Brexit back and forth
Markets getting another breath higher this morning. The bears/shorts were sure Brexit was the next bear market catalyst. Still might be, but not this morning.
Join me right now for this week’s Live Q&A Chat at 2pm EST at https://twc.scutify.com/members/ or on the Trading With Cody app. You can also just hit reply on this email or email support@tradingwithcody.com to ask a question to me directly and we’ll include it in the transcript.
No trades for me today so far. Still not 100%, but pushing full speed anyway today. See you at the Chat!
In the meantime, I wanted to share with you some of the back and forth about Brexit and my long form report and analysis from yesterday about it. Here’s an interesting email from a Trading With Cody subscriber based in Germany:
Cody – two remarks:
- London will suffer in the way that all EU-regulated financial products will no longer be managed out of the city. This business will migrate to Frankfurt, Paris or Amsterdam, so in the end no global issue. Just wondering what will be left for a de-industrialised country like England (slightly exaggerating here).
- As a (proud) EU citizen and (currently less proud) German citizen: The EU is about more than regulation, it is essentially about free movement of people, goods and money (and originally about preventing WW3). One of the three would not work without the other two. It was a mistake to grow the EU from 12 to 28/27 in such a short time and Brexit is a result of it. But it would be helpful from an US perspective to rather consider the EU as a setup very similar to the US: some state legislation and some federal; highly differing economic power; highly differing political standpoints.
Keep up the good work,—HU
And I shared some snippets of my big Brexit write up yesterday on Scutify and got some interesting perspectives from US and EU-based folks there too:
2h ago Maybe the real question is whether or not Brexit is a Black Swan event that will cause ripples and asset price crashes throughout the economy and markets like the Great Financial Crisis/Real Estate Bubble Pop of 2008 did? We shouldn’t overlook what the giant global banks based in Europe might be signaling with their crashed stock prices. From $CSto $BCS to $DB, most of the giant European bank stocks are down 70-80% over the last twelve months. $GS to $MS are down 40%.
https://www.scutify.com/premiu…
LunaticTrader2h ago @CodyWillard Poluticians and pundits are falling over each other to talk the market down. Would they do that if we really were at the verge of an economic crash? The first sector that stands to benefit is tourism => Bloomberg – Brexit Sends Tourists Flocking to London to ‘Buy, Buy, Buy’ http://www.bloomberg.com/news/…
HelgerH2h ago @CodyWillard as for now, the markets are counting the UK to stay in the EU single-market after brexit. It could be in the form of Norvegian or Swiss model. Now this is not a certainty, so if the political tone starts to suggest otherwise the markets will react. Because going to WTO rules means tariffs and a instant economical influence in the form of lost revenue and jobs.
2h ago
I’ve long avoided the giant bank stocks as I’ve outlined how their record earnings for the last few years are at all-time highs as a percentage of GDP and are dependent upon continued government assistance, protection, subsidies, etc. So I’m obviously not I’m terribly surprised to see them get crushed when they lose control via the EU losing control.
Maybe there’s a few derivative currency bets at the major global banks that are now so huge that we’re going to hear some announcements about cross-party trade risks ie, the inability for the bank on the losing side of those currency bets to pay off the bet. And maybe there will be a new slew of giant banks that will actually be forced to under and recapitalize entirely since the world probably won’t allow for another round of outright bailouts ala 2008 if there are a bunch of risky currency derivative bet weapons of mass destruction that are currently going off in the global financial system. Last week, the Fed gave the TBTF banks in the US a passing grade in their “stress tests,” and it sure would be poetic if that marked the top in this eight year stability in the global financial system, wouldn’t it?
But over the long run, I think the US economy, stock market and each of our individual prosperity will all be much better off with fewer and less powerful central control centers running the global economy. Britain will see more prosperity in the next ten years than they ever would have as part of the EU. And so will most of the rest of the world’s economies and citizens.
In the end, while I recognize the increased near-term risks of Black Swans in the financial system, I still think the risk/reward lies most favorably with our current playbook and set-up. I remain net long overall, and have increased some of that long exposure in the last couple days just a bit, but I am less bullish today than I was in 2010-2012 when I had been aggressively net long with few shorts, lots of large long positions and the liberal use of longer-dated call options.
On the final hand, long-term readers of mine know well that I’m perfectly willing to get bearish when the economy, geopolitics, system stress and/or other Black Swans come along. So I’ll remain as vigilant, objective and hard-working as I can be to keep us in front of the risks, as always. @HelgerH @LunaticTrader
LunaticTrader1h ago @HelgerH @CodyWillard Tariffs work both ways. The UK is the EU’s biggest customer. UK sells 50 billion worth of stuff to Germany every year, and Germany exports 100 billion to them. So who has more to lose if no trade deal is made? Germany of course. UK will simply tell EU that they can get the same tariffs as the EU is giving to them. So, what tariff will the EU chose?
HelgerH1h ago @LunaticTrader @CodyWillard maybe they are talking things down because it really is bad. On the other hand, not all of them. The majority, in the form of investors and traders, seem to be really happy, the stock prices are green all around. Now, when a bad thing happens and prices go up, up, up, is it a great buying opportunity or the heard effect kicking in?
