Lance Gaitan
With only one day separating us from the historic “Brexit” vote on the other side of the pond, the implications remain unclear and the markets are as still as a deer in headlights, fixated by the uncertain outcome.
Of course, I’m talking about the United Kingdom’s vote to stay in the European Union (Bremain) or to exit (Brexit).
The polls show the vote will be tight, which is making the worldwide financial markets churn.
Stocks sold off sharply last week when polls suggested an exit and then rallied back when a new poll showed a swing to stay.
No one really knows what exactly will happen if Britain exits the EU… but the propaganda, speculation and posturing from both sides of the debate have reached a fevered pitch.
Trade is easier for the UK if it remains, but regulations will continue burdening those same trade deals.
Travel is also easier within the EU, but immigration policies won’t allow Britain to control the large flow of “undesirable” (and possibly dangerous) immigrants from Syria.
The British economy would probably take an initial hit from the exit, but longer-term it might be better off according to Brexit proponents.
On the other hand, the economy might take a hit and suffer longer-term because of the time it would take to renegotiate trade deals currently in place with the EU trading bloc.
This vote has temporarily taken some focus away from central bank action and market speculation on what they will do next.
It has also come about just in time, because it’s been getting more apparent that central bank action has had less and less effect on asset prices.
The whole point of worldwide central bank stimulus is to generate spending, or hopefully convince consumers to borrow cheaply and spend since they can’t make anything by saving.
Central banks are simply hoping their meddling will produce increased economic activity for their respective economies.
In other words, central banks have experimented with rate cuts, zero interest rates, quantitative easing (bond buying or money printing) and negative interest rates without success.
These policies haven’t fueled the desired economic outcome.
Unfortunately, when everyone is doing the same things around the world, the result is that unnaturally depressed interest rates spur investors to riskier assets.
It’s also less and less effective when everybody’s doing the same thing. That’s why we’ve seen the bubble in stocks that just refuses to pop.
Japan has been fighting this battle (of deflation, demographics, debt-deleveraging and currency strength) for decades.
Their stock market has moved higher but their economy, deflation and demographics are still a problem.
They’re also fighting to keep their currency weak so their exports and corporate profits strengthen.
Japan has been the poster child of central bank creativity and failure.
And then the U.S. followed their game plan of manipulation, which was then followed by the European Central Bank. But then let’s not forget about China, who is in the game too!
It’s the same old story from all the central banks: it hasn’t worked as planned because we haven’t done enough!
No, it hasn’t worked as planned because it doesn’t work.
Harry saw what was happening in Japan in the late 80s and predicted what would happen there. Central banks can’t fight demographics, they can’t create jobs with their policies and they can’t create economic prosperity out of thin air!
The Brexit vote is creating market volatility, or at least the uncertainty of the outcome is.
For now, there’s nothing that bankers can do but sit on the sidelines until after the vote is over Thursday.
But after that, you can count on central banks to try and fix what’s been broken.
Lance Gaitan
Editor, Treasury Profits Accelerator
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