Remembering June: A Tale of Two Cities
“It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity, it was the season of Light, it was the season of Darkness, it was the spring of hope, it was the winter of despair….” Charles Dickens, A Tale of Two Cities
And that’s only the past four weeks! Charles Dickens’ Tale actually spans 25 years, but his famous opening sentence pretty well sums-up June, 2016.
June was the Best of Times
- U.S. business confidence rose.
- The Federal Reserve stayed the course.
- Retail sales surged.
- Inflation remained low.
- Oil prices stabilized.
June was the Worst of Times
- U.S. jobs weakened.
- Import prices jumped.
- Industrial production dropped.
- Germany’s interest rates went negative.
- We all learned a new word: Brexit.
Speaking of Brexit, the tweets flowing out of England after the vote were pretty great:
“Hey, do you know why the English like tea so much? Because tea leaves.”
“India is just blown away that you can get the English to leave by voting.”
“Have we tried unplugging 2016, waiting ten seconds and then plugging it back in?”
“Brexit is to be followed by Grexit, Departugal. Italeave. Czechout. Outstria, Slovakout. Latervia. Byegium. Only Remania will stay.“
After reading some of those tweets, Charles Dickens might decide June was the Season of Foolishness. Meanwhile the U.S. stock market Czeched-out for a couple of days during Brexit, then made up its mind to ignore the English drama. The Dow opened the month of June at 17,754 and closed June at 17,930; up 1% through the best and worst of times..
Economic Tales From Two Cities – London and Frankfurt
London: by now you’ve heard everything that can be said about Brexit (and then some). You know the vote isn’t binding. You know that even if England does pull out of the EU, the exit will take years to happen.
You know the bigger fear is that other European countries may now try to pull out of the EU.
Which raises the question: Has anything like Brexit ever happened before?
We asked this question of Allen Gillespie, Fintrust’s chief investment strategist. An avid student of market history, Allen is our go-to guy for historic precedents. Turns out Brexit actually happened in 1931, or something close to it.
Brexit circa 1931
“Brexit is very similar to when the British left the gold standard in 1931,” Allen explains. “The gold standard was Europe’s monetary system and helped organize international trade, which is also how the European Union is now organized. When Britain left the gold standard, the devaluation was about 24%.”
24% devaluation sounds like a lot, but it was brief. Says Allen, “Historically devaluation events after a period of adjustment turn into a positive. When the British left the gold standard, 23 other European countries also voted to leave. Historically, these events occur closer to market lows after a three to six month adjustment period.”
We found a graph illustrating Allen’s point.
The graph above shows the aforementioned negative economic growth during the 1931 Brexit. The initial damage was followed by eight years of positive economic growth.
Comment: One last Brexit tweet, “If rapper ‘50 Cent’ plays in London, he’ll have to change his name to Ten Pounds.”
German Interest Rates went Negative
The Bourse in Frankfurt
Frankfurt: On June 6, the average yield on ten year German government bonds fell below zero for the first time. This works exactly the way it sounds: you loan your money to Germany and you pay them interest to keep it for you. Great deal for Germany, not a great deal for bond buyers.
Rates went negative in Germany because of the European Central Bank’s attempts to jack-up the economy and raise inflation.
Fintrust portfolio manager Cliff Hodge tells us negative sovereign debt now adds-up to almost $12 trillion worldwide.
What will be the result of the negative debt? Nobody really knows, but everybody is guessing. The chart below appeared last week in Zero Hedge. The last time German rates went negative occurred in 1922. The result? Hyperinflation within a couple of years. Rates then shot back up, to almost 14% by 1927.
Comment: The U.S. ten year bond pays 1.43%, as of July 1. Doesn’t seem like much interest for ten years…until you compare it to Germany.
Looking ahead to July
Not much happening with earnings or economic reports in the first couple of weeks of July, however a couple of days in those first two weeks may get some attention from the markets:
- On Wednesday, July 6, the Fed will release minutes from its June FOMC meeting.
- Thursday, July 13: Producer Price Index
Friday, July 14: Consumer Price Index
On July 13 and 14, the markets will be looking at the inflation numbers.
(source, Bureau of Labor Statistics)
The third week of July will be – how would Donald Trump say this? – “huuuuuuge”. Second quarter earnings will be in full swing. Beginning July 18, the Republican Convention will commence in Cleveland.
The fourth week in July will give us the Gross Domestic Product, and the Democratic National Convention in Philadelphia.
And finally…from all of us at Fintrust