Awaiting the data

After the shock of Brexit, the next test will be the economic impact

SHOCK, followed by frantic recalculation. That was how astonished financial markets reacted to the British vote to leave the European Union.

The initial phase saw a worldwide sell-off in riskier assets, such as equities, and a flight to safe ones, prompting further declines in government-bond yields. After the sell-off, equities started to bounce again on June 28th, in part because central banks may respond with easier monetary policy (or, in the case of the Federal Reserve, slower tightening); in part because Brexit may not have much of an impact on, say, the Chinese economy.

The biggest casualty of the vote was sterling, which was edging towards $1.50 on Thursday but on June 27th briefly dropped below $1.32, a 31-year low. In trade-weighted terms, the pound has fallen by 11% this year (see chart). Britain has a large current-account deficit (7% of GDP in the fourth quarter of 2015), which needs financing. A big drop in the pound, to make British assets more appealing to foreign investors and imports less appealing to Britons, is a necessary adjustment.

Equities have not suffered as much. Many companies in London’s FTSE 100 index—the oil and mining giants, for example—have little connection with the British economy. Since much of their income is in foreign currencies, sterling’s weakness will be good for profits. The more domestically oriented FTSE 250 index took the bigger hit, falling by 14% in two days.

Now the initial shock has passed, investors need to work out what the economic impact will be.

David Cameron, Britain’s lame-duck prime minister, did not immediately trigger Article 50—the provision in European treaties about a member state leaving the EU—bequeathing that decision to his successor. That will only prolong the uncertainty over what kind of deal will emerge from the negotiations between Britain and Europe.

One question is whether consumption will suffer because of the Brexit vote. A survey by Retail Economics found that more than half of consumers planned to reduce their spending on non-essential items. Shares in estate agents, housebuilders and budget airlines have all been hit.

However, this might be a short-term effect. The biggest risk to consumption was a crisis in the gilts market that forced up mortgage rates. But gilt yields have fallen, partly because of their risk-free status and partly because the markets anticipate further rate cuts from the Bank of England.

The bigger worry is investment. There have been lots of hints about jobs or corporate headquarters moving abroad, but nothing concrete so far. Many companies may be waiting to see whether Britain decides to join the European Economic Area, alongside Iceland and Norway, which would keep it in the single market. If it does, then the temptation will be to stay.

But since that deal would require freedom of movement, it seems unlikely that the next prime minister will accept it. In the meantime, of course, the uncertainty means that few businesses will be inclined to invest in new projects. And the longer it takes for a deal to emerge, the longer the hiatus.


Almost three-quarters of economists polled by Bloomberg think that Britain is headed for recession either this year or next. But the many anecdotal reports of cancelled contracts may not show up in the economic data until the third-quarter numbers are released; the more detailed estimate is not due until November 25th. Markets may get earlier indications of the trend in business surveys, such as the purchasing managers’ index. That will be the next big test for British equities.

In the longer term, some hope that the departure from the EU will turn Britain into a more vibrant economy. Chris Watling of Longview Economics is one of the few analysts to spell out what this might mean in practice. He suggests the immediate announcement of trade talks with the rest of the world, the abolition of corporation tax and the creation of new towns to ease the housing shortage.

The first would take a long time to achieve; the second would stir fierce political opposition; and the third, both. Again, investors will want to see some concrete plans if they are to believe the campaign promises of some Brexiteers of a more open Britain.

For the rest of Europe, the question is whether Brexit will encourage other anti-EU movements.

The indicator to watch is the German ten-year Bund yield, since it is the safest asset on the continent. It has dropped further into negative territory, hitting -0.12%. That yield needs to move well into positive territory before the risks of the British vote can be said to have been contained.

How the struggle for Europe was lost

The Remain campaign had no answer to the seductive message of Leave, writes Peter Mandelson
At times the referendum campaign seemed like a re-enactment of the gang warfare from West Side Story, although, as I remarked early on to George Osborne, the chancellor, it sometimes felt as if our gang was taking a spoon to this knife fight.
The defeat of the Remain side in the EU referendum has colossal national and global implications. How did it happen?

A relatively short campaign was never going to cool the resentment that many of those who voted Leave harboured towards an establishment they believed had let them down over many years. Yet the failure of the Remain campaign, of which I was one of the architects, was not inevitable.

Initially, we were confident. Internal polling showed that the voters we needed to convince would support the side they thought would best protect their economic wellbeing. Although they understood little of the way the EU works (as one Number 10 staffer remarked, we were fighting “a referendum on a subject people don’t understand”), they seemed intuitively to grasp that it was good for the economy and that leaving would be a significant risk. Our pollsters assured us that economic concerns trumped those about immigration.

