Brexit and instability

Right now as I write this, equities worldwide seem to be tanking and US Treasuries are rallying. In the coming weeks, as things settle down, where will the money invested in equity for EU based companies end up? In just bonds or do you think people will see US companies as safe haven? Could the US market ultimately rally and strengthen because of this? I realize many SP500 companies get a lot of profit from Europe. But i am not sure what the effect of the EU turmoil really has on that.
I know this is all conjecture.
Thoughts are welcome.

David–I will not pretend to know. I was thinking that maybe interest rate hikes by the Fed might be on hold for a while: BREXIT concerns was one of the stated reasons by Yellen for not raising rates at the last meeting. The net effect? I would be guessing.
-jim

The writing has been on the wall for the EU for a long time. Brexit marks the beginning of the end. And I believe this will give Mr Trump a major booster shot as voters see that defiance of the establishment can be successful.

Personally I am very happy as I don’t see globalization as beneficial to anyone except for big business. All I see is job commoditization and having the choice of what bruised / tasteless / GMO fruits and vegetables I want from halfway across the world instead of good produce from local markets that get put out of business :slight_smile:

Steve

One of the CEO’s of a company I own said something to the effect of “We manage UK business out of London and we manage the EU business out of Germany. Brexit means very little to us.” That made sense to me.

I think a company whose business is more fully entangled in the regulatory mess this will spawn has a lot more reason to be concerned, but they also have time to figure it out.

On a macro level I have no idea what it means.

Dollar, TLT and Bitcoins (TLT and Bitcoins (ETF: GBTC) 50% of my port) saved me today, actually I am even a bit up today. Still, this could Change the mood for the rest of the summer / autum in all equity markets (also for US) until we get better earnings (if!, if they deterioate, market
head south!).

From what I hear from Berlin that a lot of real estate agents get calls from the UK, so german housing might prosper in Berlin and other bigger cities in Germany.

Gold (Bitcoins?)and the Dollar (TLT) might be seen as a save haven for the forseable future…

Regards

Andreas

Steve, I think you’re right on… The EU is in trouble. Well, let’s say they are about to get their standing-eight-count. Italy’s reaction this morning is predictable. It will be most interesting to see how Germany and France react. The consequences/benefits/fallout (pick your adjective) of this referendum are not going to play out over the next few weeks or months; It will be over the next few years.

I think Brexit reinforces the idea that we are in the midst of a transition from one major “regime” to another. We all know the interest-rate situation. Yeah, US treasuries are rallying, safe haven and all that . . . but seriously, look at a rate chart, where’s the ceiling? Millimeters away, not miles away as has been the case for much of the time since 1980.

But it’s more than that. We’re seeing the political arena start to muscle out pure economics. We’re saw a self-proclaimed socialist run for president in the U.S, without having been laughed out of the race within a few weeks. We’re seeing companies like Wal Mart voluntarily starting to raise wages. We’re seeing Trump . . . enough said. Brexit is another example, a case where the obvious economic efficiencies are being pushed aside for non-economic reasons. Globalization has gone on the defensive – regardless of what happens to Trump, it’s now become more acceptable for mainstream economists and politicians to back away from aiming at the max in free trade.

Investors have seen many many things go right for about 35 years in terms of economics and politics. I don’t know that things will turn anti-business/markets. But it looks like we’re heading to amore even-handed battle between business/finance versus politics/social factors. For those who follow the NFL, think back to the period a while back when the Super Bowl (business/markets) was one blowout after another. Then, we transitioned to a period in which one very close game followed another. I think that’s where the markets are heading. Things can still work well, but it will be more of a fair fight, and businesses will have to work harder for profit growth (i.e. they won’t be able to just keep outsourcing and laying off and buying back stock – they may actually have to build new things. Many did so in the past. But many others didn’t yet still were able to flourish in the old regime. If they can’t mend their way, they may be left by the wayside going forward).

For us, we should probably watch closely different responses among big-cap versus smaller companies. In times of risk-off, such as now, big cap should do better (as we’ve been seeing). But once the markets adjust to the new normal and big caps have to grow based on new business and attract capital, not as safe havens but as genuinely attractive vehicles, it’ll be interesting to see how they fare. Also, the biggest companies are the ones who benefitted most from the possibly fading globalization regime.

