index ... introduction

The Brexit EOW Cycle

by Roger Bourke White Jr., copyright May 2018, started August 2017

 

Update July 2018

More rising profile. This 12 Jul 18 Economist article, A new Brexit plan creates fresh depths of chaos, is the lead article in this week's issue. It talks about two of May's ministers resigning in the controversy over how to handle the exit.

But conflicting with this is a US stock market that is pausing and dipping. As an example Facebook has now dipped twice in the last six months. This pause-and-dip is coming too soon. Is it replacing the Brexit crash I'm envisioning, or just competing with it, and this current pause will be replaced with more mania rising over the next nine months?

I don't know yet. I'm watching carefully.

Update June 2018

Good. Brexit is rising in profile again. Now that the distractions of Trump Trade War and Itexit are moving on Brexit is getting more attention. This 14 Jun 18 Economist article, Brexiteers fear being stitched up by the establishment As hopes of a hard Brexit fade, the stab-in-the-back theory gains currency, is one example.

From the article, "Ambrose Evans-Pritchard, a pro-Leave journalist, says that “the quixotic bid for British independence has failed”. On the Remain side, Jonathan Powell pronounces hard Brexit “dead”, killed by the conundrum of the Irish border."

More Brexit concerns that are describing the mania. Why Hot Money Is a Problem for Britain at Just the Wrong Time U.K. has long relied on foreign investors, but its funding is becoming less secure

From the article, "But recent changes in the type of inflows Britain is seeing—and the kinds of assets foreigners are putting most money into—have left the country more vulnerable to tightening credit conditions, the Bank of England warned this week."

Update May 2018

Ouch! This developing Italian election crisis is so much like Brexit that it is overshadowing the Brexit pattern. This is a surprise. What it means to the Brexit pattern will have to be watched for. Here are two articles on the crisis. This 28 May 18 Economist article, Italy’s new government collapses before even getting started, talks about the government crisis, and this 29 May 18 WSJ article, Italy Sparks Global Fear of Fresh Euro Crisis by Jon Sindrew and Mike Bird, talks about the stock and bond market responses.

This 6 May 18 WSJ article, Why Stocks Can’t Wait for the Midterms to Be Over by Mark Hulbert, describes a possible amplification to the Brexit EOW mania. It is the uncertainty of the November mid-term elections in the US. If these two harmonize, the November through April period will be real boomish, followed by the Brexit hangover starting in 1Q or 2Q in 2019.

From the article, "They found that ever since the Dow Jones Industrial Average was created in the late 1890s, it has produced an annualized gain of just 1.4% in the six months before midterm elections, in contrast to a 21.8% annualized return in the six months thereafter."

This 10 May 18 WSJ article, Economists Think the Next U.S. Recession Could Begin in 2020, is talking about predicting the next recession. No mention of Brexit or Brexit mania, so little thought of a 2019 beginning.

From the article, "As for the most likely primary cause of the next downturn, 62% selected an overheating economy leading to Fed tightening. Other options picked by at least 5% of economists surveyed were a financial crisis, the bursting of an asset bubble, a fiscal crisis or disruptions to international trade."

It also points out how hard recessions are to predict. They are always surprises.

A revised thought: If the Feb/Mar wavering and contraction is replaced with going back to more steady rise in May/June then the Brexit EOW pattern is back in place.

Update April 2018

The markets may not have waited for Brexit. There have been the wild daily gyrations for the past month that have had markets going both plus and minus over 1% on many days. Now another sign of dream changing has come.

This 12 Apr 18 WSJ article, Bitcoin’s Hype Vanishes Just Like That: ‘We’re in the Boring Phase’ Daily trading volume is 70% lower than its most active days, and the virtual currency is fading from social-media feeds by Steven Russolillo, talks about interest in Bitcoin declining.

From the article, "The 30-year-old from Nashville told them he had bought bitcoin and litecoin last fall but recently sold most of his holdings. The discussion quickly shifted to another subject.

“Months ago, they would’ve been genuinely interested in how to invest in [cryptocurrencies], how it works, and where I [thought] the price was going,” he said. “Now it’s something that’s the brunt of jokes, like I had invested in comic books or baseball cards.”"

Bitcoin is the iconic new financial tool of this market's boom mania. If interest in that is moving on, the mania is moving on as well.

Update end of March 2018

The market gyrations of February and March have been wild, several days have seen 1%+ stock moves, both up and down. They have also been remarkably contained in their range, as in, the wild crashes have been followed by wild recovery rises.

I envision this as being a result of two forces. One force is an attempt at a market correction, as in, ending this long bull market. The other force is Brexit EOW mania which is keeping the market buoyant. If that boyancy mania stays strong, the boom lasts for almost exactly another year now.