Economic research was commissioned, stakeholders lined up and interventions planned. This early onslaught was undoubtedly successful. While our case was backed up by authoritative independent sources, it was clear that our opponents, when pressed to offer alternatives to life inside the EU, had none. Internal polling in the early part of the campaign showed a healthy lead. Our research and planning had paid off. It helped, too, that Remain initially had behind it the combined weight of the government machine and the prime minister’s office.

A decisive shift in the campaign occurred towards the end of May, with the beginning of the “purdah” period, during which Treasury officials and other civil servants were prohibited from engaging in any activity that could be construed as an attempt to affect the outcome of the referendum. This was not because the big guns of the government were silenced but rather that there was a requirement on the media to give more time, and therefore credence, to the Leave case.

Another factor shaped broadcasters’ coverage of the campaign. One BBC journalist said to me: “You’ve won the economic argument hands down, so we can move on.” This was a gift to Leave, which opted for a “core vote” strategy, abandoning economic questions and concentrating on immigration.

While Leave transmogrified into the official opposition, spraying around spending pledges they were in no position to make, Remain was discovering the limitations of running a campaign led by David Cameron without the echo chamber of the rightwing press. The difference between this and every other campaign fought by the Number 10 team was that it lacked the support of the Tory-leaning press, which, instead of trumpeting their economic warnings, now sought to discredit them.

Remain campaigners asked Number 10 for licence to attack Boris Johnson and Michael Gove .

But the prime minister saw this as a “trap” which would simply exacerbate the grievances of rebels in his own party after a Remain victory.

Meanwhile some in the campaign thought we should broaden our economic message. We had to do more to explain why being in the European single market is so important, how leaving would harm jobs and investment in the regions and why the other options available were inferior.

The problem was that, while the single market was the core of our argument, the majority of voters did not know what it was. This was a serious communications challenge, especially as we were up against Leave’s simple and seductive message of “Take back control” and “spend £350m on the NHS” — but I thought it was essential that we took it on.

In the end, however, it was decided that the focus on the single market was too difficult and that instead we had to hone the message about risk — hence the focus on the fiscal dangers Brexit posed to the National Health Service and public services, alongside stories about the threat to pensions, mortgages and house prices.

This decision was pivotal. Whereas Leave was campaigning around a single number — the £350m — we presented voters with a succession of different figures which bounced off them and did not cohere into a single, overarching economic narrative.

At the same time it was becoming clear that we had a major problem with Labour voters. After an initial surge in support among them for Remain, it was now haemorrhaging badly. The dominance of Tory voices in the media and the halfhearted campaigning of Jeremy Corbyn, the Labour leader, meant that many voters did not know what the party’s official position was. The Labour leader’s office refused to engage. Indeed the problem became so bad that we were reduced to trying to engineer television appearances by Mr Corbyn in front of Remain posters so that Labour voters might pick up the signal. At times it looked as if the Labour leader was actively sabotaging a campaign he was happy to see fail.

As this drama unfolded, our strategy on immigration was to focus on economic risk — with every question met with a “pivot” to the economy. This did not work. Together with Will Straw, the director of the Remain campaign, I argued that the immigration argument needed to be tackled head on: benefits championed; current and future controls explained and advocated; the single market choice made stark. But there were no takers for this message in Number 10.

The belief of Mr Cameron’s team in the Conservatives’ election-winning formula was total: no playing on your enemy’s turf, no distraction from economic risk. As one of the architects of message discipline in modern politics, I can only say that I never meant it to be quite so one-dimensional.

Immigration remained an open flank, where we had no coherent message or credible message carriers and a division over tactics. We suffered from failing to agree our approach to the subject long before the campaign started, a lack of appetite on the Conservative side to confront it and an oversimplified interpretation of our task by those providing us with data.

We failed to persuade voters sceptical of the economic benefits of EU membership (and the costs of leaving) and those concerned about immigration. Leave, by contrast, had a direct, if dishonest, pitch to end free movement, retain economic benefits and insulate Britain against future enlargement.

In the end, people voted for risk and rebellion over stability. We did not mount an effective “persuasion” campaign but a cruder “get out the vote” one. The public was not offered a future vision of Europe they could believe in and for that we must take responsibility.

Now, the political centre is reaping what it sowed. While for too long the centre right sought to garner support from the grass roots and from sections of the media by demonising Europe, on the centre left support for EU membership was taken for granted. This conspiracy of complacency on both sides led to a culture of anti-Europeanism that we were unable to overcome during the campaign. In the meantime, while we have to live with the result of the referendum, we do not yet have an outcome to embrace. That is something to be negotiated in the coming years and for the British people to accept, or not, as they judge best.

