“Neither Hillary Clinton nor Donald Trump is electable, yet one has to win.”

Unknown

 

In my last letter I highlighted the two key developments that markets would need to navigate for the balance of this year which were the June UK referendum on remaining in the European Union and the November US Presidential election. Well, as we all know, a small majority of the UK voted to leave the EU largely because of the growing anti-immigration sentiment. And Donald Trump has won the Republican nomination for the Presidential election due in no short part to his anti-immigration and anti-trade stance. The risk of rising protectionism was something I talked a lot about after the financial crisis and it is happening. Protectionism is not only about trade, it is the “us” versus “them” mentality that is taking hold around the world. It is also happening with the other key risk that I highlighted after the financial crisis and that was competitive currency devaluations which we have been seeing over the last 7 years. Devaluing your currency and throwing up walls in order to “beggar thy neighbor” is a key theme that will grow in significance over the coming years. And it will not actually take years if America actually elects Donald Trump as he is pitting Americans against the rest of the world.

 

Much to everyone’s surprise, Brexit so far has been practically a non-event with just 2 days of slight panic after the results were announced and pretty good markets ever since. Markets stumbled for just those 2 initial days and then moved higher. I think the divorce analogy is a good one in that so far, the parties have just announced their separation but the lawyers have yet to get involved with drafting up the divorce. This is when things will no doubt get a bit messy as hammering out new trade deals will take years to complete and there will be some hard feelings along the way. But Brexit never really posed the systemic financial risk that even Greece posed when it threatened to exit the EU a few years back due to the common currency. The UK kept its own currency and for that reason it was never really was 100% committed to the EU membership from the beginning. That said, the markets will likely hit air pockets again when the divorce proceedings get underway.

 

So after a terrible start to the year (one of the worst on record actually), markets have moved up nicely with much of that happening in July after the Brexit vote was completed (and after the second quarter closed off). After bouncing on either side of break-even for the first 6 months (frustrating everyone), US stock markets have broken out of their trading ranges and moved higher which could very well lead to further material gains over the next 6-12 months. And while Canada suffered greatly last year (remember we had the second worst stock market in 2015 after just Greece!) our markets have had a powerful bounce, although we are still about 1,000 points lower than where we were about a year ago. But now that the “anti-Canada” sentiment that was so prevalent over the last few years has abated, our market is playing catch up and some sectors such as the long suffering material sector (like precious metal stocks) and moving dramatically higher.

 

I know the last 18 months has been a real grind and seemingly little progress has been made in the overall markets and in most portfolios. And while there are still lots of real and potential risks that markets will need to digest, global central banks are committed to keeping the liquidity taps wide open as a backstop. Every time there is talk of removing the proverbial punchbowl, central bankers find circumstances or developments to keep the “free money” party going. There is even more credible talk of “helicopter money” coming our way with Japan likely to be the first country to initiate this unprecedented liquidity creation. Central banks are intent on reflating their economies with essentially easy monetary conditions until we get economic growth and most certainly at some point, more inflation than we expect.

 

I think that is what real estate, high end collectibles like cars and art and now precious metals are anticipating.