Sorry to inject a little politics into the markets
Two gigantic weeks are coming up. Up to bat first is Washington and Fed Chair Janet Yellen. The Fed knows it’s an absolute absurdity to raise rates in an economy that just created 38,000 jobs. But do you want to tell me they have their collective heads in the sand about an economy barely staying above water at 0.8% GDP? They know the ship is sinking and don’t want to be left holding the bag when it eventually goes over the cliff. I don’t know how the market will like the idea of raising rates in an environment like this.
To show you how dysfunctional the markets really have become, they are finally waking up to the fact the Brexit vote is just 2 weeks away. Experts have suggested the market has not priced in the Brexit vote. Well, I have news for you, if they haven’t priced in Brexit there is a lot more where that came from. Starting on Friday the VIX started rising on fears about the Brexit vote. If you listen to the politicians and economists, they would have you believe the UK leaving the EU is really a bad thing. We’ve heard President Obama and Yellen warn about dire financial issues if the British people decide to go on their own.
Sorry to inject a little politics here but this comes down to a fight between the globalists and nationalists. Perhaps the globalists are the biggest constituents in financial markets but in a normal world they are supposed to represent the rest of us who are getting the short end of the stick in terms of trade deals all the way down to safety on a local level. Markets are afraid the people of the UK are actually going to vote to leave which will turn Europe upside down.
If you really want to get down to it, I’ll give you the Reader’s Digest version of the European Union. Unfortunately, the continent of Europe has suffered one disastrous war after another for hundreds of years. The climax hit with WWII when that generation and the one that followed realized Europe could not survive another devastating war. They decided the answer was to create something called the United States of Europe. That worked during the good times of the long secular bull market. But since the Great Recession things haven’t been the same. Now Europe has been overrun by a hostile generation of refugees the continent can’t afford in any shape or form. So the union is splintering and with the current weak leadership there is no way they will be able to keep it together no matter how this vote goes.
Perhaps the markets aren’t as dysfunctional as it seems. Perhaps in its divine wisdom it knows Europe must splinter for its own survival but is telling us a period of correction and chaos is upon us and we must go through a thousand miles of broken glass and nails before we get the revelation that heals society. Whatever the case it sure appears the market fears a UK willing to break out of the union.
For our work we are on the back end of the 377-week window to the bottom in 2009. This is it, they either continue what they started on Friday or this window produced nothing. The 3-week window actually closed on Friday when it started dropping. As I’m writing this on Sunday night the Nikkei is down nearly 3% in early Monday trade for the exact reasons I’ve discussed so the early indication is we are starting to get some follow through on the time window. On Friday European markets got crushed as the DAX was down 2.52%, CAC 2.24% and the FTSE only down 1.86%.