Evans-Pritchard, McWilliams, and Luntz on the Implications of Brexit

John Mauldin

 
In the wake of Orlando, I feel somewhat ambivalent about dragging us back to the world of economics. As I write this note, it is still unclear what the reaction of the country will be to the largest shooting massacre ever on US soil. Everywhere I turn, it seems that people are trying to spin this in one direction or another, always filtered through their own worldviews.

My friend David Kotok of Cumberland Advisors frequently offers common-sense commentary on a wide variety of topics, and he sent out his observations on the recent tragedy with a good summary of the rather stark and unpleasant choices in front of the American people. We are using drones to kill American citizens in Yemen. The surveillance of Americans is already intense. The terrorist in Florida was a homegrown American citizen and had already been investigated twice by the FBI. You can read David’s commentary here. This event has major implications for surveillance and what will pass for privacy in the future. Guaranteed to make Baby Boomers uncomfortable.

But moving on, for your Outside the Box reading today I bring you something I never expected to see: Ambrose Evans-Pritchard, writing in his regular Telegraph column that he is going to vote for leaving the EU, that is, for Brexit. Ambrose is unabashedly pro-European, while being very critical of the European Commission and the way Brussels runs things; but he is also a patriotic British citizen (who mostly lives in France, I think). His access to the inner circles of Europe is amazing and leaves me a tad jealous. His explanation as to why he will vote to leave the EU doesn’t focus on the usual rhetoric (which I think he probably disdains). Rather it is a thoughtful analysis of the role of nation states and the significance of national sovereignty.

He leads off like this:

With sadness and tortured by doubts, I will cast my vote as an ordinary citizen for withdrawal from the European Union.

Let there be no illusion about the trauma of Brexit. Anybody who claims that Britain can lightly disengage after 43 years enmeshed in EU affairs is a charlatan or a dreamer, or has little contact with the realities of global finance and geopolitics.

I will let the rest of his column stand on its own. I think you will find it thought-provoking, with implications for all of Europe and the US.

It is really hard to overstate the importance of the upcoming Brexit vote next week. Right now “Leave” seems to have a substantial lead in the polls; but as Brent Donnelly pointed out this morning, the leave vote when Québec was deciding whether to abandon Canada and the leave vote when Scotland was deciding whether to part company from the United Kingdom were both ahead in the polls right till the very end. It seems that on big, close decisions we end up opting (if barely) for the known rather than leaping into the unknown.

I don’t think the real economic impacts of Brexit would come immediately, but there could be seismic shifts before the year is out. However, the most important consequence could be “contagion” spreading to the rest of Europe. France has already made it clear that it would seek to make the new economic reality for the UK as difficult as possible in order to discourage any more countries from leaving. But given that 90% of the respondents in a recent Dutch poll stated that they wanted to have their own referendum; that Austria came within 1% of electing a far-right candidate in its recent presidential election; that right-wing National Front leader Marine Le Pen is an increasingly strong candidate for president of France next year; that Rome is on the verge of electing a mayor aligned with Beppe Grillo’s Five-Star Movement; that Germany, too, is having second thoughts about the EU – and on and on – I think there is plenty of impetus to the idea that there is a rebellion of the “unprotected” class against the establishment in country after European country.

In fact, that may be the new political divide: establishment versus anti-establishment. We’ve seen this phenomenon before in history, and it is generally not accompanied by order and tranquility. Neil Howe demonstrated at my conference that we are in the last half of what he calls “the Fourth Turning,” and he stated that the coming strife and chaos will be more than we have seen in the last eight years; so this divide is not just a passing phenomenon. It resonates with events that have happened roughly every 80 years in the Anglo-Saxon and European world for the last 400 years. (You would have to read Neil’s books and/or listen to his speeches to get the full import of what he’s saying. I personally think the lessons he imparts are profound.)

I want to offer you two links that I think you should follow up with after you read Ambrose’s piece. The first takes you to my Irish friend David McWilliams, who writes the most-read economics column in Ireland. We don’t see eye to eye on economics, but I value his insights into what’s happening in Ireland and Europe. He has a different perspective because he works hard at maintaining his connections to the “street,” more than to the elite. He wrote a recent column on the implications of Brexit for Northern Ireland. He also agrees with me that, post-Brexit, it is very possible that Scotland would demand another independence referendum and vote to stay in the EU. (The Scots are heavily pro-European in the polls.)

Without its natural ally Scotland, would Northern Ireland stay British? As McWilliams writes, Northern Ireland would have been far better off joining Ireland from an economic standpoint, as Ireland has grown from being economically dominated by Belfast to massively outperforming Northern Ireland in recent times. Stay or leave breaks down along religious lines in Northern Ireland, as almost everything else seems to. Who knew there was a Catholic or Protestant position on whether to participate in a European political union?

Then I will point you to what pollster Frank Luntz reveals about his own British polls and numerous focus groups. He wrote a column in Time magazine highlighting the implications of his research.

The Brexit question represents the political conflict rapidly spreading across the globe: Do hardworking, taxpaying citizens fundamentally trust or reject half a century of globalization, integration and innovation? Have the promises of the political and economic elite helped improve their daily lives? Or is it time for a rethinking and redrawing of our political and economic systems from the ground up?

That’s why the majority of British voters’ heads may be with Remain, but their hearts are with Leave – and those hearts are winning out in these final days before the vote.

I think Luntz is worth reading because he is tapping into a sentiment that is now global, and what he talks about in Britain is to some degree the same thing we’re seeing all across Europe and the US. Those of us who have been mired in the traditional left/right view of the world are going to have to change the lenses on our mental cameras. Maybe Donald Trump is right. In 4-8 years the Republican Party may be seen as the workers’ party and have a completely different mix than it has today.

Political alignments shift and sometimes massively. In fact, that happened during the last Fourth Turning, in the 1930s. Just saying…

I will repeat both of those links for your convenience at the conclusion of Ambrose’s column.

This all reminds me of a dinner I had about three years ago with George and Meredith Friedman at their home in the hill country south of Austin. It was cool enough to sit outside, and those dinners tended to last a few hours because of the intensity of the conversation. George and I can riff off each other for hours at a time.

George was in the middle of writing his powerhouse book on Europe, and I had just finished Code Red, in which I dwelt a great deal on the economic pressures in Europe. I argued that Europe would either have to form a fiscal union and mutualize national debts or there would be a breakup. I thought the political elite might force through a fiscal union.

George, not untypically, disagreed. “Europe will break up, but it will be over immigration and nationalism, not merely economic concerns.” Remember, this was three years ago. And so what do we see today? For many people, the main issues in Brexit are immigration and what Luntz terms “survival” issues.

Citizens are asking: “Do our current policies help, or hurt, the goal of preserving and protecting our pensions, benefits and NHS?” Translation: with the flood of immigrants, asylum-seekers and refugees into Europe, a majority of Brits are crying out, “Enough.” … With Europe in perceived decline, why hitch our future to a sinking ship? [Luntz]

More than one observer has characterized the coming election in Britain as a canary in the coal mine. The outcome is clearly too close to call with any certainty. The polls say one thing and the betting parlors say another. Whatever the result, you can bet that the sentiments being expressed by the Leave camp are not going to go away anywhere in the world anytime soon.

And that you can take to the bank.

