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#402 6-26-16: Brexit!
by Mark Lawrence

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The Brits voted to leave the EU. This is huge. Too huge for me to forecast in detail. We definitely live in interesting times. Some of the UK advertising campaigns implied that if the UK leaves the EU there will suddenly be a tariff war, the UK economy would go into severe recession, and all the big banks will leave London. A tariff war would be far harder on Germany than the UK, so that's not going to happen. And personally, I think big banks are leaches that drink your economy's blood, I would be thrilled to see Goldman leave the US.


S&P 500 December 28 2015 to June 24 2016

Brexit is on. Britain has voted to negotiate a withdrawal from the EU and their horribly undemocratic government. Is this a short-term event that will rock world markets for a couple of weeks, or is this the first domino in a chain? I don't know right now. However the immediate aftermath was a 10% drop in european stocks, a 6% drop in oil, a 5% gain in gold in dollars, a 15% gain in gold in pounds, the pound has dropped to its lowest value in 30 years, and David Cameron, the PM of the UK, has resigned. These market turns will certainly continue into next week, and plausibly all summer. If this goes far enough - if European stocks drop 25% or more - several big European banks will be in serious trouble and require major bailouts. That especially includes Germany's two biggest, Deutsche and Commerzebank - both of them could wind up being nationalized. Those two banks are already in trouble and they have no fat on their bones to weather this storm. Marine Le Pen, the leader in next year's French presidential elections immediately called for a referendum in France, which would likely pass. The PM of The Netherlands called for a referendum which also will likely pass. We could be watching the EU come apart before our eyes over the next six to eighteen months. Scotland has seen a lot of infrastructure funded by the EU; Scotland voted to remain by 66%, and now they are calling for a new referendum to leave the UK and stay with Europe. N.Ireland voted to remain by about 53% so their politicians are predictably calling for the Brits to withdraw, a reunification with the south, and Ireland to remain in the EU.

What was this about? Imho, immigration. Brits are livid over the unelected EU leadership telling them they had a quota of middle east refugees to accept; and about a year ago the European court ruled that any EU citizen from any EU country could show up any time in the UK without visa or passport and they were instantly eligible for all UK welfare programs. For me it was about immigration and democracy. For several months "remain" ad a solid lead in the polls. What turned it around?

What's next? I expect the markets to continue down most or all of this coming week, perhaps even into the next week. But this is likely not a world-changing event. The central banks have had months to prepare for any liquidity events that follow Brexit. I expect in one to five weeks we'll start to recover from this shock.mThe shocks we won't be able to recover from would be a Chinese yen float, or a real EU breakup and/or several EU banks failing. Those events are unlikely to be triggered by Brexit. My outlook for the world financial system is very glum, but I don't think this is the moment where it all comes unglued. However, no one really know how may derivatives are out there or who owns them or how solvent the people are who issued them, so one never knows. . . and that's why at the very least the markets will continue down for a time, as we discover if this is the last straw. I think the central banks will tape this humpty dumpty together again, but they have very little tape left. Could I be wrong? As always, yes. The things to watch are Italian banks, German banks, Japan. Those are the three things under the most stress right now from Brexit fallout, and concerns about them are what will drive the market down for a time. If the European bank stocks drop too much, the banks are short of capital. And if the Yen rises too much it will drop Japanese exports and harm their economy. Both are currently serious problems. But the EU is watching too. Remember 2008's "Tarp?" The "Troubled Asset Relief Program?" Where a bunch of goldman-sachs people with titles like secretary of the treasury and president of the n.y.fed asked congress for $700 billion to bail out their buddies? They actually wound up using $475 billion. Well, from Friday morning until now the EU central bank, run by Super Mario Draghi, another goldman sachs guy, has handed out $440 billion to various EU banks. Unlike in the US, he didn't have to ask anyone, 'cause he's president and unelected and all that. Democracy is such a nuisance, don't you agree?

The EU has five presidents*, although essentially no European or Brit can name them. That's 'cause they're "appointed," not elected. The EU has a European Parliament, which is elected by the various populations, but the Parliament cannot propose, write, modify or invalidate European laws. The laws are written by the unelected European Commission. Essentially no European can name a single member of the commission. The laws are then interpreted by the unelected European Court. The (previously) free people of Britain and France paid for their democracies with blood, but are giving up their democracies freely for no reason that I can comprehend. Wednesday an impressive- looking 16-page color and high gloss booklet was dropped into the mailbox of every household in the entire UK, entitled "EU Basics – Your Guide to the Referendum." It was issued by an organization called the "European Movement." The booklet argues for Britain to stay in the EU. Who is this "European Movement" and who is funding it? Hint: not Brits. The CIA funded three related groups in the 1950s: the European Movement, the Bilderberg Group and the Action Committee for a United States of Europe [ACUE]. Check out the Bilderberg group - they met just last weekend. Their history and original charter is illegal to publish in Germany. Curious, in as much as they were originally a German organization, and several top ranked German officials attended their meeting last week in Dresden, including PM Merkel and Finance Minister Schäuble. I expect the vote to go to remain in the EU, perhaps legitimately, perhaps illegitimately.
*1) The unelected president of the European Central Bank, Goldman Sachs alumnus Mario Draghi
2) The unelected president of the European Commission, Jean-Claude Juncker
3) The unelected Brussels Commissar and “president of the Eurogroup“, Jeroen Dijsselbloem
4) The unelected “president of the Euro Summit“, Donald Tusk
5) The unelected president of the powerless European Parliament, Martin Schulz
The first three wield the real power.
Google these guys. You'll learn many of them have impressive criminal credentials. <

