Brexit-- Implications for Markets and Stocks

[Picasso]

Looks like there is lots of blood in the streets.... Usually a good time to buy.

 

Crazy, crazy situation... But one that will get dealt with over an extended period; UK and Europe will muddle through. Hard to see how this makes UK and Europe stronger. On balance, looks to me like strong, big US multinational companies will be the winners.

 

Regarding the big banks, looks to me like the big US banks will be winners (over the next few years). Who will want to deal with the big UK or Europe banks moving forward (I am thinking big companies or very wealthy individuals)? Who will want to work for them? Too much uncertainty.

 

How exactly are multinationals supposed to win here?  The dollar has a fire lit under its butt.  And aren't multinational earnings just a function of global GDP? Look at bond rates across the world, they are super low.  If anything multinationals from a U.S. investor perspective are probably guaranteed underperformers.

 

Also, how are US banks supposed to be winners over the next few years?  We're closer to the end of the cycle than near the beginning, the yield curve is flat to inverted for all intents and purposes, and they won't be able to return nearly enough capital to shareholders because they constantly have to ask for permission.  What exactly is going to change all that? 

 

It just seems like a lot of investors on this board see "cheap" bank stocks that are down a lot and the first reaction is that it's overblown and time to buy.  We're probably looking at artificially low default rates from all this cheap money (look at what happened with energy default rates as soon as they lost access to the capital markets), so if we do end up seeing a recession ever again (I know, hard to imagine with tons of money printing) these banks are going to get hit from both sides of credit losses and further flattening and inversion in the yield curve.  If central banks weren't so fixated on keeping short-term rates low, what would the yield curve look like right now?  It would probably be massively inverted.  The 10-2 spread is the lowest it's been in a super long time.  So saying bank stocks are cheap is just a bet that you think they can keep this game up forever and we wont have to worry about a down cycle for a long time.  Plus all these bank stress tests are complete garbage.  No one knows what to stress test for under all this market nonsense.  If they don't know what they're doing now, how are we supposed to think they know the proper range of outcomes in the future?

 

Sorry just had to rant with all these bank knife catching I see going on lately.

[Uccmal]

Looks like there is lots of blood in the streets.... Usually a good time to buy.

 

Crazy, crazy situation... But one that will get dealt with over an extended period; UK and Europe will muddle through. Hard to see how this makes UK and Europe stronger. On balance, looks to me like strong, big US multinational companies will be the winners.

 

Regarding the big banks, looks to me like the big US banks will be winners (over the next few years). Who will want to deal with the big UK or Europe banks moving forward (I am thinking big companies or very wealthy individuals)? Who will want to work for them? Too much uncertainty.

 

How exactly are multinationals supposed to win here?  The dollar has a fire lit under its butt.  And aren't multinational earnings just a function of global GDP? Look at bond rates across the world, they are super low.  If anything multinationals from a U.S. investor perspective are probably guaranteed underperformers.

 

Also, how are US banks supposed to be winners over the next few years?  We're closer to the end of the cycle than near the beginning, the yield curve is flat to inverted for all intents and purposes, and they won't be able to return nearly enough capital to shareholders because they constantly have to ask for permission.  What exactly is going to change all that? 

 

It just seems like a lot of investors on this board see "cheap" bank stocks that are down a lot and the first reaction is that it's overblown and time to buy.  We're probably looking at artificially low default rates from all this cheap money (look at what happened with energy default rates as soon as they lost access to the capital markets), so if we do end up seeing a recession ever again (I know, hard to imagine with tons of money printing) these banks are going to get hit from both sides of credit losses and further flattening and inversion in the yield curve.  If central banks weren't so fixated on keeping short-term rates low, what would the yield curve look like right now?  It would probably be massively inverted.  The 10-2 spread is the lowest it's been in a super long time.  So saying bank stocks are cheap is just a bet that you think they can keep this game up forever and we wont have to worry about a down cycle for a long time.  Plus all these bank stress tests are complete garbage.  No one knows what to stress test for under all this market nonsense.  If they don't know what they're doing now, how are we supposed to think they know the proper range of outcomes in the future?

 

Sorry just had to rant with all these bank knife catching I see going on lately.

 

Thats a good assessment of the situation. 