Well, it looks like I’m going to Cleveland. Golden State failed to close out the NBA Finals at home when Lebron James & Co. decided to show up and take control. Finally. So tomorrow I will be getting on a plane to fly to Cleveland to sit in box seats down at the front with my friend and doctor Mike Roizen, who is an insanely avid Cleveland Cavs fan. Having gone to NBA games for 34 years in Dallas, I know the intensity of the finals and especially games six and seven. There is really nothing else like it in the United States. It has its equal in soccer elsewhere in the world, but soccer is played in a huge stadium while basketball is played in an enclosed arena where the noise level and intensity are electrifying. I get to watch two of the greatest players of this generation, LeBron James and Stephen Curry, go at it, aided by the enormous talent that surrounds them both. Thu s I find I must break my intention to stay in Dallas until I finish my book, in order to seize this once-in-a-lifetime opportunity.

We’ve had a huge pot of beans and hamhock’s cooking since early this morning, so I’m going to get a little fiber in my life. (Okay, maybe we added a little bacon, just for flavor…) It’s funny how much I like beans, because growing up I got really tired of them. We ate them because they were filling and cheap – and my family certainly did not qualify as middle-class. I rather imagine we were in the bottom quintile, at best. But growing up in the country, you didn’t notice the social and economic differences in the nation at large. When I was in junior high school and we moved to the Dallas suburbs, I began to notice the differences; but by then I was working at least two jobs a day, so I had walking-around money and could buy the clothes and other stuff I needed. But we still ate beans, and I only stopped eating them when I left home. It has only been in the last few years, as Shane has started cooking large crockpots of them, that I have come to realize that I really do like them. Once again they are a staple in my life. You have a great week.

Your wondering how the Brits will vote analyst,

John Mauldin, Editor
Outside the Box
 



Brexit vote is about the supremacy of Parliament and nothing else: Why I am voting to leave the EU

By Ambrose Evans-Pritchard

With sadness and tortured by doubts, I will cast my vote as an ordinary citizen for withdrawal from the European Union.

Let there be no illusion about the trauma of Brexit. Anybody who claims that Britain can lightly disengage after 43 years enmeshed in EU affairs is a charlatan or a dreamer, or has little contact with the realities of global finance and geopolitics.

Stripped of distractions, it comes down to an elemental choice: whether to restore the full self-government of this nation, or to continue living under a higher supranational regime, ruled by a European Council that we do not elect in any meaningful sense, and that the British people can never remove, even when it persists in error.

For some of us – and we do not take our cue from the Leave campaign – it has nothing to do with payments into the EU budget. Whatever the sum, it is economically trivial, worth unfettered access to a giant market.

We are deciding whether to be guided by a Commission with quasi-executive powers that operates more like the priesthood of the 13th Century papacy than a modern civil service; and whether to submit to a European Court of Justice (ECJ) that claims sweeping supremacy, with no right of appeal.

It is whether you think the nation states of Europe are the only authentic fora of democracy, be it in this country, Sweden, the Netherlands, or France – where Nicholas Sarkozy has launched his presidential bid with an invocation of King Clovis and 1,500 years of Frankish unity.

My Europhile Greek friend Yanis Varoufakis and I both agree on one central point, that today’s EU is a deformed halfway house that nobody ever wanted. His solution is a great leap forward towards a United States of Europe with a genuine parliament holding an elected president to account. Though even he doubts his dream. “There is a virtue in heroic failure” he said.

 
I do not think this is remotely possible, or would be desirable if it were, but it is not on offer anyway. Six years into the eurozone crisis and there is no a flicker of fiscal union: no eurobonds, no Hamiltonian redemption fund, no pooling of debt, and no budget transfers. The banking union belies its name. Germany and the creditor states have dug in their heles.

 
Where we concur is that the EU as constructed is not only corrosive but ultimately dangerous, and that is the phase we have now reached as governing authority crumbles across Europe.

 
The Project bleeds the lifeblood of the national institutions, but fails to replace them with anything lovable or legitimate at a European level. It draws away charisma, and destroys it.


This is how democracies die.

 
“They are slowly drained of what makes them democratic, by a gradual process of internal decay and mounting indifference, until one suddenly notices that they have become something different, like the republican constitutions of Athens or Rome, or the Italian city-states of the Renaissance,” says Lord Sumption of our Supreme Court.

 
It is a quarter century since I co-wrote the leader for this newspaper on the Maastricht summit. We warned that Europe’s elites were embarking on a reckless experiment, piling Mount Pelion upon Mount Ossa with a vandal’s disregard for the cohesion of their ancient polities.

 
We reluctantly supported John Major’s strategy of compromise, hoping that later events would “check the extremists and put the EC on a sane and realistic path.”

 
This did not happen, as Europe’s Donald Tusk confessed two weeks ago, rebuking the elites for seeking a “utopia without nation states” and over-reaching on every front.

 
“Obsessed with the idea of instant and total integration, we failed to notice that the citizens of Europe do not share our Euro-enthusiasm,” he said.

 
If there were more Tusks at the helm, one might still give the EU Project the benefit of the doubt. Hard experience – and five years at the coal face in Brussels – tells me others would seize triumphantly on a British decision to remain, deeming it submission from fear. They would pocket the vote. Besides, too much has happened that cannot be forgiven.

 
The EU crossed a fatal line when it smuggled through the Treaty of Lisbon, by executive cabal, after the text had already been rejected by French and Dutch voters in its earlier guise. It is one thing to advance the Project by stealth and the Monnet method, it is another to call a plebiscite and then to override the outcome.

 
Need I remind readers that our own government gave a “cast iron guarantee” to hold a referendum, but retreated claiming that Lisbon was tidying up exercise?  It was no such thing.


As we warned then, it created a European supreme court with jurisdiction over all areas of EU policy, with a legally-binding Charter of Fundamental Rights that opens the door to anything.

 
Need I add too, that Britain’s opt-out from the Charter under Protocol 30 – described as “absolutely clear” by Tony Blair on the floor of the Commons – has since been swept aside by the ECJ.

 
It is heartening that our judges have begun to resist Europe’s imperial court, threatening to defy any decision that clashes with the Magna Carta, the Bill of Rights, or the core texts of our inherited constitution. But this raises as many questions as it answers.

 
Nobody has ever been held to account for the design faults and hubris of the euro, or for the monetary and fiscal contraction that turned recession into depression, and led to levels of youth unemployment across a large arc of Europe that nobody would have thought possible or tolerable in a modern civilized society. The only people that are ever blamed are the victims.

 
There has been no truth and reconciliation commission for the greatest economic crime of modern times. We do not know who exactly was responsible for anything because power was exercised through a shadowy interplay of elites in Berlin, Frankfurt, Brussels, and Paris, and still is. Everything is deniable. All slips through the crack of oversight.

 
Nor have those in charge learned the lessons of EMU failure. The burden of adjustment still falls on South, without offsetting expansion in the North. It is a formula for deflation and hysteresis. That way lies yet another Lost Decade.

 
Has there ever been a proper airing of how the elected leaders of Greece and Italy were forced out of power and replaced by EU technocrats, perhaps not by coups d’etat in a strict legal sense but certainly by skulduggery?