The writer is a former secretary of state for business, innovation and skills

Wall Street's Best Minds

Byron Wien: How Rising Populism Hurts Markets

The Blackstone strategist writes that developments in the U.S. and Europe are troubling to portfolio managers.

By Byron Wien    

These are confusing times in both the United States and Europe. The forthcoming U.S. presidential election has two unpopular (according to the polls) candidates running against each other. One is viewed as untrustworthy and the other as dangerously extreme. In the U.K. the “Leave” vote was a shocker. Britain is the second largest economy in the Union, and its departure creates concern about whether others will follow.
Because of that there may be an effort by EU leadership to achieve the separation quickly. Some worry that the EU will punish Britain for its decision, as a warning to other countries considering defection. I hope not. Article 50 of the Lisbon Treaty provides for a two-year period of negotiation of a withdrawal agreement. A work-out result involving continuing trade relationships with the continent, or even being part of a single market, would be ideal. At this point, German chancellor Angela Merkel seems to be in favor of a gradual withdrawal. In any case, the “Leave” outcome is a setback for growth in Britain, in Europe and around the world at a time when economies are generally struggling. Not a good sign for markets for the rest of the year.

While the vote was decisive, key “Remain” constituents did not turn out as expected. Younger voters were 75% in favor of “Remain” and they had a 36% turnout. Scotland, which favored “Remain,” had a low turnout. The weather in and around London was bad favoring “Leave”; older, less educated rural voters held sway. The overall turnout was a heavy 72%. There is some buyer’s remorse, but it is done.

The economic historian Walter Russell Mead, a professor at Bard, believes that Brexit and nationalism generally derive from a systemic crisis related to (a) the economic vulnerability of the Eurozone; (b) the Middle East refugee crisis and fear of terrorism; and finally (c) Russian aggression. In the United States, he sees skepticism toward trade agreements and a growing isolationism. Donald Trump’s ascendency to the Republican nomination is also a reflection of those populist ideas. So is Bernie Sanders’ younger-voter following, which emerged in response to growing inequality and a lack of opportunity.

A major common thread in both Europe and the United States is the fear about immigration. On both sides of the Atlantic the average person is concerned about the loss of jobs to immigrants who will be satisfied with lower wages. In Europe there is the additional worry that if Turkey were to become a member of the Union and its people have easy entry into any member country, the flow of immigrants into prosperous nations like Britain would be considerable.
The ethnicity issue is central on both sides of the Atlantic. The Orlando shootings by an American-born Muslim did not temper the views held by the President and the likely political candidates. The Democrats argue that the few should not contaminate the many. Trump recognizes that terrorism has made Americans generally afraid, and therefore is useful politically. Voters who are scared, on either side of the ocean, are likely to act emotionally, which is what made the outcome of the referendum uncertain. While economic issues argued strongly for Britain remaining in the European Union, fear of disruptive immigrants ultimately dominated the thinking of many people. When fear is the controlling factor, fundamentals on the other side of the issue play a smaller role. This will be a consideration in elections across the continent in the coming year.
During June I traveled to London, Amsterdam, Paris, Geneva and Zurich, meeting with investors and discussing the factors that were contributing to asset allocation uncertainty everywhere. I think it is fair to say that Europeans are baffled by the prospect of Donald Trump becoming President of the United States. They view him as threatening to the world order. While they know that American political leadership can veer off in troublesome directions, they believe that Trump represents a new precedent that they hope can be restrained by Congress if he is elected. The confusion that populism has created on both sides of the Atlantic has made asset allocation decisions difficult for European portfolio managers. I didn’t find anyone who was enthusiastic about any asset class. Most were looking for a place to hide until the outlook clarified, but the feeling was that the investment landscape would not improve soon.
The greatest concern was about what would happen if the developed world slipped back into a recession for any reason. Everyone was aware that the current expansion began in the middle of 2009, making it one of the longest on record. If we got into an economic recession on either side of the ocean, what policy steps could be taken to hasten the recovery? Interest rates are already at record lows and further monetary accommodation might be less productive than previous efforts.