The other thing to keep in mind is that recessions are the result of dream changing, as in, what has been working has stopped working and communities are searching for a replacement that does work. So far, the current economy is working just fine, and working fine all over the world, so if a recession happens it will be the result of people getting scared by the wild market gyrations, and a for-real long-lasting plunge that becomes part of them. The crash will start the recession, not vice versa.

Update Feb 2018

A manifestation of mania in China, the rise of Ponzi schemes. This 3 Feb 18 Economst article, Pyramid schemes cause huge social harm in China Ponzi schemes cause huge social harm in China. Crackdowns may not be working, describes the current rise in their popularity.

From the article, "THE authorities call them “business cults”. Tens of millions of people are ensnared in these pyramid schemes that use cult-like techniques to brainwash their targets and bilk them out of their money."

Update from Jan Cyreenik Says

Crypto currencies are still in their infancy

Crypto currencies are now a white-hot destination for get rich quick investing. But the concept is brand new and as a result is still filled with lots of live-and-learn glitches that will get corrected over the next few years. Will get corrected, but they aren't corrected yet.

This 23 Jan 18 WSJ article, The Programmer at the Center of a $100 Billion Crypto Storm How a top source of bitcoin data contributed to a sudden plunge in digital currencies by Paul Vigna and Jim Oberman, illustrates just how capricious they still are.

From the article, "The globe-rattling move can be traced to one address: An apartment in a new residential building across the street from a local union headquarters in a gentrifying section of Long Island City, Queens.

It is the workplace of Brandon Chez, the 31-year-old computer programmer behind coinmarketcap.com, a website that is a top source for data on bitcoin and hundreds of other cryptocurrencies. Mr. Chez’s site, which went live in 2013, has become one of the most heavily trafficked websites in the world."

Crypto currencies are a wild and wooly place and at the center of the EOW Brexit investing mania that I think we are experiencing. If I'm right, the investing bust will come in the first quarter of 2019 as Brexit transforms from frightening into a non-issue, and crypto currencies will be the most memorable part. This will be following the pattern of the Hong Kong Turnover in 1997 and the Y2K in 1999.

Irrational exuberance is upon us

The US and world economies are booming, so are the stock markets. The booms in the US markets have been going on many years now. Is the end near? Are we in the mania phase?

There has been lots of discussion of this in the business media streams I read. Here is my forecast -- I base this on the patterns I see in history.

The dramatic rise in interest in bitcoin and other crypto currencies is an indicator that investing mania is upon us. With mania upon us, the big questions become how will this boom end and when? It will end as a bust, the details of which I can't forecast, but when I can.

I see this as an End of World mania that is being spawned by the Brexit issue. The pattern being followed here is the one that evolved around the Hong Kong Turnover to China back in 1997. The concerns about the turnover lead to an investing mania in office building that spread around the Pacific Rim from Vancouver to Calcutta -- "All those Hong Kongers will leave and need new places to carry on their businesses. Hmm... I can build one here for them." This mania was followed by the Asian Flu bust in 1998 when the turnover turned into a non-event. The Y2K mania --> dotcom bust also fits this pattern.

If the current mania follows the pattern it will continue into the first quarter of 2019. That's when Brexit will complete and transform into a non-event. As that happens the mania will end and the bust will come.

So, bust in 1Q 2019, this is my forecast based on the patterns of history.

Update 26 Nov 17

This 26 Nov 17 WSJ article, Will Investors’ Low-Rate Mistake Kill the Stock Market? New research shows a behavioral quirk may be leading investors to take excessive risk by Justin Lahart, talks about instinctive risk taking. He attributes the high market to the low interest rates on bond-style assets and talks about a psychological study that supports this.

From the article, "But how much more? A series of experiments conducted by economics graduate students Chen Lian, Yueran Ma and Carmen Wang show that when rates are low, investors’ appetite for risk increases beyond what seems logical."

This isn't the same as, but it meshes well with, my Brexit mania theory.

Update 1 Nov 17

This 1 Nov 17 Economist article, The Phillips curve may be broken for good Central bankers insist that the underlying theory remains valid, may be another example of Brexit EOW mania. The Phillips Curve relates unemployment to inflation in an inverse way. The article says it applied well in the 1970's and 80's, but hasn't applied well in the 2010's. This could be mania, but it may not. It may not because the breakdown started happening years before the Brexit vote happened.

Update 5 Oct 17

This 7 Oct 17 Economist article, Asset prices are high across the board. Is it time to worry?, is their current take on the boom. They see it and they see high ratios, but they don't see an end coming. Things are going up but this time doesn't look like the euphoria of 1929 or the "Things are different this time." of the Dotcom Boom of 1999. While the ratios are high, this time things are booming all over the world and inflation is staying low, and that's why this looks sustainable. And in 6 Oct 17 WSJ Intelligent Investor, Income Investors: It’s OK to Be Sad, But Don’t Get Desperate by Jason Zweig, a perennial bubble warner.

