What a crazy few days in the market.  First, the Brexit occurs and markets swoon lower for 2 days only to recoup most of those losses the next 3 days.  So what is going on?  In our opinion, central banks around the world have changed their focus from the economy to creating “stability” in the financial markets.  By not allowing the market to naturally adjust, central banks are setting the stage for more instability in the future.  The Brexit is a good example of this.

With the Brexit, central banks have jumped into the markets to calm market jitters and avoid some issues with European banks (especially UK banks).  Sounds like a reasonable thing to do.  However, we would espouse that while the Brexit is damaging to the EU, having a member state that uses the Euro as its currency leave is much more damaging.

So here is the quandary for the EU.  Do you punish the UK, which will hurt your economy, or do you try to stabilize things so the overall EU economy doesn’t get hurt (thus, making it appear that leaving was not that bad for the UK)?  Central banks have voted for the latter – stability.  Every country in Europe is seeing a rise in anti-immigration sentiment and nationalism.  Britain is the first nation to vote since this rise has occurred.  If the UK economy doesn’t get damaged and actually grows, it emboldens the desires of the rising nationalistic parties in other EU countries to make the move as well.  In a perverse manner, the EU needs the UK to suffer immensely so that other countries don’t leave.   But, as we mentioned earlier, it appears to us that central banks have chosen the opposite path.  This does not bode well for Europe and the Euro in the long run.

What does this mean for your portfolio?

It is even more important than ever to be an investor and not a gambler/trader in this market.  Through their manipulations, central banks are allowing “non-traditional” investments to be re-priced to valuations that are compelling.  That was the case last year for Master Limited Partnerships (MLPs) and Business Development Corporations (BDCs).  Central banks had no overriding incentive to “stabilize” these areas and they fell more than 50% in value and became compelling sectors in which to invest.  Those investors concentrating on just US large companies will miss out on these opportunities.