On June 16, we told you “Brexit”—the United Kingdom’s referendum on whether to leave the European Union—would be the biggest vote of 2016.
We were right…
Overnight, the U.K. voted (52% to 48%) to leave the EU. It sent markets around the globe into total panic.
Here are some examples:
The British pound plummeted about 10% vs. the U.S. dollar. It was the pound’s largest intraday drop in history… hitting a 35-year low.
“Risk assets”—like stocks and commodities—plummeted around the globe. The U.S. Dow Jones industrial average opened down 500 points. Oil crashed 5%, back below $50 a barrel. All the major U.S. stock exchanges are now down between 2% and 3%.
“Safe haven” assets spiked. Gold surged as much as 8% (it’s still up over 4%). U.S. Treasuries exploded higher… as the 10-year note saw its yields crash almost 10% (bond yields move opposite of their prices).
The U.S. dollar rocketed 3% higher against a basket of the world’s major currencies. Three percent may not sound like much… but in the currency markets—the largest, deepest markets on Earth—it’s the equivalent of an avalanche.
The good news is, if you’ve been following our advice, your portfolio is well-positioned to handle this turbulence. Most of our equity positions are down today… but our “insurance policies” for events like these—things like gold and the U.S. dollar—are up big.
Today’s events are why we incorporate “chaos hedges” into our asset allocation models. They help prove the value of PBRG’s robust risk-management protocol: the Palm Beach Three-Legged Stool of Safety. (If you’re new to PBRG, review this protocol right now.)
Even though our wealth is safeguarded…
Fear pervades every news item you’ll lay your eyes on today. So Palm Beach Letter editor Teeka Tiwari wanted to give you his take on what to do now. Listen in the three-minute video below:
I’ve also been chatting Brexit with some of the most brilliant minds around the investment newsletter industry. They offered to share their own insights with the PBRG audience, below:
From Chris Mayer, senior strategic analyst, Bonner & Partners: RUN FOR YOUR LIVES! THE WORLD IS ENDING! RUN! RUN!
From the perspective of a long-term owner of businesses (my perspective), Brexit doesn’t change anything. It’s always amazing to me that stocks fall so much when things like this happen.
I can’t imagine waking up to this and saying, “Oh well, now I’m going to sell my Berkshire Hathaway, AIG, etc.” Huh? Really? If that’s how you feel, you’re really not much of an investor… and you probably don’t understand what you own very well. You probably shouldn’t be in the market at all.
In a year, this will be forgotten.
If anything, it’s an opportunity to take advantage of the panic and buy something great on sale…
I’ll be looking hard at EU stocks, which I presume will take the brunt of the beating. I think there are many EU stocks that are cheap already and this may make one or two irresistibly attractive. There are also U.S. stocks that do a lot of business overseas or in EU markets. Presumably they’ll be hit by panicky selling and may get super attractive.
Again, I’m a long-term investor in stocks. I look at them as part ownership in a business. I own them like I’d own real estate. I hold for years. Brexit does nothing to change that.
From Jeff Brown, technology executive and editor of Exponential Tech Investor: There has been a clear flight to safety. The dollar index has been up well over 3% since the vote. And the Japanese yen surged against the dollar.
[The Japanese yen is known as another “safe haven” currency, like the U.S. dollar.]
During the day (Japan time), the yen had initially weakened to as much as 106.66 per USD. That was before the vote.
Then when the votes came in, the yen-to-dollar ratio dropped almost 6% in the span of just a couple hours, down to 100 and change. Of course the Japanese news has been in a panic as the yen is getting way too strong. Not good for exports at all.
Interestingly, cryptocurrencies saw large gains, too.
Bitcoin is up 7%-plus during the same window. Even ether (which just experienced a major hack/theft) has been up a similar amount. So there is a flight away from fiat currencies. (But it’s important to keep perspective. Bitcoin’s global market cap is only a mere $10 billion right now… and ether only one-tenth of that.)
From Louis James, senior analyst, Casey Research: The $100-plus surge in gold is impressive, but not surprising, given that most investors seemed lulled into believing the U.K. would remain in the EU.
What is really interesting is to see gold stocks bucking the crash.
Even with gold up, such a crash can create a downdraft that brings everything, including gold stocks, down. Margin calls and other urgent needs for cash can cause people to sell “the good stuff”—like gold stocks—simply because the bids are there.
So it’s very encouraging to see the surprise and panic pushing people not only into gold, but gold stocks, right on the first day.
Precious metals should do very well in the weeks and months ahead. The disruption of the U.K. leaving the EU is just beginning. And the fundamentals remain on gold’s side.
Gold stocks should respond to this with leverage. Some marginal producers just became profitable overnight. And some marginal projects will now boast high internal rates of return (IRRs). It’ll be off to the races for many…
But beware of commodities in general. The panic will not be good for copper, oil, iron, etc. (Oil could carve out its own path if the Saudis cave from flooding the market.)
PBRG subscribers are in a strong position to weather the Brexit storm. The advice of the day remains clear:
Trust in our safeguards—they’re working just as they’re supposed to.
Be ready to take action—to profit from others’ fear. We’ll tell you exactly how to do that in our various publications.
24 June 2016
Delray Beach, Fla.