Brexit: What You Need to Know


Well, they did it. British voters decided to “declare their independence” from the European Union. But before we start talking in grand terms about self determination, there are some points to keep in mind. This is not Britain’s “July 4, 1776 moment.” This was a non-binding referendum that will require multiple years of negotiations between The UK and Brussels. But before those negotiations even start, there will likely be months of internal discussions in Whitehall to figure out what comes next. Here is how I see it playing out:

  • At some point in the next three months, Britain will formally invoke Article 50, which will begin the exit negotiations. Once invoked, this process should take two years.
  • At this point, Britain’s access to the European market becomes ambiguous. Nothing will officially change until the exit is complete. If Britain were to negotiate a trade deal similar to what the Swiss enjoy, that is — at least in theory — an entirely separate set of negotiations that cannot even formally start until after the exit arrangements have been made. Of course, this is Europe, where all treaties seem to be flexible and open to interpretation.
  • The EU will probably stop short of brutally punishing the UK for leaving as doing so would hurt the EU just as badly. No one wants to see the European nationals working in London’s banks to get booted out, and no one wants to see British expatriates in Europe sent packing.

Bottom line, no one really knows what this will look like, and there promises to be a lot of muddle and a lot of making up the rules as we go.

Ignore the Jobs Report; The Fed Won’t Be Tightening Any Time Soon

The jobs report came in better than expected today, leading the usual barrage of speculation that the Fed will be tightening sooner rather than later.

Guess what?  Not gonna happen.

I try to avoid Fed bashing.  There is really nothing worse than a Monday-morning quarterback, and in any event, complaining about the Fed’s policies is counterproductive.   It’s a distracting waste of time.

That doesn’t mean that I support Yellen & Company, mind you. I just try to keep my emotions out of the mix when handicapping the Fed’s next move.

The general consensus seems to be that the Fed will aggressively start to raise rates starting late in the first quarter of next year, and the Fed itself seems to be forecasting an aggressive timeline for hikes. By the end of 2017, the Fed’s policy-setting committee expects the fed funds rate to be 3.75%.

That seems awfully aggressive to me.  Assuming quarter-point rate hikes, the Fed would have to raise rates at 15 consecutive meetings.  If they start in March of 2015, they could theoretically hit that number by the first quarter of 2017.  But the bond market seems to be telling a different story if you look at the spread between traditional Treasury yields and inflation-protected Treasury (or TIPS) yields. The market is pricing in annual inflation of just 1.9% over the next ten years.

I don’t see the ten-year Treasury yielding more than 3.75% by 2017, particularly with rates as low as they are across Europe and Japan.  That means that the Fed would be inverting the yield curve (raising short-term rates above long-term rates), which is generally a leading indicator of a recession.

We probably will have a recession sometime in the next two years (see October Portfolio Outlook) as part of the normal ebb and flow of the economy.  But I don’t think the Fed is reckless enough to force one unless inflation gets out of control…and again, the bond market is telling us that that isn’t happening any time soon.

But here’s the real trump card and a major reason why I believe the Fed will remain dovish for a lot longer than most Fed watchers expect: The hawks are retiring.


(Thomson Reuters created the graphic; click here to visit the original.)

Dallas Fed President Richard Fisher and Philadelphia Fed President Charles Plosser—two of the three most hawkish governors—will be stepping down in 2015 and will most likely be replaced by more dovish appointees by President Obama.  That will leave Jeffrey Lacker as the last of the reliable hawks.

Bottom line: The Fed will not be tilting in a more hawkish direction any time soon.

Charles Lewis Sizemore, CFA, is the chief investment officer of the investment firm Sizemore Capital Management. Click here to receive his FREE weekly e-letter covering top market insights, trends, and the best stocks and ETFs to profit from today’s best global value plays. 

My Bitcoin Rant

The best aspect of Bitcoin is that it is a free currency, completely outside of the control of any government or central bank.

Funny thing is, the worst aspect of Bitcoin is that it is a free currency, completely outside of the control of any government or central bank. On the other hand, Bitcoin also values customers’ privacy and makes Anonymous delivery possible, hence abiding by customers’ privacy privilege. 

I’m not the biggest fan of central bankers.  Like the rest of us, they are human and will err.  They are tasked with making critical decisions under conditions of murky uncertainty and face conflicting mandates and political agendas…not to mention the unimaginable stress and the emotional burden of knowing that the livelihood of 315 million Americans depend on them making the right policy decisions.

