Harry S. Dent Jr.'s Blog, page 18

Want to Invest Like the Pros? Roll Your Bonds as the Yield Curve Flattens

In the beginning of time, BC (Before Children), I traded bonds at Prudential Securities. It wasn’t like the “Wolf of Wall Street” or even Bonfire of the Vanities, but it had its moments. We didn’t get a lot of training. As we came in the door we were expected to know things like convexity and duration. And to be able to parse out bond prices given interest rates, coupon payments, and maturities.

Two Important Lessons 

We were told to stand up and stretch our arms out like airplanes, and then lean side to side. Then we were told to “hold” bond prices in one hand and interest rates in the other, and never forget that they moved inversely. It felt childish at the time, but it stuck.

We were also told, in no uncertain terms, to never fight the Fed.

But it only took a few days on the job to realize that instruction, both academic and practical, is different than reality.

Most investors, as well as professors, talk about bonds as staid, once-and-done purchases that sit on the shelf and gather dust.

But professional investors and institutions know better. Bond prices move, and over the last 15 years they have moved fast. When asset prices change, there’s an opportunity to make money – or at least improve your positioning. Pension funds, hedge funds, insurance companies, and other groups that hold large bond portfolios are constantly tweaking their holdings. Right now, with the yield curve almost flat, one of those opportunities is staring us in the face.

It’s Time to Roll

Rolling a bond portfolio, be it one bond or ten million, means to dramatically change the duration, or weighted maturity, of the holdings. The change in the interest rate environment dictates which direction to go. And right now the yield curve is telling us to come way in, exchanging long bonds for short bonds.

It’s all about risk.

The essential part of bond investing is trading time, or maturity, risk and credit risk for income. The longer until maturity, and lower the credit, the more investors should get paid for investing.

But sometimes these relationships get out of whack.

Today, the maturity risk to income relationship is skewed. Due to outside influences, the 30-year Treasury bond yields just 2.04%, while the six-month Treasury bond yields 1.90%, essentially the same, even though the difference in maturity risk is 29 and a half years!

If you’d purchased a 30-year Treasury bond a year ago at the prevailing rate of 3.04%, your bond would have increased in value by just over 20%.

This is where we “roll.”

Plot Your Move

The smart bond trade today is to sell long maturity bonds, capture the gains, and then reinvest in shorter maturity bonds that have close to the same interest rate. The reinvested capital gain will help make up for the lower coupon.

The risk in the trade is that interest rates might fall further, or the yield curve might steepen by short maturity bond yields sinking, which will cause reinvestment risk when the newly purchased bonds mature.

But the potential gain is that when long interest rates eventually move higher, investors will have captured and protected their capital gains and can use those proceeds to buy bonds with higher yield.

Unlike stocks, bond investments are made with an eye toward multi-year changes. To determine if you think this strategy makes sense, you have to ask how long will the 30-year Treasury remain at 2% or lower? One year? Two? Five?

It’s a game of probabilities.

Invest Like a Pro

Given what lies ahead with the U.S. elections, the lack of growth abroad, and central banks crushing rates to keep their economies upright, long interest rates in the U.S. could be low for a couple of years.

The flip side is that the long Treasury bond just touched the lowest price in history, so if we return to anything approaching normal, rates will move up by at least 200 or 300 basis points (2% to 3%), after this unusual period passes.

By rolling down bond maturities, investors give themselves incredible flexibility to make investment decisions in the future, and with the yield curve so flat, they don’t give up a lot of income to do it.

That’s a professional move that retail investors can consider at home.

Rising Temperatures Are Real

Climate change has continued to be a big topic in the news, especially with record temperatures again this summer. Are humans the primary cause?

When this first became a major issue many years ago, I initially was more skeptical of the human impact. I had studied long-term climate cycles and saw how much they’ve varied simply from natural trends. Were we big enough to impact substantially?

The first wake-up call I got was when I looked back at the key very predictable longer-term cycles. Every one of them, from very long to shorter, were pointing towards moderate cooling. Even the shorter-term sunspot cycles keep coming in lower intensity since 1959 – and more so since 1990, which has a cooling effect – and temperatures keep rising anyway!

