aaron Clark, a Portfolio Manager at GW&K Investment Management. “It wants to raise rates but, the the [economic] data isn’t strong enough. The central bank has had to continually back away from its own overly aggressive [economic] projections the past two years. The Fed’s credibility is at risk.” I would ask — what credibility. One thing is certain, an interest rate rise by the Fed isn’t going to happen anytime soon — barring a significant increase in the jobs number and sustained growth above 2 percent — neither of which seem likely till sometime next year.
Britain & The E.U.: To Leave, Or Not To Leave — That Is The Question
This Thursday, June 23, 2016, British citizens will go to the voting booth to decide on whether Britain remains in the E.U., or leaves. My bet is that they vote to leave. Right now, the vote is too close to call; although the leave forces seemed to be gaining momentum going into the weekend. George Will, in a May 25, 2016 Op-Ed in the Washington Post, summed it up pretty well: “Sixty-five years ago, what has become a European Union was an embryo conceived in fear. It has been stealthily advanced from an economic, to a political project, and it remains enveloped in a watery utopianism — even as it becomes more dystopian. The E.U.’s economic stagnation — in some of the 28-member nations, youth unemployment approaches 50 percent — is exacerbated by its regulatory itch; and, the self-inflicted wound of the Euro — a common currency for radically dissimilar nations. The E.U. is floundering amid mass migration…..the greatest threat to Europe’s domestic tranquility since 1945.”
“The E.U.’s British enthusiasts, who are notably unenthusiastic, hope fear will move voters to affirm Britain’s membership in this increasingly ramshackle and acrimonious association.” Mr. Will concludes, “Brexit might spread a benign infection, prompting reassertions of national sovereignty by other E.U. nations.” There is no “might” to it — it will most certainly prompt other E.U. members to leave; and,may well be the beginning of the end of the E.U. next Thursday. “Hence,” Mr. Will wrote, “June 23 is the most important European vote since 1945.”
The left-leaning Washington Post and New York Times have been running commentary that echoes our very left-leaning POTUS — warning that a Brexit would be bad for the U.S. and Europe. But, the idea of a united Europe, stitched together with a very flawed concept is inevitably doomed to failure, in my opinion, no matter what happens on Thursday.
The European Union was a noble idea, spurned by a continent’s desire to avoid the circumstances that led to two world wars in the 20th century. But, instead of uniting Europe, it has led to a fractured structure that pleases no one. As the Oxford educated British economist Bernard Connolly, author of “The Rotten Heart Of Europe: The Dirty War For Europe’s Money,” put it, “the monetary union — which is at the heart of this grand Euro experiment….is rotten to the core. This destructive pursuit is making the economic situation worse than it would otherwise be; and, this forced harmonization is engendering distrust, ridicule,, resentment, contempt, and even hatred, among and between the people’s of Europe. We have an elitist, bureaucratic, corrupt, authoritarian, repressive leadership on one side; and, a demoralized, lost generation (youth unemployment) on the other, who see an unaccountable, undemocratic, illegitimate, and ultimately repressive super-state, that is digging Europe, and themselves into an even deeper hole.”
A very powerful and compelling counter-point to what the New York Times and the Washington Post has been peddling.
Here’s What Happens 72 Hours After Britons Vote To Leave The E.U.
Emran Mian, writing for the June 17, 2016 edition of London’s The Telegraph, wrote about what is likely to happen in the immediate aftermath of a vote by Britons to leave the European Union. First, he writes, “Bank of England (BoE) Governor Mark Carney has already admitted that — in the event of a leave vote, we should expect a drop in the value of sterling overnight, and through Friday morning.” He adds, “we can guess that members of the Monetary Policy Committee are on standby too, in case a hike in interest rates becomes necessary,” in order to strengthen the pound sterling. And, even in the event of a yes vote, “Britain won’t be out of the E.U. immediately,” he wrote. “The laws and policies with the E.U. can remain in place until the negotiations over the terms of exit are much further advanced.” And, there will be the thorny issue of migrants, as well as E.U. citizens living in the U.K., and British citizens living somewhere other than Britain, but, on the continent of Europe.
What can we expect here? Gold no doubt will get a bid, as will the U.S. dollar. There could be a fair amount of volatility, and selling of stocks. If so, I intend to use that pullback as a buying opportunity. But, there is no give that we’ll even get a selloff here at home. Indeed, as Randall Forsyth wrote in this weekend’s Barron’s, “Brexit could be another Y2K,” or a non-event for global stock markets.
Foreign Stocks Could Be Big Winners If Brexit Vote Is To Stay In The E.U.
Andrew Bary wrote in this weekend’s Barron’s, that “foreign stocks will be big winners,” if England votes to stay in the European Union. European banks and financials have been destroyed in 2016, with many of the major banks down anywhere from 30-50 percent. Expect a big rally in this sector, at least in the short-term. Some of the global funds that Mr. Bary thinks will get a boost in this scenario: Vanguard FTSE Europe ETF (VGK) – down 7 percent from its June 8 high; the iShares Core MSCI EAFE ETF (IEFA), the iShares MSCI Japan ETF (EWJ), Royal Dutch Shell (RDSA), and of course financials/banks — Barclays (BCS), Credit Suisse (CS), Deutsche Bank (DB), SunTrust Bank (STI), CitiGroup (C), Bank of America (BAC), Wells Fargo (WFC), JP Morgan Chase (JPM).
Here at home, Jason Trennert of Strategas Research likes: Johnson & Johnson (JNJ), Exxon Mobil (XOM), Coca-Cola (KO), and Proctor & Gamble (PG).
For those interested in the precious metals trade, Mr. Bary wrote that “money has been pouring into the largest gold ETF, SPDR Gold Trust (GLD),” may be a consideration, though I like the miners instead, GDX, Neumont Mining, ALPS Sprott Junior Gold Miners (SGDJ), ALPS Sprott Gold Miners ETF (SGDM), and the IQ Hedge Market Neutral Tracker (QMN).
Finally, expect a volatile trading week leading up to Thursday’s big vote. Traders and institutions will place their bets NLT Wednesday here at home. My bet is that the leave vote wins. V/R, RCP