TGIF! June 24, 2016

Last week we previewed the British referendum vote.  Today, we outline what happened and where we see things headed.  The vote was guaranteed to be close, but expectations clearly were in the “Remain” camp.  The vote was 52% to 48% to “Leave”.  Global Markets plummeted as Brexit, in stunning form, did indeed happen. Great Britain will no longer be a member of the European Union.  Now the really hard part comes in moving forward.  There is no precedent here.  Not surprising, British Prime Minister David Cameron resigned.  European leaders are scrambling to form a game plan and global markets were hit hard with tremendous uncertainty.  This opens the door for other European nations to consider leaving.  2 things are certain; Britain is breaking away from the European Union. And the European Union is forever changed.  

The British Pound was pounded overnight, falling from $1.50 to $1.34; levels not seen in over 30 years.  The Dollar spiked higher.  Gold raced higher too.  We’ve never seen currencies move like they have in the last 24 hours.  You may recall, that despite being a member of the European Union, the British never embraced the Euro currency.  That will be significant in the British departure from the EU.  It will be messy, but the currency makes it less messy.  Regardless, the French, German and Japanese stock markets fell 7% overnight.  Our futures were down nearly 800 points on the DOW and 100 on the S&P, but opened off those lows in the regular session this morning.  The DOW ended the day with a decline of 600 points and the S&P fell 75.  These were 3% declines, which is not a calamity at all.  In fact, the selloff basically erased the gains from the rally earlier in the week which anticipated a British remain.

This British referendum vote was in so many ways a vote against the establishment and status quo.  This was a vote against the European Union, the European Central Bank, the International Monetary Fund, and the elitist establishment around the globe. The results are loud and clear.  The ripple effect will be strong throughout the world.  It will no doubt have great influence on our Presidential election.  Assuming the next British leader, whomever that is, respects the democratic process, Article 50 of the Lisbon Treaty will be invoked to begin the formal process for leaving the EU. That would start a series of negotiations for how to disentangle the U.K. from its many European Union structures, and could take as much as 2 years.  But nobody wants an extended period.  It will need to be done quickly, which both sides seem to be committed to.  However, this is a dangerous precedent.  Now that the British are leaving, the door is wide open for Italy and France, who have expressed interest.  Spain has contemplated such a move too.  Scotland will no doubt reconsider separating from the UK.  What does Northern Ireland do in response?  Great Britain could very well get smaller.  There are far more questions than answers right now. There’s still a great deal of uncertainty. The Market hates uncertainty.

We really didn’t think that the vote would result in a British exit, but regardless, we knew that there were going to be many challenges ahead in Europe and beyond.  We didn’t trust the recent rally feeling that risks were far greater than further reward.  We entered the Summer very defensive with tactical positions in Gold, the US Dollar and other hedges.  We have substantial cash built up as well to help cushion from declines.  The selloff came fast.  But importantly, it was orderly.  The NYSE and NASDAQ had circuit breakers in place and were ready for an active and ugly day. Today was the worst gap down open since 1986.  Importantly, the DOW and S&P closed today at basically the same level they were just a week ago.   It could have been much worse.  Levels we expected to be hit in July or August were hit overnight.  We still expect tough trading ahead.  The lasting impact of Brexit will be far and wide.  There is a bridge of uncertainty between now and the November election.  There is no reason to panic.  This is not armageddon.  We were ready and we held in just fine.  This is a day we will remember for the rest of our lives.  This is a moment in history.  Planet Earth is a complicated place.

Have a nice weekend.  We’ll be back, dark and early on Monday.


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