Brexit Opportunity Alert – Here’s What Investors Should Do
Editor’s Note: I sent the following alert to investors in my fund this morning. It’s a quick but vital message, and I wanted to make certain it reached my Sure Money readers too.
British citizens issued a wake-up call to global elites yesterday by voting to exit the bureaucratic monstrosity known as the European Union. Warned that England would sink into the North Sea if it voted to reject Brussels, English voters knew better. World markets long overdue for repricing are turbulent as they absorb news they didn’t expect to receive but the damage is greatest in currency markets. British Sterling is suffering its largest single day loss in modern history (though it is only down 3-4% on the week).
Of more global significance is the rally in the Japanese Yen, which for some reason investors view as a safe haven despite Japan’s status as an economic basket case that must destroy the value of its currency to survive. The Euro is also holding up better than expected despite the fact that Britain’s exit will damage trade flows and economic growth in the region. I would ignore these short term moves and increase my Euro and Yen short positions; those currencies’ strength is unsustainable.
Stocks are giving back what they gained the last couple of days as confidence grew that Britain would vote to stay. The worst damage is occurring in U.S. and European financials. European banks and insurance companies were already suffering under the curse of negative interest rates, one of the hair-brained schemes foisted on them by the European Central Bank. Brexit puts further pressure on their businesses. The weakest banks – Deutsche Bank, Barclays, HSBC and Standard Chartered – are likely to fare poorly in the period ahead. The overall European banking sector is under serious strain with the biggest concern remaining Deutsche Bank, whose stock is down sharply today along with the rest of the group.
The long term consequences of the vote are undoubtedly destabilizing to the European and global economies and markets. The process of extracting Britain from the EU will take a couple of years and the terms of the new relationship must be negotiated. The vote will increase pressures from other countries and regions to separate although it is too soon to bury the EU. Already this morning, politicians in France and Holland were calling for similar referenda on their countries’ futures in the EU. More important, the vote is consistent with rising populism in Western democracies as the disenfranchised come to realize that elites prospered while they suffered since the 2008 financial crisis. This is an important moment in history because British voters chose to speak truth to power rather than do what they were told by the mainstream press and political and business elites.
Understood in the larger context of political instability and weak economic growth, the investment lesson from this vote is clear. Investors should:
- Limit their exposure to risk assets such as equities and junk bonds
- Increase their exposure to true haven assets such as U.S. Treasuries and the dollar
- Buy physical gold and gold-related equities as the global paper money system crumbles.
They should not listen to the bad advice that was immediately offered on CNBC and similar cartoon networks to “buy the dip” – global risks just increased significantly and the last thing investors should be doing is putting their capital at more risk. U.S. stocks are overvalued and are unlikely to produce attractive risk-adjusted returns over the foreseeable future.