Conservative governments in Europe and a Republican Congress in the United States are not likely to pass legislation providing major fiscal stimulus measures. Central banks dealt with the financial crisis of 2008-09 very effectively, but there is no guarantee that the next crisis will be handled with similar skill.
At present, Europeans seem resigned to a prolonged period of slow growth. They are puzzled by the negative interest rates in Germany and Japan but believe there is significant risk aversion among investors who are looking for a place to store their money until they develop more conviction about where they can find capital appreciation opportunities, and some are willing to pay the banks a storage fee to do it. They are also unsettled by the uncertain political outlook on the continent as they look ahead to the numerous elections scheduled over the next year. Angela Merkel has lost political capital at home and with other members of the European Union over the immigration issue, and she was the putative leader of the continent. Europeans have no idea of what to expect after the new leadership takes over in Washington. They would expect Clinton to follow Obama’s policies but are unwilling to count on that.
Europeans are aware of the importance of monetary expansion in causing the equity markets to rise and keeping interest rates low. They wonder what will happen to the U.S. economy when the Fed starts shrinking its balance sheet back to more normal levels. It has $4.5 trillion in bonds on its books now; back in 2008 it had $1 trillion. In my discussions, I pointed out that a serious reduction of the Fed balance sheet was unlikely to happen soon, because the economy is vulnerable to any form of monetary tightening.
Everywhere I went, investors pleaded with me to suggest an asset class where they could get double-digit returns. When I told them that future nominal returns from public equities were more likely to be closer to 5% than 10%, they were disappointed but understood my reasoning. If world real growth were 2% and inflation were 2% and productivity were 1%, 5% is all you were going to get in earnings. We had a number of discussions about productivity. I suggested that we needed to see productivity of about 1% for profits to improve and the standard of living to rise. Currently we are running at about half that rate. Many believe that the measurement process does not pick up the contributions to productivity that have come from technology. One pointed out that in Europe the underground or “black” economy plays an important role, and its output data is not picked up in the productivity figures.
The general thinking in Europe is that growth is slow but okay. Youth unemployment is still high, but real GDP growth for the continent should still be 1% for 2016. The refugee crisis is under control for the moment and some jobs are being created. The problem may be in part a result of the European Union becoming too big, with too many countries and no strong central leadership. The bureaucracy is cumbersome and costly and the regulatory framework has become a burden. Consequently, companies are always looking for ways to cut costs and reducing the work force is a prime option. It used to be that if you went to work for a big company, you had a job for life. There was a social contract between a company and its employees. Now all that is gone. In this climate of uncertainty, many people are attracted to candidates with extreme positions, but so far the outsiders are not yet in control.
Europeans are very worried about political instability in the Middle East leading to a rise in the price of oil. Some believe that the recent rise carries a supply disruption premium. They say oil cannot be looked at as a simple supply/demand problem. Terrorism and regime change in key countries has to be taken into account.
Some thought the enthusiasm about energy was unfounded. The price may stay lower than expected because of fracking and increased production from Iran. Many Swiss investors are buying gold again.
They believe that the lack of attractive opportunities in other asset classes will drive more investors to become more defensive. They also feel that political problems in Europe and the United States will make gold attractive.
There wasn’t much of an appetite for investing in China or the emerging markets. European investors recognize the appeal of countries with a growing middle class, but the short-term political problems and weak commodity prices have kept them on the sidelines. Several believed there were opportunities in Africa but were reluctant to make investments there. One pointed out that the German work force is shrinking faster than the Japanese. Since Germany is the prime mover in European growth, this is a serious concern for the future.
One investor said market volatility and a lack of discernible trends discouraged him. Another noted that the mobility advantage would always favor America. Europeans have a language problem that limits moving, and they have difficulty selling their houses. On the favorable side several said that Europe is ready for change and it will be driven by young people who are dissatisfied with the status quo. Throughout the continent’s history, as Europeans grew older they accepted life as it came to them, but younger people today want more opportunity and they are pressing their leaders to provide it for them. It is uncertain whether they will be successful, but Europe is likely to be a more vibrant place economically as a result.
Greece continues to be a problem. Its loan obligations may be extended, but the prospect of the government ever paying the money back remains dim. There is too much corruption, people don’t pay their taxes and the industrial base is small. The country will continue to be a drain on Europe and weaken the Union. Greece is no longer in the headlines, but the problems are still there. The question is whether the stronger countries like Germany will support the weak ones forever. Governments play a much larger role in European economies, with state expenditures representing 50% or more of total GDP in many countries. What’s more, Europe is very resistant to change and reforms are hard to implement. One investor said he thought there might be a movement in France to outlaw robotics in manufacturing plants. In any case, the French will use almost any excuse to strike. While I was there, there were widespread disruptions over work rule changes. As for China, European investors were concerned about accounting practices (among even the best-known companies), low-level corruption and market volatility. High-level corruption seems to be under control. While most expect growth to continue at a somewhat slower pace, some were concerned that a banking crisis caused by non-performing loans could create a hard landing.
Although the investors I talked with were worried about the immediate-term problems of asset allocation, some reflected on longer-term problems that were worrying them. Health care has improved and people are living longer and some are working longer, but fewer workers are going to have to support more retirees.
This is likely to put a burden on government entitlement programs, causing taxes to be raised. Climate change may have an impact on food production and create shortages as the population grows. What will cause productivity to rise? With terrorism increasing, aren’t we going to have to spend more money protecting ourselves? Will pollution in Asian cities limit the growth of that region?

