The Macro-Economics of BREXIT & Trump , by Al Martin

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by Al Martin

The Macro-Economics of BREXIT & Trump

(6-9-16) BREXIT is an acronym for Britain leaving the EU, which is up for a vote on June 23. So how will equities, gold and the euro react to BREXIT?

The first and most obvious market reaction is that the British pound would move lower if BREXIT goes through. The British pound has already sold off about 5% in the last 30 days in anticipation of such a move. Because the vote is close, the British pound has gotten sold down because the British pound would have the biggest reaction. The flip side of that, of course, is that if BREXIT gets voted down there’s going to be a hell of a short covering rally in the British pound. The reaction to the euro, I think, is uncertain. BREXIT if approved becomes a net negative for the euro.

In a column called “BREXIT v. Yellen,” Martin Armstrong of ArmstrongEconomics.com, writes – “The euro would bounce if BREXIT won, giving a bit of a bid there.” I think that’s hard to judge and it really depends on where the euro is trading on the day of the vote. The euros have already backed off and come down from their 30 day high. The euros traded up into the 115’s and I sold them at 115.35. They have been traded all the way down to 110.80 and I covered them down there. Now they’re trading at about 111.90. They’ve had a little short covering. The reaction in the euro is as uncertain as it would be in the British pound.

Armstrong continues – “To the contrary, BREXIT is a huge deal for if the “real” vote prevails if we do see an exit that the establishment cannot prevent. Sure, the pound will get hit at first, but thereafter, a contagion of separation movements will appear and contribute to the demise of the euro. That will have a broader long-term influence on capital flows pouring into the USA.” But I think it’s wrong to say that this would result in the demise of the euro since it appears to be too radical a presumption.

“Two-bedroom condos in Brooklyn are now going for over $1 million,” Armstrong writes. “This is all foreign capital pouring into the USA on cash deals. The same is taking place in Miami, and this is why the IRS demands title companies to pierce corporate veils to get at the real owners only in New York and Miami. BREXIT can have a profound impact on the dollar because it has the potential to send mountains of cash fleeing Europe to the USA.

And certainly a BREXIT vote is bullish for the dollar and bearish for gold. We have already seen gold come down substantially, 6-7%, off of its recent high. That’s in reaction to what the euros are doing.

Armstrong writes – “The debate shifted following the Jobs Report, and people now assume that the Fed will not raise rates. Hence, we have a bounce in gold and the euro.”

That started last Friday when the gold came down to 1205. I was still short, covered it, got long when the gold hit 1200 and was looking for a place to hold. The euros started to back off. The dollar started to rally because the dollar got a little too short. And the price of gold bounced about $10 off the recent lows. They tried to make a move back to 1220, got turned back and now the gold is trading around 1212-1213.

In another piece called “Yellen Says Interest Rates Will Go Higher,” Armstrong writes – “Janet Yellen’s remarks today confused the people who think the world turns on the Jobs numbers since they remain clueless with respect to the changing trend in employment.” What Yellen is implying is that they’re going to move in July. However the market isn’t saying that. The market is saying that they’re not going to move until much later in the year.

“They do not take into consideration the technology shift, so they are still trying to trade from 20th-century concepts,” he continues. “Yellen gave an outlook of the U.S. economy and said that interest rate hikes are coming. Higher rates are needed for pension funds, and the decision will cause the stock market to take off which will appear like asset inflation.”

He also says that if that happens then watch the Dow “rally to test the 23,000 level in the years ahead.” However when you strip away all the hyperbole, higher rates is a net negative for equities – just as it’s a negative for bonds. Since bonds are a fixed instrument, in a higher rate environment, they are going to move lower in value.

What Armstrong is really saying is if you yank up interest rates in order to create some artificial inflation and that in turn is bullish for equities because you would get a normalization of interest rate spreads again which would be good for the banks and all the financials. And everyone that points that out is right about that.

“Then we have Donald Trump, and a victory there would really change America. Trump is talking about a 15% corporate tax rate that would match Hong Kong. If this policy were to happen, we would see $2 trillion in offshore corporate cash return to USA. Then if the Fed wisens up and fails to raise the 0.5 rate on excess reserves or eliminates it, as it should, there will be another $2 trillion freed up,” Armstrong continues.