That’s when I realized that we must be driving that rising CO2 trend and its correlation with temperature that has held throughout history.

Global Urbanization The Biggest Driver

In my most macro analysis of all the global trends, the biggest is simply accelerated urbanization since 1920. Developed countries urbanized fully since the mid-1800s, but emerging countries are only starting to in the past several decades – and who are the big polluters now? China, and increasingly India.

Look at this chart. It shows a correlation between urbanization and CO2 on a 40-50-year lag. Here, 50 is used.

Urbanization roughly triples GDP per capita, and then people use a lot more energy.

But why the lag? The scariest part about CO2 (and methane) emissions in the atmosphere is that they are cumulative. They last a long time and build upon each other like compound interest. Hence, a 40-50-year lag makes total sense to me.

That means that even when global urbanization is predicted to slow down again near 80% urban around 2110, the damage to the atmosphere and warming will continue for another 40-50 years… Damn!

I know this is a politically sensitive topic that divides largely on partisan lines. But my forecasting techniques do not – except in shorter-term scenarios.

I came into this issue a sceptic… I am not now. This is a serious issue and will become more so… another reason I’m glad I’m in mountainous Puerto Rico rather than flat Florida.

We’re lucky that the sunspot trends are working in our favor and will likely continue to do so for at least the next 10 years.

Treasury Yields Continue To Fall … Bringing Stocks Down With Them?

Dateline and Byline go up here Every Monday, Rodney and I issue a forecast report to our Boom & Bust subscribers  . We like to think of it as a preview of what’s to come based on the week. Or at least a set of predictions; it’s hard to anticipate exactly what is going to happen in a given week, especially in the present landscape. However, last week’s events – with the herky jerky markets, gold’s failed breakout, and the flip of the yield curve, produced such volatility that we feel it would be most advantageous to extend this week’s 5 Day Forecast to Economy & Markets readers. This is the caliber of research and analysis  that Boom & Bust subscribers have grown used to. We hope you’ll consider joining. – Harry

Treasury Yields Continue to Fall … Bringing Stocks Down with Them?

The stock market hit a predictable snag when it hit the top of the mini-megaphone pattern I have been projecting at 27,400. One of the clear reasons: The China trade deal keeps looking less likely – as Rodney and I have been forecasting from the beginning.

Falling Treasury Yields 

But the larger reason has been that the bond market keeps seeing a slowing global economy. Hence, yields on the 10-year Treasury just keep falling with only a minor bounce in recent days that does not look likely to last. Here’s the bigger picture since the 2007 economic peak. Yields have actually been falling in a more predictable channel since 1989. But they have been consolidating and moving more sideways in a channel since 2012. It now looks like the top was likely put in last October, at 3.25%. The last low in 2016 was 1,36% and yields are likely to continue to fall in the next few months towards a slight new low around 1.32%.

Bonds Yields and Stocks 

Normally bond yields would be rising with inflation in the late stages of an economic boom. But not this “perverted” one this far. But we could still see a significant rise in longer term rates in the final bubble stages still predicted ahead. That will give a final buy signal for longer term bonds. If bond yields continue to fall, then stocks are likely to continue to correct in the deeper correction scenario off the mini-megaphone top first. Then we could see the final Dark Window rally into a top that would come later in 2020 rather than early. A likely scenario is that the Fed continues to be more muted in lowering rates, then starts to panic and gets more into Trump’s call for more aggressive rate cuts with continued falling rates. Maybe we finally see that 50bps cut in October or November. Then stocks would rally, and bond yields could bottom for a while, likely with signs of a bump in growth rates from stimulus programs in China, Europe and Japan, with similar expectations for the U.S. after stronger easing.

The Longer-Term Trends Are Still Clear

But the longer-term trends are still clear: 10-year Treasuries should go to historically low yields towards zero by late 2022 or so, near the bottom of the next greater financial crisis and depression. That will fulfill a grand 40-year up and 40-year down cycle since the last depression low yields in 1941! Then the gold bugs get their inflation trends again, but global growth will be moderate as will inflation rates – so still NO hyperinflation. When such bond yields finally hit bottom in 2022 or so: sell bonds, and buys stocks, gold and commodities!

