This past week saw another bombshell drop in the world of key geopolitics, this time from the United Kingdom and British Prime Minister Theresa May’s long-awaited gamble with early Parliamentary elections. Unfortunately for May, the Conservative Party, and the crucial Brexit negotiations, the end result was not a larger majority for her. Instead it was a hung Parliament. May will be able to form a coalition with the DUP Democratic Unionist Party from Northern Ireland and have a working majority, but she has been badly damaged by the outcome. Moody’s has opined this election result hurts the country’s credit rating prospects.
More importantly for the future of relations between the United Kingdom and the European Union, the clock is fast ticking on the maximum two year period to finish the Brexit negotiations. This past week EU Chief Brext Negotiator Michael Barnier upped the pressure on the U.K. telling the media that Britain runs the risk of crashing out of the EU without any deal in the hardest of all possible Brexits. It took only another day or so for the German Finance Minister Schaeuble to muddy the waters further by offering for the British to reverse their Brexit decision and be “welcomed back” to the block.
In the United States, Goldman Sachs warned that the Goldilocks stock market rally is now nearing its end. They have drawn parallels between the Dot-com bust and the current stock market environment. This week the Federal Reserve meets to decide on an interest rate hike tomorrow. Time to protect your portfolio from the artificial stock market bubble.
All of the latest geopolitical intrigue and infighting reminds you of why you need to own gold in your IRA. Gold is the ultimate historically proven defense against financial catastrophe that could lie one stock market crash or black swan event away. Gold offers insurance and protection during market turbulence.
PM Theresa May’s Early Parliamentary Election Gamble Backfires Badly
British Prime Minister Theresa May has pulled off what may be one of the biggest political disasters of our time in a choice of her own making. With no election scheduled or necessary until after the Brexit negotiations finish in 2019, she still elected to call one for June 8th in an effort to increase her Parliamentary majority so that she would not be held hostage by warring factions within her Conservative Party.
As last Friday demonstrated, this proved to be a disastrous decision that caused her ruling Conservative Party to go from a 17 seat majority to a nine seats short of a majority position in Parliament. Thanks to the party’s common bonds with the DUP Democratic Unionist Party that won 10 seats in Northern Ireland, she should shortly form a working majority government that will allow her and the Conservatives to proceed with the Brexit negotiations and running the United Kingdom.
The problem is that now she is badly damaged, and the British efforts to negotiate Brexit has been severely shaken. Pound sterling dropped as much as two percent on this worst possible perceived election outcome last Friday before recovering somewhat. It declined significantly against every one of the G10 currency peer rivals as the nation now faces the unenviable position of a barely stable coalition government just ahead of difficult and complex Brexit talks that are slated to start as soon as possible. They were to begin on June 19th, but this looks unlikely now. London-based Senior Market Analyst Craig Erlam of OANDA warned:
“A hung parliament is the worst outcome from a markets perspective as it creates another layer of uncertainty ahead of the Brexit negotiations and chips away at what is already a short timeline to secure a deal for Britain.”
Most troubling for Britain may be the news that came out of Moody’s Investors Service on Monday. They announced that these unsettling results from the election have increased the fiscal risks and will hinder Brexit negotiation talks. The ratings firm warned that the election result is credit-negative for the United Kingdom. These are the kinds of warnings that proceed sovereign credit rating downgrades.
EU Chief Brexit Negotiator Threatens Britain with Crashing Out and Germany’s Schauble Dangles Offer to Reverse Brexit
The European Union lost no time in drawing blood from a politically battered Great Britain once the dust from the election fallout had begun to settle. The EU and Britain were already squaring off over Brexit before the election. Now the European Union Chief Brexit Negotiator Michael Barnier took to the media to warn that the British are risking leaving the block without any deal at all, with:
“We haven’t negotiated, we haven’t progressed. Thus we must begin this negotiation. We are ready as soon as the U.K. itself is ready.”
In other comments, Barnier said the government of Theresa May continues to “waste” time three months after invoking Article 50 to leave the EU in two years. Evidence of the truth of this claim came as the Head of the Department for Exiting the European Union Oliver Robbins could not commit to a Brexit talks start date with Barnier at their Brussels-based meeting Monday of this week. Barnier warned that the negotiating phases of the Brexit talks have to be concluded by November of 2018, or next year, with:
“My preoccupation is that time is passing, it is passing quicker than anyone believes because the subjects we have to deal with are extraordinarily complex. I can’t negotiate with myself.”
As if on cue, Germany’s Finance Minister Wolfgang Schaeuble then came out to announce that the United Kingdom will be welcomed back to the EU if the British come to the decision that they do not wish to quit the continental block any longer. He admitted that he had talked about the shock U.K. election results with his counterpart British Chancellor of the Exchequer Philip Hammond on the day following the vote. Schaeuble came to the conclusion that “we have to leave them some days” to decide on their way forward.
This only exemplified the chaos that has become the new political reality in the U.K. since the snap election last week caused the ruling Conservatives to suffer the loss of its Parliamentary majority. This is a situation that bears close watching as it entails both the largest trading block in the world the EU and the second largest financial center (London) as well as fifth largest economy (Britain) in the world.
Goldman Sachs Predicts End of Tech Bull Market As Fed Anticipated to Raise Rates Again
Goldman Sachs (one of the last two U.S. Investment banks left standing after the carnage of the 2009 Global Financial Crisis) announced in a note to its clients on June 9th that the stock market “fairytale is coming to an end.” They called this attention-grabbing and market-moving note “Goldilocks and the Three Hikes: A fairy tale scenario behind the Tech stock rally.”
The gist of their convincing argument is that the unusual mixture of fairly good economic growth alongside low interest rates can not last. This is what has supported the multi-year stock market rally that began after the end of the Global Financial Crisis and Great Recession. Goldman’s prescient warning is that this rare assortment of conditions that has underpinned this longest-lasting bull market is shortly to end. Technology stocks are in particular danger, per Goldman’s Chief U.S. Equity Strategist David Kostin:
“This unexpected mix of healthy growth and declining rates represents a Goldilocks scenario for U.S. equities. However, just like in the fairy tale, this perfect scenario is unlikely to last.”
The analysts at Goldman see two potential conclusions to the fairy tale, and neither are promising for overvalued stocks. If the stronger growth case emerges, then the Federal Reserve which meets tomorrow will begin to hike rates more aggressively. This would lower stock market valuations. Alternatively, the reason for still-low interest rates will be that the economic growth has already significantly slowed down, which is equally negative for stocks.
Despite the fact that the Fed is anticipated to increase interest rates by the end of this week’s two day meeting on Wednesday, the rates of the 10 year Treasury benchmarks have dropped to 2.21 percent Monday this week from over 2.60 percent back in March. Already the unwinding of the Fed’s enormous balance sheet threatens your retirement portfolio.
Another warning has recently emerged per Kostin and his team of researchers. A rare phenomenon is underway with some of the best capitalized stocks. It last happened in the end of the dot-com bubble and could be pointing the way to a decelerating economy and stock market in the near future.
The lessons from this week are that surprising black swan events like the outcome of the British elections can and do happen more often than you might like to think. It’s time to prepare your retirement portfolio for the bursting of various bubbles. Be sure your retirement portfolio is protected by knowing what gold goes in an IRA.