“With $4 trillion free, the only place will be equities. We will see the Dow come into that sweet spot where you can buy it with two hands and watch it rally to test the 23,000 level in the years ahead. Nobody seems to expect a rally and that makes this even more explosive.”

The reason nobody expects a rally is because all of the stars have to align just the right way for Trump’s scenario to play out. The likelihood that Trump could get some sort of stimulus package through seems pretty slim.

All in all Trump is a net negative and there’s no way around that. Why? Because he would have the ability to do this by executive power as president without Congress to severely impede the United States’ foreign trade – which he already says he’s going to do.

First he wants to back out of NAFTA which he could do by executive authority. He wants to scrap the current TPP agreement which the Obama Regime just signed with China, Japan and all the Southeast nation-states.

Trump is saying that as a way to defend his position about the allied nation-states getting a free ride in defense for so long. And that’s been a Republican argument for a long time, even as Ronald Reagan pushed that argument. But it never went anywhere.

What Trump wants to do is force the so-called 4% requirement which under the NATO agreement means that the NATO countries have to spend at least 4% of their GDPs on their militaries. And that’s not going to happen. The United States is the only country that actually lived up to that policy of the NATO charter.

One of Trump’s positions is that he wants to do away with both NATO (North Atlantic Treaty Organization) and SEATO (South East Asia Treaty Organization). And he wants to do business with Putin. He wants to normalize relations with Russia again.

However I believe that doing away with NATO and SEATO is a bad idea because all you would be doing is strengthening Moscow and Beijing’s hand. Why? Because taking away the threat of NATO and SEATO, you would take away the military capability of a threat.

Trump’s idea is that if you do away with NATO and SEATO it will be easier to do business with Moscow and Beijing.

Meanwhile Obama’s saber rattling continues. The game that Obama is playing has to be walked on a very fine line. He’s pressuring the Russians but has not exerted enough pressure to cause their economy to collapse. He has put their economy under pressure but has not pushed their economy over the line – which he certainly has the ability to do.

In conclusion, traders should be advised that the initial reaction in a BREXIT vote – if the vote is approved – will be a lower pound. If the vote fails there will be a sizeable short-covering rally in the pound

Looking at it down the line, if Trump were elected, there would be certainly a net negative for US equities. And it’s not only the US equities -- but the whole world would come down with us.

It should also be noted that Trump favors the 1930s Smoot-Halley Act which effectively brought global trade to a standstill. It effectively closed American markets to foreign exports which in turn contributed to the Great Depression.

However the effects of Smoot-Halley were international because there was a global chain reaction. Once America closed its markets, Britain, France, Germany, etc. did the same thing. Everyone went down the same road trying to protect their own economy.

This can be seen as a classic case of Isolationism vs. New World Orderism. It also shows that even then in 1930, isolationism was no longer plausible. By 1930 about half of the planet’s GDP depended on global trade. And today it’s even absurd to go down that road.

It’s all interconnected and the world has become a very small place. Some of the old former Republican vanguard still like to rattle the sword of Isolationism because they know it’s popular with Old Republicans that don’t understand anything about economics. It could be a bumpy ride.

Stay tuned…

* AL MARTIN is an independent economic-political analyst with 25 years of experience as a trader on NYMEX, CME, CBOT and CFTC. As a former contributor to the Presidential Council of Economic Advisors, Al Martin is considered to be a source of independent analysis for financially sophisticated and market savvy investors.

After working as a broker on Wall Street, Al Martin was involved in the so-called "Iran Contra" Affair as a fundraiser for the Bush Cabal from the covert side of government aka the US Shadow Government.

His memoir, "The Conspirators: Secrets of an Iran Contra Insider," (http://www.almartinraw.com) provides an unprecedented look at the frauds of the Bush Cabal during the Iran Contra era. His weekly column, "Behind the Scenes in the Beltway," is published weekly on Al Martin Raw.com, which also publishes a bimonthly newsletter called "Whistleblower Gazette."

Al Martin's new website "Insider Intelligence" (http://www.insiderintelligence.com) will provide a long term macro-view of world markets and how they are affected by backroom realpolitik.

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