- The false confidence of Wall Street and the City of London before the “Brexit” vote
- The demonization of Brexit supporters: Shades of Oklahoma City and “ricochet theory”
- But what will it mean for Thursday’s vote? And is there a way to play it?
- This sector led the market down last year; now a reversal is underway
- The spanking of aspiring Chinese bankers… more Mary Jane double-entendres… the war on drugs as a political strategy… and more!
“Complacency is a state of mind that exists only in retrospective,” said the novelist Vladimir Nabokov: “It has to be shattered before being ascertained.”
This morning, we’re anticipating many shattered states of mind in the markets in the next 72 hours. Play it right and it could mean a substantial short-term gain by the weekend.
The complacency is captured in this Los Angeles Times headline atop an Associated Press story: “Stocks Rise as Investors Grow Hopeful That Britain Will Stay in the EU.”
This is the “risk-on” trade we anticipated on Friday and saw unfold yesterday: The assassination of a pro-EU politician in England last Thursday — apparently at the hands of a hardcore British nationalist — triggered an appallingly cynical reaction both on Wall Street and in the City of London. We summarized the mindset as follows: “Boobus Britannicus might start to think ‘Brexit supporters = wack-jobs’ and vote to stay in the EU.”
Polls over the weekend seemed to bear that out. The “Remain” camp pulled ahead of the “Leave” camp. Hence a global rally in stocks yesterday and the British pound’s strongest one-day performance in eight years.
To no small degree, the Western world’s “financial professionals” are wishing and hoping for a self-fulfilling prophecy.
“Market participants are personally heavily biased in favor of Remain,” says Jim Rickards — who’s in London this week, picking up as much “ground truth” as he can before the vote just two days from now. (And yes, there’s a way to play his up-close insight. But we’re getting ahead of ourselves…)
“Bank CEOs have already informed staff that there will be thousands of layoffs in London if Leave wins. Since London is the financial center of the world, such threats are bound to skew the opinion of market makers somewhat. Global monetary elites, media, policymakers and bankers are united almost completely in favor of Remain.”
So when pro-EU parliamentarian Jo Cox was killed on Thursday, the elites sought to exploit the outrage in much the same way Bill Clinton seized on the Oklahoma City bombing in 1995 to indirectly smear anyone of a limited-government mindset.
Clinton aide Dick Morris published a memo from the time in his memoir Behind the Oval Office: It suggested using “extremism as issue against Republicans” — not with “direct accusations,” but rather using a “ricochet theory.” In other words, guilt by association.
“It worked better than Clinton or Morris could have predicted,” conservative writer Byron York recalled in 2010. “In the months after the bombing, Clinton regained the upper hand over Republicans, eventually winning battles over issues far removed from the attack [i.e., the 1995 partial government shutdown]. The next year, 1996, he went on to re-election.”
Will “ricochet theory” work again? If it fails, it won’t be for lack of effort on the global elites’ part.
Hours before Cox’s murder on Thursday, the pro-Leave firebrand Nigel Farage — you might remember YouTube videos a few years back of his impassioned speeches before the European Parliament — appeared in front of a poster featuring a long line of refugees/prospective immigrants…
The next day brought a viral article by one Alex Massie — noteworthy because it appeared in a generally pro-Leave magazine, The Spectator.
“When you shout BREAKING POINT over and over again, you don’t get to be surprised when someone breaks,” Massie wrote. “When you present politics as a matter of life and death, as a question of national survival, don’t be surprised if someone takes you at your word. You didn’t make them do it, no, but you didn’t do much to stop it either.”
As we go to virtual press today, the drumbeat continues: Cox’s widower tells the BBC, “She had very strong political views, and I believe was she killed because of those views.”
So conventional wisdom says Remain will win out on Thursday. Jim Rickards is taking the other side of the trade.
Not because he’s sure of the outcome… but because conventional wisdom has delivered the gift of a trade with massive upside and extremely limited downside.
“The polls showing Remain ahead were thin gruel,” he says. “The lead was only two points, and the margin of error was more than that — three points. This makes it a statistical tie, still too close to call.
“A victory for Remain will mean business as usual. That outcome is mostly priced into markets already. A victory for Leave will be an earthquake. The outcome is not fully priced into markets.”
It’s that complacency thing again…
Now remember… Gold raced past $1,300 last Thursday when it looked as if Leave was on the verge of an upset victory… and it promptly tumbled $20 after Jo Cox was killed. This morning, the complacency is even deeper, the bid down another $20, at $1,269.
“So we have an asymmetric situation,” Jim sums up, “where a Remain victory will not be a huge head wind for gold but a Leave victory will be a catalyst for much higher prices.
“The polls close at 10:00 p.m. London time. The ballots are paper and are counted by hand. In a close vote, we likely won’t know the winner until Friday morning — 6:00 a.m. London time, or 1:00 a.m. New York time.
“Yet hedge funds have paid for private exit polls and may know the results ahead of the rest of us. The exit poll results should be available to the hedge funds before markets close on Thursday. If Leave wins, we may see a huge collapse in stock prices, the pound sterling, and the euro late Thursday. We could also see a spike in the price of gold. If Remain wins, gold may tick down a little, but not much, because it has already traded off based on the polling data.”
Again: If Remain wins, little changes. If Leave wins, expect major market turmoil. Jim’s hit upon a way to exploit that turmoil for big gains… with limited downside if the status quo prevails. There’s a lot to like in such a trade.
Obviously, though there’s not much time to act. Jim lays out the scenario and the profit potential in detail when you click here.
Aside from gold’s drop, there’s not much movement in the markets today. The S&P 500 has tacked on four points to reach 2,087. A 10-year Treasury yields 1.68%. Crude, however, is an outlier — off more than 2%, at $48.29.
