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While most Americans are caught up in election fever, most Europeans are suffering Brexit aftershocks, obsessed with a looming collapse and asking a host of urgent questions:
Are European authorities telling the truth about the United Kingdom’s exit from the European Union? Or are they lying through their teeth?
One year ago, when Greece was threatening to exit the EU, those same authorities swore that it would be fatal to their union. But now, with the UK irrevocably on its way out, they say it’s “manageable”?
Don’t they know that, just in terms of GDP alone, the UK is nearly 15 times larger than Greece?
Or consider Cyprus. Back in 2013, when this small EU member was on the brink of collapse due to bank failures, the European Central Bank, the European Commission and the IMF thought the threat to the union was so serious they rushed in with an unusual bailout.
Now these same institutions are busily putting out the word that Brexit is somehow OK, despite the fact that the UK economy is 147 times larger?
Don’t they recognize the sheer dimensions of the shock? Don’t they realize that Britain’s GDP is bigger than Austria’s, Belgium’s, Sweden’s, Netherlands’, Ireland’s, Finland’s and Greece’s combined?
And what about London!?
Surely they must know that, among all the financial centers on the planet (including New York, Hong Kong, Tokyo and Frankfurt), London has the most active foreign-exchange market, the largest international debt market, the biggest money markets and the most derivatives trading. Or have they forgotten that, too?
In their collective amnesia, do they ignore the fact that London ranks #1 on the widely respected Global Financial Centers Index? Or that it’s the home of the European Banking Authority itself?
The bigger questions, of course, are these:
Can the EU survive?
If not, will its demise occur gradually over time or in a series of Black Swan collapses?
What impact will a continuing EU disaster have on the global economy?
What can US investors do to prepare?
These are very tough questions in the midst of a largely unpredictable convergence of economic and political forces. But strange as it may seem at first, some of the most relevant lessons are to be learned from the recent collapse of another major federation:
The Soviet Union
Yes, I know. The Soviet Union was built on the weak foundation of a centrally planned economy. The European Union is not. And I open this conversation by saying: That’s a very important difference.
But the similarities are equally important.
Like in the EU, the USSR enjoyed decades of economic growth, followed by years of economic stagnation and seething discontent.
Like in the EU today, the USSR was torn apart by powerful centrifugal forces — 15 republics with different languages and ethnic heritages, resentful of central government control, waiting anxiously for their chance to achieve autonomy.
And much as we’ve just seen with Brexit, the USSR was shaken by Black Swan events that ultimately triggered its demise.
For each of these three similarities, let’s compare the USSR and the EU side by side …
Similarity #1
Economic Decline
In the early years of the Soviet Union, authorities could boast a series of economic achievements: explosive GDP growth … near-zero unemployment … free education and medical care … plus the aura of income equality.
But in 1965, there began a two-decade period known as Zastoi (Stagnation). Growth slowed to a crawl. Agriculture floundered. Consumer goods disappeared from shelves. Living standards sank.
Dealing another blow to the consumer economy, the Soviet military’s top brass stepped up the arms race with the West, embarked on a costly war in Afghanistan, and boosted military spending to 20% of GDP.
Corruption and nepotism spread like a plague. Popular resentment of Moscow sweltered.
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European Union: Like in the USSR, the early years of the European Union brought a series of successes: growth and expansion … the second most-widely traded currency in the world … low unemployment in most member states … headquarters for 100 of the world’s largest corporations … and much more.
However, in the wake of the 2008 debt crisis, economic stagnation overtook much of the Continent. GDP sputtered. Unemployment surged. The PIGS countries (Portugal, Italy, Greece and Spain) stumbled from debt crisis to debt crisis.
What’s worse …
- According to the European Commission, itself, corruption across the EU is “breathtaking.” Three-quarters of Europeans surveyed say it’s widespread. Nearly all say it’s getting worse.
- Italy could be the focus of the next major financial crisis. As Money and Markets editor Boris Schlossberg explains, Italy’s banks now have nonperforming loans that represent a whopping 18% of bank assets, over triple the level that makes regulators nervous. (See “Italy, Its Banks and the Future of the Euro.)
- Perhaps most shocking of all, 22 eurozone banks are now vulnerable to Brexit, according Weiss Ratings. (For a list of their names, assets, country and Weiss Safety Rating, go here.)
Similarity #2.