 
On what authority did the European Central Bank write secret letters to the leaders of Spain and Italy in 2011 ordering detailed changes to labour and social law, and fiscal policy, holding a gun to their head on bond purchases?

 
What is so striking about these episodes is not that EU officials took such drastic decisions in the white heat of crisis, but that it was allowed to pass so easily. The EU’s missionary press corps turned a blind eye. The European Parliament closed ranks, the reflex of a nomenklatura.
 

While you could say that the euro is nothing to do with us, it obviously goes to the character of the EU: how it exercises power, and how far it will go in extremis.

 
You can certainly argue from realpolitik that monetary union is so flawed it will lurch from crisis to crisis until it ruptures,  in the next global downturn or the one after that, and will therefore compel the European elites to abandon their grand plans, so why not bide our time. But this is to rely on conjecture.

 
You can equally argue that the high watermark of EU integration has passed: the Project is in irreversible decay.  We are a long way from the triumphalism of the millennium, when the EU was replicating the structures of the US federal government, with an EU intelligence cell and military staff in Brussels led by nine generals, and plans for a Euro-army of 100,000 troops, 400 aircraft and 100 ships to project global power.

 
You can argue too that the accession of thirteen new countries since 2004 – mostly from Eastern Europe – has changed the chemistry of the EU beyond recognition, making it ever less plausible to think of a centralized, close-knit, political union. Yet retreat is not the declared position of the Five Presidents’ Report, the chief blueprint for where they want the EU Project to go. Far from it.

 
In any case, even if we do not go forward, we may not go backwards either. By design it is almost impossible to repeal the 170,000 pages of the Acquis. Jean Monnet constructed the EU in such way that conquered ground can never be ceded back, as if were the battleground of Verdun.

 
We are trapped in a ‘bad equilibrium’, leaving us in permanent friction with Brussels. It is like walking forever with a stone in your shoe. 

 
But if we opt to leave, let us not delude ourselves. Personally, I think the economics of Brexit are neutral, and possibly a net plus over 20 years if executed with skill. But it is nothing more than an anthropological guess, just as the Treasury is guessing with its cherry-picked variables.
 

We are compelled to make our choice at a treacherous moment, when our current account deficit has reached 7pc of GDP, the worst in peace-time since records began in 1772 under George III. 

 
We require constant inflows of foreign capital to keep the game going, and are therefore vulnerable to a sterling crisis if foreigners lose confidence.

 
I am willing to take the calculated risk that our floating currency would act as a benign shock absorber – as devaluation did in 1931, 1992, and 2008 – but it could be a very rough ride. As Standard & Poor’s warned this week, debts of UK-based entities due over the next 12 months amount to 755pc of external receipts, the highest of 131 rated sovereign states. Does it matter?


We may find out.

 
The Leave campaign has offered no convincing plan for our future trading ties or the viability of the City. It has ruled out a fall-back to the European Economic Area, the “Norwegian” model that would preserve – if secured – access to the EU customs union and preserve the “passporting” rights of the City.

 
The EEA would be a temporary haven while we sorted out our global trading ties, the first step of a gradual extraction. The Leavers have not embraced this safe exit – or rather, less dangerous exit – because it would mean abandoning all else that they have pledged so promiscuously, chiefly the instant control of EU migrant flows.

 
By this fourberie they have muddied the water, conflating constitutional issues and with the politics of immigration. We risk a Parliamentary crisis and shrieks of betrayal if the Commons – discerning the national will – imposes the EEA option on a post-Brexit government, as it may have to do.

 
We leave Ireland in the lurch, at risk of an economic shock that it did nothing to provoke.


Those Leavers who chatter cavalierly of resiling from the (non-EU) European Convention of Human Rights should be aware that the Good Friday peace accords are anchored in that document, and if they do not understand why it matters that just 12pc of Ulster Catholics support Brexit, they are not listening to Sinn Fein.

 
However unfair it may seem, the whole Western world deems Brexit to be an act of strategic vandalism at a time when Pax Americana is cracking and the liberal democracies are under civilizational threat.

 
Without rehearsing well-known risks, we have a Jihadi cauldron across much of the Levant and North Africa; Vladimir Putin’s Russia has ripped up the post-War rule book and is testing Nato every day in the Baltics; China’s construction of airfields along international shipping routes off the Philippines is leading to a superpower showdown with the US.

 
The Leave campaign was caught off guard when Barack Obama swept into London to make it the US view brutally clear, followed by Japan’s Shinzo Abe, and a troop of world leaders. You do not unpick the web of interlocking global ties lightly.

 
One hopes that Brexiteers now understand what they face, and therefore what they must do to uphold British credibility if they win. We must be an even better ally. But by the same token, the people of this country have every right to take this one chance to issue their verdict on four decades of EU conduct.

 
To those American friends who ask why we cavil at compromises with Europe when we “pool sovereignty” – an inaccurate term – with scores of bodies from NATO to the United Nations, the answer is that the EU is not remotely comparable in scale, ideology, or intent to anything else on this planet.

 
Remainers invoke Edmund Burke and the doctrine of settled practice, but settled is the one thing the EU has not been in its irrepressible itch for treaties and its accretion of power, and Burke is a double-edged sword. 

 
He backed the American Revolution, not to create something dangerously daring and new, but rather to restore lost liberties and self-government, the settled practice of an earlier age.


Americans of all people should understand why a nation may wish to assert its Independence.
 

This is my decision. It may go against my own interest, since I hope to live out part of my remaining years in France – though countless Britons lived there contentedly in 19th Century before we ever had such a thing as the European Union, and no doubt will continue to do so long after it is gone.

 
I urge nobody to follow my example. It ill behoves anyone over 50 to exhort an outcome too vehemently. Let the youth decide. It is they who must live with  the consequences. 
 


Up and Down Wall Street

Global Worries Spur Negative Interest Rates

More than $10 trillion in government securities around the globe now offer buyers no yield, and the total is rising. Also, would a President Trump be good, bad, or neutral for the economy and the markets.

By Randall W. Forsyth          
.

Is Trump bullish for financial markets? Bloomberg News
 
 
Neither a borrower nor a lender be, young Laertes was advised. In today’s world of zero or negative interest rates, to be a lender leaves one victim to what may be described as a Polonius assault.

“For a loan oft loses both itself and a friend,” the Bard wrote in Hamlet. Yet in today’s capital markets, lenders seem more than willing to lose by investing in bonds with negative yields—which by definition return less than the original investment.

The total of government securities with negative yields has surpassed $10 trillion and continued to rise last week. The benchmark German 10-year Bund stopped just short of that mark at 0.02%—two basis points—while the Swiss equivalent costs a buyer 50 basis points and the Japanese, some 17 basis points.

Why would rational investors subject themselves to such guaranteed notional losses? The sophisticated answer is that negative-yield securities could provide a real return if there were deflation. Still, to stash cash in the proverbial mattress would seem preferable. That’s what Commerzbank (ticker: CBK.Germany) mulled doing, according to the Financial Times, rather than pay the European Central Bank 40 basis points to bank its cash. But the bank chose not to pile euros in vaults, the FT said.

Logistics may have had something to do with it. The Federal Reserve Bank of Chicago helpfully tweeted Friday afternoon that a pile of $100 bills stacked a mile high would total $1.4 billion—which suggests that financial institutions would need lots of expensive space for a bunch of Benjamins should they ever want to resort to warehousing liquidity in physical cash, rather than electronic entries at the central bank.

