Juggling Dynamite

As self-serving status quo pundits spew more hyperbolic nonsense about the ‘catastrophic’ costs of Brexit, why the yes vote should not be implemented, why the majority did not really understand what they were voting for, or how the margin of yes was too small to be accepted (anyone remember the Bush/Gore tie in 2000 that took the Supreme Court to break?) we should reflect on history and understand just how destructive and sinister such assertions truly are. Majority votes are not to be respected only when they go in favor of the ruling powers, sorry.  The Rolling Stone’s Matt Taibbi offers a must-read historical reminder on these matters, see The Reaction to Brexit is the reason Brexit happened:

Democracy appears to have become so denuded and corrupted in America that a generation of people has grown up without any faith in its principles.

What’s particularly concerning about the reaction both to Brexit and to the rise of Trump is the way these episodes are framed as requiring exceptions to the usual democratic rule. They’re called threats so monstrous that we must abrogate the democratic process to combat them.

Forget Plato, Athens, Sparta and Rome. More recent history tells us that the descent into despotism always starts in this exact same way. There is always an emergency that requires a temporary suspension of democracy.

To his credit, outgoing UK Prime Minister David Cameron reaffirmed his respect for the democratic process in the UK Parliament after Brexit here is direct video link.

The S&P 500 is breaking below 2000 this morning for the first time since it bounced last March.  The excuse-du-jour is Brexit.  The reality is obscene overvaluations and record leverage, are always a train wreck waiting to happen.  It’s just a question of which event finally serves as the breaking point.

Nice start the past 2 days, but a long, long way to go in the mean reversion that will complete the coming bear market.  The fundamental and economic supports for stocks have been absent for at least 3 years+.  But as shown here in Cory Venable’s chart of the S&P 500 since 2013, there is also little to offer any technical support between current levels and 1800 on the downside.

When 1800 breaks, we should look for the 2007 cycle peak in the 1550 area for the next cyclical test. If prices break below the 2007 cycle top, then the 2009 lows will be back in focus as potential downside.

With all the usual long-always-advisers/managers out in full force to assure everyone that Brexit is no game changer or cause for panic, I would agree.  It’s not Brexit that is the justification for a major repricing cycle in risk assets.  It’s the years of reckless financial policies and decisions that have earned the next loss cycle.

Looking to shelter life savings from the likelihood of a major market storm is not panic–it’s very wise risk management.

Mohamed El-Erian, Allianz chief economic advisor, shares perspective on the Brexit vote and what investors should be watching in the wake of the UK referendum. “There will be opportunity for those with cash.”  Here is a direct video link.

“Is this an opportunity to buy right now?” Well Becky, be my guest….Oh wait, CNBC and its mongrel hoard of long always guests, recommend that everyone be fully invested at all times, regardless of valuation or market cycle.  So buy with what Becky?

About those levered accounts “that will have to cover”…margin debt (borrowed to speculate on risk assets) hit an all time secular high in April 2015 (red line) and has been slowly working lower to date.  (To say nothing of the leverage piled on through other credit and derivative markets worldwide). But as shown below, the mean reversion toward prior cycle lows and the selling pressure this suggests for stocks (S&P in blue), has barely even started.

Shocks like last night’s ‘Brexit’ hit the overly confident and recklessly levered like a ton of bricks, as risk markets plunge in concert, paper equity vanishes and a cash crunch hits.