Tempting as it is to include Brexit in the headline, Brexit is not the headline, it is the response to Brexit that is the real headline. The knee jerk slide of the markets was a very rational response to the vote. In typical fashion the markets oversold the rumor leading up to the vote, and oversold the facts in the days following the vote. In rational fashion the markets rebounded as the “dust settled” so to speak, but in an irrational fashion global markets have mostly shaken off the news.
Gold and silver have been jumping on a flight to safety, energy supply and demand are looking for balance, agriculture futures have mostly been down on excellent growing conditions, bonds have been increasing in value on lower yield, and equites have recovered post Brexit losses. While the world economy has another earthquake that puts yet another crack in the foundation and like in the game “Jenga” any time the foundations weakens the tower gets a bit more wobbly. The issue is that the world market is putting its head in the sand and turning a blind eye as Central Banks look for magic pills to fix our economic hangover. But like in Jenga, the longer the game goes, the harder the tower comes crashing down when the foundation finally fails.
The Brexit in and of itself may not end up being that big of an issue to European trade, but what the vote tells us that real, live people are note as economically as pleased as the markets are telling us that they should be. Here in America equity markets have been hitting new all time highs, with the DOW around 18k, the NASDAQ pushing 5k, and the S&P at 2,100 it would seem that things are great for business. American is a melting pot, and in this small world we live in Europe, China, Japan, and the rest of the world economy are all wooden blocks in our Jenga economy.
Uncertainty is fear, and fear is volatility. Markets hate uncertainty, Brexit is now certainty, and in typical fashion since the vote happened and the four horses of the apocalypse did not coming riding in, the world has largely kicked the can down the road and celebrated it as a victory for more cheap money from Central Banks. In a twist of fate, the UK, France and Germany’s fears are creating just the right amount of fear to keep the printing pressing going, driving down bond yields, and prices in equities.
The only real losers so far have been big banks. All twenty of the world’s biggest banks are down this year, and according the Wall Street Journal the top 20 banks have lost $500,000,000,000 in market cap so far this year. It is not like this happened generations ago and time has healed all wounds, we just went through a banking crisis and it not only shook the foundation of the American economy, but the world. Bank losses are caused by real people, and real companies that have real issues. If banks are losing that is a wakeup call. Brexit should be a wakeup call. Wakeup! The world economy and have real issued that need fixed, not repaired, but fixed!
Though economics is a “science,” it is an art. The science part of economics is more a “science experiment.” With every shake of the foundation, and every block that is removed from the Jenga tower, the question becomes how long can the game be played. It is not science; it is physics that tells us that what goes up must come down. What the Brexit vote told the world is that the people are restless.
Markets may appear to be healthy, the market is made up of people. The people are not healthy. Another topic that have reported on time, and time again is jobs. The Jobs Report continues to show that it is low wage jobs in the service economy that is driving growth. As jobs and markets become top heavy, people get restless. And like in Jenga when the tower gets top heavy the tower falls. Tower can be saved though. Europe needs to look no further than the Leaning Tower of Pisa as a reminder of how to make the best situation out of a comedy of errors.
It is not all doom and gloom. For now Central Banksters are keeping the gears greased and the ship sailing full steam ahead. Brexit is not the end of the world. Europe has been around for thousands of years and is not going anywhere. However, the UK is the canary in the coal mine. The world needs to wake up and take the Brexit as a signal that things need to change before the tower falls over.