The market likes a good narrative.  The story pre-payrolls seemed to be that Brexit would exacerbate the global growth slowdown.  A slowdown in the UK and EU would cause more central bank stimulus, which would put downward pressure on rates.  And the slower global growth would put the Fed on hold.  That’s a reasonable story.  But there’s another story I like to call…

The Capitalist Pig in a Divorce

When there is a divorce, there is a lot of sorrow, anger and concern.  But for the Capitalist Pig bystander, there is opportunity.  Let’s say your neighbors are getting a divorce.  There is going to be a lot of fighting and sobbing that’s going to drag down the neighborhood.  The overall happiness of the neighborhood is lower – not just for the couple, but maybe there will be no more holiday parties at their house, less involvement in the PTA, whatever.

But for the Capitalist Pig, amid the uncertainty and stress, there is plenty to be gained.  If he is a lawyer or real estate broker, there is potential new business.  He may get a kickback from the moving company he’ll recommend.  If he wanted more golf time with the husband, he will probably get it after the dust settles.  If he wanted to date the wife, she is now on the market – and so is their boat named “Happy Forever.”  Not everyone loses in a divorce.  Just because the size of the pie got a little smaller doesn’t mean you can’t gain share from the losers.

160807 JPM vs BarclaysThe point of the story is that just because it sucks to be the UK doesn’t mean it sucks to be the US.  For example, Jamie Dimon was one of the louder CEO voices against Brexit before the vote.  He said thousands of UK jobs may have to move.  Banking is a key component of the UK economy.  But this does not materially affect JPM’s position to profit.  They will go where the opportunity is – it doesn’t have to be London.  It really only sucks if you are disproportionately exposed to the sectors of the UK economy that will get hit, like Barclays.  Here is my “Chart of the Day” – an equity chart of JPM (green line) and Barclays (blue line).  JPM is at the 3mo high and BCS is still languishing.  This is especially notable in an environment where the FTSE has outperformed the US equity indexes since Brexit.  This is only one example.  But there are MANY companies in the US that can benefit from the UK and EU split.  It’s a dog eat dog world.  One country’s loss will most likely be another’s gain, and the US is in a prime position to benefit.  Nobody wants to sound like a Capitalist Pig / vulture / grave robber in this time of “crisis.”  Perhaps that is why you don’t hear this narrative –it could be considered a little distasteful.

The “truth” is going to be some combination of the “global slowdown” narrative and the “Capitalist Pig” narrative.  I just can’t believe the markets were pricing in a near 100%-0% split between the “global slowdown” and “Capitalist Pig” narratives for the US economy.  Pricing the first five meetings of 2017 at 3.5bps on Thursday was so absurd.  I’m more 50%-50% between the two narratives.  This is in keeping with my Mr. Belly (the center of probability distribution is more likely than the tail) nature.  There could be a global slowdown, but it’s not clear to me the US economy couldn’t profit from the European divorce.

For US consumers, if one of the top google searches was “What is the EU?”, Brexit is probably not going to affect their spending, and could increase spending on some things, like travel.  For US businesses, over 50% of the uncertainty of Brexit is gone – the UK voted “yes.”  There is no uncertainty there.  Now some of them can move on with any growth plans (including investment plans).  Some will still have to wait for more details, but may start looking more into Plan B (which involves spending money).  This also puts New York back on top in terms of the leading global financial center.  London real estate may drop, but don’t look for Manhattan apartments to get cheaper (relatively) any time soon.