In comparison, the 1.64% on the benchmark U.S. Treasury 10-year note seems like an absolutely high yield, even if it is historically low. And the 2.46% on a 30-year Treasury long bond appears absolutely lush when the British equivalent pays just 2.06%, just as the United Kingdom faces a crucial vote next week on whether to secede from the European Union—with polls swinging to the exit side by last week’s end.

Why are investors around the globe flocking to securities with negligible or negative returns?

Clearly there has been a deterioration of attitudes over the past week or so, especially since the release of the dreadful May U.S. employment numbers the Friday before last. Not only is confidence in U.S. growth waning, it is being felt worldwide. In part because of interest earnings getting crushed, European bank stocks have slumped sharply. And South Korea’s central bank last week surprised by joining in with rate cuts to spur that nation’s lagging economy.

The combination of concerns dragged down U.S. stocks at last week’s end, leaving the major averages on either side of unchanged. The mood was considerably worse, however, with an uptick of options volatility (although still subdued) and, most especially, the flight to safety in low- or no-yield bonds. Jeff deGraaf, head of Renaissance Macro Research, further observed that copper hit a 65-day low, in tandem with the Treasury 10-year yield, while defensive stocks were relative outperformers.

Ahead of this week’s meeting of the Federal Open Market Committee, Fed Chair Janet Yellen Monday removed references to the timing of rate increases, which she previously had indicated could arrive “in coming months” (“Yellen Changes Her Tune on Interest-Rate Hikes,” May 28). She reverted to the mantra that policy will depend on the incoming data.

But what data? The Fed created a Labor Market Conditions Index consisting of 19 indicators.
As Steve Blitz of economic advisory M Science points out, the LMCI has been sliding since December 2014, and has dropped into negative territory. Previously, in such circumstances, the Fed has cut rates, not raised them, as the consensus persists in expecting.

To be sure, the FOMC is virtually certain not to raise rates this week. What will be more revealing will be a new dot plot of committee members’ rate expectations, which had anticipated two hikes this year. The fed-funds futures market is now putting only even money on a single boost in 2016, and not until December. As our colleague Vito Racanelli points out in The Trader on page M3, the futures market has had a vastly superior forecasting record than Fed officials. The fall in bond yields and the stumble in global stocks are consistent with what the futures see.

IS DONALD TRUMP BULLISH for financial markets? No. Yes. Or maybe. Those answers are proffered by a trio of experts, and their lack of agreement might help explain why the presumptive Republican presidential nominee thus far has had little impact on the markets.
Neither, for that matter, has his presumptive opponent, Hillary Clinton, who last week finally secured the requisite delegates to lock up the Democratic nomination.

Also last week, Lawrence Summers issued a jeremiad in the FT that a Trump presidency would raise the specter of a severe recession within 18 months and a global trade war. Yet other, less-partisan observers suggest a Trump presidency could boost the economy, driving the dollar and U.S. interest rates higher, hurting stocks and gold. Or there could be “helicopter money” with the Donald at the controls, letting fly a torrent of greenbacks to pay for his tax cuts and spending, boosting prices of Treasury securities and gold, but battering the dollar.

There’s little doubt about the presidential preference of Summers, who was Bill Clinton’s last Treasury Secretary. Summers asserts that Trump would threaten the nation’s fiscal stability with a planned $10 trillion in tax cuts, which could send stocks reeling. That could provoke something like the 2011 debt-ceiling crisis, when stocks fell 17%, he writes in the FT.

Even if Trump imposed just half of the protectionism he’s promised, Summers asserts, “he would surely set off the worst trade war since the Great Depression.” Furthermore, “Trump’s authoritarian style and cult of personality would surely take a toll on business confidence, which would be the best way to damage a still fragile U.S. economy.”

Gee, Larry, tell us what you really think of the Donald.

BCA Research is rather less hysterical in its assessment, as befits its Canadian base. “All three of Trump’s signature policy proposals—increased deficit-financed infrastructure spending, a more restrictive immigration policy, and trade protectionism—are dollar bullish,” writes BCA Managing Editor Peter Berezin. “The implementation of these policies could cause the U.S. economy to overheat, forcing the Fed to raise real rates more than it otherwise would.”

Protectionist curbs would reduce the U.S. trade deficit, even if trade partners retaliate tit for tat, because U.S. imports exceed exports by 25%, he continues. Political risk from a Trump administration wouldn’t necessarily hurt the dollar, since the greenback typically benefits during geopolitical unrest, as in the 2013 U.S. debt standoff. (It’s tough to keep all of those debt crises straight.) If the world decided to dump U.S. Treasuries, Berezin posits, the Fed could buy them. And, he adds, Trump would hardly be averse to any resulting dollar weakness.

The notion of a Trump Treasury borrowing full tilt to stimulate the economy, with the Fed supporting the effort by buying the bonds, jibes with the next step envisaged by economists for monetary policy after negative interest rates. Academics call this “overt monetary financing,” but it’s better known as helicopter money—from then-Fed Governor Ben Bernanke’s invocation in 2002 of Milton Friedman’s metaphor of dropping dollar bills from choppers to spur spending.

And, according to MacroMavens’ Stephanie Pomboy, “in Trumpspeak: it’s gonna be HUUUUUUUUGE.”

“Having succeeded at being too big to fail in business, he’s ready to take that formula to the next level,” she writes. “And, as much as we’d like to deny it, the fact is that we need his braggadocio and ‘expertise.’ For, default is our ONLY option—whether silent (via Fed monetization and dollar debasement) or via Trump’s middle finger—this is where we’re going.

There is no other way we can fulfill the obligations we’ve made, especially after six years of financial repression.”

That would be the half-trillion dollars in unfunded corporate pension liabilities, which pale against the $3.4 trillion of state and local pension deficits if something less than the funds’ “fantastical” 7.6% return assumption is used. Adding in estimated unfunded federal liabilities, the aggregate hole is $7.5 trillion, Pomboy explains.

With no other way to meet the massive obligations to an aging population and the self-proclaimed King of Debt in the White House, policy makers would rev up the copters. And with central banks monetizing the debt and capping interest rates, “currencies again will pay the price for policy sins.” Treasuries and gold would rally, just as they did during the financial crisis, she concludes.

Sounds pretty extreme. Just like when Steph harangued her clients more than a decade ago that the massive buildup of real estate-related debt posed a clear and present danger to the financial system and the U.S. economy. And we know how that turned out.

So, if Summers is right, Trump could lead to a 1930s-style trade war and deep recession. If BCA’s Berezin is right, Trump could produce an overheated economy, with higher inflation and interest rates. And if Pomboy is right, Trump will embrace debt, just as he has in business, and foster an expansionary fiscal policy funded by printing-press money to meet the obligations to an aging population, which she sees as inevitable in any case.

In any of these scenarios, a bullish case for stocks is hard to discern. Or maybe we continue to stumble along with weak growth and low returns. That said, as Herb Stein, Richard Nixon’s sage economic adviser, observed: If something can’t go on forever, it won’t. How it ends is far from certain, however. 