In an investment environment already afflicted by low returns, these longer-term problems may make asset allocation even more difficult.
Almost all the investors I talked with felt their total return targets were too high, but they were having difficulty convincing their superiors to lower them to more realistic levels.

Wien is vice chairman of Blackstone Advisory Partners, a subsidiary of the Blackstone Group.

Signs of Trouble for Deutsche Bank

By Jacob L. Shapiro and Lili Bayer

A crisis in Germany’s largest bank would be felt by financial markets worldwide.

The International Monetary Fund (IMF) issued a damning 63-page report on the German banking and insurance sector yesterday. It is a long and thorough report, with the key point buried on page 42: “Deutsche Bank appears to be the most important net contributor to systemic risks in the global banking system.”

Then, the U.S. Federal Reserve said that the U.S. subsidiary of Deutsche Bank was one of two banks (the other was Santander) that failed an annual stress test. Deutsche Bank failed the same test last year, and while the Fed noted that the U.S. subsidiary had strengthened its capital position since its previous failure, it said there was still much more work to be done. The markets punished Deutsche Bank, already reeling from Brexit, forcing shares down at one point to their lowest level in 30 years.

With all the news surrounding volatility in the markets due to Brexit, there is a temptation to dismiss this as more of the same. But in reality, these two developments, particularly the IMF report, are of far greater importance. If Deutsche Bank really is on the verge of a crisis – and we believe it is – the implications will be felt worldwide and the global financial system will shudder. First, however, the effects will be felt by Germany, and before we can explain why, Deutsche Bank’s unique and important role in Germany’s history and development must be placed in context.

Deutsche Bank is not merely Germany’s biggest bank. The political role it plays in Germany is unique when compared with other countries. There is no good historical antecedent with which to compare it in the U.S.; Deutsche Bank’s importance to Germany is many times greater than that of an investment bank like Lehman Brothers to the U.S. in 2008. Deutsche Bank is technically a private bank, but it is tied to the government informally and to most major German corporations formally. Its fate will be shared by all of Germany.

Deutsche Bank is technically a year older than Germany itself, having been founded in 1870, a year before Prussia declared that the German Reich had succeeded the Holy Roman Empire. It is one of the Big Three German banks – the others being Commerzbank (also founded in 1870) and Dresdner Bank (founded in 1872 and bought by Commerzbank in 2009) – that played the role of both capital provider and master puppeteer in the development of the German industrial machine over the last century and a half.

After its founding, Germany was extremely poor. Deutsche Bank provided short-term loans and in return received equity shares in the companies it bankrolled. By the mid-1980s, according to a German government study, the Big Three were estimated to control the voting authority of over three-quarters of the shares of most major German companies. A 1995 report by the U.S. Congress’ Federal Research Division estimated that the Big Three by themselves, not counting the shares they held for their clients, held 30 percent of the seats on the advisory boards of all German companies. Disaggregating Deutsche Bank from the German government’s political goals or the structure of German corporations is impossible. They are all inextricably linked.

In the 1990s and early 2000s, Deutsche Bank tried to maintain its unique role while at the same time taking advantage of financial globalization. That meant operating more and more like a typical investment bank. Deutsche Bank began prioritizing short-term gains and investing in risky assets, including securities backed by subprime mortgages in the U.S. real estate market.

In Germany, the significance of the 2008 financial crisis was not just the loss of money, but the fact that Deutsche Bank, for so long a symbol of the German economy, was delegitimized and implicated in high-risk behavior. Besides the problems with its bottom line, it still faces a battery of investigations, legal troubles, scandals and potential fines to be paid in the coming years. The bank has fallen quite a way from its beginnings.

Fast forward to today, and Deutsche Bank, Commerzbank and indeed most German banks have been able to stanch the bleeding from 2008 but not to heal the wound. These banks are struggling in large part due to the ultra-loose monetary policy put in place by the European Central Bank (ECB) to attempt to stimulate the European economy. The ECB has cut interest rates, moved deposit rates to negative territory and embarked on an ambitious asset buying program in an attempt to boost inflation and stimulate economic growth across the bloc.

Low interest rates, however, cut into German banks’ profit margins and have already forced some banks, most notably Deutsche Bank, to introduce new fees and implement job cuts. In fact, Germany’s financial watchdog, BaFin, estimates that about half of Germany’s banks have a heightened exposure to interest rate changes and as a result may have to hold more capital.

Another side effect of low interest rates has been that, according to the IMF, some German banks have turned to riskier Spanish and Italian sovereign paper. With southern Europe experiencing its own banking problems, boosting investment in Italy and Spain is clouding the outlook for German banks even further.

