OPENING MONOLOGUE BREXIT KEY POINTS...... Brinker comments: There is an old Chinese bromide "may you live in interesting times" – well, here we are. Are the times interesting enough for you right now or do they have to become even more interesting than they became when the votes were counted in Great Britain at the end of the plebiscite to leave or remain in the European Union. When they totaled them all up 52% said get us out, 48%.… The clock doesn't begin ticking in the UK until article 50 is implemented Article 50 did not even exist before 2009. It was created to accommodate Greece. Greece has been on a slippery slope since 2009 but never used it.…Now Great Britain is expected to use it as a result of this vote.....There is no timeline on article 50. "I love this stuff. It's so fascinating."
What is BREXIT Article 50?
Honey EC: I also enjoyed the evening of the vote when it did the "ginormous" turnaround. It was very exciting to see that there is still some spirit of 1776 people left in the UK! For those not aware, the EU tyrannically dictates to the UK rules that they have to live by - all the way down to which teapots that they can use. They tell them how many people they must import into their country, and they take twice as much money out of the UK as they give back. Who in their right mind would want to live like that?
Brinker comments: I think we should put the US stock market in perspective this week and I'll tell you why. When it was all said and done at the end of the week, the S&P 500 index was down 1.6%, which is solidly in the category of stock market noise.…NEW FIDUCIARY RULE TO PROTECT INVESTORS.....BB comments: There is a new fiduciary rule that is applicable to investors that is coming on stream. There has been some discussion of this but I wanted to boil it down as to what this new rule means. What this new rule means is that if someone is giving you advice about your retirement money – that would be your tax privileged accounts, 401(k), IRA's, that kind of thing – they have a real fiduciary responsibility to do what is best for you, not what is best for them, from the standpoint of commissions.… Now incredibly, there is some push-back out there from the industry on the new rule.… We'll see how it plays out but I will say this to you......Based on my observations with what people get away with it by selling products in the various mediums… One can only hope that this has some impact. Some of the things that I hear in terms of sales programs are… definitely not in the best interest of the investor – but are in the best interest of the seller. And I hate to see that happen.
What happened this week in the stock market was, you had a BREXIT rally that had a foundation of quicksand. Let me specify......I'm talking about the US stock market rallying smartly this week because enough investors believed the polls which were saying that "remain" was a slam-dunk. By the time it got to Thursday – at one point, the odds in the London bookmaking shops reached 1 to 12.…
That would be a horse - if you equated to a racetrack payoff – that would be a horse that would pay $2.08 for two dollars, roughly. Can you imagine wagering on a horse race, picking a horse that was so heavily favored that if the horse won, your payoff would be $2.08 for a two dollar wager. You would make eight cents but you risk two dollars. How ridiculous is that… So many things can happen during a horse race… In the case of this election, there was a point on Thursday where it was so evident to bettors – the bookies don't make the odds, the bettors make the odds – there was no question it was going to be remain. It got to 1 to 12.....And of course everything changed as the results started to come in.
With the first couple of results came in, I remember commenting to someone that these results are lead results. One of the first places that came in was supposed to be 6% in the "remain" camp And it was only 1%.… At that point you had to say whoa.....And of course the result went the other way eventually, even though it was close at 52 to 48......It was amazing that the markets believed that and they rallied.… What happened in the US market was the big gains that was rallied up going into the vote count was given back +1.6% – that's what happened. That's why you must look at the week as a whole. You can't just look at Friday.…
INTEREST RATES......BB comments: I think that it is unlikely that the Federal Reserve is going to have much flexibility in the near term to do anything with interest rates.… If we continue to see what we see right now, and if the economy stays at a moderate pace, I think that the interest rate situation right now is unlikely to change materially going forward. Now going forward means certainly in the weeks ahead I don't see a change likely in interest rates.....I don't even see it this summer… Because they have made it clear at the Fed that they are looking at the international situation. And they like to see stability in the international situation and that is the reason they are unlikely to do anything with rates right now.
EUROPEAN UNION MORPHED INTO DICTATORSHIP.....BB comments: In 1973, the common trading market – giving more power to the European nations - that makes sense to me. But to morph into this sovereign body is just very strange to me.
Honey EC: As the EU became a "sovereign body" the countries that belong to it lost their sovereignty. It's not strange to me. We see the same thing in the US as the Federal Government becomes more and more powerful at the expense of the rights of the states.
USA PRESIDENT AND S.O.S. BUTTING IN TO BREXIT.....Brinker said: "Secretary of State John Kerry went before the cameras and made this statement about how he's going to go over there, and about how the United States is going to continue with good relationship with UK.....My reaction to that was, why are you doing this? This is not about the United States. This is not about the Secretary of State. It's not about our relation with Great Britain.… Why are we imposing our presence over there on them. Why would we do that? For our president to go over there and tell them to "remain" – it's none of our business. When I heard it, I thought this is definitely going to result in more people voting to leave."