[KCLarkin]

If central banks weren't so fixated on keeping short-term rates low, what would the yield curve look like right now?  It would probably be massively inverted.  The 10-2 spread is the lowest it's been in a super long time.

 

Aren't the central banks keeping long-term rates low? If all the central banks ended QE, wouldn't one possibility be that all interest rates rise, say, 2%? The 10-2 spread wouldn't change. But banks would be more profitable because deposits would no longer be pegged at 0?

 

Interest rates are so low that the proper market clearing rates for insured deposits is negative. But there is psychological barrier against negative interest rates so banks cant charge -1%.

 

--

I can't predict future interest rates, but I am pretty sure current central bank policy punishes financials (and savers and pensions). It benefits borrowers. Maybe I'm not very smart, but I don't see how artificially low interest rates can benefit both the borrowers and the lenders.

 

 

 

 

 

[Guest cherzeca]

i would agree to stay out of banks until yield curve steepens.

 

i was thinking ijh (S&P mid cap) might outperform spy going forward a bit, but dont have much conviction

[racemize]

This discussion of banks without any concern for what price they sell at leaves me a little confused.  If BAC was $1, I don't think you would say that.  C and BAC are selling for meaningfully less than TBVPS, have good ratios under stress, and are about to return more capital.  Additionally, look at what JPM did even through the financial crisis--it maintained strong compounding and didn't even lose money annually.  Pessimism on an entire sector without any discussion of price doesn't make sense to me, particularly on a value board.

 

Perhaps I will burn for all of my bank investments though. 

[Guest cherzeca]

This discussion of banks without any concern for what price they sell at leaves me a little confused.  If BAC was $1, I don't think you would say that.  C and BAC are selling for meaningfully less than TBVPS, have good ratios under stress, and are about to return more capital.  Additionally, look at what JPM did even through the financial crisis--it maintained strong compounding and didn't even lose money annually.  Pessimism on an entire sector without any discussion of price doesn't make sense to me, particularly on a value board.

 

Perhaps I will burn for all of my bank investments though.

 

i agree that banks appear cheap, but i have a rule of thumb about banks and the yield curve...

[Gamecock-YT]

Give it a week or so. Too much emergency liquidity holding the balloon together right now.

 

One has to think that anything trading in London without either a British, or European headquarter - is in trouble.

Commodity miners in particular.

 

SD

 

Yep, here are the headlines at FT.com

 

Overseas buyers race to secure London property bargains after Brexit vote

 

Opportunistic overseas buyers are jumping to buy property in some of London’s wealthiest areas and take advantage of effective discounts caused by sterling’s nosedive after the UK voted to leave the EU.

 

..

 

not exactly blood in the streets.....maybe try Venezuela.

[fareastwarriors]

Give it a week or so. Too much emergency liquidity holding the balloon together right now.

 

One has to think that anything trading in London without either a British, or European headquarter - is in trouble.

Commodity miners in particular.

 

SD

 

Yep, here are the headlines at FT.com

 

Overseas buyers race to secure London property bargains after Brexit vote

 

Opportunistic overseas buyers are jumping to buy property in some of London’s wealthiest areas and take advantage of effective discounts caused by sterling’s nosedive after the UK voted to leave the EU.

 

..

 

not exactly blood in the streets.....maybe try Venezuela.

 

I think it's way too early to tell.

[muscleman]

I still don't understand the real impact of Brexit. Some banks say they may withdraw business from Britain, but why?

If you look at Switzerland and Norwei, they are not in EU but they seem to be doing well. They have negotiated trade treaties with EU.

Singapore is out of no where but still thrive as an offshore financial center.

 

However I don't understand the economics of these countries either.

[VersaillesinNY]

Brexit and the Future of Europe by George Soros - Jun 25, 2016

 

https://www.project-syndicate.org/commentary/brexit-eu-disintegration-inevitable-by-george-soros-2016-06

[Jurgis]

Brexit and the Future of Europe by George Soros - Jun 25, 2016

 

https://www.project-syndicate.org/commentary/brexit-eu-disintegration-inevitable-by-george-soros-2016-06

 

Soros does not do any good by scaremongering the EU disintegration. It's one thing to acknowledge that the situation is difficult and changes are needed. It's another thing to openly say that disintegration is inevitable. Calling for "we must not give up" after that sounds rather meaningless: if you believe the fallout is inevitable, what's the point of action?