Right. Definitely in a risk off mode now. And I agree with others that some other EU countries will have their own referendums in the next year. This will drag on with no certain outcomes. Uncertainty creates volatility. If anything, maybe some of the macro hedge funds guys will do well by making lucky bets as in 2008.

I own Manpower (MAN) and they are down 13% today (ouch). “Shares of ManpowerGroup Inc. dropped sharply Friday morning following the news that Britain voted to leave the European Union. The Milwaukee-based global staffing agency, whose largest market is in France, saw shares fall $10.35, or more than 13 percent”. So companies that are exposed to Europe could get really whacked.

Marc - I see things a bit differently.

Interest Rates:

  • Back in the late 80’s I was thinking of buying a car. I told the used car salesman that I would probably hold off because interest rates were declining and I could probably get a better rate in the future. The salesman told me that rates were at a "historic low"and don’t expect lower rates ever.
  • Early 2000’s I got a call from a broker who had the “trade of a lifetime”. Interest rates could not go any lower and it was time to take a position …
  • Last year this guy named Gerstein started to say that holding TLT is crazy as there is a floor to interest rates …

Now, the contrarian view (my view) is that rates will continue to go lower and will likely go negative. The unfortunate part of Brexit is that Ms Yellen now has an excuse for why she was wrong about a strengthening economy. The truth is that the economy hasn’t been improving ffor some time and the Fed’s own indicators show this (see graph).

Politics vs Economics:

  • Economics for whom? Globalization is great for big business and hence the elite, but what does it do for the average citizen? What does it do for the environment and climate change? Are we better off flying in products from half way around the world or having products built or grown in our neighborhood? How is globalization efficient? It may be efficient in terms of price, but while sacrificing quality, local economy, and the environment.
  • Politics isn’t muscling out economics, it is quite the contrary. The reason we are seeing anti-establishment leaders flourishing in the US is because the average Joe is suffering economically.

Big-cap versus Smaller companies:
In the long run small businesses will flourish much more than today is because today they can’t compete with international companies. It may be a hard road but tomorrow they will be able to compete on level ground. If the USA wants to have a high standard of living it will be based on the innovations and hard work of small business, not the bean counters of big business content to ship our expertise overseas. It is economic suicide to be training engineers in China and India while laying off our own. But that is what globalization is doing, for the almighty buck.

Cheers
Steve


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Marc,

So I do not see much to disagree with. But “fading globalization” is mixed with “not everyone is happy with crony capitalism,” IMHO. Many do not hate capitalism–it is crony capitalism that they do not like.

As just a small part of the problem: have you had any trouble getting the medicines you want (restrictive formularies)? You will if you haven’t already.

Have any of you seen the prices charged for those medicines if not covered by your insurance? Even if they are generic medicines the prices can be ridiculous. Does it take days, letters, prior authorizations, numerous calls, even a lawyer to get the medicines you need?

Valiant is just the tip of the iceberg. The problem is everywhere. Take the generic of Plaquenil for example. It has been generic for decades. It is now often not covered on many formularies and people simply cannot afford it when it is not covered. It used to be cheap.

I saw a patient on methotrexate instead of Plaquenil the other day because of insurance. Methotrexate requires weekly blood tests to avoid the potentially fatal complications. No one has ever died from Plaquenil. Both are used to treat rheumatoid arthritis.

I’m not sure which candidate you might want to turn to to solve the problems. But people are no longer missing that there is a problem.

Jim - the medical system has problems because capitalism takes precedence over peoples’ health. At a certain point in time you would have thought that capitalism would make the medical system as cost effective as possible. And that was probably true for a while. The problem is that shareholders don’t care about cost efficiency for the patient, or America’s health, they only care about profits. Maximum profits trump health care. Maybe some of it is crony capitalism but not all. I just read the other day that there is a radiation treatment that is going extinct (one already has). It is a proven treatment and the best option for some kinds of cancer. Yet doctors don’t tell their patients about it because they are not trained to administer it and they can make a lot more money using chemotherapy. The treatment is a money loser for the company and will eventually stop offering it. (This is evidence that the cancer industry isn’t about findinga cure or better treatment.)
Steve

Steve,

There are a lot of corrupt doctors and I have no reason to defend them. I do not even mind spending a good amount of time focusing on them (and the hospitals) if you want: limited by my fear of being accused of being libelous or of straining your credulity with the stories I could tell you.