George Soros, the billionaire genius that I love to hate, says Brexit makes the breakup of the EU "practically irreversible." I agree. p>Aliso Canyon in the LA area rather famously had an enormous gas leak for 4 months - November of last year through February of this year. S.Cal Edison fixed the leak by capping off a major gas storage facility. Without that gas available, S.Cal Edison cannot generate enough power to run LA through the summer air conditioned months. Today they warned that LA area customers should expect about 14 days of blackouts this summer. No power. No air conditioning. No lights. No refrigerators. The rest of us can safely assume LA Riots version II for our entertainment. We can also assume that the democrats in Sacramento will push through some massive spending bill to "fix this," and that with six months to prepare S.Cal Edison will somehow wind up making some serious money off their environmental disaster.

States with balanced budget amendments just love to move things off books, including, in some cases, pensions. Bill Bergman, Director of Research at Truth in Accounting, developed the "Zombie Index" two years ago to rank states for looming financial crisis due to poor accounting. Four states stand out in his new yearly index: New Jersey, Connecticut, Illinois, New Mexico. There are anecdotes of people in Illinois having their property taxes rise by 25% per year. Unsurprisingly, the property tax rates in these states set the bar for the rest of the country with rates north of 1.5%. If you're thinking of moving to one of these states, think carefully.

There are now a bit over 200,000 armed federal bureaucrats - IRS agents, EPA, HUD, FDA, all with AR-15s and training, many with camos. By contrast there are 182,000 marines. Next time you're thinking of gun control, think that Federal workers are #1 on the list of people to be disarmed.

San Francisco - the home city to Twitter, Uber and Square, where tech professionals have bid up the average house to over $1 million, has just announced that they will no longer teach algebra in middle school (7th - 9th grades). "This way all our students enter high school with the same mathematical foundation." Welcome to the People's Republic of California, where all our children are above average. I took algebra in 7th grade. What's this about? Asian and some white kids take to algebra early on, leaving the minority kids behind; that's no longer acceptable. Algebra is traditionally taught to advanced 8th graders, putting them on track to take calculus as high school seniors and preparing them for college physics, chemistry, engineering. In San Francisco, that's all over. Since there's almost no black or latino kids in high school calculus, there simply won't be a high school calculus. Perhaps San Francisco State will delay calculus until graduate school. When my kids hit 15½ I got them learners permits and small motorcycles, put them on half days at high school, and registered them at the local jr.college. By the time they had graduated from high school they had also nearly finished their sophomore years at college. IMHO, that's the college track: get out of high school asap and into college. If I had to do it over, I would only take math and shop classes in Jr.High and High school, drop out as soon as I could drive, and start immediately at the local Jr.College. Actually, I did drop out as soon as I could drive, but I didn't take the shop classes and therefore I'm an indifferent machinist at best and I have no clue how to weld - two useful skills I could have learned.

Twin Falls Idaho is pretty much the definition of a bucolic city - populated substantially by Mormon farmers, unknown to much of the rest of the world. And now center of a highly un-sought for controversy. On June 2nd four muslim refugee boys attacked a 5 year old retarded girl. One of them stood by recording on a phone, the other three boys got naked, stripped the girl, raped her (according to her parents who were quoting a doctor at the hospital), urinated on her and in her mouth. The boys were apparently from Sudan and Iraq. The oldest, 13, recorded the incident on his phone and coached the others. When the girls mother got there she took the phone away. When the 13 year old's father got there he high-fived his son. It took the police two and a half hours to show up; they mother handed them the pone. It took two weeks to arrest anyone. The boys were released from detention six days later and are out walking around free now. I would not have mentioned this but for the latest development: Obama's local federal prosecutor, Wendy Olson, has threatened federal prosecution to anyone who "spread false information or inflammatory or threatening statements about the perpetrators or the crimes itself." The European disease, where police don't arrest muslims, district attorneys don't file charges, and the press doesn't report, is here in the US now.

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