Hope For More Migrants and Vote Out Your Congressman

Last weekend I drove 400 miles to the Rio Grande Valley and stayed on South Padre Island. It’s Texas’ answer to Florida’s beautiful beaches, and it’s less than 20 miles from the southern U.S. border. We arrived late Friday evening and I realized I’d made a rookie mistake in booking the hotel. While guests gave it four stars for their experience, the property itself was two stars… and over-rated.

I debated moving accommodations, but at my wife’s urging I got over myself. It’s just a hotel, it was only two nights, and while modest, it was clean. I’m glad we stayed, because it was another lesson in culture blending, and a reminder that immigration is part of the life blood of America.

Boringly, Wonderfully, Normal

The hotel staff spoke to each other in Spanish. They spoke to other guests in Spanish. I’m sure they speak to their pets in Spanish. But I’m about as plain WASP as they come, so every time one of them looked at me they gave a cheery, and heavily accented “Hello!” I was the odd man out, and I couldn’t have been more comfortable.

From the kids in the pool to the young parents on the beach, the story was the same: typical American life happening, just with a different cadence.

Business signs were bilingual because, as is the American way, we meet on the field of commerce. If it helps business owners to market in more than one language, then they’d be foolish not to.

The only place this became annoying was the radio, as I could only find one station in English. It played the hits of the 1980s.

Kid-friendly restaurants and attractions were packed, and beach tents were lined up against the water’s edge. It was all boringly, wonderfully, normal.

As a nation, we need more of this.

Immigration Of The Nation

The domestic birth rate last year dropped to 1.72 children per woman of child bearing age, the lowest in U.S. history. We need to produce 2.1 children per mother just to replace our population. The number of children born fell to the lowest level since 1987.

These numbers aren’t a secret. Nothing about the data is hidden or obscured, and yet our Congress can’t seem to find a way to propose, much less adopt, common sense immigration laws, starting with the easiest rung of immigration to address: people already here.

During the last years of the Obama administration we beat up the “Dreamers,” immigrants brought here as children that exist in sort of a no-man’s land. Most were brought here before they became teenagers, were educated in the U.S., and have only faint memories of their homelands. The term “Dreamer” applies to about 700,000 such young people who applied to remain in the U.S. under a special program, but there could be up to 3 million kids out there who fit the bill.

These kids and young adults are here today, and we’ve paid to educate them both formally in school and culturally as Americans. Why create these human assets just do punt them out the door? Our Congress has been deliberating how to create a legal path for them to remain in the U.S. since 2001. That’s right, it didn’t start with Obama; he simply signed an executive order because Congress couldn’t get it done. In the intervening 18 years, we’ve had three stretches where one political party or the other controlled both Congress and the White House, and yet… nothing.

2020 is around the corner.

Fire. Them. All.

Assimilating immigrants into an existing culture is never painless or easy, but throughout our history we’ve proven that we’re better off for the effort. Our political system is specifically designed to highlight opportunity, and the freedom to pursue it, as the main driver, which welcomes all who will play by the rules.

Go On Or Get Out, Dear Representatives

I won’t cover the old ground of “we’re all immigrants, blah, blah blah.” We know all that. But it’s worth remembering that most people who migrate are poor, however not always uneducated. If they were rich, or even in the comfortable class in their home country, they’d have less reason to leave. The original settlers were an anomaly.

Even though they are poor, or in dire straits at the moment, migrants usually self-select to uproot themselves for better opportunities, which is a heck of a personal trait. As I’ve often said, the couch potato in Mexico is still in Mexico.

We still need – and need to enforce – laws about immigration. Those calling for open borders are idiots. As the Muriel Boat Lift proved, if you open your borders, other nations will open their prisons. If you’re not willing to accept another nation’s murderers and gangsters, then you don’t want open borders.

Who and how many we accept is up for debate, or at least it should be. And, as with any good business, we should first discuss the clients we already have, or the immigrants already within our borders.

It all goes back to Congress. They set the rules, they appropriate money for enforcement.

We’ve come to a point in which we’re angry at presidents, either the current one or his predecessors, for how they’ve approached immigration through Executive Orders. Those are just temporary band-aids that do little to solve problems that rightly belong to Congress.

They were elected to govern, so they should get on with it or get out.

