To the surprise of talking heads and many of the world's “experts,” Great Britain's voters opted in a referendum last Thursday to leave the European Union. It seems that economic misery and the regulatory bullying of EU bureaucrats led to a surge of nationalist sentiment that caught the pundits by surprise. I have a strong feeling that this is merely the first of many changes ahead.
Washington, DC -- (ReleaseWire) -- 07/07/2016 --On Sunday's Financial Myth Busting show, Richard Williams of the Mercatus Institute shared with me that his response to Thursday's vote. "I think the British people gave themselves a chance to govern themselves," he said. On CNBC, former Fed Chair Alan Greenspan said that he believed that the problems that led to the "Brexit" were far more widespread than might be obvious at first look. "Fundamentally, what we're looking at is a massive slowing in the rate of real incomes," across Europe, the United States, and even the entirety of the OECD (Organization for Economic Cooperation and Development). He went on to say, "...and that is creating a serious political problem which is not easy to resolve." Greenspan also mentioned that likelihood that the Scottish Parliament could well revisit the issue of Scotland's independence as a result of the vote. Other EU countries, including the Netherlands, France and Italy also saw an upsurge in calls for withdrawal from the Union.
Another interesting effect of the British referendum was the shot in the arm it has given the movement supporting Texas' secession from the United States, driven my many of the same issues that led to the Brexit: feelings of interference from the federal government, stagnant wages and weak labor markets, and a general dissatisfaction with the dismal political and economic landscapes we face. The use of the hashtag #Texit exploded by nearly five times in the wake of the Brexit vote, with nearly two thousand tweets between the hours of 7 and 8 AM, London time, which was after 1 AM in Dallas.
But that's ridiculous! Texas could never secede! It would be economic suicide! Well, let's examine that. As of 2014, if Texas were a sovereign nation, it would have had a GDP of nearly $1.7 trillion and been the 12th largest economy in the world, barely behind Canada and ahead of Australia and South Korea. Texas and Switzerland gross about the same from exports each year. Why on earth couldn't Texas make it on their own? Or California, for that matter. Their economy is the 7th or 8th largest in the world, depending on who you ask. What would we hashtag that? #Calexit?
So, Britain opts out of the EU and other countries may follow. There's an upsurge in discussion about Texas seceding from the United States. What about us, as individual citizens and investors. As our favorite reality TV candidate, Donald Trump, proves, the populist nationalism that is driving these movements is alive and well throughout the United States. How can we not be frustrated at hearing of a "recovering" economy that never makes it to our wallets and pocketbooks, at watching our politicians play endless rounds of legislative tug-of-war that rarely end in anything other than a draw where each side claims victory regardless? Let's look at some specifics that may lead to the conclusion that we, too, should opt out at whatever level we can, at least out of the markets.
Following the Brexit vote, global markets took a hit on Friday, primarily in the developed economies. In currency trading, the pound lost more than 10 percent against the dollar at one point. Gold screamed up. Friday was also an indication from a trading perspective that the plunge protection team or the Federal Reserve, whoever is currently attempting to control the markets, has lost a bit of that control. When trading is that heavy, it's just too hard to artificially keep things buoyant.
Another reason is because our economic data points have been negative, and people are catching up with it. Your job is to keep your head on straight and to remember that this basic economic data is continuing to worsen. For example, US consumer sentiment weakened in June. The University of Michigan index dropped to 93.5 from 94.7 in May, well below the level of a year ago, when it was at 96.1. This shows that consumers on the whole are now more bearish about expectations for the economy. US-made durable goods orders fell about 2.2 percent last month. Core capital orders sank. These are the data points you need to continue to focus on. Next week, about 2 billion in bond payments are coming due for Puerto Rico. The territory's governor has reiterated that the Commonwealth will default on its current obligations, and they need help, so they're here in Washington lobbying for Congressional approval of a bill that would set things up to help pay them.
Capital is shifting right now at lightning speed. Fortunes are being made and, of course, lost. The volatility on Friday was absolutely stunning. Just understand that the natural instinct to want to capitalize off of this is all well and good, but you must keep your head straight. There are opportunities, but they pop up like a game of whack-a-mole. Games are just games, and in this particular case I think it's best to sit on the sidelines and watch how it all plays out.
Start asking yourself some questions. It's always worth examining the issues in the light of your own personal circumstances. How do you weight protection and liquidity in your portfolio? What do you need to do to prosper in this type of environment, or even just hold on to what you have now? I believe that you need to be hyper-focused on and skeptical of certain asset classes that suffer illiquidity gaps even during good times, like micro-cap and small-cap stocks.
If markets continue as Friday, to me it seems a foregone conclusion that there will be stimulus, not only from the Federal Reserve, but likely from the ECB. And it will likely be the master of all stimulus packages. At the least, the Fed will certainly be forced to continue putting off the rate hike that they never quite tell us they're considering. Sadly, this is a fantastic opportunity for the Fed to get it right, but if the past is an indication of the future, they're going to continue to do the same thing they've been doing: trying to inject some type of solvency and liquidity, likely by printing yet more money, which to me is just putting their heads in the sand.
And that has hurt our dollar tremendously. Nobody has really recovered from the recession of 2009. What that did was just push our debt burden to the breaking point, and it's happened in Europe as well. I suppose one of the positive elements is that we're "lucky" enough to witness it in real time, but the other lucky element is that hopefully you already have your portfolio extremely defensively set up.
This should be an opportunity for our leaders and central banks, and even our political candidates. Instead of grandstanding, or hiding their heads in the sand or over-stimulating by printing money, this could be an opportunity to be open and share, to address the omnipresent sense of betrayal and mistrust of politicians and economists. To speak honestly, and listen carefully. Because if they don't start, more and more of us will simply choose to opt out.
About Dawn Bennett
For over a quarter century, Dawn Bennett has been successfully guiding clients through the complexities of wealth management. Her unique vision and insight into market trends makes Bennett a much sought after expert resource with regular appearances on Fox News Channel, CNBC, Bloomberg TV, and MSNBC as well as being featured in Business Week, Fortune, The NY Times, The NY Sun, Washington Business Journal in addition to her highly regarded weekly talk radio program - Financial Mythbusting. Through prudent and thoughtful advice, Dawn Bennett has strived to consistently provide the highest quality of guidance.