No one—not Bernanke or Yellen or the quants that Goldman Sachs keeps locked in the basement—is smart enough or has enough information  to effectively manage a currency, which is why central bankers constantly get it wrong.  It’s an impossible job.

But to adapt Winston Churchill’s quote on democracy—that it is the worst form of government except all those other forms that have been tried—I’ve reached the conclusion that the modern central banking system is the worst monetary system ever devised…except for all others that have ever been tried.

The classic gold standard encouraged punitively high interest rates during times of crisis—which is precisely the time when liquidity is most needed—and crucified the working classes on a cross of gold.  It also encouraged mercantilist economics—the scourge that Adam Smith preached against in the Wealth of Nations—which was a leading cause of wars in the post-industrial era.

The gold standard is never coming back.  But what about modern variants like Bitcoin?

At first blush, there is a lot to like.  It has the anonymity of cash.  It can be transferred without the disclosure requirements of the world banking system.  And the creation of new Bitcoins is preset according to an algorithm, making something like an Argentine-style devaluation impossible.

But let’s get serious here.  If your bank fails, you have FDIC insurance in place to protect your savings.  But who do you call when a Bitcoin exchange is hacked or shut down due to a bug? Or for that matter, when someone steals the laptop that was storing your Bitcoins?

Federal Reserve Chairmen are regularly asked to testify before Congress to explain their actions.  And if things ever got bad enough, the Federal Reserve has a physical location that could be stormed Bastille-style with pitchforks. (I’m joking.  Sort of.)   Though imperfect, there is a level of accountability.

But who do you drag in front of Congress when Bitcoin breaks?  Satoshi Nakamoto, the John-Galt-like character (or characters) that created the virtual currency under an assumed name?  Good luck with that.

Look, I don’t trust the government.  I agree with the gold bugs, Bitcoin enthusiasts and other assorted malcontents on that count.  But I do trust the government more than I trust a crypto-currency of murky origins backed by an algorithm that lives in the netherworld of the internet.

I’m not going to wag my finger and tell you not to speculate in Bitcoins.  If you like to trade, and you feel comfortable with the risks involved, go for it.  Had you bought at the right time last year, you could have made more than 10 times your money.

So by all means, speculate.  But don’t drink the Kool-Aid here and buy the ideology.  Bitcoin is a deeply flawed idea, and it is not a viable store of wealth.  I’m not opposed to the idea of a free-market parallel currency, and indeed precious metals have served that role to some extent ever since the fall of the gold standard.  Some future iteration of a Bitcoin-like currency might be a viable option.  But as of today, we’re simply not there yet.

Charles Lewis Sizemore, CFA, is the editor of Macro Trend Investor and chief investment officer of the investment firm Sizemore Capital Management. Click here to receive his FREE weekly e-letter covering market insights, global trends, and the best stocks and ETFs to profit from today’s exciting megatrends.  This article first appeared on InvestorPlace.

Janet Yellen: What We Learned From Her First Testimony

Janet Yellen must be wondering why she ever agreed to take this job.

In her first congressional testimony today as Fed chairwoman, I witnessed one representative badger Janet Yellen to give a precise definition of how many hours per week qualify as a “part-time” job. A bewildered Yellen replied that those definitions came from the Bureau of Labor Statistics — not the Fed — but the details don’t particularly matter in a hazing ritual.

I would rank “Fed chairwoman” near the top of the list of truly thankless jobs — above even garbage man or bail bondsman.

You’re constantly accused of being a stooge for Wall Street banks … even though the Wall Street banks hate you and consider you a stooge for the president and Treasury.

You’re always either “unfairly” punishing savers with low yields or punishing borrowers with high yields.

You’re either inflating a bubble … or being accused of popping one.

You’re a perpetual scapegoat for whatever ails the economy — too much inflation, not enough inflation, too much unemployment, etc. — and a punching bag for every populist politician, Democrat or Republican, looking to make a name for themselves.

So, with all of that said, how did Janet Yellen do in her first pass through the gauntlet?

Janet Yellen: Tuesday’s Testimony

She looked a little rattled and out of her league throughout — I expect that a stiff drink might be in her near future — but the good news is that with respect to policy outlook, she stood her ground and gave us no unexpected surprises. There would be “continuity” with Ben Bernanke’s policies, and Yellen made it clear that she herself had helped to form them.

