Brexit may kick equities and high yield bonds off their perch. From Michael E. Lewitt at Money Morning via davidstockmanscontracorner.com:
All eyes will be on the upcoming “Brexit” vote in the United Kingdom next week, now that polls are showing that the Brits are more likely than not to shock conventional wisdom and exit the European Union.
Wherever she is, Margaret Thatcher will be beaming at the wisdom of her former constituents seeing the wisdom of exiting the deeply flawed and ultimately unsustainable confederation of European countries.
Markets will no doubt react very badly if the vote tracks the current polls, but this type of short-term pain is child’s play compared to what has to happen to return the global economy to some semblance of sanity and growth in the years ahead.
Take the U.S. stock market, for instance…
Wanted: Strong Corrective Measures
Something radical is certainly required to snap investors out of the complacency.
While stocks sold off sharply on Friday, they were flat on the week with the Dow Jones Industrial Average rising 58 points or 0.3% to 17,865.34 and the S&P 500 losing 3 points or 0.15% to close at 2096.07.
The Nasdaq Composite Index fell 1% to 4894.55. The Dow danced above 18,000 a couple of times during the week, giving rise to the predictably idiotic CNBC news flashes despite the fact that this was not news (unless you believe that profound investor stupidity is news, but unfortunately it is all too predictable).
Junk bonds also kept rallying despite deteriorating credit quality with the average yield on the Barclays High Yield Index moving closer to 7%, which in case anybody asks you is an oxymoron since 7% is a low yield, not a high yield.
Investors have clearly checked their brains and good sense at the door; when they check out, they are going to leave a good deal poorer.
Here’s What’s Ailing High-Yield
Junk bond yields are being dragged down by high grade and sovereign yields. There are now more than $10 trillion of sovereign bonds trading at negative yields.
Last week, the European Central Bank began its latest assault on the lunatic asylum by buying high grade European corporate bonds, pushing the average yield on European investment grade debt below 1%.
This means, of course, that buying these bonds produces a negative inflation-adjusted yield, indicating that the era when bond investors were considered the “smart money” has conclusively passed.
Of course, investors no longer buy bonds for yield – there is none – but instead for capital gains when the next cock-eyed pessimist comes along to buy it at an even lower yield.
Now why would someone buy a bond that they have to pay for the dubious privilege of owning?
Sophisticates will tell you that these certificate of confiscation will generate profits if there is deflation.
But until the final hammer comes down and debt deflation erases the value of financial assets as it did in 2008, the only deflation in the world is in the size of central bankers’ cerebellums.
In the real world, the price of everything that matters (except commodities) is rising – goods and services, financial assets, etc. And even oil prices have doubled off their lows of earlier this year. The point is that buying any fixed income instrument in today’s world is like flushing money down the toilet – where it can sit comfortably beside consensus thinking on economics, markets and politics.
There’s plenty more circling the drain, too…
To continue reading: Why Brexit May Bring The Reality Shock The Market Needs
