How Vulnerable is the Shaky US Economy to Brexit Fallout and European Bank Meltdown?

Business optimism “lowest since the height of the Financial Crisis.”

You know things are getting bad when our leaders call for calm. US Secretary of State John Kerry just did that.

“It is absolutely essential that we stay focused on how in this transitional period, nobody loses their head, nobody goes off half-cocked, people don’t start moving on scatter-brained or revengeful premises,” he told reporters in Brussels on Monday after Brexit had thrown the EU into political turmoil, while European bank stocks had their worst two-day meltdown ever, on the toxic mix of Brexit and a full-blown banking crisis.

And all kinds of things are suddenly happening.

Fed Chair Janet Yellen was supposed to speak at the annual central-bank shindig in Sintra, Portugal, organized by the ECB. It started on Monday. But Bank of England Governor Mark Carney had bailed out after the Brexit vote. Then an updated version of the event program showed on Monday that a panel with Yellen, Draghi, and Carney had been taken out. The Fed confirmed that Yellen, after the weekend meeting of the Bank for International Settlements, was returning to the US.

There are more important things to see to – even in the US, where the mood on Wall Street is suddenly souring.

“We have never seen a set of analysts’ notes as negative and scary as these,” Business Insider explained.” Before the Brexit vote, “economists at the major banks expected the UK to continue growing, albeit at a slower pace, into the foreseeable future.” But… “‘Recession,’ ‘contagion,’ and ‘stagflation’ are the words they’re using now.”

Here are some tidbits from BI’s report:

Barclays’ Fabrice Montagne figured that the UK “is likely to enter a period of stagflation,” and that Brexit would “exacerbate current elevated levels of uncertainty and thus amplify already slowing economic momentum.”

Barclays’ Philippe Gudin fretted that a “clear and coordinated strategy to safeguard the rest of the EU and the euro area does not look to be present.” So they expected “uncertainty to spread and euro area confidence and domestic demand to fall.”

Deutsche Bank’s George Saravelos wrote that the “extreme market reaction in GBP” – the crash of the pound – “is right” and that “a period of exceptional uncertainty now starts for the UK.”

Bank of America Merrill Lynch’s Robert Wood called it, “Hello recession.” Uncertainty would be enormous: “We do not even know what the geographical boundaries of the UK will look like in a few years. This uncertainty is likely to be prolonged and will lead investors – including residential investors – to postpone decisions. The economy will turn down quickly in our view.”

HSBC‘s Karen Ward et al figured that “Some market contagion is likely.”

Bank of America Merrill Lynch’s Ethan Harris wrote: “The decision for the UK to exit the European Union is another in a long string of confidence shocks, hitting an already vulnerable US and global economy.”

Note how often the words “confidence” and “uncertainty” show up. They’re key in any economy.

So how vulnerable is the US economy? The manufacturing sector has been in trouble, with industrial production in decline since November 2014 [read… OK, I Get it, the US is a Service Economy, but this Looks Terrible].

Manufacturing is only a small-ish part of the economy. The service sector dominates, but now it has to pull the US economy forward on its own, against the drag of manufacturing and the fallout from Brexit. Here’s what Markit just reported about the sector on which all hopes are riding:

Reports from survey respondents suggested that relatively subdued demand continued to weigh on activity growth in June, reflecting heightened economic uncertainty and risk aversion among clients.

Service sector business activity, at 51.3, was flat with May and “only marginally above the neutral 50.0 threshold,” Markit said. Here are some gems from the report:

The degree of positive sentiment … was the lowest since the survey began over six-and-a-half years ago.

The survey data indicate that any rebound in the economy from the weak first quarter was largely confined to April, and that growth has since faded again. The June PMIs, which provide the first insight into national business activity in the second quarter, suggest the underlying rate of growth in the economy is only a meagre 1%.

However, even the service sector has seen growth weaken in recent months, with firms citing increased uncertainty over the economic and political outlook both at home and abroad.”

Business optimism was the lowest seen since the height of the financial crisis, with firms seeing greater hesitation in spending on services by business and households.

Uncertainty looks set to intensify in coming months….”

This survey of purchasing managers was taken before the Brexit vote! It sums up how vulnerable the US economy really is when it gets hit over time with Brexit fallout.

Uncertainty is anathema to this Fed-designed economy with its inflated asset prices, which have become a confidence game – confidence in the Fed’s ability to keep them inflated and to somehow conjure up demand.

During the Financial Crisis, as the Fed was bailing out banks, Corporate America, and everyone holding assets, there was the notion that these asset bubbles would create demand. The “wealth effect,” it was called. This has never happened, and as a consequence, the Fed and other central banks that played the same game have lost their credibility: It’s now clear to everyone that central banks cannot create demand. All they can create are asset bubbles.

And even in that department, they’ve lost credibility, given the crash in European and Japanese stocks over the past year. Thus even more uncertainty.

With the Brexit vote, the veneer of confidence – what little remained – has come off the economy, globally. The uncertainties that have been beneath it all along have suddenly appeared on the surface. And given how lethargic the US economy has been for years, any loss of confidence and any increase in uncertainty are going to weigh on it, and on the markets.

