The rift between the British and continentals isn’t the only one on full display now.
We’re all seeing the start of a breakdown between those who have invested in Europe’s future and those who have control of it.
From pensioners and middle-class savers to the wealthiest clients of the largest investment firms, it isn’t just political mistrust and uncertainty.
Blaming the Brexit voters is just the easiest, most superficial story to write.
What truly underlies what we’re seeing today is a fundamental belief that Europe, and the world at large, has allowed technocrats who are utterly blinded to reality by their hubris to admit that:
The models used have been critically flawed and have caused a feedback loop of stagnation,
and that institutional tools brought to bear cannot possibly address the root causes.
As the headlines focus on Brexit and the rise of nationalism and anti-immigration politics, the incompetence of politicians in office is ignored.
While the negatives to European trade from an unraveling open market are being cited as the source for a possible recession, and at least slower growth, the low productivity and welfare state issues of large swaths of Europe fade into the background.
Europe is showing two sides of itself. Those in power will continue to wield it in the same unsuccessful ways, with dire warnings for anything but total compliance with their agenda.
Meanwhile, those who are invested in Europe’s future are seeing the Brexit as just one small factor in a litany of critical flaws, and are moving to protect themselves from the ineffectiveness of the ruling class.
Running For the Hills
Recent headlines are warning of the European market fallout following the vote, but the truth is that it was just an increase to an already entrenched trend.
$9.67 billion was pulled out of European equity funds in the two weeks following the vote, according to EPFR Global.
However, this was a two week extension to what was already a 20 consecutive week trend. This is the longest streak in over eight years.
As EPFR Global noted, $54 billion had left the region’s equity funds year-to-date through early July.
Investor surveys have consistently shown that uncertainty about growth and profit outlooks predate recent politics.
Unfortunately, this outflow only emboldens calls for further central bank and ECB intervention.
Interest rates are already in the negative and all the stops are pulled out. The only options these bankers would consider are further penalties for savers, or further ways to inject as much cash into equity markets as possible.
Where The Money Goes
All this money needs to go somewhere, and it is increasingly going to traditional and overcrowded safe havens, according to further data from EPFR Global.
A lot of it is heading to government bonds, which already command extremely high premiums for historically low, if not negative, yields.
Even worse are the money market funds, which use extremely short-term government debt with even lower yields.
Bond yields around the globe have fallen even further in Brexit’s wake, many of them hitting fresh all-time lows, including yields in the U.S., UK, Germany, France, Australia, Japan, Switzerland, Canada, and elsewhere.
Then there is the money jumping the pond and coming into the U.S. market. While we’ve been hovering the same all-time highs for well over a year, the underlying long-term growth and stability makes it the safest port in the storm.
Especially with China and the rest of the emerging markets facing their own currency drops, slowing growth, and political volatility.
The Gold Safe Haven
Finally, a good amount of money is moving into gold and gold funds. Of all the safe havens, this may be the most effective.
While gold trades in dollars, it is a completely fungible commodity with thriving global markets, and thus offers protection from any local currency drops.
As an investment, it can only absorb so much before prices soar. The global gold market can only absorb a small fraction of what is invested in equities.
We’re already seeing signs of that with gold up around 28% year-to-date. Gold miners are outpacing gold even further.
Just take a look at Resource Stock Digest Premium. In the several months it has been published, it already has positions up 4.35%, 41.38%, 42.03%, 62%, and 118.18%.
With the outflows entrenched and limited capacity to absorb new inflows, this upward trend will only continue as Europe’s leaders continue failing to effectively deal with their economies, and investors continue fleeing to greener pastures.