According to Yellen, the labor market is still very weak, and tapering of Ben Bernanke’s quantitative easing program would happen “in measured steps.” Janet Yellen emphasized that she is “considering more than the unemployment rate when evaluating the condition of the U.S. labor market,” and specifically mentioned long-term unemployment and underemployment as factors that concerned her, which Wall Street views as confirmation that short-term rates will remain at or near zero for the foreseeable future

And in reassuring words that Wall Street wanted to hear, Janet Yellen reiterated Bernanke’s statements that quantitative easing and its continued tapering are not on a “preset course.” The market took this to mean that a slowdown — or even a reversal — of the $10-billion-per-month tapering was entirely possible if job growth doesn’t start to materialize. (In subsequent meetings, the Fed has reduced its bond purchases from $85 billion per month to $65 billion per month.)

Yellen also acknowledged the volatility coming out of emerging markets but doesn’t currently see it as a fundamental risk to the U.S. economy.

Bottom Line

What are we to take away from all of this?

The Fed probably will taper by another $10 billion in March. But if we get another month of disappointing job growth, that is by no means certain. But the most important takeaway here is that investors will not have to worry about fighting the Fed any time soon.

Janet Yellen paid lip service to the Fed’s dual mandate of maintaining both low unemployment and low inflation, hinting that with inflation still very low she had a lot of wiggle room to err on the side of dovishness.

Charles Lewis Sizemore, CFA, is the editor of Macro Trend Investor and chief investment officer of the investment firm Sizemore Capital Management. Click here to receive his FREE weekly e-letter covering market insights, global trends, and the best stocks and ETFs to profit from today’s exciting megatrends.  This article first appeared on InvestorPlace.

The Transatlantic Trade and Investment Partnership: Will It Happen?

What do you get when you have a second-term American president eager to secure a positive legacy and a European continent desperate for economic growth?

If all goes well, you’ll have a game-changing free trade agreement between the United States and the European Union.

The agreement—tentatively called the Transatlantic Trade and Investment Partnership (“TTIP”)—will potentially be the biggest trade deal in history, covering half the world’s economic output and roughly a third of all global trade. It makes NAFTA and the (alas, defunct) attempt at the Free Trade Area of the Americas look puny by comparison.  Negotiations are supposed to formally begin in July and might take as long as two years.

A free trade deal of this scale is no easy project; even small deals, such as recent pacts with Colombia and South Korea, have political stumbling blocks.  What may be liberating for consumers in the form of lower prices and better selection is the protected turf of favored industry and labor groups.

Past attempts at comprehensive trade deals across the Atlantic have lost steam.  Neither side was committed enough to challenge the subsidies given to their coddled farmers and some of their “national champion” industries (think American Boeing vs. French Airbus).  France has also consistently insisted that there be “cultural exceptions” for French-language films, music and art…which gums up negotiations on media and intellectual property.   And the United States government procurement market is much harder for foreign firms to break into than most European government markets.  Congress tends to play the populist “Buy American” card when it comes to supplying the government…which, of course, jacks up expenditures for American taxpayers.

So, while Americans and Europeans both like the idea of free trade in theory, in practice the status quo has been too hard to overcome.

But today, the timing might finally be right.  You have free-trading Republicans controlling Congress and a Democratic president who sees an opportunity to strengthen political and economic ties with “Old Europe.”

The Democratic Party—traditionally hostile to free trade for the perceived damage it does to American labor—has also been gradually getting more comfortable with it since the presidency of Bill Clinton, and the fact that European labor markets are regulated as high (or higher) than America’s makes a deal easier for them to swallow.  This isn’t a giveaway to Big Business using cheap third-world labor; it is partnership between two large players with similar income levels.

And for the geopolitical strategists and foreign policy hawks, uniting the Western world under a giant trade umbrella allows the West to effectively set the rules for the world economy for the next 50 years and waters down the influence of China, India, and other emerging countries.

And on the European side, it amounts to one word: growth. 

The Eurozone crisis has stabilized in the sense that the breakup of the currency union is off the table, at least for now.  But the entire continent is suffering from having too much debt and not enough growth to realistically pay it back…or even stop it from snowballing.

As the past two years have proven, Europe’s leaders will push through major reforms only when they have the bond market pointing a proverbial gun to their heads.  But shaking up their protected industries, while politically hard, is easier than raising taxes and cutting spending in perpetuity. A free trade deal with the United States give Europe a potential way out of the malaise.

The potential deal has broad support, but it also has two powerful enemies on both sides of the Atlantic: populism (of both the labor left and the isolationist right) and entrenched interests.   Let’s hope the voices of reason prevail.

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