Note that doctors are likely to be hospital employees now: often told what to do. If anything you are just making my point about corruption in a different way.

I still do not think the insurance companies and drug companies always have your best interest at heart when they make the formularies. And they are becoming a oligopoly: not really what you would call a free market, IMHO. And maybe it is just me but I think the government occasionally benefits them with a regulation or two.

-Jim

I do believe that globalization has been a benefit in the aggregate. Unfortunately, it has also created winners and losers. When the guy building compressors for AC units loses his jobs, he’s not going to move to Silicon Valley and start coding machine learning algorithms for Facebook. The jobs lost are not the same kind of jobs gained and, in the process, globalization has created pockets of unemployment and underemployment is the US. And that’s not a failure of globalization per se. It’s a government policy failure not to provide more aid and retraining. This issue is also seen with the Brexit. Many in the UK didn’t receive the full benefits of EU membership … or so they felt.

Walter

So if Brexit (or Frexit or Danexit, etc) means that we are becoming less economically Globalized, then you would think that small companies (ie, Russell 2000) that get most of their business here in the US (they are too small to have a global sales exposure) would actually do better (relatively speaking). The same for smaller Canadian companies, etc.
I guess to counter that, if most small companies sales are just to larger, Global companies, then the small guys will just suffer with the large ones.

It is not clear to me from the data in the P123 database how to measure the impact of this changing environment on a company’s performance. Active management, which can look at other, non financial statement data, possibly has a let up here.

I would be more concerned about how the exchange rate will affect earnings. With a stronger $US (against either the Euro or Pound), the larger cap US companies may be more negatively affected.

Walter

Walter - the only retraining that could possibly help is to learn Chinese.
Take care
Steve

My strategy has been bought out of money put option to hedge Brexit. Because it’s out of money, I still down more than 2% today. Andreas nice job on buying bitcoin ETF. I didn’t know there is ETF for bitcoin. Good to know.

Terry

Ha, ha, Steve!

So true! You know my job was transferred to China!

I have little sympathy for the UK. Many of the EU benefits there were unevenly distributed and for that a political price was paid. Globalization isn’t bad, the way it’s managed is. We’ll see what happens in the US in November.

Walter

Walter - does it make sense to transfer engineering jobs to China? It won’t be long before we have lost any advantage in leading edge technology. Then we (North America) will essentially be no better than third world status.

I don’t see the bright future of globalization. It isn’t clear to me at all that globalization has aggregate benefit. Over the last 25 years we have seen massive increases in debt, terrorism, and cost of housing.

In a hundred years the human race (if still around) will wonder why we burned up all our natural resources in the name of growth, GDP, inflation, globalization, and profits. Not to mention the environmental damage due to globalization.

Steve

What were they thinking?

At least 2 of us in this thread have tried to read the minds of the voters in Britain. I have said they did not like corruption and were against “crony capitalism”–whatever that means. The problem I have with the term crony capitalism–even though I am the one that used it–is that it is never clear whether the solution is more regulations to reign in the corrupt corporations (Bernie Sanders approach?) or less regulations to give the corrupt government officials less power (some Republican’s approach?).

Well anyway Marc thinks globalization has something to do with it–if I read his post correctly.

But after reading this article, I’m not sure that I know what they were thinking. “Brexit Leaders Prepare to Disappoint Supporters on Migration”

I understand Johnson was a leader of BREXIT and and may be the next prime minister. He wants: “…a liberal, free market, low-regulation country modeled on London, the city Johnson led for eight years.”

Is a liberal free market for or against globalism? More specifically would a liberal, free market with low regulations be conducive to free trade? BTW, “liberal,” “low-regulatory” and “free market” in the same sentence? I’m guessing the author means classic liberalism? Hard to imaging that the term “liberal” would equate to “European Socialist” in this context.

As far as the effect on “crony capitalism” I think I will find a more specific term.

As far as what they were thinking it may depend on whose mind you are trying to read. And the article suggests that what they are saying and what they are thinking may not always be the same.