In an interesting twist, this past week the markets rallied in anticipation Britain would “Remain” in the European Union reversing the sell-off last week which was hedging the potential split risk. The problem of front-running the vote, of course, was the possibility of being wrong.
Despite a variety of polls and betting sites showing rising odds of Britain remaining in the EU, the “inconceivable” occurred last night proving everyone wrong. This is why I said on Tuesday:
“There are times in portfolio management where “doing nothing” is better than “doing something.” This is one of those times.
With portfolios already running at just 50% of total recommended equity exposure, portfolio risk is already substantially mitigated. This leaves us is the best place to be for the moment as we await the outcome of the “Brexit” vote on Thursday and the culmination of Yellen’s testimony on the “Hill.”
From that vantage point, we can then assess the markets and make a reasonable assumption about what to do next. Could we miss a bit of upside? Absolutely. But such a small lag is a much better outcome than trying to recoup a substantial loss if things go wrong.”
In this weekend’s newsletter, (subscribe for free e-delivery) I will do a complete technical review of the markets and portfolio allocations following the “knee-jerk” reaction to the vote.
The long-term outcome for Britain is much more favorable than that of the EU. The biggest problem for the EU will be trying to keep the rest of its members from jumping ship as well. The vote in Britain last night will likely mark the beginning of the end for the EU as it currently exists.
Importantly,with the vote now behind us, the focus of the markets will once again turn back global economic realities which remain wanting at best. As Andrew Lapthorne noted from SocGen (via ZeroHedge) previously:
“Whatever the outcome of the Brexit vote this week investors will still be facing the prospect of negative rates and negative yields on a huge range of bonds, massive corporate leverage with worryingly rising delinquencies and of course expensive equity markets and falling profits. To that extent, these political events are a distraction from the main event, weak global economic growth and perverse asset markets. So whilst the market preference for the status quo might be celebrated in the short-term, actually when the fog clears all of the problems will still be there.“
Here is your reading list for the weekend.
“With markets having wrongly bet on a Remain win in the past few days, and with patchy liquidity sure to amplify price movements, there will be severe pain for levered long investors and, potentially, opportunities for cash-rich ones” – Mohamed El-Erian, PIMCO
CENTRAL BANKING
- Brexit & Long Arm Of The Lawless by Danielle DiMartino-Booth via Money Strong
- Fed’s Third Mandate by David Stockman via ContraCorner
- Thoughts On Low Interest Rates by John Hempton via Bronte Capital
- Yellen: Recession Is Unlikely by Jon Hilsenrath via WSJ
BREXIT
- Britain Dreams Of Swiss Miracle by James Steward via NY Times
- Bravo Britain by Editorial via NY Sun
- After Fall, UK Assets Will Be A Good Buy by Jeremy Warner via The Telegraph
- Biggest Threat Is To Rest Of Europe by Simon Jenkins via The Guardian
- Brexit Is Milestone In Global War On Elites by Simon Shuster via Time
- Surprised? Don’t Blame The Polls by Nate Cohn via NY Times Upshot
- Fidelity: What It Means To Investors by Lisa Mattingly via Fox Business
- Brexit: A New Word For Fear by Eric Reguly via Globe & Mail
- Brexit Crash: When Markets Might Recover by James Connington via The Telegraph
THE MARKET, ECONOMY & BONDS
- Poverty Is Slowing Growth by Chloe Pfeiffer via BI
- Gundlach: This Is Going To Be A Rough Summer by Akin Oyedele via BI
- Shadow Fed Funds Rate = Sells Stocks by BCA via Financial Sense
- Brexit Isn’t The Markets Big Risk by Robert Powell via MarketWatch
- The Global New Normal Is Not New by Yves Smith via Naked Capitalism
- Why Forecasts Are Necessary by Buttonwood via The Economist
- What Market Predictor Is Saying Now by Mark Hulbert via MarketWatch
- Recession Is Here by Michael Pento via CNBC
- Cusp Of A Recession by Jonathan Garber via BI
- Is The Market In A Bubble Again by Paul La Monica via CNN Money
- Are Buybacks Overly Driving Stocks by Jon C Ogg via 24/7 WallStreet
- Cash Is More Important Than Ever by Anora Mahmudova via MarketWatch
FUNNY
I Think My Dog Is A Democrat by Brian Lewis via YouTube
INTERESTING READS
- 6 Lessons From Mohnish Pabrai via The Waiters Pad
- Why Some Make Forecasts by Greg Morris via StockCharts
- Businesses Running Out Of People To Hire? by Caroline Baum via MarketWatch
- Unequal Gains In Growth & Inequality by Peter H Lindert via Naked Capitalism
- Imagine What Might Happen Next by John Hussman via Hussman Funds
- Yellen Says Fed Not Targeting Asset Prices by Tyler Durden via ZeroHedge
- Wall Street Hockey Sticks by Jeff Snider via Alhambra Investment Partners
- Over-Prepared For Brexit Volatility? by Dana Lyons via Tumblr
- How To Interpret Fed’s Warning On Valuations by Jesse Felder via The Felder Report
Questions, comments, suggestions – please email me.
Lance Roberts
Lance Roberts is a Chief Portfolio Strategist/Economist for Clarity Financial. He is also the host of “The Lance Roberts Show” and Chief Editor of the “Real Investment Advice” website and author of “Real Investment Daily” blog and “Real Investment Report”. Follow Lance on Facebook, Twitter, and Linked-In
