Summary – A top-down review of interesting calls and comments made last week in Treasuries, monetary policy, economics, stocks, bonds & commodities. TAC is our acronym for Tweets, Articles, & Clips – our basic inputs for this article.
Editor’s Note: In this series of articles, we include important or interesting Tweets, Articles, Video Clips with our comments. This is an article that expresses our personal opinions about comments made on Television, Tweeter, and in Print. It is NOT intended to provide any investment advice of any type whatsoever. No one should base any investing decisions or conclusions based on anything written in or inferred from this article. Macro Viewpoints & its affiliates expressly disclaim all liability in respect to actions taken based on any or all of the information in this article. Investing is a serious matter and all investment decisions should only be taken after a detailed discussion with your investment advisor and should be subject to your objectives, suitability requirements and risk tolerance.
1.“It took backbone”
Once again, the real quote of the day belonged to Rick Santelli who described Brexit simply & succinctly as “It took backbone, got to hand it to the Brits“. Everyone in Europe, except perhaps Germany & Germanic bloc, has been going through the same gut wrenching problem. What problem? Let the maestro tell us:
- “… the problem that is causing the British problem is more widespread; fundamentally what we are looking at is a massive slowing in the rate of real incomes across the whole European spectrum … real incomes are not going anywhere & that is creating a serious political problem which is not easily resolved …”
That is why Dr. Greenspan called Brexit “just the tip of the iceberg“. So let’s take a quick peak at the iceberg, shall we?
Hmmm; so why were the Brits only ones to leave? To use the Santelli expression, they are the only ones in Europe with a backbone.
2. What does Friday’s decline say? What parallels does it suggest?
If Financial TV had not made a huge deal of it, would it have felt as bad? Wasn’t Friday just a little more than a reversal of the rally of the previous four days. There was real concern last weekend. But steadily improving polls prompted most to close their hedges by Thursday’s close. That is probably why the decline was so swift & steep. To quote Santelli again, “it was a giant margin call for macro hedge fund managers in the world“. In other words, errant positioning was being painfully corrected.
We do not mean to minimize what Brexit has created – a shifting of the tectonic plates under the politico-economic consensus of the last two decades. It is a big deal indeed. But all that may take months or years to sort out. What we are more concerned here is what happens next week or next quarter or in the next two quarters.
We heard loose talk about Lehman moment or Long Term Capital moment thrown around on Friday morning. Really? Lehman was not a moment; it was a deliberate decision by Paulson-Bernanke. A mere $20-30 billion would have punted the problem past the 2008 election and into the lap of President Obama. And Long Term Capital really did pose a threat to balance sheets of all bulge bracket investment banks.
Nothing like that is threatened by Brexit. It is not like a Frexit or Italexit that would need structural migration from Euro to a new French Franc or new Italian Lira. And nothing happens next week anyway. Even choosing a leader to replace David Cameron would take a few weeks followed probably by an election. Then the negotiations can be begin to implement the Brexit. The speech by Boris Johnson showed he was in no hurry to do anything quick or drastic.
So if we have to think of a parallel to Friday’s action, our choice would be Tuesday, February 27, 2007. It was a pretty ugly day both in China and in America. Chinese stocks had suffered a meltdown of 9% overnight. That created a swift & steep fall in US market. The Dow closed down 416 points and VIX shot up by over 60% on that day. Remember China was far more important to the global growth story at that time and a 9% collapse in Shanghai created a massive scare. But it turned out to be a one day decline.
Will Friday’s Brexit fall turn out to be a quick event? May be if Sunday’s Spanish election quells some of the exit fear. And if next Friday’s payroll number comes in better than expectations. It doesn’t need to be robust. A lukewarm number that reduces the fears of Recessionistas would suffice, we think:
- Carl Weinberg of High-Frequency Economics as quoted by Steve Liesman – “ …We think the time has come to consider that a financial market crash today may push a world economy teetering on the verge of a contraction over the edge …”
We are all aware of what a Monday after a steep Friday decline with a bad close can bring. And it might be healthier to get another decline on Monday for a reversal on turnaround Tuesday. It may all depend whether the errant long positioning has been flattened.
- Ryan Detrick, CMT @RyanDetrick – S&P 500 is down about 1.9% for the week. This is the 3rd straight weekly loss. Hasn’t been down 4 straight since Sept/Oct ’14 (Ebola lows).
One good factor may have come out of Brexit:
- Lisa Abramowicz @lisaabramowicz1 – The chance of a near-term U.S. rate hike is now about zero, with the chance of a cut getting more probable…
3. The real determinant
Whether economists like Carl Weinberg are “alarmists”, as Steve Liesman called him on Friday, or not depends on the real determinant as we discussed last week. All R-word discussions or references to 2007 are meaningless without some turn in the credit cycle, the real determinant. Well:
- David Rosenberg – June 23 – Is the credit cycle about to turn? – One thing seems certain from the data, bank credit growth is starting to slow down discernibly ….
- Jesse Colombo @TheBubbleBubble – Pimco: ‘Storm Is Brewing’ in U.S. Commercial Real Estate :http://www.bloomberg.com/news/
articles/2016-06-20/pimco- says-storm-is-brewing-in-u-s- commercial-real-estate … Another bubble fueled by low rates
But isn’t China the epicenter of the credit bubble now?
- A Evans-Pritchard @AmbroseEP – Jun 20 – Latest China property boomlet rolling over. This credit game may have reached its final limits. via Nomura today
4. Cute or smarty pants?
What is the appropriate label for the tweet below?
- ian bremmer
@ianbremmer – Could not be standing further away from him if he was announcing a mistress.
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