The Establishment Has Lost Its Hold On The People, Brexit Gains Momentum

By: Nathan McDonald
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The Establishment Has Lost Its Hold On The People, Brexit Gains Momentum
 

People around the world are sick and tired of the status quo. They are sick and tired of the overly political correctness and the way that the system is attempting to control every aspect of our lives. You can see this growing wave of discontent from the ever-growing amount of politicians getting elected around the world with a nationalist ideology.

An increasing mass of people is sick and tired of the welfare state that has been created around us and want to get back to good, honest work - the type of hard effort and commitment that made the West the most prosperous nation in the world. Sadly, over the last few decades a growing portion of the population has gotten lazy and have expected more and more from "daddy" government.

The government has been overjoyed with this fact, as it has allowed them to expand endlessly, creating more and more justification for their existence and increasing their power over we, the people.

No more! That's right, no more! The tide is starting to shift, the pendulum swung too far and now it is starting to return back to the center. The tools that the government used to "shame" us into walking in step are no longer working and the curtain has been pulled back.

As I stated, you can see this happening all over the Western world, slowly, but surely. The most recent example that we can point to is the popularity of Donald Trump and his national agenda. This proves that a growing portion of those in the United States are sick and tired of what is being spoon-fed to them.

Yet, an even more immediate and important example can be found in Britain, where the people will be voting very soon on "Brexit". Up until recently, the polls have shown that more people were in favor of staying in the EU than leaving. The government propaganda was working, but has now been chipped away as the facts of how it is destroying those countries partaking can no longer be ignored.

Now, the polls are showing something entirely different. Those in favor of leaving the EU have exploded and they now enjoy a massive 19 point lead! If you follow polling at all, you will know that this is a stunning lead, and one that has the establishment shocked in disbelief.

What is even more heartening for liberty lovers around the world is the fact that only a short while ago, this lead was only 10 points, pointing to the fact that this movement has momentum and at a key time before the votes are taken.

Barring any funny business (which I would not rule out), it appears that Britain will be once again gaining its independence and shedding their un-elected overlords in Brussels.

This victory is being speculated to push gold to new heights, as it is going to lead to short-term uncertainty while the markets prepare for the unknown. However, I know for certain that it is going to lead to long-term prosperity from both a freedom perspective and an economic one for the people of Britain.

Let's hope the trend remains the same. Let's hope that the people do what is right and that liberty will reign the world over.

Why the Fed Can’t Stop the Runaway Bull Market in Gold

Justin Spittler
.



Gold just set its most important high in two years.

This morning, the price of gold topped $1,300 for the first time since August 2014. Gold is now riding a six-day winning streak, and is just a few percentage points from setting a new two-year high.

If you’ve been reading the Dispatch, you know gold stormed out of the gate this year. It jumped 16% during the first three months of the year, its best quarter in three decades.

Then, gold cooled off. It went nearly two months without setting a new high.

We told you it was healthy for gold to take a “breather” after such a hot start to the year. But we also said it would likely head higher soon. We encouraged readers to use the break in the action as a buying opportunity.

Last Tuesday, gold started rallying again. It’s up 22% on the year.

• The Federal Reserve gave gold a big push yesterday…

Yesterday, the Fed said it will keep its key interest rate at 0.38%…well below its historic average of 5.0%.

The Fed slashed rates in 2008 to encourage borrowing and spending. It’s kept them near zero for eight years in an effort to “stimulate” the economy.

It hasn’t worked. The U.S. economy is growing at its slowest pace since World War II. And America’s real median household income is about $2,500 lower than it was in 2007.

The Fed effectively makes money “cheap” when it keeps rates low. That’s bad for the U.S. dollar, which is a paper currency. Yesterday, the U.S. Dollar Index, which tracks the dollar’s performance vs. major currencies like the euro and Japanese yen, fell 0.4%. It’s now down 4.2% on the year.

As regular Casey readers know, what’s bad for the dollar is good for gold. That’s because gold is real money. It’s protected wealth for centuries because it has rare set of qualities: It’s durable, easily divisible, and easy to transport. No matter where you go, folks immediately recognize gold’s inherent value.

• Many investors thought the Fed would raise rates…

Last month, Fed Chair Janet Yellen said a rate hike was likely “in the coming months” if the economy improved.

A week later, the Labor Department said U.S. companies are hiring at the slowest pace since 2010.

The miserable May jobs report was the latest sign the economy is moving in the wrong direction.

Yesterday, Yellen hinted that “headwinds blowing on the economy” played into her decision to not hike rates.

• Yellen is also worried Britain will leave the European Union (EU)…

If you’ve been following the news, you’ve probably heard this is a possibility. The media is calling this scenario a “Brexit.”

According to CNNMoney, this also played into the Fed’s decision:

"Brexit…is something we discussed and I think it's one of the factors that factored into today's decision," Yellen said. She said the U.K. decision could have consequences for the economic and financial conditions of the global financial markets and will play a role in future decisions.

Great Britain will hold a vote on June 23 to decide if it will stay in the EU or leave.

• The Fed still said investors could expect one or maybe two rate hikes this year…

Yellen even added that a July rate hike was not “impossible.”

Some investors think a rate hike would hurt gold. The thinking is that gold doesn’t pay a yield, so it becomes less attractive if rates rise. That’s because investors would rather own bonds and other assets that pay interest.

Our colleague Steve Sjuggerud says the conventional wisdom is dead wrong. As you may know, Steve is one of the smartest analysts in our industry. He’s got a PhD in finance…experience running a mutual fund and a hedge fund…and one of the best trading track records in the business.

In his short note below, Steve says the Fed’s decision shouldn’t affect gold’s rally. Gold is going to do what it wants.

Here’s Steve:

The next Federal Reserve rate hike is on hold… for now.

Yesterday, the Fed announced that they won't raise rates this week. But they did tell us that at least one (and maybe two) rate hikes are possible through the end of the 2016.

If you own gold, this probably has you worried…

But should you be worried?

In short, no…

The last time the Federal Reserve raised rates was from 2004 to 2006. Rates went from 1% all the way to 5.25%.

If gold was truly affected by the Fed raising interest rates, then you would think that the dramatic move we saw from 2004 to 2006 would have a devastating effect on the gold price… right?

You'd be wrong. Gold was unaffected. Its price just kept going up while the Fed was raising interest rates. Take a look:

Specifically, exactly one year after the Fed's first interest rate hike in 2004, gold prices were up more than 10%.

The story was the same the previous time the Fed started hiking rates… in 1999. One year after the Fed started hiking interest rates, the price of gold was up more than 10%.

Just because gold went up 10%-plus in a year the last two times the Fed raised interest rates doesn't mean that it has to happen again…

We can't say that gold will go up 10% or more. But we can say you shouldn't worry so much about the Fed right now.

The last time the Fed started raising interest rates, gold was in a bull market. And higher rates didn't hurt gold.

Today, I believe we're in a new bull market in gold – one that would also be unaffected by interest rate hikes by the Federal Reserve, just like we saw from 2004 to 2006.

Look, the media might try to spook you about gold and the Fed in the coming weeks…

Pay no attention to it… You know the truth. Gold doesn't care about the Fed, especially when gold is in a bull market.


• If you want to make big gains in this gold bull market, we suggest you check out Steve’s research…

That’s because Steve recently discovered a “Magic Number” that appears before EVERY big move in gold and even gold stocks.