Demands for Autonomy
Soviet Union: In the years leading up to the collapse of the USSR, separatist movements spread from the Baltic Republics to the Caucuses and beyond.
In Latvia, mass demonstrations began in 1986, under the slogan “Soviet Russia out! Free Latvia,” with even larger protests in 1987 to remember Stalin’s mass deportations of Latvians of 1941.
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In 1988, all three Baltic Republics — Latvia, Lithuania and Estonia — literally joined hands as two million people formed a human chain that connected their three capitals.
We saw similar mass demonstrations in Kazakhstan, Armenia and Azerbaijan.
European Union: Anti-EU political parties are surging in:
Hungary, the home of the right-wing Fidesz party …
Poland, where the Law and Justice Party has scored major victories …
France, where the right-wing National Front took more votes in local elections of 2015 than the Socialists or the Republicans, and …
In the Netherlands, where the rising Freedom Party’s agenda is an immediate exit from the EU.
Not to mention Spain, Italy and Greece, where left-leaning parties have long sought to reject EU-mandated austerity measures.
Just small minorities with little national traction? Not quite. According to a recent Pew Research poll, the majorities in Italy, Spain, Germany and the UK believe these new parties are “a good thing.”
In both cases — the USSR and the EU — central governments, once credited with creating “economic miracles,” could no longer address rising economic challenges.
In both cases, there emerged a fundamental flaw in the very structure of the union:
In the USSR, it was inflexible, all-encompassing central planning.
In the EU, it’s an unwieldy central monetary policy, effectively imposing a single interest rate on all countries. Result: Bigger booms in some countries and deeper recessions in others. Worse, a single currency means that member governments forfeit their power to control their financial destinies, including steps they could take to avoid their own fatal bankruptcies.
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Similarity #3.
Trigger Events
Soviet Union: Contrary to popular belief, the critical events that marked the beginning of the end were neither sudden nor unintentional. They were carefully planned, relatively modest reforms in the Soviet system designed to provide appropriate responses to changing times.
Perestroika (The Reformation), introduced by Mikhail Gorbachev in the mid- to late-1980s, gave Moscow ministries some more leeway for independent decision-making, while allowing unwieldy state-run enterprises more freedom to decide production levels based on actual consumer demand.
In parallel, Gorbachev’s Glasnost (Daylight), was designed to provide more transparency and freedom of speech, along with a new foreign policy that gave East European nations the signal that, unlike the old days, Moscow would not send in its tanks to block their own reforms.
But the changes were too little, too late for the Soviet republics and satellite nations; too much, too soon for the union, causing confusion, and unleashing the powerful centrifugal forces I cited above.
The historic trigger event came on May 2, 1989, when Hungary began dismantling its 240-kilometer fence with Austria, opening the first major crack in the Iron Curtain since the construction of the Berlin Wall nearly 27 years earlier.
East Germans and other East Europeans flooded to the West, first directly via Hungary, then via Czechoslovakia, and ultimately by tearing down the Berlin Wall.
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Lithuania was the first to unilaterally declare independence, adopting the Act of the Re-Establishment of the State of Lithuania. Estonia and Latvia soon followed. Ultimately, even Russia, itself, adopted a declaration of sovereignty from the USSR, officially recognizing the end of the union.
European Union: While Perestroika and Glasnost were relatively moderate and introduced from the top, the same cannot be said for Brexit, the trigger event that now threatens to dismember the EU.
As I demonstrated at the outset, Brexit is huge, sudden and has struck Brussels from the outside.
Moreover, even as we speak, it’s catapulting anti-European movements to new highs.
Right now, according to International Business Times,
“The Five Star Movement in Italy, which recently won in 19 of the 20 cities it contested in July’s elections, is currently seeking a referendum on Euro membership. In the Netherlands, Geert Wilders’ hardline Eurosceptic Party for Freedom has an astonishing 13 percentage point lead, according to the most recent polls. And even in France, only 38% of people currently view the EU favorably.”
Former Irish Prime Minister John Bruton says Brexit is the most serious crisis the country has faced in 50 years.
And economic experts call it “the biggest breaking point since the Cold War.”
Global trade, already stagnating, could shrink dramatically. The global economy, already slammed by deflation, is bound to take a big hit.
