FRA Co-founder Gordon T. Long is joined by Peter Boockvar in discussing the aftermath of Brexit and the effects on the future economy.

Peter is the Chief Market Analyst with The Lindsey Group, a macro economic and market research firm founded by Larry Lindsey.

Prior to joining The Lindsey Group, Peter spent a brief time at Omega Advisors, a New York based hedge fund, as a macro analyst and portfolio manager. Before this, he was an employee and partner at Miller Tabak + Co for 18 years where he was an equity strategist and a portfolio manager with Miller Tabak Advisors. He joined Donaldson, Lufkin and Jenrette in 1992 in their corporate bond research department as a junior analyst. He is also President of OCLI, LLC and OCLI2, LLC, farmland real estate investment funds.

Peter graduated magna cum laude with a B.B.A. in finance from George Washington University.

BREXIT

The shock is going to lead into some chaotic-type thinking, but while this is a gigantic inconvenience and reason for continued economic slowdown, over time the UK will adjust and trade with Europe the same way Norway and Switzerland does. For the rest of Europe, this raises the question of other countries deciding to leave.

“I think having the Euro is something they want to be a part of, but that is a major risk, no question.”

This is also exposing a lot of fault lines within the EU with bureaucracy and the pushback against the “ruling class”. The failure of the EU in Brussels to address the refugee problem is a major concern, but immigration was a short term emotional decision.

“Certainly, if it wasn’t for the immigration issue,  I think it’s pretty obvious that they would’ve voted to remain.”

EU BANKING STRUCTURE

“On a bank to bank basis, they’re being crushed by the ECB and the negative interest rates. That’s the biggest threat to the European banking system, and their overleveraged banking sheets with too many nonperforming loans. Not the UK vote.”

We should remember what the underlying fundamentals are that we’re faced with every day. That is, slowing economic growth globally. In the US that is falling earnings, falling profit margins, a loss of credibility on the part of all central bankers and the Fed. On top of this is an asset price bubble over the last six years that leaves us with no margin of safety in order to face all these headwinds.

The European Union can adjust to it, because this is a gigantic wake-up call and they have two choices: they either let this bleed away or they say, you know, we have to change our ways, and some things for the better may come from that.”

“The global growth story remains very challenged, asset prices remain very expensive, and central bankers have lost credibility. Those are the risks that people should be mostly focussed on right now.”

China’s been slowing for years. Who doesn’t know that China’s going through challenges? Even the Chinese stock market is down 50% from where it was in 2007. It’s still part of a broader picture of slow growth.

DOLLAR AND YIELD

Past the very short term knee-jerk reactions – sell the Euro, sell the Pound – the Dollar has its own issues. The Fed is stuck at 37½ basis points throughout this economic cycle. They likely won’t raise rates until the expansion after the next recession. So it’s easy to sell other currencies to buy the Dollar right now, the Dollar has its own issues.

“The fair answer to that question is which is going to be the currency left standing? And the only answer to that is going to be gold and silver, and that’s obviously being reflected today. The dollar is getting a knee-jerk bounce here, but I’m not a believer in a strong Dollar because I think it itself is facing major headwinds.”

The Fed isn’t raising interest rates, and the US economy is slowing. Going from current growth to recession is not that far of a leap. The determinant of that is what asset prices do, actually. If the S&P500 goes back to 1800, then the odds of a recession increase.

The reason the stock market is used as the swing factor is because the last two recessions were led by a decline in asset prices, tech stocks, and housing prices. We have our third bubble in front of us. Tt’s mostly been manifested in credit markets, but if you do get a decline in asset prices, as it reprices to the global economic reality, that in itself could tip us over. In the US, the consumer is the only thing keeping us from a recession, and a decline in asset prices could tip the consumers over from a psychological standpoint.

LOOKING FORWARD

“The Fed has no policy right now… They were so clear on how they were going to ease, and they’ve been in the clouds on how they’re going to exit… they’re stuck, they’re trapped, and they essentially are writing policy with their fingers crossed.”

The US growth will likely continue to slow, we saw durable goods today that were very weak, we saw core capital spending within that is at a five year low, at a level last seen 10 years ago, and this was before the greater unknowns now coming out of Europe. Growth will continue to slow and asset prices will continue to decline.

In an election season and campaign, this is when peoples’ voices are heard. Where that goes socially, who knows. It’ll depend on a lot of different things. People are making their voices heard, and hopefully the ruling class is listening.

“I think the whole commodity space has bottomed out. I think investors need to look where it is most painful to look. That remains emerging markets that have already gone through a five year bear market and have much better valuations than the rest of the world.”

In Europe right now, you’re going to see carnage, but there’s probably going to be some opportunity there. There might be opportunities in the UK where selling is occurring due to the weaker pound.

“I’m very nervous about the US stock market, which happens to be one of the most, if not the most, expensive in the world.”

Abstract by: Annie Zhou a2zhou@ryerson.ca

Min Jung Kim minjung.kim@ryerson.ca

Disclaimer: The views or opinions expressed in this blog post may or may not be representative of the views or opinions of the Financial Repression Authority.