According to his research, you could have used this number to make gains of 66%…382%…and an extraordinary 1,160% gain in one gold stock. There are countless examples like this.

You can learn more about Steve’s “Magic Number” by watching this short presentation. You will also learn how you can get access to Steve’s research for 50% off the regular price. This deal ends at midnight tonight, so you must act soon. Click here for more information.


Chart of the Day

Gold miners soared to new highs today too…

Today’s chart shows the performance of The VanEck Vectors Gold Miners ETF (GDX), a fund that tracks large gold stocks.

As you likely know, gold stocks are leveraged to the price of gold. A small jump in the price of gold can cause gold stocks to soar. Yesterday, a modest 0.5% jump by gold caused GDX to surge 3.9%.

Today, GDX is up another 2.6%, and is now up 97% on the year. It’s trading at its highest level since August 2014.

That’s a huge move for such a short period of time. Remember, we’re not even halfway through the year. Still, gold stocks could just be getting started. During the 2000–2003 bull market, the average gold stock rose 602%. The best ones surged 1,000% or more.

Keep in mind, gold stocks are incredibly volatile. It’s not uncommon for a gold stock to swing 10% or more in a day. If you can’t stomach that kind of volatility, stick with physical gold. Its value could easily double or triple in the coming years.

European Integration With or Without Britain

Kemal Derviş

Euro and Pound

WASHINGTON, DC – When British Prime Minister David Cameron agreed with the European Union in February on revised terms for the United Kingdom’s membership, he insisted that the EU be recognized officially as a “multi-currency union.” With clear limits on European integration in place, on currency and other issues, Cameron believed that he would be able to win a popular majority in favor of the deal – and thus of remaining in the EU – when the UK holds its referendum on June 23.
 
Yet, rather than providing such clarity, the pact uses contorted language to avoid such an official declaration – and the explanations that would have to come with it.
 
To be sure, the February decision did give Cameron enough to enable him to campaign against Brexit. By specifying that the UK and Denmark are under no obligation to adopt the euro, Cameron’s counterparts did effectively confirm the EU’s status as a multi-currency union.
 
But the decision also reiterated the goal of creating an EU “whose currency is the euro,” and reaffirmed treaty provisions stipulating that other non-euro states, such as Bulgaria and Poland, must adopt the euro when they meet the pre-determined conditions. (Sweden has no permanent opt-out, and does meet the conditions for euro adoption, yet somehow manages to avoid joining the monetary union.)
 
That ambiguity was born of an unwillingness – or inability – to provide a clear description of how a multi-currency union will function in the long term. It is a tough question – one that will have to be addressed, regardless of the referendum’s outcome. After all, if British voters choose to leave the EU, a similar problem would arise in any post-“Brexit” negotiation to keep the UK in the single market.
 
There is now a general consensus that, over time, the eurozone will need to build more integrated economic governance systems. Indeed, most economists agree that any monetary union needs not only a banking union, which is now being established in the eurozone, but also greater fiscal-policy coordination, to compensate for the lack of independent monetary policies and flexible exchange rates.
 
Politicians, too, support the shift toward greater fiscal integration – at least those who represent the moderate mainstream. Germany’s conservative finance minister, Wolfgang Schäuble, France’s center-left Economy Minister Emmanuel Macron, and Italy’s centrist Finance Minister Pier Carlo Padoan, have all called for versions of a common eurozone finance minister.
 
Where the disagreement lies is in the form integration should take. Germany considers fiscal coordination to be critical to enforcing firm rules of conduct, while France and Italy would like to include more mechanisms for common risk management, such as Eurobonds or cost sharing for unemployment insurance.
 
Clearly, a balance will need to be struck. To satisfy Germany, stronger fiscal rules must form the foundation of greater integration. But such rules must entail greater counter-cyclicality and more symmetry, forcing surplus and deficit countries alike to reduce imbalances. Moreover, the framework will need to support more effective risk sharing and a distinct eurozone budget, as the southern member states demand. Institutional and legal changes, including the establishment of some kind of eurozone parliament and treasury, will also be needed, in order to provide legitimacy to the endeavor.
 
Achieving all of this is essential to enable the EU to function as an effective multi-currency union.
 
Cameron, like his predecessor Gordon Brown, who was present at the euro’s creation, but kept the UK out, recognizes the need for further eurozone integration, if only because the UK has an interest in better economic performance in its most important export market. But engaging effectively with a more deeply integrated eurozone, without joining it, will be no easy feat.
 
To be successful, the UK will need to pursue two key objectives. First, it must establish strong cooperation with the EU on other key issues, such as security, foreign, and climate policy.
 
Second, it must ensure that an increasingly integrated eurozone does not gain the authority to make unilaterally fiscal and regulatory decisions that, by reshaping the single market or the financial sector, have significant implications for the UK. The eurozone, for its part, must regard British interests in the integration process, without allowing the UK to slow it down.
 
While issues relating to eurozone integration and the multi-currency union have not been central to the Brexit debate, which has tended to focus on immigration, they remain vital to the future of the EU, with or without the UK. Though Britain’s continued EU membership is not fundamentally incompatible with a more integrated eurozone, creating institutions that can support a permanent multi-currency union – essentially, as I have argued, two Europes in one – will be politically and legally challenging.
 
In its failure to put forward a clear vision, the deal announced in February did not set a strong precedent for overcoming these challenges. If Europe is to make genuine progress toward greater stability and prosperity, it will need to ensure transparency and legitimacy every step of the way.
 
Only with a clear political vision and institutions that can steer policy during crises and in normal times alike will the EU be able to prosper again. If the UK stays, the EU must urgently work out how a legitimate multi-currency union will function, instead of reverting to business as usual. If the UK leaves, the same basic problems must be solved, with the difference, however, that the UK will have lost all leverage.
 
 

The Next Bear Market Will Be Ruthless

by: Eric Parnell, CFA
 
Summary
 
- It has been almost nine years since the outbreak of the financial crisis. And it has been more than seven years since the start of the most recent bull market.

- The Fed has created a bubble not only in asset prices but also in the investor belief that the value of their investments will be protected no matter what.

- Unfortunately, the next bear market will eventually come, and it is likely to be ruthless once it finally arrives.

- Investors who recognize such an eventual reality can stand at the ready to capitalize once the time finally arrives.

 
It has been almost nine years since the outbreak of the financial crisis. And it has been more than seven years since the start of the most recent bull market. Stocks have been impressively resilient in the face of every test during the post-crisis period thanks in large part to the seemingly endless support from monetary policymakers including the U.S. Federal Reserve.

This has helped foster an environment where many investors are not only comfortable but have swagger about owning stocks at historically high valuations despite chronically slow growth. As a result, the Fed has helped create bubbles not only in asset prices but investor expectations that the principal value of their investments will be upheld no matter what challenges befall the economy. Unfortunately, just like the bursting of the tech bubble and the onset of the financial crisis, the next recession will finally come. And when it does, it has the potential to be absolutely ruthless for investors.

Let's Get This Out Of The Way

I can already hear the bulls sharpening their knives for the comment section of this article, and I very much look forward to reading and responding to all points of view including those that strongly disagree with my article, but let me get out in front with a few observations.