And despite a raft of official statements seeking to minimize the disaster, some high authorities agree: Last week, the IMF slashed its global growth forecasts entirely in response to the Brexit news, predicting a “substantial increase in economic, political, and institutional uncertainty, which is projected to have negative macroeconomic consequences, especially in advanced European economies.”
Can the United States withstand the shock? If the nation had rid itself of major speculative bubbles, perhaps. But as Mike Larson has thoroughly documented in recent months, we can now detect speculative bubbles in …
Trillions of dollars of negative-yielding government bonds …
An auto leasing boom fueled by some of the riskiest lending in history …
Not to mention the speculation in commercial real estate.
Your Action Plan
Even more so than before, I suggest you invest with extreme caution. That means five critical elements for any investment strategy:
- Quality. Investments that merit the topmost ratings from a totally independent source. Specifically, go to www.weissratings.com and in the second menu from the top, select “Stocks,” “Mutual Funds” or “Exchange Traded Funds.”
(For the reason ratings independence is so important, be sure not to miss my classic article, “Lies, Lies and More Lies” and “Harvard Business School: Ratings Agencies Drop ‘Independence.’”)
- Liquidity. Avoid investments where trading volume is low, making it difficult to sell at times when you might need to do so with urgency. Also beware of certain annuities and mutual funds that charge high commissions or exit fees.
- Cash. Currently, near-zero yields on short-term money markets is discouraging global investors from holding cash precisely when cash could be needed the most to avoid losses, and later, to pick up bargains. For institutions best able to safeguard your cash assets, go to www.weissratings.com and select “Banks” or “Credit Unions.” Seek to do business with banks rated B+ or better, while avoiding those with a D+ or lower.
- Insurance. To help you find the safest and avoid the riskiest, in the www.weissratings.com menu, click on “Insurance Companies.”
- Hedges. If you’re still overexposed to risk, continue to follow my hedging prescriptions in “My 7-Step Portfolio Protection Strategy.”
Above all, stay safe.
Good luck and God bless!
Martin
(with Anna Zakharchenko
contributing from Moscow)
Dr. Weiss founded Weiss Research in 1971 and has dedicated his entire career to helping millions of average investors find truly safe havens and investments. He is Chairman of the Weiss Group, which includes Weiss Research and Weiss Ratings, the nation’s leading independent rating agency accepting no fees from rated companies. His last three books have all been New York Times Bestsellers and his most recent title is The Ultimate Money Guide for Bubbles, Busts, Recession and Depression.
{ 31 comments }
Martin,
Greece is in the Eurozone, the UK is not. Defection from the euro is more threatening than defection of a non-euro partner from the EU. Britain has never been easily contorlled by Brussels in any case, and it’s all about control. As for Brexit (should it eventually happen) being an economic disaster, this is just hegemonic propaganda, as peddled by George Soros and company. It can be a disaster if that’s what they insist on making it – or not.
As a Brit leaver I couldn’t have put it better. The UK just wants to trade and if Europe goes along there need be no dire outcome.
It’s not that simple. While not in the eurozone, the UK was expected to help out with insolvent eurozone banks nonetheless. If the UK is out of the EU, a major source of support is gone.
England will never leave the Eurozone freaks, unless you tow it to the otherside of the world! Its geographic proximity to EU states will forever make it deal economically and politically with it’s neighbors to whether it wants to or not!
Yeah, you have summarised things pretty well.
thank you Marty
Martin
You could paint 5 different scenarios on what might happen the EU?
1. Brexit is a wake up call to the EU centre and they start to relook at the model to see how it can become less centralist ! The right wing parties are still very much in the minority. Uk had a rush of blood to the head and put in protest vote not to the EU but the current global crises!
2. UK might find it very cold outside EU Club and ask to rejoin ?
3. Article 50 may not be activated? Scotland and NI will be problematic if it does ?
I could go on !
Whatever happened to all those toxic assets held by those solvent banks.I recollect Helicopter Ben’s Federal Res. absorbing them for the sake of the banks.One bank sticks out like a sore thumb;it’s called Citibank.R remember that problem banking list back in 2006-07
Excellent overview of the EC’s issues and the changes that are currently underway. The supreme driving mechanism in each country is that people need to feel that they are in control of their own destiny.
The Brexit vote confirms this in clear terms and will inspire and motivate many people to increase their level of participation in their countries individual development
No longer will people accept that we must be part of this ” organization” because it’s the only way to stop us from killing each other in the tens of millions.
