|
|
Musings Report #26 6-25-16 Inside Brexit: the Pie Is Shrinking
You are receiving this email because you are one of the 500+ subscribers/major contributors to www.oftwominds.com.
For those who are new to the Musings reports: they are basically a glimpse into my notebook, the unfiltered swamp where I organize future themes, sort through the dozens of stories and links submitted by readers, refine my own research and start connecting dots which appear later in the blog or in my books. As always, I hope the Musings spark new appraisals and insights. Thank you for supporting the site and for inviting me into your circle of correspondents.
Welcome to June's MUS (Margins of the Unfiltered Swamp)
The last Musings of the month is a free-form exploration of the reaches of the fecund swamp that is the source of the blog, Musings and my books.
Inside Brexit: the Pie Is Shrinking
The media is chockful of commentary on the Brexit vote, in which a slight majority of U.K. citizens favored leaving the European Union.
Pundits and analysts are struggling to make sense of the "shocking" vote to exit the Eurozone, and there are many reasons given--for example,
Britain's Elites Can't Ignore the Masses
Britain’s Point of No Return (Foreign Affairs)
The sky has not fallen after Brexit but we face years of hard labour
"This referendum was never a fight between Britain and Europe, as so widely depicted. It was the first episode of a pan-Europe uprising against the Caesaropapism of the EU Project and its technocrat priesthood. It will not be the last."
It seems to me the primary dynamic is not that complex: the economic pie is shrinking, and that is pressuring every status quo arrangement as people "circle the wagons" and try to protect their slice of the pie from the onslaught of others' claims for a larger piece of the dwindling pie.
The general media line is that the Brexit vote is a vote for change, a vote arising out of anger with the status quo's inequalities and asymmetries of wealth and power, and a rising sense of insecurity.
I read it in a slightly different way. I see Brexit as part of a secular (i.e. long-term) trend toward conscious fragmentation and decentralization of centralized organizations, and as a reflection of our naturally-selected programming response to insecurity and instability: circle the wagons.
By circle the wagons, I mean our tendency to withdraw into an internally cohesive group with defined membership and defined territory.
The largest such political group is the nation-state, and so it is natural for people to circle the wagons around their national identity.
We can also expect people to circle the wagons around ethnic and religious identities, local identities and economic-social class identities, as the ruling Elites become the "other" (i.e. "foreigners" with whom we have little contact, people who "aren't like us") or the "enemy" who is inherently opposed to our self-interests.
This process of withdrawal into safe havens of internally cohesive groups and group identities is intrinsically messy in globalized, multicultural societies. No wonder populations are dividing into camps of increasingly angry people with little interest in compromise. Our instinct is to seek clear delineations of "us" and "them" and to seek the relative comfort of "us," which in a multicultural nation, can contain quite a mixed bag of people who nonetheless feel a shared identity.
Market Musings: Brexit Aftermath
While the vote results might have been surprising, what wasn't surprising is the open gaps in the S&P500 chart at 2,100, 2078 and 2052 were all filled.
Eventually the big gap at 1,875 will get filled, and the question now is--are we heading there now that stocks are in a global freefall?
Panic declines like Friday's have different characters than waterfall declines like we saw in January and February.
As my old boss Stew Pillette often observed, the market can handle bad news; what it doesn't like is uncertainty, and the uncertainties surrounding Brexit triggered a panic decline.
The other cause of waterfall declines is the emergence of something that the market hasn't priced/discounted. In 2008, this was the collapse of Lehman Brothers, which revealed the global fragility of the financial system.
But the possibility that the U.K. might vote to leave the EU was very well known, and opinion on the likelihood seesawed over the past few weeks. So this panic decline is unlikely to lead to a cascade, if this difference in the causes of panicked declines matters.
We should also note the soothing sounds of support emanating from central banks, and we can be fairly sure they are buying "risk assets" directly or through intermediates.
The other key factor is the difference between the EU, Japan, China and the U.S. Of the four, Japan and the U.S. are considered risk-off "safe havens," hence the huge jumps in the Japanese yen and the U.S. dollar Friday.
The weakness of the big banks in the EU, China and Japan only accentuates the relative (and this is a key word) strength of U.S. banks and the U.S. financial system. For this reason, I expect U.S. financials and markets to recover more quickly than other markets, though the sell-off in Europe also looks overdone.
Recall that the 2008 global meltdown was triggered by excesses of leverage and risk in the U.S. The crisis quickly spread from the center.
Now, what is the crisis? It is ultimately political in nature: what other nations might elect to leave the EU, and what becomes of the grand EU integration program? These are long-term questions, not crises triggered by collapsing banks.
Yes, Euroland banks are vulnerable and under-capitalized; but then this is also well-known.
So while many market watchers expect a waterfall on Monday, an opening move down followed by a rally wouldn't surprise me.
Support on the SPX is around 2,020 (200-day MA) and 2,023 (50-week MA), levels that are a mere 12-15 points below Friday's closing.
I might be completely wrong about this decline's character, and Brexit will unleash a cascade next week. But my sense is the real declines are yet to come, perhaps in the usual September-October "crash window," and they will be triggered by evidence of recession, not something that has been in the news for weeks.
As a sidenote: I discussed the possibility of a correction in bitcoin (BTC), which did occur as BTC fell over $200 from $780 to $550.
I had expected a modest 38% Fibonacci decline of around 125 points, but the recent sharp gain from $450 to $780 (330 points) was hit with a 62% Fibo decline (-205 points) to the 550-575 level.
Price jumped rather quickly to the 38% retrace level around $655, and is hovering back at support/resistance around $670-$680.
It's useful to keep track of sentiment. Markets rarely reward the majority, hence my suspicion that the Friday panic will reverse into a rally now that the majority expects a cascade drop.
In the same fashion, now that the bloom is off bitcoin, it may resume a steady, less euphoric climb toward the $1,000 level.
From Left Field
'Beautiful Flight' Across The Atlantic Is Major Milestone For Solar Plane (via John S.-P.)
Marine Corps looks to fighter jet 'boneyard' after new fleet delay (via John D'A.) -- The F-18 Super Hornet and the F-22 are better, cheaper options to the failed F-35...
funny stuff from Asia (via Maoxian) -- a real time-sink, lots of funny short videos from mobile phones, weird game shows, etc.
Imamura's ambiguous 1967 film, A Man Vanishes -- one of my favorite peculiar Japanese films, some similarities to Godard and Antonioni...
Solstice Druids vote ‘leave’ (via Steve K.)
The Fathers of the Internet Revolution Urge Today’s Software Engineers to Reinvent the Web (via Lew G.)
46 exceptional photos (via U. Doran) -- well worth scrolling through...
Andreas M Antonopoulos The Future of Cryptocurrencies (51 minutes) (via Jonee T.)
Graft In The Grassroots (via Maoxian) -- corruption in China is endemic, right down to the neighborhood level...
Britain’s Point of No Return (Foreign Affairs)
The Lonely Aftermath of China's One Child Policy (via Maoxian)
The World’s Disappearing Sand (via Joel M.)
"Life isn't about finding yourself. Life is about creating yourself." George Bernard Shaw
Thanks for reading--
charles |
|
|
|
|
|