Back in May, we published a study of the German economy entitled “Germany’s Invisible Crisis.” We pointed out Germany’s dependence on exports, and how it is simply not feasible for Germany to maintain its current levels of exports in a global economy that is stagnant at best, and in many places around the world is in varying degrees of crisis. Should the U.S. enter a cyclical recession, what remains of the demand propping up the German economy will collapse, and what was once invisible will become clear as day.

In our report, we also noted that the most analogous problem for Germany’s current predicament is Japan in the late 1980s and early 1990s. The first warning of the collapse of the Japanese miracle was the Bank of International Settlements’ warning that Japanese banks would be suspended from international transactions because of low reserves. We cannot help but view yesterday’s events, and particularly the publication of the IMF study, as a similar red flag.

The analogy is not watertight because capital reserves do not (yet) seem to be a problem for Deutsche Bank and for German banks on the whole. The IMF report makes it clear that there are “substantial capital buffers” across the board for all German banks, including Deutsche Bank (though it bears noting that Deutsche Bank’s ratio of Tier 1 capital to assets dropped precipitously in response to the 2008 financial crisis). One thing that caught our eye though was the fact that compared to peer banks, German banks’ ratio of risk-weighted assets to total assets was only 31.2 percent – barely a third of the ratio for U.S. banks, and 25 percent less than other eurozone peers. So overall, German banks are minimizing losses by avoiding riskier enterprises. This betrays the fact that there must be a weakness in the system that is forcing German banks to be extremely stingy.

Deutsche Bank is showing signs of that weakness more than any other German institution right now. Last year, Deutsche Bank posted a net loss of roughly 6.7 billion euros, or $7.4 billion.

Deutsche Bank’s chief financial officer told CNBC that he did not expect Deutsche Bank to find its way back into the black until 2018 at the earliest. Deutsche Bank’s first quarter report for 2016 said revenue was down 22 percent year-over-year – and that’s compared to a year when the bank took a 10-figure loss.

In just the last year, Deutsche Bank has laid off tens of thousands of workers and has seen rating downgrades from both Fitch and Moody’s on its long-term debt and its deposit ratings.

Deutsche Bank is also sitting on $41.9 trillion (not a typo) worth of derivatives, an inheritance no doubt from its pre-2008 activities, and perhaps even its post-2008 activities. The crisis is no longer invisible. The IMF, Germany and the markets all see it.

This is one of those situations where it brings us no pleasure to say that yesterday was a good day for our forecast. It was also a bad day for Deutsche Bank, and by extension for the global economy. If developments continue to unfold as we expect, it won’t be the last.

Following Brexit, Central Bank Desperation Never More Evident...

by: The Gold Report

- Traders had purchased volatility prior to the Brexit vote, and once it spiked after the decision.

- They staved off a 12.5% currency haircut versus the Yankee dollar and they got an 8.5% lift in gold.

- The big news for me is the performance in the silver market.
- This article was provided by Michael Ballanger.
Precious metals expert Michael Ballanger discusses market reactions post-Brexit vote.

To truly appreciate market crashes, you must have an ample serving of grey hair.
Over the weekend, I must have received three dozen "Emergency Email Alert" notifications by newsletter services and financial intermediaries that got absolutely obliterated Friday morning and were expecting more of the same on Monday, which they got in spades. This new generation of "wealth advisors" has, unfortunately, been living off the largess of Central Bank guarantees and the winks and nudges of the "Finance Ministers" and "Treasury Secretaries" and "Chancellors of the Exchequer," where they make investment decisions based not upon analyses of balance sheets or income statements but upon the collective wisdom of Champagne Socialists. I have been writing about this for about thirty-five years and while it has not yet manifested itself in the advance of the prices of precious metals to levels that would correspond to the level of coinciding currency debasement, especially in the United States and Europe, it is going to be the "Talk of the Town" here in 2016.
Yesterday I heard two commentators on CNBC ask two of the stupidest questions in history.
The first one was when Bob Pisani asked, "Why is the VIX (Volatility Index) down over 2 points with the S&P off 40?" The answer, which was even more ludicrous than the question, implied that traders had purchased volatility prior to the Brexit vote, and once it spiked after the decision, they were selling "vol," which was telling you that the sell-off was going to be short-lived.