 

 

Now, on the other hand, most pro-EU commentators are saying that changes are needed. What changes? Soros says "a genuine banking union, a limited fiscal union, and much stronger mechanisms of democratic accountability". First two of these are probably good ones. But common people probably don't give a crap about "a genuine banking union, a limited fiscal union".

 

Common people might care about "democratic accountability" of EU institutions, but that's a tough one to reform for people to like. Euro parliament is already elected. Transferring more power to Euro parliament is not going to be attractive right now. It's not clear to me what else can be done for "democratic accountability" of EU institutions.

 

Other areas of contention:

 

1. Euro. Yes, euro was possibly a mistake. But disbanding euro into separate currencies right now would be a tough thing to do and possibly not satisfying to anyone. Clearly it would lead to some de-EUization. Might be an interesting thing to consider: to sacrifice euro and yet maintain EU. Probably unlikely.

 

2. Inter EU free movement of labor. I agree that this is one of the major features of EU and without it EU is so much less. Another one that common people care about (clearly on both sides: some are pro, some are against), but very difficult to envision EU without it. So probably no change, which means continued unhappiness of some (significant) percentage of common people.

 

3. Immigration from outside EU. This is recent issue. On one hand, this is somewhat easy to deal with: EU just closes its doors to outside immigration or at least severely reduces it. This would be popular among most common people. As much as I am pro-immigration, this might be (and might have been already) a way to go to stop intra EU breakdown. In a way, step back to lose a fight, but keep the EU. Not sure if this is possible at this stage. Maybe it's too late to change public opinion even if steps to curtail outside immigration are taken.

 

4. EU "laws" and "regulations". This is another place where single EU framework is a significant part of EU structure. I think this is overblown as concern to common people. I.e. it is something against-EU camp is drumming up, but in reality it's not a big issue. Reducing bureaucracy and lightening the regulatory frameworks might be possible and positive. I am not sure it would change much in people's perception. It might change things in CoBF and business owner's perception, but they are not the ones that campaign and vote against EU mostly.

 

 

In general, anti-EU sentiment is mostly due to bad economy. This is usually the case. When economy is good, people are friends. When economy is bad, immigrants, politicians, gays, muslims and Euro bureaucrats are to blame. So the answer is to fix the economy stupid. The tough part is that EU has limited powers to fix economy and some of these powers are not even used well. But still perhaps it's the way to go if EU is to survive.

[Graham Osborn]

Brexit and the Future of Europe by George Soros - Jun 25, 2016

 

https://www.project-syndicate.org/commentary/brexit-eu-disintegration-inevitable-by-george-soros-2016-06

 

Thanks for posting.  I think most people would agree that the most significant risk here is that we run out of exits - "Brexit," "Nexit," "Frexit," "Grexit," ?"Gerxit"..

 

The essential point which both Soros and Jurgis bring up is the relationship between debt and populist movements.  QE is a great way to make people with no savings feel slighted - particularly if combined with local austerity measures.  In that sense, I think the populist campaigns in Europe and the US do have parallels.  Paradoxically, the very QE that is widening the wealth gap is also providing life-sustaining intervention for not only the banks of Europe (remember that though they are hurt by low rates they are helped by monetization of their crappy balance sheets), but countless companies the world over that have grown inorganically through cheap debt.  Because the EU banks did not receive "adequate" support during the last financial crisis, many of them are additionally too crippled to withstand any serious disruption to their liquidity.  And if enough banks fail synchronously, confidence in the ECB itself might be undermined.  Any serious threat to the integrity of the ECB over the next few years would be - to put it mildly - catastrophic, owing to the ECB's position as lead bond-buyer in a world of low/ negative rates.  To use a Mungerism, the world is addicted to crack, and the ECB is the biggest dealer in town - especially corporates.  If they get busted, we're all going into detox.  The only conceivable backstop I can think of then would be some sort of international banking consortium including the Fed to buy European sovereigns and corporates.  The day that happens, I'm packing my bags for Switzerland.  But I don't think the US would ever go that far.