I still see England doing Business with the continent although they may lose some foreign money and cheap labor due to some rule changes that would protect there citizens from losing there jobs to foreigners . But I do not see them bowing down to the continent on issues such as allowing migrants into the country , how much there fisheries are allowed to take and using there tax payer money to bail out the continent . Maybe they saw a $400 Billion dollar Bailout for Italy’s Banks and wanted no part of it ????
Yes Dr.Weiss, the EU (just as the Soviet Union) is doomed, as it has been from the start. In particular, you mention a single interest rate imposed on all countries; how can that be sustainable, and how can that not be self destructive in and by itself. This is just one of the reasons behind my past comments that the concept of the EU and the euro are like wanting to have your cake and eat it too. Unfortunately, Brussels and the ECB have sucked the “mama hog” for so long that it is now bloated with stinking decayed hot air to the point that when it blows up it will be like a beached whale that has been beached for far too long. Phew!
Love the PIIGS cartoon.
Will
Martin,
I’m left to assume you never were required to stand military duty during the Vietnam Era Military Draft period, like so many of us “dirt poor” kids were….. If you had, I believe you would have been really aware of the extreme military advantage that the Soviets had over us, until we began to rebuild and rearm during the Reagan Era…..
As that “window of vulnerability” began to close, the price of Gold went to all time highs as, in my opinion, many of the wealthiest in the world (who employed some of the best retired Intelligence officers) believed that the Soviets might have the guts to attack us while they still could…..
Then a brilliant CIA ruse called “Star Wars” came along and the Soviets began spending money that they could not afford and when Gold Topped and began to fall in the middle 1980’s, in my opinion, many in the intelligence communities realized that the Soviets had gone bankrupt…..
I vaguely remember a joke going round then as to how long it would take the American media to realize that the Soviets were negotiating with the West Germans to sell them back East Germany, to raise badly needed cash….. If I remember right,I believe it took about two years…..
In my opinion, after spending a lot of time in Europe, I believe the E.U. was brilliant…. Sadly, if they had set “solvency standards”, perhaps they would not have offered membership to the “Pigs” until they improved their financial situations…..
Of course, then came the financiers from Wall Street who, in my opinion, made things even worse for the “Pigs” and now here we are, aye?…. :(
CIA ruse “Star Wars”? Does the Iron Dome ring any bells?
…certainly a well-balanced approach to a real problem.I always find Dr. Weiss’s commentary to be cogent…right on!
Once again Thank you Dr. Weiss for your valuable insight and reminder.
The odds are that the black swan events will originate in Europe. A major difference between the collapse of the SU and the EU is that the people in the EU have much farther to fall than the people of the SU. Due to the centrally controlled economy in the USSR, things were pretty bad there to begin with. So when the USSR collapsed, the people were already much more self reliant than the people in the EU who depend on government and corporations to deliver their comfortable life styles. This includes a dependence on imported energy. E.g., people in Russia grow their own food and know how to fix appliances and cars. Even now with Russia’s faltering economy, a garage-based economy has developed which is free from taxation.
The EU has been a weak vessel from the start. Germany has been forced to continually pull the train economically. The common currency came far too soon. A sustainable union WILL happen someday in the future…..but not now. Financial issues and large numbers of hostile immigrants have been too great a strain for this utopian idea…that was realized ahead of its due time.
Well done Dr Weiss, I believe that you have written a most enlightened piece on Brexit. It is with great credit that the U.K. voted leave, in spite of wild E.U. propaganda and with those same economists of whom recommended that we join the Euro currency in the 80’s & 90’s. The E.U. was sapping the life out of the U.K. by having unsuitable trade agreements and high regulation.
With best wishes,
Brian.