No, Bob, that is incorrect. The only "traders" selling "vol" yesterday were those at 33 Liberty St. in New York (home of the NY Fed), after instructions were taken from the "Working Group in Capital Markets" (covert arm of the U.S. Treasury).
They weren't "lightening positions" taken prior to Brexit, either - they were bludgeoning the VIX futures in order to drive the algo - bots into the "long S&P futures" trade, so naturally, since the market rallied off the lows in late trading in response to the sagging VIX, a rather obvious wink/nudge was hand-delivered to the masses. Net effect? A 20-point S&P rally arrives, and another 35-point rally follows.
The second "dumb as a bag of hammers" moment was when Kelly Evans questioned a fund manager about his ownership of gold within his family of funds: "You are a value manager, so how can you like gold in here when it offers no cash flow and no yield?"
Well, Kelly, why don't you ask that question to those British investors who flipped their British pounds into gold last Wednesday? They staved off a 12.5% currency haircut versus the Yankee dollar and they got an 8.5% lift in gold. Ask that question to a depositor in the Cyprus banks a few years back when they got sideswiped by the advent of the "Bail-In." It is called "counter-party risk"-where the guy on the other side of the trade is unable to settle the transaction - and you can bet there has been a lot of that being talked about across the pond these days. So THAT, Kelly, is a tad more important than cash flow or yield - it is called capital preservation. (See chart above.)
I am giving the markets a few days to bounce but I really do think that Europe is unraveling and that the ability of the Central Banks to inject liquidity ("manipulate") is rapidly coming to a close. I therefore will attempt to buy back the UVXY July $10 calls at $1.45, and since these were sold for double what I paid, the new adjusted cost on the 60% position is now $0.725. So when Bob Pisani tells us that the declining VIX is a sure sign that the sell-off in stocks is going to be "short-lived," ask yourself what he was telling the viewers back from May 31-June 10, when the VIX traded under 13; it hit 25 on Friday.

As for the miners, they are acting "tired," considering that gold has traded above $1,300 for three days now. And despite all of this safe-haven volume, the HUI (Gold Bugs Index) has barely made a new high. However, the next time Kelly Evans asks a guest what they see in owning gold, show her the chart posted below.
The big news for me is the performance in the silver market, with it being rejected once again as it crossed the $18.50 threshold on multiple occasions. Knowing the cretins as I do, I fully expect them to allow the breakout later this week and suck all of the technical traders into the long side of the trade. I am already long the July 15 calls from the March 31 "Long Silver/Short Gold" options trade, and have about a month left on them since first mentioned in the March 31 Gold Report: "I will buy 100 SLV (iShares Silver Trust) July $15 calls for $0.68 (US$6,800) and also 20 GLD (SPDR Gold Trust) July $115 puts for $2.92 (US$5,840) for a net debit of US$12,640. I will need to see either $108.68 on the GLD or $16.26 on the SLV as breakeven points on this trade by the third Friday in July."
The SLV July $15 calls went out today at $2.40, making this a 90-day return of 89.8%; I haven't booked the profit but I will offer these calls tomorrow at $2.40, and wait to see if we can get a solid breakout (I hate that term) above $18.50. The chart below looks like we are already breaking out, but the thickness (or lack thereof) of the line can turn you into a bum pretty fast, so I am going to wait for a solid move through $18.50 and pray that this time I'm not being set up for yet another classic "false breakout" in the odious Crimex silver pit.
I'm working on my mid-year review this week, where I provide revisions to the long, intermediate and short-term forecasts for gold and silver. I'll give you a hint: The long and intermediate are unchanged, but the short-term forecast for weakness into the end of July was going to be called into question until these Central Bankers decided to "rescue" the global stock markets with their incessant "interventions."
Lastly, remember what I have been saying since the early '80s about owning stocks when Central Banks are fabricating currency: "NEVER underestimate the replacement power of equities (stocks) within an inflationary spiral." The worst thing one can ever hold is a "fat bank account," because the longer it remains in cash, the less time it takes to depreciate. The reason that politicians created "central banks" was to give them a "foil" upon which to defer every time they elect to trash the purchasing power of the currency unit in which you get paid every month.

Why is it that they all commit to an "anti-inflation" policy statement with government pensions PROTECTED from it? All of the politicians and government employees have pensions "indexed to inflation," and you and I do not. Think about it. Think about it very hard and email me if you can think of a plausible solution.
How about "Fire them all!"?
Originally trained during the inflationary 1970s, Michael Ballanger is a graduate of Saint Louis University where he earned a Bachelor of Science in finance and a Bachelor of Art in marketing before completing post-graduate work at the Wharton School of Finance. With more than 30 years of experience as a junior mining and exploration specialist, as well as a solid background in corporate finance, Ballanger's adherence to the concept of "Hard Assets" allows him to focus the practice on selecting opportunities in the global resource sector with emphasis on the precious metals exploration and development sector. Ballanger takes great pleasure in visiting mineral properties around the globe in the never-ending hunt for early-stage opportunities.
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All charts courtesy of Michael Ballanger.