[Picasso]

If central banks weren't so fixated on keeping short-term rates low, what would the yield curve look like right now?  It would probably be massively inverted.  The 10-2 spread is the lowest it's been in a super long time.

 

Aren't the central banks keeping long-term rates low? If all the central banks ended QE, wouldn't one possibility be that all interest rates rise, say, 2%? The 10-2 spread wouldn't change. But banks would be more profitable because deposits would no longer be pegged at 0?

 

Interest rates are so low that the proper market clearing rates for insured deposits is negative. But there is psychological barrier against negative interest rates so banks cant charge -1%.

 

--

I can't predict future interest rates, but I am pretty sure current central bank policy punishes financials (and savers and pensions). It benefits borrowers. Maybe I'm not very smart, but I don't see how artificially low interest rates can benefit both the borrowers and the lenders.

 

My read is that central banks cannot directly control long-term rates (indirectly, sure), and rates on various 10-year bonds are very low despite their best attempts to create the opposite effect.  When have the equity markets and economy performed best since 2009?  It's been when long-term rates shot up even with announcements of large bond purchase programs.  The best sign of effective monetary policy is when these central banks lose money on their asset purchases.  Instead I think they're sitting on massive unrealized gains because their policy isn't working.  Instead of the market taking a clue and letting central banks and governments eat the loss on super inflated bond prices, the market is happy to pay even higher prices than the biggest buyers in the world.  Who can buy these bonds if central banks ever started selling?  But now it almost doesn't matter what they're doing on the short end or with asset purchases.  Long-term rates are contracting all over the world.  If the fed announced QE-4ever, bond rates might go up 50 bps, then just go right back down again.  If they reversed course, we'd probably see the biggest inversion in the history of yield curves.  The marginal impact seems to be less and less for a good reason.  It's run its course.

 

Logic would seem to follow that if long-term rates are dropping without similar meaningful drops in short-term rates (they can't drop too much more on the short-end), any "normal" short-term rate would probably end up higher than long-term rates because it seems fairly obvious that 1) this interest rate/asset policy isn't working anymore (aside from keeping the status quo), 2) it's normal for the curve to invert/flat line at this part of the cycle.  A steady 200 bps shift across the entire yield curve seems unlikely if short-term rates went to 200 bps.  And so instead of facing the cycle, central banks are trying to keep the curve from inverting the best the can, so what does that do to a bank?  It makes them take on tons of extra credit risk to lend just as much, while getting paid less to do it!  I couldn't imagine being a bank CEO right now.  Their shareholders want to see returns in the form of earnings growth or even just stability, but you can only do it by taking on more risk than you otherwise should.  There's a reason all these banks trade at big discounts to book value.  The result will be the same, but it will take longer to get to the losses and it will just end up being more severe.

 

Normally I'd say ignore macro, but banks have been macro investment vehicles for a while now.  Unless it's been some special situation where it just ended up super cheap for non-macro reasons.  In fact there are other sectors in similar valuation doldrums.  Airlines, automakers, retailers, resources.  It's interesting how they happen to be the very cyclical ones. 

 

But perhaps the banks have already become cheap enough to overcome all that.  And some of them are certainly very well run.  We'll see..

[rb]

If central banks weren't so fixated on keeping short-term rates low, what would the yield curve look like right now?  It would probably be massively inverted.  The 10-2 spread is the lowest it's been in a super long time.

 

Aren't the central banks keeping long-term rates low? If all the central banks ended QE, wouldn't one possibility be that all interest rates rise, say, 2%? The 10-2 spread wouldn't change. But banks would be more profitable because deposits would no longer be pegged at 0?

 

Interest rates are so low that the proper market clearing rates for insured deposits is negative. But there is psychological barrier against negative interest rates so banks cant charge -1%.

 

--

I can't predict future interest rates, but I am pretty sure current central bank policy punishes financials (and savers and pensions). It benefits borrowers. Maybe I'm not very smart, but I don't see how artificially low interest rates can benefit both the borrowers and the lenders.

 

Why do some people just assume that the central banks are keeping interest rates artificially low? Is it just because they heard it from the talking heads on CNBC?

 

Let's do a bit of inversion here. Let's assume that the rates are artificially low. What should we see if that was the case? We should see lots of investment, low unemployment, and inflation. Is that what the world looks like today? No.