In the meantime, we’ll keep looking for people to fill our shops as both employees and customers. Chances are, we’ll find that more of them either came from somewhere else, or their parents did. As fewer Americans have children, this is a boon to our economy for decades, even if it comes with immediate adjustment pains.

The Tip of the Debt-Bomb Iceberg

This week I wanted to bring your attention to a key development. And while overlooked by many, is part of the trigger that will set off the next financial crisis.

All eyes were focused intently this week on US Treasury yields. And a lot of people might have missed what I believe will prove to be a very big event – after the dust from the next big implosion finally settles.

The Argentine stock market and currency crashed on Monday . It went down 38% and 29%, respectively, in one day. However, it was about more than a political shakeup in the South American Republic.

The Argentina situation is another potential domino to fall in the wave of protectionist regimes sweeping the globe. That’s a trend that Andy Pancholi and I correctly predicted years ago would continue apace. However, it is the tip of the iceberg of something colossal in scale that will bring about the next financial crisis.

Developed world debt triggered the Great Financial Crisis in 2008. But then in a desperate attempt to keep the global economy afloat by flooding the world with cheap dollars and euros, central bankers set up the next disaster. This time it will come from the emerging world, which has racked up astronomical levels of debt thanks in large part to these policies.

I have much more to say on this, including where the biggest financial earthquake will come from in the not-to-distant future, and why. (It’s not Argentina.)

Argentina Goes Bust

You might have missed this in the news, but Argentina’s market had a major crash this week – for one simple reason. Find out what it is from Harry as he recaps the markets’ activity, cheap money’s long lasting repercussions, & more. Sign up for Boom & Bust here: https://pro.dentresearch.com/m/1051908

Posted by Economy and Markets on Friday, August 16, 2019

Playing Interest Rates in Real Estate

I can walk into a car dealership and drive away with a moving asset worth more than $130,000 in less than an hour. However, if I want to buy – or sell – an immovable object that’s always right where you left it, then I have to go through a million hoops.

Home Sale And Home Purchase

Clearly, I’m frustrated with the latest twist in my home sale and purchase saga.

Everything started out pretty good. We listed the house, had a fair number of showings, no real bites, so lowered the price. And we negotiated with one couple, but before we settled on a number, another group jumped in and out-bid them. We came to an agreement and started the option/inspection/negotiation/appraisal process.

It’s been water torture.

Of course, at the same time, I’m going through the same machinations on the other side, where I’m the buyer, although I like to think I’m more agreeable.

As I consider how to get revenge on the inspector, appraiser, and buyer’s agent who’ve all made this transaction so complicated, I can at least take solace in one aspect of the financial circus…

I’m going to end up with a smoking hot interest rate on my new mortgage.

The Mortgage Interest Rates Are Great

When I bought my current house a few years ago, we secured a 4% rate on a 30-year fixed mortgage, which I thought was awesome. Mortgage interest rates climbed from there, making me look much smarter than I am.

But now rates are lower than they’ve been for several years, and mortgages have followed. My latest quote is 3.625% for 30 years, fixed.

Early in my career, I traded bonds, so I’m well versed in agency paper, mortgage-backs, CDO’s, CMO’s, etc. When I see almost 3.5% for residential mortgages, it seems almost impossible. My first home mortgage in the early 1990s was near 8%, and that seemed like a great deal at the time!

But some people just aren’t satisfied. Or at least aren’t sure.

We’re getting more questions about real estate, and more specifically, about the best time to refinance. Is it now, or should people wait as mortgage interest rates creep lower?

The short answer is, no one knows. U.S. interest rates have been higher than the rest of the world for years, and that should continue, but all of them can go lower than they are today, just ask our good friend Lacy Hunt from Hoisington Investment Management. He’s been bullish on bonds for decades.

But if you’re considering buying a home or refinancing, mortgage interest rates is one concern that you should put to bed. If you can finance – or refinance – a home at less than 4%, then it’s definitely a good idea!

Reset the Rate

Don’t confuse this with the wisdom of buying a home in the first place. Harry has railed against real estate for a while. But you might be like me. Yes, I’m selling, and downsizing a bit, but I still like owning, and I’ve got my eyes wide open to the potential consequences. Besides, my wife likes to renovate. It’s sort of a thing with us.