Reawakening Europe

Joschka Fischer

Newsart for Reawakening Europe

BERLIN – The decision by the United Kingdom’s voters to “Brexit” the European Union is not an example of the British black humor that I love. It’s not “Monty Python’s Flying Circus,” “Yes, Prime Minister,” or “Fawlty Towers”; it’s just Boris, Michael, and Nigel and their disastrous political reality show.
Given the UK’s economic, political, and military significance, Brexit will leave a gaping hole in the EU. But it will not destroy Europe. At the moment, the same cannot be said of the UK. Will the country remain united, or will the Scots leave, with Northern Ireland seeking unification with the Republic of Ireland? Has Brexit paved the way for the decline of one of the EU’s most dynamic economies and the end of London’s reign as a global financial center?
The UK’s withdrawal from the EU is a hitherto unprecedented move and will no doubt throw up many unpleasant surprises. Until now, with the exception of Greenland, the EU has experienced only enlargements, which is why no one really knows how Brexit will take place, how long it will take (Greenland’s exit took three years), and what implications it will have for the UK and the EU.
In any case, one thing is certain: the British decision – even if implemented in the fastest conceivable way – has initiated a long period of political and economic uncertainty and European preoccupation with its own affairs, even as the world around it changes dramatically.
If only rational reasoning was the basis of decision-making, the remaining 27 member states would, in line with their interests, move to strengthen the EU by taking immediate steps toward stabilization and enhanced integration. But there seems little hope of that.
Differences over strategy and tactics between the key members of the currency union, especially Germany and France, and between the eurozone’s northern and southern members, simply run too deep. Everyone is aware of what needs to be done: find a new compromise within the currency union between the stubborn German-led focus on austerity and the Mediterranean countries’ need for increased spending to restore growth and boost competitiveness. But Europe’s political leaders seem to lack the courage to pursue this.
As a result, no sign of strengthening or of a new start for the EU can be expected. On the contrary, despite many loud assertions after the initial Brexit shock that things must change, there are many indications that business as usual will prevail.
But the underlying causes for the rejection of Europe run much deeper than current conflicts.
Resurgent nationalism has revived the myth of a bygone golden age of ethnically and politically homogenous national states free of external constraints and not exposed to the negative consequences of globalization.
I write this a few days before the centenary of the carnage at the Somme on July 1, 1916.
Apparently, the myth-busting power of two terrible world wars, once sufficient to forge a common Europe and establish the EU, is no longer enough to sustain the post-1945 European integration project. The words spoken by former French President François Mitterand in his last speech before the European Parliament – “Le nationalisme c’est la guerre!” – seem to have sunk into oblivion.
Today, nationalism is rising in almost all European countries, and it is directed primarily against foreigners and the EU. These two targets were also used by the UK’s “Leave” campaign. Brexit advocates appealed almost exclusively to nationalist myth, whereas the “Remain” side often sounded like accountants. The bloodless bean counters didn’t stand a chance.
The reversal of the positive vision of Europe not only ignores the past. It is also a symptom of European – or, perhaps more precisely, Western – decline (at least in relative terms), which has resulted in deep-seated distrust of the “elites.” Europe is not alone in this regard: in the United States, presumptive Republican presidential nominee Donald Trump welcomed Brexit and is pushing many of the same nationalist buttons.
For many Western citizens, entities such as the EU, no less than the rise of major emerging economies such as China and India, are perceived as agents of this decline, rather than as a source of leverage to influence global power shifts and react in accordance with its values and interests. Thus, salvation is sought in the nation-state. Unfortunately, as the UK will demonstrate, this strategy amounts to nothing more than a self-fulfilling prophecy of decline.
The rising tide of nationalism cannot be pushed back unless the European idea regains its positive visionary power. This will require not only a new European narrative (which the UK’s natural experiment in self-destruction could help to create), but also a renewed EU.
First and foremost, it must be made clear to millions of Europe’s citizens where the real power within the EU lies: not in Brussels and Strasbourg, but in the hands of national governments.
The EU institutions are blamed for all kinds of problems: globalization, immigration, welfare cuts and Thatcherism, youth unemployment, lack of democracy, and much more. In fact, by preventing the EU from addressing these issues, the national governments – helpless to tackle them effectively on their own – have made these problems worse.
For now, the governments of almost all member states are maintaining a contradictory stance, rejecting further integration while insisting that the EU must “deliver.” Just what the EU should deliver, and how, in the absence of further integration remains unexplained. But even in Europe, no one can have their cake and eat it.
There still may be time to reverse current trends in the West. We do not need a victory by Trump, or by National Front leader Marine Le Pen in next year’s French presidential election, to know where the nationalism underlying the Brexit vote leads.