Honey EC: Not only did Obama say that they should "remain" in the European Union, he told them that if they did not, he would see that they were put at the end of "the queue."
FRANKJ'S MONEYTALK GUEST SUMMARY
Bob’s third hour guest on this Sunday, the 26th of June 2016 was a professor from Harvard, Hal Scott. From the start, the interview was plagued by a poor audio connection, so I was not able to hear some of the professor’s answers to Bob’s questions.
Editorial comment in italics as usual.
As advertised earlier by Bob, the topic was Brexit: Britain’s exit from the European Union in case you’ve been news free for the past few months.
Bob referenced the “false run up” in the market in anticipation of Britain staying in the EU. That didn’t happen. On Thursday they voted to leave. So on Friday the SP 500 was down 1.6%. (For the week, from the prior day? Bob didn’t make it clear.)
The guest said he was shock on the “leave” vote. He had been looking at polls and expected them to stay, not realizing as Bob has been pointing out, that the polls are inaccurate in the UK.
So… the prof must not be a MoneyTalk regular.
The guest said investors should be a little worried but not overly worried. The vote was driven by pushback against EU policies, along with immigration. Scotland and Ireland want to stay in but they were over ridden by voters in England. As for Scotland, it is not impossible for them to stay in. They’ll have to work out the currency issue though.
Bob brought up Spain and their recent elections which came out as expected, i.e., no major changes to their governing body.
Great Britain retained their own banks and currency when they joined the EU so they won’t have currency issues to deal with upon leaving. One example is re-denominating bonds and the headaches and possible lawsuits that might occur. Leaving might be a bigger problem for other countries though. Then there are some countries like Greece who the EU would be happy to see leave.
After the break, Bob asked about any impact this might have on US GDP growth which has been weak. The guest gave a long and somewhat rambling answer, hearkening back to the Lehmann bankruptcy in 2008. He seemed to be saying that the Brexit vote wouldn’t have a big effect, but some other event (like Lehmann) could tip us over because the same safeguards that protected the US economy then are no longer in place. He said we have restricted the Fed’s ability to act and taken away things the Fed had in place after Lehmann.
Then he and Bob had a little chuckle on how the taxpayer came out to the good as a result of Tarp and Fed actions.
(Tell that to people who had their fixed income investments blown up, particularly people who wanted to be in CDs. Tell it to people who reached for yield and took on more risk than they realized and in some cases got burned.)
The prof thinks the “leave the EU” vote was a mistake for three reasons:
- Finance is a big part of the British economy and banks will find it harder to function in GB after the exit.
- New trade agreements will be needed and higher tariffs could hurt.
- The UK and Germany were the adults in the room with the EU and with the UK gone, so too will be their moderating influence on economic policy.
“There are too many bureaucracies, people are willing to keep handouts and be enslaved… is there going to be a buildup of courage among people in the world?”
The guest said, “I’m all for that,” probably in reference to the courage statement. Then he went on and said Keith’s question doesn’t have much to do with the topic.
I’d say the question was on topic, and maybe the guest just wasn’t equipped to answer that maybe the people voting to exit were tired of policies that undermined their nation’s sovereignty. Maybe they didn’t see the benefits of citizens of any country in the EU being able to emigrate with few or no restrictions.
There was discussion of negative interest rates and the guest said they are perplexing, could have a bad impact and they can be a “little” negative but not too negative.
So, what should US investors do in light of Brexit? Stay alert but don’t be nervous. US investors should not make changes on the basis of the vote – that’s the professor’s opinion.
Bob wrapped up about 3:52 pm.
Honey here: Thanks for that great summary of a very current subject! His view was diametrically opposed to Brinker's, but they seemed cordial about it. Sounds like the Professor doesn't think very highly of the citizens of Great Britain - they can't be trusted to handle their own finances. Wonder how the air is up there in that ivory tower?
JEFFCHRISTIE'S MONEYTALK FINAL EXAM QUESTION
Bob Brinker said that 62% of the people of Scotland wanted to stay in the EU and as a result of the vote to leave they are:
A) Mad as hell.
B) Ticked off.
C) Bent out of shape.
D) Burned up.
Honey here: Thanks Jeffchristie. I suspect this had something to do with the resentment that many in Scotland and Ireland feel toward the monarchy. And now with Scotland talking about actually leaving the UK, who knows what might happen. I know this blog has readers from those areas. I would love to hear opinions from over there.
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