1h ago
@HelgerH As we saw during the 2008 financial crisis, the powers-that-be typically try to convince the world that everything is kosher when things are crashing in hopes that they can somehow create a reflexive cycle. They don’t warn of crashes and crisis if they really are worried about crashes and crises, which I think is what @LunaticTrader is getting at.
LunaticTrader1h ago @HelgerH @CodyWillard I think the main reason why EU politicians keep talking things down is because they fear that other countries would follow in Britain’s footsteps by organizing an “In or Out” referendum as well. That’s the domino effect they try to stop. => But that talking things down could also end up having the opposite effect if things pan out much better than feared. And that’s what British stocks are pointing to already. FTSE is back to last week’s high already.
deerpuncher131h ago @CodyWillard it’s interesting FED providing US dollar liquidity
this could’ve been a much worse dollar spikenot to mention every central bank providing billions in emergency liquidity at the onset of Brexithttps://next.ft.com/content/e3…
HelgerH1h ago @CodyWillard @LunaticTrader I do understand your arguments and logic. What I’m trying to imply are the near- and middle-term, real economy influencing and palpable consequences of brexit. The single market and free flow of workforce has a purpose: to stop one country from discriminating another to pursue self-interest. As a result the free flow of capital, goods and workforce gives an overall economic advantage on the situation where everybody is chasing their agenda and negotiating everything.
HelgerH55m ago @CodyWillard @LunaticTrader In a scenario where: the trade is hindered, the revenues and profits from imports/exports fall, leading to a contraction in domesting spending, leading to a contraction in domestic economy outbut, all in all meaning less jobs and so on. Fundamentally, I really can’t see how this should translate into higher equity prices in the UK or EU in a near to medium term. I’m quite sure the prices will be higher in 10 years time, no matter how things play out. Just my opinion.
46m ago @HelgerH I don’t think the EU regulations ever deliver any ‘free flow of capital, goods and workforce’ except for those giant global corporations and other politically-connected beggars. @LunaticTrader
LunaticTrader41m ago @HelgerH @CodyWillard The EU worked well until the late 1990s when it was mainly a free trade zone. It has gradually morphed into an “unfree trade zone” because that “free” has been gradually replaced by 80000 laws and regulations, combined with the Euro, which took away the weaker countries’ (Greece , Italy, Spain…) main tool to manage their own economy. This doesn’t offer any economic benefits to the weaker EU members, as has become abundantly clear.
LunaticTrader35m ago @HelgerH You talk about “scenario where trade is hindered”. I think that’s a very description of what the EU has brought us. E.g. 2000+ pages with regulations for the marketing of hazelnuts. Does that help or hinder trade? I think it hinders. And it favors multinationals over smaller companies. That’s what UK leaves behind if they leave the EU. And then they can trade freely again, on their own terms. That’s why their stocks go up already, discounting a better future. @CodyWillard
LunaticTrader22m ago @CodyWillard The free flow of people is not what it appears to be, especially for US readers. In the US you pay taxes based on nationality. Not so in Europe. => Here you pay taxes based on residence. So, when engineers or doctors from Greece or Spain move to Germany for work, they stop paying taxes in their home country and start paying taxes to Germany. It’s easy to see why this is so destabilizing for the peripheral economies.@HelgerH
LunaticTrader18m ago @CodyWillard So, the tax base shrinks in Greece, Italy and then they get austerity pushed on them to stay within accepted budget limits. It would be better to call this “free flow of tax money to Germany” instead of free flow of workforce. This brain drain is becoming very visible in some countries. The educated have gone away, and the gypsies and old people stay behind. They dare to call this “harmonizing Europe”… @HelgerH
Livingston67Ideas5m ago @CodyWillard The black swan event to me,means perfect storm when many problems converge at once highlighted by a major theme.. I do not feel Brexit is a swan, but it does not bolster confidence, This combined with US elections means risk off…..As uncertainty looms…Looking for strong oil and weak equities …..$$$
HelgerH4m ago@LunaticTrader@CodyWillard honestly speaking, I have no idea where the UK/EU stock prices will be in 1 day, 1 week or 1 month. Counting the possible variables and scenarios I doubt if anybody does. I find it more probable they will be down from the current levels a year from now and up 5-10 years from now. I look at the fundamentals and see headwinds outweighting the tailwinds. EU is not perfect but better then the current alternatives.
HelgerH1m ago @LunaticTrader @CodyWillard on a separate issue, as a citizen of a small country, i find the pros of EU membership outweighting the cons. Of course the EU is overregulated, but again the alternative would be what? As for the euro, it provides for stability, something that a small country can not attain by own currency. And yes, the workers who go abroad, they pay there taxes as residents, but spend a lot of their income home.
0m ago @HelgerH I totally disagree that the EU is better than current alternatives. The world, the economy, and individual citizens will be better off in a world with less central control of trade, economy, immigration and tax laws.
