ExecutiveSummary
Brexit Redux
The Brexit remains a high topic of discussion, even if it feels like it is reaching the saturation point. One thing is clear: The political parties in the UK have been thrown into chaos. The British Prime Minister, David Cameron, has resigned, but not effective until October. A leadership campaign has broken out, and the PM presumed and a key leader of the ‘leaves,’ Boris Johnson, abruptly dropped out. Not so Michael Gove, a lieutenant of Johnson’s, who showed no interest in the leadership but who is now running along with Theresa May, who was a leader on the ‘remain’ side. The leadership race promises to be eventful. The opposition Labour Party is also in disarray with its leader, Jeremy Corbyn, under attack, while the leader of the UKIP Party, Nigel Farage, who was also a key leader of the ‘leave’ side, also abruptly resigned. NO wonder this week’s title for The Economist was “Anarchy in the UK.” But ex-its are breaking out all over, even though no others have stepped forward with a referendum. In behind, nothing really has changed. The EU remains in chaos. Article 50, the requirement to start the Brexit, will not be invoked until a new leader is in place in October. Could the Brexit die on the vine?
The Mess in the Italian Banks (and elsewhere for that matter)
Banco Monte dei Paschi di Siena S.p.A., founded in 1472 and the world’s oldest bank, is in a mess of trouble. But so is the entire Italian banking sector, with US$400 billion in non-performing loans, some 18% of Italy’s GDP. It’s a mess and getting messier, and there seems to be no way out except a coming massive bail-in under new EU laws that prevent bailouts. The Italian banking mess is, however, just part of a bigger banking mess lurking in behind. Everywhere, global banks are either in free fall, starting to free fall, or threatening to free fall. One of the worst is Germany’s Deutsche Bank (DE:DBKGn), with $1.7 trillion in assets and down 90% from its peak. The next Lehman Brothers? Actually the collapse of Deutsche Bank (NYSE:DB) would make Lehman Brothers look like a Sunday school picnic. We show a series of charts of sinking banks.
UK Property Market Funds in Trouble
Some are calling it the next Bear Stearns. Recall that Bear Stearns announced in July 2007 the closing of some subprime mortgage hedge funds. That helped set the world in motion for the 2008 financial panic. Well, the Brexit has caused four commercial property funds to close their doors. Seems one doesn’t exactly have liquidity in commercial property. The ETFs associated with the funds are in free fall. Is it the proverbial canary, like the Bear Stearns funds?
Collapsing Interest Rates and Interest Rate Spreads Are Signalling a Potential Recession
Interest rates are collapsing. German bunds are trading at negative yields. So too are Japanese Government Bonds (JGBs). US Treasury Notes have fallen to record low yields (record low is actually an understatement). And spreads between short-date maturities and longer-date maturities are narrowing rapidly. In the US they are not yet negative for the 3-Month Treasury Bill/10-Year Treasury Note spread. But whenever it has gone negative in the past, recessions followed. Savers, pension funds and insurance companies are hurting with these low yields.
Weekly Market Review
Stocks
Stocks quickly recovered their post-Brexit losses, but just as quickly are stalling out once again. Is it a triple top forming? Triple tops are rare. Usually they break through. But the negative seasonals of August/September are coming up, and the Democratic and Republican conventions could well be a “riot.” The Dow Jones averages are not confirming each other, and that bodes poorly for the bulls. We look at a 200-year chart of the Dow Jones Industrials (DJI) and can’t help but notice that the DJI has overthrown its 75% prediction band. In the past it didn’t stay that way for long before it eventually returned to the bottom of the band. Ouch! It’s a long way down.
Currencies
The British pound continues its way downward into oblivion, making fresh 30-year lows. Meanwhile the USD pauses, and it still has not broken out to the upside. It still could, but cycles show that the US$ Index is on its last legs (at least historically speaking), and the next major phase could be down once a top is in. Still, forming tops is not an overnight sensation, so more upside may remain as we head into convention season, and ongoing nasty mud slinging between the candidates. Meanwhile the yen has moved to new highs, and the Japanese can’t be too happy about that. But the Chinese continue to maneuver their currency lower (albeit slowly), as they are trying to save their export sector. As well, they continue to pump billions of QE into their economy. The world doesn’t need a Chinese crash, but may get one anyway.
Gold and Precious Metals
Gold and precious metals and the gold stocks continue to march higher. The gold stocks in particular are becoming increasingly frothy, following 100%-plus gains so far in 2016. But in powerful bull markets they can stay that way for quite some time. Despite the big gains, they remain well down from their 2011 high. And the gains, as good as they have been, are still not as much as the gold stocks initially saw following the 2008 financial panic. Still, a pause would be healthy. But signs abound that gold, silver and the gold stocks are in a strong bull market, with all of the trends now to the upside, and all making new 52-week highs. As well, gold and silver are rising in all currencies—a very positive development. If gold is tied to the level of US debt, then gold has to rise considerably to regain equality with the growth rate of US debt. Gold has a history of over- and under-performance vis-à-vis the growth rate of US debt. The last few years have seen gold underperform. Some catch up is needed, and that alone could take gold back to its 2011 highs.