The European banking crisis jumps to the next level. Read…  European Banks Get Crushed, Worst 2-Day Plunge Ever, Italian Banks to Get Taxpayer Bailout, Contagion Hits US Banks

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  32 comments for “How Vulnerable is the Shaky US Economy to Brexit Fallout and European Bank Meltdown?

  1. Janet says:

    Stocks din’t drop this much today. Tomorrow tomorrow you’re only a day away…..

  2. George says:

    “With the Brexit vote, the veneer of confidence – what little remained – has come off the economy, globally. The uncertainties that have been beneath it all along have suddenly appeared on the surface. And given how lethargic the US economy has been for years, any loss of confidence and any increase in uncertainty are going to weigh on it, and on the markets.”

    Your last paragraph renders all the preceding of your excellent analysis superfluous.

    All economics, currency, and geopolitics – not to mention personal relations – emanate from confidence. Once confidence is compromised, relationships change. Expect a serious realignment of nations from this vote.

    Tighten your cinch, cowboy, it’s going to be one hell of a ride.

  3. ML says:

    Irony. The US gave us the sub-prime crisis. Just one of thise things. Get over it. The UK reciprocates.

  4. night-train says:

    Things do appear to be on shaky ground. When the cheerleaders don’t think the team can win, it’s bad.

    I was amused by Larry Willmore’s comment regarding the CNN money-honey saying more than 2 trillion dollars had evaporated from markets. Larry said and I paraphrase “Water evaporates. Money doesn’t evaporate. Somebody looses that sh*t.”

  5. Meme Imfurst says:

    There has never been an example of any ‘group of people’ escaping the whip of tyranny without some sacrifice. The British people were tired of being a non-sovern nation ruled by non-elected neocons.

    An voluntary economic unity became a political unity based on ultimatums.

    Three cheers to the Brits, taking back their laws and their financial future!

    Indeed, this is a warning for the USA. The USA now acts in many ways like the EU and the ECB, and when the countries who suckle at Uncle Sams money tit have had enough of Washington’s political directives, we too will walk in the footsteps of the current EU.

  6. jack says:

    Soon we see end of month investments of funds for June, so a rebound for the holidays, then another serious testing. We are in an economic slide which will last the summer I suspect.

  7. Dan Romig says:

    The “wealth effect” for the 0.01% elites is a new yacht, jet plane, villa or piece of high-end art. The asset bubbles created by the last eight years of CB interventionism hasn’t done much for Main Street or the masses – except reduce their economic status.

    • nick kelly says:

      I don’t know any .01 percenters but I do know the firefighters in my city make 95 K after five years, entering what can only be called the upper class while still in their late twenties or early thirties, with no post -secondary education requirement.
      Police and fire salaries and pensions have literally bankrupted several US cities, e.g, San Jose.

  8. Meme Imfurst says:

    “Trickle Down” didn’t work for Reagan, why would it have worked for Greenspan, Bernanke, or the current fall gal with a new name painted on the same pig “wealth effect”. It isn’t working in the EU and it isn’t working here….so lets keep doing it.

    No baron in industry ever thought his financial success would dribble down to the masses and make them whole, prosperous, and his new next door neighbor …how ridiculous ! At least FORD knew that without a good paycheck, no employee could buy a car.

    The “experts” rely on the “experts” to reinforce their Ivy League pedigree opinions and sell them to the public as ‘investments’. Wall Street expert opinions are worthless because they are based on SELF INTERESTS, not yours.

    The average person has not forgotten the housing crash, but the elites did and they are the ones sweating now. Asset ‘prices’ falling and jobs for joe-sixpack erased from the landscape every second, means he can’t buy goods, services, or pay rent. Will take an IOU until Tuesday ?

    Everyone knows what the world crises is about, increasing population and jobs disappearing (and perhaps the land that most of the world population sits on). Any idea of balance is nonsense, where would it begin? Whose interests would be stepped on or voluntarily given up? Automation is going to kill every economy, and with it the governments that can’t make ends meet anymore.

    Later that day….the CBs paid the market to levitated back the comfort zone.

  9. Petunia says:

    Yesterday I watched a tv show on a local company started after the Civil War. It is a well known brand, sold all over the world, has made the owners rich, and supported an entire town for generations.

    As I watched, I knew that they only reason this company was still operating productively was that it was family owned. Had they gone public, Wall St. would have unlocked the shareholder value, fired the employees, degraded the quality of the product until sales disappeared, then blamed the economy.

    “The Markets” have morphed into a hideous parasite and we need to stop feeding it because it will consume everything good in our economy. When you play the betting game (investing) think about what the end game is really going to be.

    • VegasBob says:

      One of the major byproducts of globalism is the ‘crapification’ of manufactured goods.

      After manufacturers have taken advantage of global wage arbitrage to cut costs, the only remaining way to reduce costs is to reduce quality.

      After nearly 30 years of this racket, a huge percentage of stuff in stores today is of marginal quality at best, designed to wear out as soon as the warranty expires – junk that is not even worth buying.

