Shanghai, Black Swans, Etc

By Michael Kosares – Re-Blogged From

Real black swan is disaffection with status quo, not Brexit vote

“You say: ‘I did not think it would happen.’ Do you think there is anything that will not happen, when you know that it is possible to happen, when you see that it has already happened?” – Seneca, 62 AD

The Brexit vote has come and gone, but the after-shocks remain. A good many will look upon the event as a black swan, but by definition it is not. For an occasion to gain black swan status, it must be at the minimum (a) unforeseen, and (b) bring extreme consequences. Those are the two criteria originally advanced by economist Nicholas Taleb who coined the term. Brexit misses on both counts. Though a surprise to much of the public, it was foreseen by many including a number of hedge fund operators who placed significant bets on the outcome. As for the consequences, they were troubling but fall short of being extreme. In fact much of the result is still pending.

All said, though, it would be a mistake to believe that the storm has passed without a major incident. Henry Kissinger warns that “The impact of the British vote is so profound because the emotions it reflects are not confined to Britain or even Europe.” Alan Greenspan described the current financial environment as “the worst period I recall since I’ve been in public service.” In other words, we are probably closer to the end of the beginning than the beginning of the end, to borrow Winston Churchill’s famous admonition.

(One wonders which side the great wartime British prime minister might have taken on the Brexit question. I did see an interview of his grandson, Nicholas Soames, and in it he said there was no doubt in his mind that his grandfather would have come down on the side of Remain. I, for one, am not certain on that. If Winston Churchill was anything, he was an unwavering defender of British sovereignty. For many in the Conservative Party of which Churchill was a member, the whole Leave argument centered around the issue of self-determination.)

Though Brexit itself might not have been a black swan event, the public disaffection that drove it might be. That is where gold and silver once again enter the picture. Needless to say, precious metals demand went through the roof in the United Kingdom following the Brexit vote. Now, in the wake of severe credit rating downgrade and a collapse of pound sterling, that demand is likely to become entrenched for the long run. The Bank of England will do everything it can to smooth the way for Brexit, but we are in a time when central banks are not as capable of pulling rabbits out of the hat as they once were.

Outside the United Kingdom the flight to gold will likely gain pace simply because a good many investors around the world will conclude that the United Kingdom is not alone in either its politics or its economics. Black swans might someday paddle on both sides of the pond. The investor who is properly diversified might be surprised by an event like Brexit (or any further dislocations), but his or her portfolio won’t be.

Hedging Caesaropapism

“Brexit,” writes the Telegraph’s Ambrose Evans-Pritchard, “is not the cause and this is not contagion. The latest Pew survey shows that anger with Brussels is just as great in most of Northwest Europe as it is Britain, and in France it is higher at 61pc. This referendum was never a fight between Britain and Europe, as so widely depicted. It was the first episode of a pan-Europe uprising against the Caesaropapism* of the EU Project and its technocrat priesthood. It will not be the last.” I would add to Evans-Pritchard’s assessment that the Trump and Sanders phenomena reflect the very same mind-set at work in the United States.

At the moment, the effects are largely political, but it will not be long until the markets begin to reflect the economic and financial backwash in a very real way. The immediate knee-jerk reactions in global stock and bond markets (negative), as well as the gold market (positive), might in future years be viewed as fractal events that foreshadowed the greater instability that followed.

If the “uprising” is going to generate an economic effect, it will likely be in bond ratings. Indeed one of the immediate casualties of the Brexit vote, along with a crash in pound sterling, was a downgrade in Britain’s sovereign debt by the major rating services. “We take the view,” says Standard & Poors, “that the deep divisions both within the ruling Conservative Party and society as a whole over the European question may not heal quickly and may hamper government stability and complicate policy making on economic and other matters.”

Solidus, Byzantine Empire
Constantine IV, 654-668 AD
Courtesy of the British Museum

If one reads between the lines in that statement, Standard & Poor’s sees Britain as likely to proceed even deeper into the disinflationary tangle and the associated systemic risk that has become the new normal. The event that pushed gold to its all-time highs at over $1900 per ounce, we might recall, was Standard & Poor’s downgrade of U.S. debt in August, 2011. Prior to that top-end spike, gold had already proven its wherewithal as a disinflation hedge in the wake of the 2008-2009 financial crisis – a performance that took a good many analysts and investors by surprise.

By the way, in the same interview quoted in the previous section, Alan Greenspan called for a return to the gold standard. In the past, he has publicly advocated private gold ownership saying “Gold is a good place to put money these days given its value as a currency outside of the policies conducted by governments.” As reported in our last issue, Mervyn King, former governor of the Bank of England, has similarly recommended the safety of gold.

It has been said many times that in the absence of a gold standard, the judicious thing to do is to put one’s self on the gold standard by purchasing physical gold coins and bullion. It is a matter of more than passing interest that two of the most respected central bankers in the present era – two individuals with an intimate knowledge of the workings of the contemporary global economy – would resolve the complexities involved by suggesting gold as a workable option for private investors.

*Editor’s note: Wikipedia explains Caesaropapism as “a political theory in which the head of state, notably the Emperor (‘Caesar’, by extension a ‘superior’ King), is also the supreme head of the church (‘papa’, pope or analogous religious leader).” To stretch Evans-Pritchard’s analogy, the Brussels bureaucracy with its “technocratic priesthood” becomes the modern equivalent of the medieval Vatican. Britain’s exit from the European Union, it follows, could be likened to Henry VIII’s renunciation of the Roman Catholic Church – another chapter in history when Britain led the way in a much more inclusive and cross-border schism with long-lasting effects.

Stuff that just kind of sneaks up you

The US national debt. . . .

Through May 31, 2016 (the first eight months of its fiscal year, which ends September 30th), the U.S. federal government has added a cool $1.115 trillion to the national debt.

It now stands at $19.265 trillion.

The average interest rate on the national debt according to the Treasury department is 2.32%.  Thus interest on the national debt for this fiscal year will run in the neighborhood of $446 billion.

– If the Fed is successful in pushing up interest rates 1% to 3.32% over the next several months, the


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