We might see mortgage rates dip lower in the months or years ahead, but it would be very strange for rates to fall too far for one simple reason. Unlike other countries, we commit lenders to 30 years.

In Canada, rates reset every few years, and the new negative rate mortgage in Denmark only lasts ten years. The more frequently rates reset, the lower the rate lenders can offer at the beginning, which is why adjustable rate mortgages carry lower rates at the outset.

So even if interest rates on 30-year U.S. Treasury bonds and other domestic bonds fall below 2% or even to 1.5%, it’s not a sure thing that mortgage rates will follow, certainly not to the same degree.

I’ll eventually get my deal completed, even though I have to fight with various service providers. But at least I’ll be pleased with the rate on my new loan. It will be at a level that my parents could only dream about, and that many people thought impossible just a decade ago. If you’re in the market to buy or refinance, don’t let the opportunity slip away.

 

The 2019 Gold Rush

One side of my family has held a reunion every few years for more than four decades. It’s a big, raucous event filled with lots of food, many half-true stories about the past, and copious amounts of alcohol.

In other words, it’s a not-to-be-missed event.

Hosting responsibilities transferred from one sibling at the oldest generation to the next, and then moved down a level. My relatives are spread across the nation. So, we’ve held the reunion in Minnesota, Wisconsin, the Upper Peninsula of Michigan, California, Texas, and Florida. Last week we gathered in Colorado, descending on Mt. Princeton Hot Springs Resort just outside of Salida.

We enjoyed the springs and pools, and many of us went kayaking, hiking, and riding ATVs. But there was one activity that caught my attention more than others.

This year, the Centennial State has experienced a boom in panning for gold.

Grabbing a plastic or metal sluice and standing in 55-degree creek water has been a thing in Colorado since gold and silver were found there in the 1800s. But this year, things are different. Over the past winter, the state received more than 160% of the average snowfall from 1981 through 2010, which was followed by a wet spring. The resulting runoff has closed attractions like the creek bed hot springs at our mountain retreat. It’s also moved boulders and sediment that has been in place for hundreds if not thousands of years.

As the rocks have shifted, whatever was underneath has become exposed. In some cases, that includes gold.

I didn’t see anyone show up with gold nuggets, or claim they’d found riches, but there’s no doubt that many of the visitors trolling the mountains were keeping a weather eye for the shiny stuff.

Investors appear to be doing the same thing.

Banking On Gold

After spending almost eight years in purgatory, bouncing between $1,100 and $1,300, gold finally broke out to the upside a few weeks ago, climbing through $1,400 and – despite a brief downturn Tuesday morning– now sits comfortably around $1,500. Gold enthusiasts (who are not to be confused with insects) are starting to feel a bit more confident. But their benefactor isn’t the weather, it’s the coordinated efforts of central banks around the world.

The Fed lowered rates at its latest meeting even though the U.S. economy is bumping along with just above 2% growth, less than 2% inflation, an unemployment under 4%. Fed Chair Jerome Powell claimed to be fighting a foe that hasn’t yet entered the ring, possible economic headwinds that could emerge later this year due to the trade wars and a weakening global economy. But those are strawmen. His enemy is clear: other central banks.

The European Central Bank all but explained that it will restart its bond buying program in September, while the Bank of Japan is contemplating more aggressive monetary easing. Central banks from New Zealand to India are lowering rates as everyone tries to do the same thing… keep their currency from strengthening so as to pave the way for greater exports.

Everyone’s trying to balance their economic books on the backs of foreign nations, and they’re cheapening their currency to pave the way. The actions make real assets worth more, and boosts the value of precious metals like gold and silver.

We now have more than $15 trillion worth of global bonds trading at negative interest rates. Almost 60% of Americans have some money in savings accounts, although most don’t know how much interest they are earning.

I can tell them – almost nothing.

Precious Metals In Context

The FDIC reports that the average savings account returns about .09% per year, which is 90 cents per $1,000. That same chunk of cash loses $18 per year in purchasing power to inflation, which makes the interest paid close to financial theft, and sets the stage for gold.

