Careful

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Sick of Brexit yet? Me too. Especially since the topic has ended what used to be civil discourse on this blog. Sad. On Monday I seriously considered shuttering the site, from which I derive no income but considerable abuse. There may even be a better use of my time. My wife. My dog. My bike. My business. Just a hunch, but I surmise there are funner ways to spend hours than reading personal diatribes from bravely anon people who hate me because I challenge their black-white world view.

Patriotism works. But not nationalism, or protectionism. So 19th Century. So dangerous. So unfair of one, exiting generation to handcuff the next. So Trumpian.

But I digress. This is a blog about money, wealth, economic achievement, excess hormones, stupid house prices, dogs and as many sexual innuendos as possible in the pursuit of financial literacy. None of those make you want to sing the national anthem, so let’s keep it there.

Here’s some of what I posted here yesterday about investing in a post-Brexit, low-rate, low-growth world (seems most people missed it because they wanted to shout at me):

  • Markets will absorb the shock – at least in North America – and stabilize not far off current levels. This is not 2008. Not even close.
  • Interest rate hikes are toast. The Bank of England will cut its key rate by at least a half point in early August. The US Fed will not carry out its planned pop in July.
  • Monetary conditions around the world get looser. The Bank of England is already flooding the land with freshly-printed pounds, while the ECB continues to spend billions on bonds every month in a massive stimulus program. The direct beneficiaries of this will not be working-class Brits who seek better incomes, but investors with financial assets gasbagged by new liquidity.
  • Brexit is good for bond holders and likely bad for families. Central banks will paper. Portfolios will recover. Economic growth will falter. Thus the workies, not the wealthy, will pay.

While one day does not mean a lot, in this case it means something. The Dow gained almost 270 points Tuesday, Bay Street added over 150, oil jumped 3.5%, gold shed ten bucks and the loonie improved a little. The Brexit sell-off could be entirely erased in a few more trading sessions (some reasons why are below), making fools of those who bailed on Friday (as usual). Meanwhile Britain’s political morass deepens and the attitudes of its jilted trading partners harden. Yep, the workies, not the wealthy, will pay.

So why have North American markets seemingly absorbed this mess so fast?

First, it’s widely believed central banks will manage this crisis in the same way they dealt with the last nine years – by ensuring the world is sautéed in money. That means more direct stimulus and cheap rates. What Brexit did was wipe away the ability of the US Fed to raise rates this summer, or maybe all year. It will bring a rate cut in the UK, and more negative rates in Europe. Now there’s even been talk of the Fed cutting rates (as impossible as that seemed two weeks ago). All this is honey to investors, who know emergency rates cause middle-class over-borrowing and excessive spending on consumer goods & houses which boosts the profits of corporations, whose borrowing costs are also falling. So when it comes to stocks, up she goes.

Second, as central bankers force down bond yields two things happen. People with bonds in balanced portfolios see the price of their assets rise, which not only offsets temporary stock declines, but delivers a capital gain. Second, why would investors tie up money in government bonds with a pitiful yield when they can buy equity-based assets that pay three times as much in dividends? Or preferred shares handing over five times the cash flow? More reasons these assets should recover quickly, post-Brexit.

Mostly, though, the UK vote on June 23rd was an occurrence, a shock, an unexpected thing like a terrorist attack or a tsunami or wildfire – and not indicative of economic deterioration or financial rot. It was not a Lehman Brothers event. No black swan. No 1929. But it certainly was a miscalculation on the part of global markets, which never believed Britons would be foggy enough to leave. Hence the big selloff on Friday, which extended into Monday. It now looks like most of that came from the desperate reversal of trades, not from worries that Britain will blow up the world.

If there’s a good thing coming out of this, it will be enhanced scrutiny of Donald Trump. Next to him, Brexit’s a burp.

 

Now what?

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What will Brexit mean to you? Your investments? Your house? Your mortgage?

So far, we know this: Stock markets in North American have shed about 6% of their value over two sessions. Sucks, but not a crisis. The losses on Day Two were one quarter of Day One, and those people with a balanced portfolio have seen a big boost in bond prices which helped offset the equity plop. Nobody should sell into a storm, especially one caused by an unexpected event, not economic rot.

But there are other things more vexing to Canadians. Oil has tumbled from $51 a few weeks ago to $46 now, a 10% decline we didn’t need. Add in the Fort Mac wildfires, and it’s likely our economic growth will barely move the needle in 2016. Brexit not only accentuates the commodity rout (the US dollar goes higher and demand for energy falls as Europe weakens), but also hurts our UK-bound exports.

Here’s what TD Economics thinks: “Based on our model simulations, we estimate that confidence and financial spillovers from a leave result could shave about 0.5 to 1.0 percentage point off GDP growth for the U.S. and Canada in the second half of 2016, driven mainly by an expected reduction in business investment growth as a result of a rise in global economic uncertainty.”

So the currency goes down. The loonie now struggles to stay above 76 cents, shedding all of the gains made since the winter lows. Remember all the $8 Cauliflower Angst on this blog? Like a fetid veggie, it’s coming back.

Here are some reasonable conclusions:

First, markets will absorb the shock – at least in North America – and stabilize not far off current levels. This is not 2008. Not even close. The Brits are eviscerating themselves, casting serious doubt on the future of the biggest free trade zone at a time of slow and wobbly global growth. That’s all serious, but no apocalypse. China benefits and ultimately the US as well. This is digestible. If your investments are balanced and diversified, leave them alone.

Second, interest rate hikes are toast. The Bank of England will cut its key rate by at least a half point in early August. The US Fed will not carry out its planned pop in July. The Bank of Canada  but may even contemplate another cut if oil travels toward the $40 mark. Then we can yak about $10 cauliflower.

Third, don’t expect this to carry over into lower mortgage rates. None of the above is great news for the economy, jobs, incomes or bank earnings. Risk has been augmented, and at the same time the T2 gang is trying to douse the housing flames in the GTA and YVR. One big tool will be to shift more exposure from CHMC to the lenders. The end result – mortgages stay about where they are even if rates in general decline.

Fourth, Britain just got whacked, losing its Triple-A credit status, with at least 3.5% of its economic growth cancelled over the next two years. That’s ginormous. Foreign investment in the UK will wane and monetary conditions around the world get looser. The Bank of England is already flooding the land with freshly-printed pounds, while the ECB continues to spend billions on bonds every month in a massive stimulus program. The direct beneficiaries of this will not be working-class Brits who seek better incomes, but investors with financial assets gasbagged by new liquidity.

All this makes Canadian bonds look sexy by comparison. Expect yields to go down and prices to rise, even as the economy in general slows markedly and job creation disappoints. Slower foreign demand for Canadian exports and any protracted decline for commodity prices (especially oil) would mean harder times for most regions of the country.

And while it’s hard to see any of that being good for residential housing prices, some people think a lower dollar and an exodus of capital from Europe will plump values further in our bubble cities. They’re also thinking that way in Australia, the other place where house horniness is a national disease. Maybe the property pimps are right. The perception that rates will stay lower for longer, and that land’s inherently safer than equities may drive more into a realtor’s embrace. Good luck with that.

In conclusion, Brexit is good for bond holders and likely bad for families. Central banks will paper. Portfolios will recover. Economic growth will falter. Thus the workies, not the wealthy, will pay. Was this the goal?