 

I actually like US banks especially the well run ones. There has been a lot of deleveraging in the US and the balance sheets have been cleaned up. On top of that home ownership in the US is a bit low and that is like a coiled spring that gets a little more compressed as time goes on. It may not be released today or tomorrow but that doesn't mean it's not valuable. On top of that the valuations are really reasonable. Even more so when compared to everything else that's out there.

[KCLarkin]

I don't subscribe to CNBC, but here is my favorite talking head:

 

GUNDLACH:  One of the consequences I think might be alarmingly contrarian for people is–one thing that seems clear is that, let’s just talk about the Untied States, the Fed buying a trillion dollars worth of Treasury bonds and guaranteed mortgages per year when the budget deficit is now less than a trillion dollars on a twelve-month trailing trajectory basis, they’re taking all the high-quality collateral or a great fraction of it out of the flow in the market. So there’s less and less high-quality collateral. There aren’t any more Triple A, or Double A even, corporate bonds, yet we have a financial regulatory system that seems to want to increase bank capital and increase balance sheet holdings of high-quality collaterals. These things are in opposite directions. You’re encouraging the financial system to hold more high-quality collaterals at the same time you’re taking it away.

 

I wonder if one of the most contrarian consequences of this could be that we actually have a melt-up in Treasury bond prices at some point. I mean, talk about something that no one is thinking about. In July 2012, I made the statement–which had been for a couple of decades one of the most dangerous statements in the financial markets–that we were at the on low interest rates for the 10-year Treasury. I mean, how many people have made that statement over the past 25 years, way too prematurely, but it just seemed to me that the movements of 2012 in the summertime were a perfect storm for what could have been the low, “the low,” the biggie, in 10-year Treasury yield. Weirdly, the yield today is about 100 basis points or 125 basis points higher than it was then. But I’m less convinced today that it was “the low,” than I was then, because of this concept of Quantitative Easing is eliminating all of the high-quality collateral or gradualistically shrinking it. And there’s this kind of regulatory need for it. Under a certain set of stresses in the system you can imagine where suddenly everyone has to buy it.

 

This is from 2013.

[HJ]

I don't subscribe to CNBC, but here is my favorite talking head:

 

GUNDLACH:  One of the consequences I think might be alarmingly contrarian for people is–one thing that seems clear is that, let’s just talk about the Untied States, the Fed buying a trillion dollars worth of Treasury bonds and guaranteed mortgages per year when the budget deficit is now less than a trillion dollars on a twelve-month trailing trajectory basis, they’re taking all the high-quality collateral or a great fraction of it out of the flow in the market. So there’s less and less high-quality collateral. There aren’t any more Triple A, or Double A even, corporate bonds, yet we have a financial regulatory system that seems to want to increase bank capital and increase balance sheet holdings of high-quality collaterals. These things are in opposite directions. You’re encouraging the financial system to hold more high-quality collaterals at the same time you’re taking it away.

 

I wonder if one of the most contrarian consequences of this could be that we actually have a melt-up in Treasury bond prices at some point. I mean, talk about something that no one is thinking about. In July 2012, I made the statement–which had been for a couple of decades one of the most dangerous statements in the financial markets–that we were at the on low interest rates for the 10-year Treasury. I mean, how many people have made that statement over the past 25 years, way too prematurely, but it just seemed to me that the movements of 2012 in the summertime were a perfect storm for what could have been the low, “the low,” the biggie, in 10-year Treasury yield. Weirdly, the yield today is about 100 basis points or 125 basis points higher than it was then. But I’m less convinced today that it was “the low,” than I was then, because of this concept of Quantitative Easing is eliminating all of the high-quality collateral or gradualistically shrinking it. And there’s this kind of regulatory need for it. Under a certain set of stresses in the system you can imagine where suddenly everyone has to buy it.

 

This is from 2013.

 

Today it's 10 bps higher than the low in 2012.

[SharperDingaan]

You might want to keep in mind who voted for what.

 

It was primarily London, 40% of the population & home of the rich, that voted to stay. Outside of London, an average 7 of every 8 people voted to leave. Adjust for Scotland which also voted strongly to stay - and ALMOST EVERY PERSON outside of London & Scotland voted to leave. Sample the press in these areas & you quickly conclude that EU membership isn't benefiting them - & in many cases; is actually making them a lot worse off.  They had nothing to lose.