A traditional knock on gold is that it doesn’t do anything. There aren’t a lot of commercial uses for gold, and it doesn’t pay interest. It’s essentially a dead asset. But if saving money doesn’t pay, and bonds actually return less than the original investment, then gold takes on a certain shine. As the currency wars heat up, gold shines brighter.

As long as the U.S. and China are trading tariffs and barbs and central banks around the world are figuring out new ways to separate savers from their cash, I think gold will trade higher. Maybe not past the highs of 2011 over $1,900, but still above $1,500.

And when we throw in the uncertainty of Brexit in late October and the falling British Pound, gold might get an extra boost.

Over the next year, Colorado might get more visitors looking for sluicing pans than marijuana shops. Luckily investors don’t have to make the trip, they can simply purchase securities like the SPDR Gold Shares (NYSE: GLD) if they want to get in the game.

Gold Fails Bullish Breakout… Stocks Likely to Breakout Instead

The funny thing is that gold and stocks currently seem to like the same thing: more money printing.

Treasury bonds keep falling in rates and we’re seeing a slowing global economy despite Trump’s tax cuts and central banks leaning towards easing. That has hurt stocks a bit, as has the recent near break-off in trade negotiations with China. Markets were fearing a currency war now that the trade war is at an impasse.

So, no surprise gold has been rallying here. But for stocks, the surprise is that they’re holding up as well as they are considering the slow growth foreshadowed by the bond markets and trade impasses.

Hence, my preferred scenario for stocks – with a minor pullback here and then a continued strong break up on the Dark Window scenario – still seems the most likely, especially with today’s strong rally.

The rally we saw was spurred largely by Trump’s decision to delay a few tariffs and put trade negotiations back on officials’ calendars in two weeks. Stocks loved that of course, and gold didn’t.

But what we’re seeing is also consistent with Andy Pancholi at marketimingreport.com reporting on Monday that he sees positive cycles for China over the same timeframe.

Gold’s Bad Break

Peter Schiff – who is also living in Puerto Rico – emailed me recently and asked when I would turn more bullish on gold. My answer was $1,525. I have been eyeing that as the key resistance; if pierced, gold would have substantially higher targets –$1,600 to as high as $1,800.

But Tuesday’s news caused gold to fall sharply just as the futures markets showed gold breaking up to $1,540+… that would have been a clear breakout. Is this the end for gold for now, or is this news transitory? These two reversals in gold and stocks look convincing for now, and bullish for stocks.

Stocks In the Spotlight

I have warned that stocks are also at a critical point; they could break up sharply towards 10,000 on the Nasdaq or down towards 5,700 –quite a spread! Given that stocks have held up as well as they have amidst the bad news on China and the bearish bond markets, we could be about to see that upside breakout soon now that the news has suddenly switched gears towards a trade deal instead of currency wars.

If we can hold the upward bottom trendline in this chart around 7,820 – and today’s 160-point rally at the open was a good start – this could be in motion. The breakout point would be around 8,500 on the Nasdaq and 27,500 on the Dow. The channel drawn would take us right up to my 10,000+ target between January and March of next year.

However, if stocks end up breaking down further, then the two targets continue to be about 7,290 on the less bearish side, and all the way down to 5,700 at the extreme.

The trends are more clear and bullish on stocks today, and may get clearer on gold quite soon. But this could be it for gold.

We’ll keep watching and guiding.

8 Reasons the EU Will Suffer Far More than UK in Brexit

I came across this Money Maven article by Mike “Mish” Sedlock over the weekend that I believe so perfectly captures the nuances and complexities concerning Brexit that I had to ask him if we could republish the article here. Mike was nice enough to oblige, and I’m thrilled to present it to our readers. I’ll be back with you on Wednesday . – Harry

Conventional wisdom says the UK will get hit harder than the EU in the event of a no deal Brexit. Conventional wisdom is wrong.

Here are eight reasons the EU will suffer more in both the short and long term.

Reason 1: Corporate Taxes

The UK can and likely will slash corporate tax rates. A lower corporate tax rate will mitigate much of the profit damage suffered by UK corporations in the event of no deal.

Note that one of the EU’s biggest complaints against Ireland now is the “unfair” corporate tax structure of Ireland.