Indeed, I have been bearish for some time, but this does not mean that I'm predicting that everything is going to go up in smoke tomorrow. Just as the tech bubble went about four years longer than it probably should have, the same could definitely be said for today's market.

Moreover, we could see the S&P 500 Index (NYSEARCA:SPY) continue to rally for the next several months or couple of years. Then again, we could already be one year into a new bear market. Only time will tell. But what's important to note is that the higher and longer today's market continues to rise, the longer and harder it is likely to fall on the backside. In the meantime and until we start to definitely roll down the other side of the mountain, I have and will continue to hold a meaningful allocation to stocks.

But isn't my holding stocks a contradiction to my bearish view? Absolutely not. For just as being bullish does not mean that one should be all in and 100% allocated to equities, being bearish does not imply that one should be completely out of stocks and hide away in a bunker waiting for the world to end. Bear markets slowly evolve over long-term periods of time, and selected segments of the stock market have historically demonstrated the ability to perform well during different stages of bear market cycles. For example, consumer staples (NYSEARCA:XLP), utilities (NYSEARCA:XLU) and healthcare (NYSEARCA:XLV) stocks all typically perform well during the early stages of a bear market, and selected specific stocks of various styles and sizes such as Wal-Mart (NYSE:WMT), Village Super Market (NASDAQ:VLGEA), Community Bank System (NYSE:CBU) and Southern Company (NYSE:SO) have demonstrated the ability to perform well throughout the entirety of two of the worst bear markets in history in the bursting of the tech bubble and the financial crisis. So while I may not be loaded up on the SPY, the market offers a solid menu of stocks that one can hold through the worst of a market storm. I also own a lot of other things outside of stocks that are performing well today and I expect will perform even better during any future bear market in stocks.

Also, isn't my making a statement that the next bear market could be "absolutely ruthless" for investors nothing more than fear mongering? No, it is not. Instead, it is trying to increase investor awareness of a view that they may not otherwise be hearing. After all, one only has to tune into one of the major financial news networks to hear a cornucopia of bullish views on the market, many from analysts that have a direct vested interest in promoting such bullish views and reassuring the audience that despite any short-term rough patch that "stocks will be trading higher by the end of the year."

Conversely, those expressing a bearish view are often met with heavy pushback and scowling derision. As a result, this leaves many that may be less experienced with investment markets exposed to the risk of wondering "why didn't I see this coming" when they eventually find themselves locked in the jaws of the next bear market.

In the end, it is up to individual investors to decide how they wish to proceed with their own portfolio allocation. But by sharing this more bearish perspective on today's markets - it at a minimum provides investors with a viewpoint to consider that they may not be hearing elsewhere.

Now that we've got that out of the way, let's get down to it.

The Economic/Market Disconnect

The next bear market is setting up to be ruthless for investors. But this does not mean that it will be ruthless for the U.S. economy. In fact, it would not be surprising at all to see a prolonged and significant decline in stocks accompanied by what amounts to a somewhat longer than normal but otherwise relatively mild economic recession. How can this be the case? Simple.

Since Main Street (NYSE:MAIN) hardly participated in the glorious ascent that has been Wall Street via the stock market over the past seven plus years, Main Street is not likely to suffer nearly as much when stock prices come falling back to earth. In fact, many parts of Main Street might actually find themselves benefiting in many ways including even lower interest rates on loans, lower gasoline prices at the pump and the execution of more effective fiscal programs by policymakers that finally have had a long overdue fire lit under them.

Impossible, you might say. How can we have a major stock market decline with a relatively milder impact on the broader economy? One has to look no further than the bursting of the technology bubble from 2000 to 2002. During this time period, stocks declined by more than -50%, but the economy hardly even declined. Although we officially had a recession from March 2001 to November 2001 according to the National Bureau of Economic Research (NBER), the overall decline in U.S. real GDP was -0.3% and we didn't even have two consecutive quarters of negative growth during this stretch. This recent example highlights the fact that it is certainly possible to have a stock market more than cut in half without any measurable contraction in economic activity. For if stock valuations get too far ahead of the economy, as they were then and are arguably today, they then have a huge air pocket through which to descend by simply falling back to the underlying economic reality.

 
What About Not Fighting The Fed? Lest We Forget - Lest We Forget!

What about fighting the Fed? Haven't we learned by now during the post-crisis period that the U.S. Federal Reserve and their global central bank counterparts are going to do whatever it takes to protect stock prices at every turn? This has been definitely true in recent times as any attempts to try and short the market over the past seven years when it looked like stocks were going to break sharply to the downside have been absolutely steamrolled along the way. But in order to avoid falling victim to recency bias, just because this has been true in recent years does not mean that it is universally true.

In fact, the history of the Fed is filled with examples of them winning so many of the battles but ultimately losing the wars.

To set the stage for this point, let's go back to the last great Fed victory, which was winning the war over inflation back in the early 1980s. How did the Fed win this war? Because it was willing to endure the hardship, lose the battles, and suffer the sacrifice to prevail with overall victory in the end.

Then Fed Chair Paul Volcker did not coddle and cajole the economy and financial markets at the time in working to solve the problem. Instead, he dialed up interest rates to nearly 20% and ripped the heart out of the inflation problem. During this time, the economy endured two back-to-back recessions and a solid bear market, but it set the stage for the years of prosperity that followed in the 1980s and 1990s. In short, the Fed was willing to lose some battles to win the war. And until former Fed Board Governor Kevin Warsh is appointed to the position, Mr. Volcker will remain my favorite all-time Fed Chair.

 
So what have we seen since? Under Fed Chair Alan Greenspan, we saw the Fed win battle after battle. This included the stock market crash of 1987, the recession of 1990, the should-have-been recession of 1994, the Asian Flu in the late 1990s, and the collapse of Long-Term Capital Management in 1998. And the Fed did so by helping investors avoid any pain along the way.

Yet, in the end, they lost the war, as the tech bubble finally burst with roughly four years of investor gains during the late 1990s evaporating in the process.

About that Fed put. While it is easy to forget, particularly when it has lifted markets for so many years, but the Fed does not always get what it wants from stocks with accommodative monetary policy. Lest we forget! During the bursting of the tech bubble, the Fed was aggressively lowering interest rates for three years starting in early 2000, yet stock prices lost more than half of their value before finally bottoming in late 2002 and early 2003.

 
But then came the post-tech bubble period. Under Fed Chairs Alan Greenspan and Ben Bernanke, the Fed once again was winning all of the wars thanks to low interest rates and a booming housing market. And once again, investors were able to bask in the warmth of an accommodating market filled with gains and free of pain. In the process, they managed to bring the stock market all the way back to its tech bubble highs. But in the end, the Fed once again lost the war, as the housing bubble burst with nearly catastrophic consequences. By the time the financial crisis was brought under control in March 2009 (not fixed, but brought under control), the market had exceeded the losses of the tech bubble to the downside and was back to the same level it had first reached more than a decade earlier.

Once again, the Fed put does not always work. Lest we forget! During the financial crisis, the Fed was once again aggressively lowering interest rates for nearly two years starting in mid-2007, eventually lowering interest rates to zero and launching into quantitative easing along the way, yet stock prices once again lost more than half of their value before finally bottoming in early 2009.