Update 20 Sep 17

In an EOW mania cycle it's not that people don't see the bubble coming, it's that powers that be can't discover good ways of stopping it from continuing to grow. This 11 Sep 17 WSJ article, China to Shut Bitcoin Exchanges Authorities to ban commercial trading of all virtual currencies by Chao Deng and Paul Vigna, describes China trying to contain the Bitcoin Bubble. After reading it I'm reminded of Alan Greenspan complaining about irrational exuberance during the Dot Com bubble. We will see how this Bitcoin Mania evolves. My prediction, it will continue to bubble.

And another example of bubbling: This 20 Sep 17 WSJ article, It’s Not Your Typical Stock, But It’s Up 143% Shares in the Swiss National Bank have surged this year by Brian Blackstone, describes the Swiss National Bank stock surging mightily for no reason.

Update 14 Sep 17

This 9 Sep 17 Economist article, Keeping calm and carrying on, talks about the magazine's surprise that the British economy is doing as well as it is in the face of the upcoming Brexit. They are surprised, I'm not. This is part of the EOW Brexit Mania that I am predicting. My prediction is that the boom will end in 1Q 2019 as the Brexit issue is resolved and becomes history, and the mania attached to it subsides.

Update 3 Sep 17

Here is a good article 22 Aug 17 Fortune article about Blockchain Mania by Chris Joslin and Robert Hackett. It covers both the uses and the mania surrounding this emerging financial technology. This is important because this will be the high-profile bubble technology for the Brexit boom coming over the next twelve months. This is the "dotcom" or CDO for this mania. And this related article The 21st-Century Bank Robbery by Jen Wieczner is about the spooky aspect of cybercurrency -- the stealing. It is spooky because it reports there is a lot of it.

Update 30 Aug 17

The bust will have an iconic bubble item. In the case of the Asian Flu bust it was new office buildings built around the Pacific Rim, in the case of the DotCom bust it was internet-related technology companies, in the case of the Great Recession it was Collateralized Debt Obligations (CDO) as part of the housing price bust. I'm predicting that cryptocurrencies (Bitcoin, Etherium and others) will be the iconic bubble item for the Brexit bust.

The interesting implication here is that they will be mostly booming up until the bust -- which means a possible profitable investment.

Another item may be a boom in business buildings in Europe to house The City financial people when they have to move out of London to keep doing business in Europe. This latter item is identical to the Hong Kong Turnover thinking.

Update 29 Aug 17

I've had the "Ah-Hah": I'm seeing that Brexit is going to evolve like the Hong Kong Turnover did. Wow! This is so unusual to see both a familiar finance pattern ready to unfold, and be pretty sure about the timing of when it will unfold. Now I get to be thinking hard about how to take advantage of this insight.

Introduction

End of World (EOW) thinking cycles are important because they can have a strong influence on economic cycles. This is about my forecasting for the upcoming Brexit EOW cycle. This one began in June 2016 with a vote, got real serious in March 2017 with an invoking of Article 50, and will climax some time in 2019 -- March 2019 is now the official leave date. Between now and then there are lots and lots of details to be worked out -- as with the Hong Kong Turnover there is lots of exciting uncertainty about how things will really work out.

Background

The two previous cycles that brought this pattern to my attention were the 1997 Hong Kong Turnover leading to the 1998 Asian Flu Bubble bursting, and the year 1999 Y2K mania leading to the 2000 DotCom Bubble bursting. This upcoming Brexit pattern strongly resembles the Hong Kong Turnover in its foundation -- its about a prosperous business region changing its political affiliations. This is what Brexit is about and it is filled with just as much commercial and social uncertainty.

Here is how the US markets reacted:

o S&P: no drop in 1998 -- in 2000 it was 1450->800=45% and the same in 2008
o Dow: no drop in 1998 -- in 2000 it was 11000->8000=28% in 2008 it was 13000->7000=46%

Here is my first discussion of the Manias and Markets concept, way back in 2003.

The Plan

The current plan is to move my equities into bonds over the 2018 year, quarter-by-quarter.

1Q (Feb) move my weakest performing 25% of stocks/funds into treasury or equivalent bonds.

2Q (May) move my weakest performing third of stocks/funds

3Q (Aug) move my weakest performing half of stocks/funds

4Q (Nov) move the rest of stocks/funds

Wait for the dip. I'm anticipating this for 2Q or 3Q 2019

Following the dip look at how "dreams have changed" and start moving back into good performing equities to take advantage of the next boom cycle.

This plan presumes that Brexit is going to happen smoothly and quickly become, in essence, a non-event, like Y2K became. The market dip will be a hangover from Brexit EOW mania. If the Brexit starts to get seriously rocky or surprising then this plan needs to get reexamined.

 

 

--The End--

 

index ... introduction