Reason 2: Currency Fluctuations

A falling currency is good for exporters and bad for importers. The British Pound has been falling in anticipation of Brexit.

Reason 3: Balance of Trade

In the event of no deal, WTO tariffs kick unless the EU offers to work out a trade deal. Under WTO rules, the EU could do that and rules allow a lengthy 10 years to get it done. The EU should agree to do that, but with animosity rising, it probably won’t.

In a rising tariff setup, exporters will suffer far more than importers. Germany has an enormous trade surplus with the UK.

Angela Merkel is very concerned about German exports, as well she should be.

Throw in the increasing chance of Trump putting tariffs on German cars and the EU will get crucified. A very severe German recession is in the cards and the EU faces a double whammy of Brexit plus Trump.

Note that a falling currency will mitigate some of the Tariff damage on UK exporters while compounding the problems for the EU.

Reason 4: Fishing Rights

In Brexit, the UK halts all EU fishing rights. EU fishermen will get clobbered.

Reason 5: Trade Deals

The UK will be able to make its own trade deals and set tariffs how it pleases.

Reason 6: Rules and Regulations

The UK will finally be free of inane EU rules and regulations on basically everything but especially agriculture.

Reason 7: Brexit Fees and Pay to Play Fee

Some dispute this, but the UK can halt the Brexit breakup fee. Boris Johnson has threatened to do that. Regardless, the UK will stop paying into the EU coffers even it does pay the breakup bill. The EU has budgeted for UK payments. When the UK stops paying, the EU will have to raise taxes to cover the difference.

Reason 8: Long Term Consequences

Both the EU and UK will suffer in the event of no deal but the long-term consequences strongly favor of the UK.

8 Reasons the UK Will Suffer Far More than UK in Brexit

I came across this Money Maven article by Mike “Mish” Sedlock over the weekend that I believe so perfectly captures the nuances and complexities concerning Brexit that I had to ask him if we could republish the article here. Mike was nice enough to oblige, and I’m thrilled to present it to our readers. I’ll be back with you on Wednesday . – Harry

Conventional wisdom says the UK will get hit harder than the EU in the event of a no deal Brexit. Conventional wisdom is wrong.

Here are eight reasons the EU will suffer more in both the short and long term.

Reason 1: Corporate Taxes

The UK can and likely will slash corporate tax rates. A lower corporate tax rate will mitigate much of the profit damage suffered by UK corporations in the event of no deal.

Note that one of the EU’s biggest complaints against Ireland now is the “unfair” corporate tax structure of Ireland.

Reason 2: Currency Fluctuations

A falling currency is good for exporters and bad for importers. The British Pound has been falling in anticipation of Brexit.

Reason 3: Balance of Trade

In the event of no deal, WTO tariffs kick unless the EU offers to work out a trade deal. Under WTO rules, the EU could do that and rules allow a lengthy 10 years to get it done. The EU should agree to do that, but with animosity rising, it probably won’t.

In a rising tariff setup, exporters will suffer far more than importers. Germany has an enormous trade surplus with the UK.

Angela Merkel is very concerned about German exports, as well she should be.

Throw in the increasing chance of Trump putting tariffs on German cars and the EU will get crucified. A very severe German recession is in the cards and the EU faces a double whammy of Brexit plus Trump.

Note that a falling currency will mitigate some of the Tariff damage on UK exporters while compounding the problems for the EU.

Reason 4: Fishing Rights

In Brexit, the UK halts all EU fishing rights. EU fishermen will get clobbered.

Reason 5: Trade Deals

The UK will be able to make its own trade deals and set tariffs how it pleases.

Reason 6: Rules and Regulations

The UK will finally be free of inane EU rules and regulations on basically everything but especially agriculture.

Reason 7: Brexit Fees and Pay to Play Fee

Some dispute this, but the UK can halt the Brexit breakup fee. Boris Johnson has threatened to do that. Regardless, the UK will stop paying into the EU coffers even it does pay the breakup bill. The EU has budgeted for UK payments. When the UK stops paying, the EU will have to raise taxes to cover the difference.

Reason 8: Long Term Consequences

Both the EU and UK will suffer in the event of no deal but the long-term consequences strongly favor of the UK.