 

Trickle down economics isn't working for the vast majority of the global population.

Toronto had 'Rob Ford', the US has Trump & Sanders, the UK has voted to exit the EU.  Europe is experiencing the largest migration of people since WWII, & there just isn't the work to go around. The 'city' of London is in denial, & starting to panic as the big players begin on execution of Plan B.

 

The 'establishment' lost here - not the 'people'.

The current way of doing things is going to be changed, & you either get on board - or go the way of the French Revolution.

 

The problem with Europe is that this type of thing tends to drag the whole world into it - & the usual solution has been armed conflicts.

 

SD   

 

   

 

[valueorama]

Here is Gunlach saying  Bremain is going to happen, suggesting it seems to be a good trade.

 

http://www.cnbc.com/2016/06/22/reuters-america-update-2-gundlach-says-considering-selling-european-equities-on-bremain-vote.html

 

[writser]

SharperDingaan, you are telling us that outside London and Scotland ~90% of the people voted to leave? That's just not true. In fact, it is complete bullshit. Take a look at, for example, this NYT voting map:

 

http://www.nytimes.com/interactive/2016/06/24/world/europe/how-britain-voted-brexit-referendum.html

 

Also, London only voted 60% Remain, Scotland voted 62% remain. If 7 of 8 of every other citizens would vote for Leave the end result wouldn't even be close to what happened.

[doughishere]

http://qz.com/717182/a-brexit-conspiracy-theory-nails-the-no-win-situation-boris-johnson-now-finds-himself-in/

[lessthaniv]

I still don't understand the real impact of Brexit. Some banks say they may withdraw business from Britain, but why?

If you look at Switzerland and Norwei, they are not in EU but they seem to be doing well. They have negotiated trade treaties with EU.

Singapore is out of no where but still thrive as an offshore financial center.

 

However I don't understand the economics of these countries either.

 

http://www.investmentexecutive.com/-/brexit-heavy-fallout-for-u-k-financial-sector?utm_source=newsletter&utm_medium=nl&utm_content=investmentexecutive&utm_campaign=INT-EN-morning

 

Good read

[Cardboard]

"I still don't understand the real impact of Brexit. Some banks say they may withdraw business from Britain, but why?

If you look at Switzerland and Norwei, they are not in EU but they seem to be doing well. They have negotiated trade treaties with EU.

Singapore is out of no where but still thrive as an offshore financial center.

 

However I don't understand the economics of these countries either."

 

Totally agree. This whole thing is an excuse to sell and blown out of proportion. People still need to eat, to have a shelter and will continue making babies!

 

I actually believe it will be a good thing in the long run because it will force EU bureaucrats to adapt their current laws to make things work better. This should produce more jobs and make the EU more competitive.

 

Regarding the UK, they will want to continue trading with the EU and the other side also. It is just a bunch of laws and treaties. As you mentioned, it is working for Switzerland and the EU which geographically is right into the middle of Europe. I see no real change in the supply and demand of goods within the economy of Europe.

 

Financial market panic and guys like Soros is the problem since it creates issues for the banks when risk aversion goes up: capital reserves, loan loss ratio, etc. Regarding Soros, I can guarantee you that I won't cry when this guy is gone.

 

Cardboard

[SharperDingaan]

SharperDingaan, you are telling us that outside London and Scotland ~90% of the people voted to leave? That's just not true. In fact, it is complete bullshit. Take a look at, for example, this NYT voting map:

 

http://www.nytimes.com/interactive/2016/06/24/world/europe/how-britain-voted-brexit-referendum.html

 

Also, London only voted 60% Remain, Scotland voted 62% remain. If 7 of 8 of every other citizens would vote for Leave the end result wouldn't even be close to what happened.

 

Apologies for this. We had a bad data feed.

SD

[Ballinvarosig Investors]

Crikey, what a couple of days. I am absolutely delighted to have been wrong on the Brexit thing. I have been struggling to put money to work, and now at last am seeing opportunities.

[Joe689]

Is TLTRO2 still closing on Wednesday?  If so, which parts of market will benefit/react the most?  Banks? (seems to easy though)