Thanks Martin your insight is always invaluable especially within the context of a circle of experts I rely on for what is happening. The USSR ultimately peacefully dismantled although under Yeltsin the ground work (blowback) was laid for Putin & Co. Selling off public companies for pennies on the dollar to Party cronies and the emergence of a healthy mafia and no safety nets for the masses led to millions of deaths. Unfortunately US foreign policy has only pushed Russia to re-arm. When Gorbachev met with US officials he was assured NATO would not move closer to the former USSR. He failed to get this in writing but there are eye witnesses alive today who will testify. Up through 2013, Russia was seeking a closer relationship to the EU; perhaps this threatened our neocons, but after the US led revolution in Ukraine, Russia abruptly pivoted to China. Why was Russia never invited to join NATO ? Seemed like a natural step in 19991? The US use of “economic sanctions” has only pushed the BRICS and other countries to try to dethrone the dollar as the world currency and escape this US economic hegemony. The Clinton-Bush-Obama foreign policy teams seem to continuously fail unless a push towards WWIII is an objective. As proof just look at how close Russia is moving its country to our bases: http://imgur.com/gallery/UzaEGyw
Martin you scared the pants off of me I just bought some more gold on the dip then watched it as it headed north straight as an arrow. You have a loyal following here. I just hope reality spreads to the rest of the world well maybe that would not be such a good thing as a world wide reality adjustment would mean utter collapse. Which is worse??
Government works best that it is closest to the people; a lesson taught repeatedly through history. Yet there are some that keep trying, each time suggesting it just needs to be done differently, somehow.
This is a good article compared to those other scaremongering articles about potential black swan events.
Irrelevant blogosphere hypothetical discussions. Even The Oracle of Omaha didn’t see 2007-2009 coming. Tis unlikely anybody will see the next one. The current core issue is the economic distortions caused by ZIRP and how do we get out from under the poison pills that are keeping us here. Japan has been stuck in this quagmire since the early 90’s, and now the rest of the world is too. So called Black Swan events will just entice central banks to do more QE.
Hi Martin
What we have at the moment is a managed serries of economies with questionable monetary policies. It is a global problem, governed by debt management. Confidence in direction is being questioned on an almost daily basis because the traditional playbook has been thrown out the window. I keep on asking myself if I want to invest in this mess of bubbled markets and false economies and the answer is no. Good luck to all.
Howard assessed the problem succinctly and correctly. Unfortunately we are all participants willingly or unwillingly. Seeking areas less affected by political whims and opposing those very same whims is about the only solution. It’s like our forefathers going against the monarchies and theocracies. But, it’s a start.
Martin you are great writer. Your vision for a market correction may come to
reality. However this market is melting up. Why?
Hi Martin
What you forgot is that Great Britain was Never a real EU member with same money, same rules and same project and paying fully the bill they have to be part of EU leaving it to France and Germany.
They already asked their money back from Tatcher times… and had this success.
So what are they Really willing to leave? In fact they are willing to leave access to the market they need to avoid economical colapse. This is their democracy choice.
But when they asked to retreive money from this they discovered that there is No money …
Not a so big change isn’t it for EU? Uk Banks wil find another place inside the EU and that’s all.and the GDP will move with it!
What about UK future as a country outside of EU, who cares? No major impact anyway, except London without banking industry as one of the most espensive place to leave will reduce their prices …
Great Britain has an Identity crisis. They do not understand that their Great Dominion has crumbled some time ago. In their simplified mind they believe that they can “be great” again if only they can shed their allegiance with the rest of Europe.
Sorry, folks; the Future is Global. There will be 3 unified Trading-blocks:
The European Common Market,
a New North-South-american Coalition of 10 States and
an Asian Axis of Trade and Technology.
As far as today’s Trade Agreements are concerned; things between North America and all of Asia will turn sour due to ever increasing one-sided Trade-deficits of America.
Any Nation on this Planet that believes they can go it alone will sooner or later find out that they are on the wrong Path.
Wake up and smell the Coffee, not so Great Britain and all the Others. The Future will unfold as it should and Prophecy is clear and in full Progress.
The very sudden Worldwide collapse of ALL Currencies is the next step in the overall scheme of things. Strangely enough, the Communist understand this. Their Motto is “Be prepared – always prepared”.
What planet is this person living on? The UK (not Great Britain, does he know the difference?) voted to leave the EU mainly because of issues of sovereignty and immigration. We have no identity crisis, we have national pride, something which the globalisation fanatics wish to stop in its tracks. Unfortunately for them, the ordinary people have realised just in time the game they’re playing and the pendulum has started to swing back. Watch the Italian constitutional referendum on December 4th. That will signal the end of the euro and the end of the entire EU not long afterwards. And when that happens, and the full corruption of Brussels is exposed…………….
Let’s not forget Chernobyl as a Black Swan event that helped trigger USSR’s demise.
The EU is doomed.
The bloated bureaucracy sheltered from the results of its own bad decisions rides on the back of the EU like an old man of the sea.
Britain should leave as soon as it can.