 
All of this leads us to today. Under Fed Chair Ben Bernanke, the Fed has won all of the battles by giving investors everything they could ever imagine and more. Stocks have skyrocketed virtually without interruption and investor pain has been virtually non-existent. In the process, the Fed managed to catapult the stock market more than one-third higher above its tech bubble and pre-financial crisis peaks. And they did so with a global economy that has been sluggish, uneven and lackluster at best.

Why The Next Recession Will Be Ruthless For Stocks

Maybe the outcome this time around will be different. But given the historical pattern over the past two decades, my bet remains that the Fed will end up losing this war once again.

Why? Let's begin with the qualitative, which is that war is not won by bypassing the pain and sacrifice necessary to prevail. And until policymakers finally decide that they are ready to win the war and replace the monetary cotton candy with a steady diet of spinach, we are likely to continue in these monetary induced boom and bust cycles.

Now let's get to the quantitative. What enabled the Fed to rescue the stock market after the last two lost wars? Because they entered financial markets firing all monetary guns for an extended period of time lasting two to three years in order to get the markets stabilized and moving higher again. But let's assume whatever bubble of the many that exist today finally bursts and sends stocks sustainably lower despite all of the best efforts and jawboning by the U.S. Federal Reserve and their global cohorts. From exactly what arsenal are they going to fire from to turn the stock market around so quickly this next time around?

Will it be lowering interest rates by several percentage points? No, because interest rates are already effectively still at zero in the U.S. and negative in much of the developed world outside of the U.S. And the temptation to go further into negative interest rate territory is unlikely, for not only has it not lifted stock price in any measurable way, evidence is growing by the day that it simply does not work and is causing more harm than good.

Will it be launching into yet another round of aggressive quantitative easing? Perhaps, but what is the justification for putting our global fiat currency system that is still a baby at only less than half of a century old at even greater peril than it already is for returning to a program that simply has not worked in generating sustained economic growth over the past seven years?

With that said, I still wouldn't put it past the Fed to go back to this well, but it stands to question what the marginal benefit to stock prices would be at the end of the day. Lest we forget the experience that Japan (NYSEARCA:EWJ) had with quantitative easing from March 2001 to March 2006 when the Bank of Japan increased its balance sheet by more than seven-fold, with the lion share of the increases taking place during the first three years of the program.

 
Yet during the first several years of the program, stock prices were cut in half before finally finding their footing. And they didn't begin bursting to the upside until more than four years after the launch of the program, and this was thanks in part to a global tailwind where the rest of the global economy was already well into its post tech bubble recovery at that point.

If and when stocks began falling in earnest the next time around, be it because of the onset of the next recession or the bursting of a bubble in capital markets, it is very likely that global central banks will lack sufficient monetary firepower and policy flexibility to stem the decline lower in stocks. In short, markets may finally be allowed to wash themselves out and cleanse themselves despite what monetary policymakers wish to allow. It's the return of Volcker-style monetary policy whether global central banks want it or not.

It should be noted that such a decline is likely to cut deeper and last longer than the two major bear markets that preceded it since the start of the new millennium. It will likely lead to a larger overall decline in the end due to the fact that central bankers will lack the resources to reverse the overall market decline the next time around. And it will likely last longer because central bankers are likely to try and fight the decline in global stock markets at every turn, as there will almost certainly be no Lehman Brothers style bandage ripping off next time around.

The good news is that it will provide investors with several opportunities to evacuate the market before the lights fully go out. One could even argue that the market is providing investors with such opportunities as we speak today.

Moreover, such a longer, more gradual bear market would provide abundant short-term trading opportunities for the nimbler investors among us. The bad news is that the next bear market is likely to feel as agonizingly long as the bull market has seemed endless today.

The Silver Lining

Such an outcome would certainly be difficult to endure and is unfortunately likely to leave a good number of investors smarting from the inevitable loss in portfolio value sustained by many along the way. But the silver lining to such an outcome is an American-style happy ending.

We don't reflect back with regret on the challenges that we had to endure during the late 1970s and early 1980s when the inflation rate was pushing toward 15% and the Fed had to crank up its restrictive monetary policy deals to fix the economy. Instead, many reflect on that time with tales of courage like how they had to walk into a bank and get a mortgage with sky-high interest rates in order to provide their family with a place to live after relocating to a new city.

And almost nobody regrets the years of sustained economic prosperity that followed during the 1980s and 1990s, and that includes struggling through the markets at the time that inspired the now much ridiculed "Death of Equities" magazine cover that came along the way. In short, suffering through this inevitable market pain ahead will bring us to the dawn of the next great phase of sustained economic growth in the United States and around the world.

 
Just as importantly, the fact that stocks are set up for a fall due in part to monetary policymakers being just about out of firepower will likely finally induce frustratingly complacent and bungling political leaders to get off their collective duffs and finally start working together in enacting effective fiscal policy to fix the chronic problems that have existed around the globe for far too long.

The general voting population around the world are really angry, and for good reason. It is because their political systems and leaders from the major established parties have failed them badly. This is a big part of the reason why we have seen the rise of outsider candidates such as Donald Trump and Bernie Sanders here in the United States and scores of outsider candidates in countries around the developed and emerging world rise to the forefront of political influence. It is also part of the reason why a candidate like Gary Johnson that effectively finished tenth out of nine candidates in the 2012 Republican primaries and could not even consistently make the debate stage that year has recently been registering in the double-digits in the general election polls as the Libertarian candidate for president in 2016. It's because the masses want big time change to happen that includes much more effective fiscal policy and they are willing to go to whatever lengths necessary to endure whatever pain required and to elect whatever candidate is needed to make it happen. And if the markets go through such a corrective cycle in the coming years, the people are likely to get this outcome regardless of who takes office both in the U.S. and in countries around the world.

The Bottom Line

Whether it starts tomorrow, next month, three years now, or already started more than a year ago, the next bear market is likely to be ruthless both in depth and duration. And the higher stocks continue to climb today, the more ruthless the next bear market is likely to be in the end.

Investors can ignore the likelihood for such an outcome, but they do so at their own peril.

Instead, investors can be well served by embracing or at least recognizing such a potential outcome and preparing their portfolio accordingly. This does not mean moving to cash right now, running for the hills and stockpiling your emergency food rations. Instead, it means crafting a game plan that includes stocks as well as components from various other asset classes that are not stocks so that you are ready to capitalize on the various ebbs and flows of the market as it travels through such an extended corrective process. After all, some of the greatest and most legendary investment gains have been made during extended bear markets, and the next time around is likely to be no exception in this regard. For those who are interested, this is an area among others that we explore in much great detail on my premium service The Universal.

Perhaps the most positive outcome of all is the following. By enduring such a cleansing process in the global economy and financial markets, as painful as it might be along the way, it will finally bring us all to that 1921, 1946, and 1982 moment where we stand at the dawn to watch the sunrise on the next great sustained global economic expansion. Nobody said the journey through the 1910s into the early 1920s, the 1930s into the 1940s, and the 1970s into the early 1980s was easy, but they were required to bring us to the periods of great prosperity that followed.

The good news is that we have already endured the challenges of the 2000s and the early 2010s.

Now we just need to finish it off with one final cleansing phase, if only monetary policymakers would finally get out of the way and fiscal policymakers would finally get on with it. Perhaps we will find out sooner rather than later one way or another.