Traders are keeping half an eye on Federal Reserve chair Janet Yellen, appearing before the Senate Banking Committee for her twice-a-year testimony. But there’s no news. Her prepared remarks were as vanilla as it gets: Because economic growth is “uneven,” a “cautious” approach to the fed funds rate remains “appropriate.” Captain Obvious, call your office.
Assuming a Leave vote in Britain doesn’t upset the apple cart, a powerful indicator is pointing to a stock market rally as spring moves into summer.
Greg Guenthner of our trading desk keeps a close eye on the semiconductor sector — the makers of the chips that keep our modern world of computers and smartphones humming. “Semiconductors have matured into an important economic barometer,” he tells us.
“One year ago, the start of the big ‘semi slide’ was the canary in the coal mine for the broad market’s big leg lower that began just two months later.
“But this year, semiconductors are quickly coming back to life. After posting higher lows in May, semiconductors look ready to rip back toward their pre-correction highs.” Perhaps more importantly, they’re outperforming the broad market…
“Semiconductors were some of the first stocks to reverse course and break down 12 months ago,” Greg concludes. “Now it looks like they could be one of the groups with the potential to lead the market higher out of this correction.”
We know the culture of the U.S. banking industry can be rough — 90-hour workweeks and such — but at least people who underperform don’t get spanked on stage.
The People’s Daily in China has posted a video showing a training session at a bank, shot by someone in the audience with a smartphone.
Eight new employees who weren’t making the cut were brought up on stage. The trainer first engaged the trainees in public shaming. Why were they underperforming? “I did not exceed myself,” said one. “I did not coordinate with my team,” said another. A third: “I lacked courage.”
The trainer then proceeded to spank them with what looks like a sizeable stick. Four times.
By some accounts, he later cut and shaved their hair, too.
“The incident took place at a training session for more than 200 employees at Changzhi Zhangze Rural Commercial Bank in northern China on Saturday,” says the BBC.
Regulators have suspended the bank’s chairman and deputy governor. For his part, the trainer issued a video apology for having “severely harmed [my] clients and the leaders” of the bank.
China’s heavily censored internet has been allowed to express its outrage: Asked a user of the Twitter-like site Sina Weibo: “Since when does beating employees become a way of raising performance?” When indeed?
“Jock tax?” a reader writes after we noted last week the Cleveland Cavaliers would be subject to additional California taxes by forcing the NBA finals to a Game 7 at Golden State.
“Many years ago, I prepared the tax return for a Seattle locomotive engineer — the guy who drives the locomotive on the train. He drove the train back and forth from Seattle to Portland, Oregon. About 160 miles in Washington state and less than 10 miles in Portland, Oregon, which is on the state border. However, based on miles, he had to prorate his income and pay Oregon income tax.”
“Jocks would not have to pay taxes in 21 states as they travel if the NBA or owners would pay industrial insurance to guarantee them against injury,” writes another.
“Unfortunately, there is little reciprocity among the 21 sovereign states of the U.S. in accepting coverage from another state. No state wants to pay for the injuries that occur to them without receiving an insurance premium, and presently, there is no single place these players must file, so they file in the state that benefits them most.”
“More chuckles,” a reader writes after yesterday’s episode with more juvenile but still funny references about Microsoft and marijuana. “‘Cloud’ computing on Friday… and now ‘joint’ venture.
“Could be more of a brownie/cookie venture these days (although we did have brownies back in the ’60s too).
“On a more serious note, it’s ironic that pot is now considered a remedy for PTSD. I read elsewhere that the VA does not endorse that treatment.
The 5: No, but if the DEA is giving permission for testing and treatment of veterans using raw marijuana, that’s huge. Ray Blanco says that’s the “smoking gun” that points to the feds taking marijuana off its “Schedule I” list of prohibited drugs… with all the profitable implications that follow.
“I read today that marijuana is classified as Schedule I thanks to Nixon,” writes another reader.
“Apparently, his aide John Ehrlichman admitted in an interview that they had it classified Schedule I so they could harass, arrest, jail and otherwise screw with those evil hippies who were protesting his Vietnam War. Turns out that Nixon may have been our worst president ever.
“Thanks for shredding the First Amendment, Dick!”
The 5: Indeed, the Controlled Substances Act signed into law by Nixon is what created the five “Schedules”… although it’s up to the FDA and the DEA to decide which substances go on which schedule.
As for Ehrlichman, the news came out about a month ago. Harper’s published an interview conducted in 1994 by author Dan Baum; the quote ended up excised from a book Baum published in 1996.
“The Nixon campaign in 1968, and the Nixon White House after that, had two enemies: the anti-war left and black people,” Baum quotes Ehrlichman.
“You understand what I’m saying? We knew we couldn’t make it illegal to be either against the war or black, but by getting the public to associate the hippies with marijuana and blacks with heroin, and then criminalizing both heavily, we could disrupt those communities. We could arrest their leaders, raid their homes, break up their meetings and vilify them night after night on the evening news. Did we know we were lying about the drugs? Of course we did.”
Ehrlichman died in 1999; his family questions the veracity of these quotes. But the notion fits in with everything else we know about Nixon and his team, going back to their “Southern strategy” in the ’68 election.
Come to think about it, it’s reminiscent of Clinton’s attempt to discredit limited-government advocates as militia nuts… and Brexit opponents painting the Euro-skeptics as neo-Nazis. The politics of demonization have a long and sordid history, no?
Best regards,
Dave Gonigam
The 5 Min. Forecast
P.S. All that said, times change — at least as far as marijuana goes. If you haven’t seen Ray Blanco’s compelling case for why the feds are about to give their blessing to medical marijuana… and the profits that could flow as little as six weeks from now… you really should check it out right away.