      • Red Rock says:

        You got that right….same stuff everywhere. Watch many, many stores tank over the next two years. It’s all good!

      • nick kelly says:

        Not that long ago a lot of furniture was made of wood.
        It could be used by one generation after another- not usually a collectible but usable.
        Then came particle board with a thin film of plastic bearing a photo print of wood.
        Now this stuff sits unwanted with ‘free’ signs on it.

  10. bead says:

    Is Brexit another rinse job? Blow out the stops and load up the truck, helicopter money is a-comin’ soon!

  11. Boatwright says:

    Econ. 101:

    1) We are in the middle of a long-term debt deflation that started in 2008. The process has been slowed and an outright crash has been avoided by huge amounts of central bank liquidity pumped into the banking system.

    2) This flow and the accompanying discount operations have resulted in serious and sooner or later unsustainable market distortions: < 0% "interest" as a glaring example.

    3) Stock markets, on the receiving end of the slush fund, are overvalued: measured against long-term PE averages, overvalued by 30 – 50%. Commodity prices are falling across the board. Residential real estate is shaky in many markets, other areas have yet to recover from 2008. Commercial property is way overbuilt.

    4) There has been NO real change in financial regulation; fraud is widespread and uncontrolled, and billions that investors and little old ladies think they have doesn't exist.

    Meanwhile, the wheels are coming off politically. The Republicans REFUSE to spend a dime on much needed infrastructure, and have adopted a radical ideology that says a complex federated republic of over 300 million doesn't need a federal government. Donald and the gibbering mass. Hillary and the preppy Wall Street mafia.

    Hope for the best folks.

  12. Paulo says:

    As Meme said, “The average person has not forgotten the housing crash, but the elites did and they are the ones sweating now. ”

    Yesterday, Charles Hugh Smith wrote an excellent essay on Brexit being the ‘chance for working folks to stick their thumb in the eye of the .01%.

    I hope that the last 20 years have shown people that even if they have a professional degree and a great job title, if they collect a pay cheque they are still ‘workers’ just like the guy pushing a truck or broom. If they don’t get it by now they won’t survive the end of Globalization.

    People have had enough as trust erodes. The last group to buy into the propaganda has been the over-indebted university grads, some who have found their newly minted Arts degrees are good for getting a job parking cars in Vegas. The decline in opportunity is more than obvious. The current demand for credentials by employers is really just a method to lower the pile of resumes and job applications.

    Tough times ahead. Workplace survivors who have been through tough times before know the best solution at keeping a job is making yourself indispensible. You don’t have to brown-nose, but you have to do your best, each and every day. Add to that some ‘luck’ , and maybe you can get through this.

    It must be very scary for small business owners.

    The elites? Blankfeins of the World? May there be a place in hell for them after they are tarred, feathered, and run off the face of the earth on a rail.


  13. unit472 says:

    Whether the UK ever leaves the EU is debatable, it could be the other way round with the EU falling apart as ( or if) Britain negotiates its divorce. The British pound has already had a stiff devaluation and the effects of this will show up immediately amongst British ex-pats in Spain and tourist revenue all along the Mediterranean. All across Europe people and business will be hunkering down waiting for the new British government. If slow growth was a given what happens when negative growth meets negative interest rates? Toss in a banking crisis, riots and the odd terrorist attack or two and Europe is not far from imploding.

    • bead says:

      Draghi is baffling them with BS but the Eurocrats are happy to be confused. What nobody seems to know is when he reaches the topple over threshold. Extend and pretend! The Italians can put their worries away until 2055.

  14. Chicken says:

    The sooner everyone realizes and accepts the EU is an unworkable boondoggle concocted by an elite class with hopes of vacuuming up the wealth of nations, the better.

    The US has gone too far down this path of fascist money as well, it’s debatable the system actually serves the people anymore.

    NKE – Even this company is having trouble growing despite they pay slave labor rates to underage workers. NKE’s problem is, the average Walmart employee cannot afford their rubber shoes anymore unless he supplements his income by selling heroine in the streets.

  15. wholy1 says:

    When One’s economy is predicated on “System D” – surivive to thrive in the aftermath!

  16. ML says:

    Of Brexit, there are in my opinionn are two distinctly separate issues here.

    First, leave voters, of which I am one, were not swayed by Boris or anything much the leave camp might have said. We had already made up our minds. Boris etc was simply theatre, a performance to keep us amused during the waiting period. Some 4m people, excluding me, supported UKIP and its campaign to leave EU long before the referendum was held. The support for leave grew apace, imcluding younger voters. The groundswell of discontent caused by being told the UK can and cannot because of some EU dictum was already being felt.

    The second is the impact of the Leave majority (some 4%) on the latchers on. When a business (‘A”) latches on to the path of another business (“B”), and B decides to quit that particular path, it is inevitable that A will get annoyed. But the annoyance is only a reflection of A’s lack of original thinking and preference for laziness. The markets have not become global because of B’s aspirations but because of A’s. Using Adobe Photoshop software, for example, numerous unconnected parties have capitalised on AP’s success with products for using the software and have done very well out of simplifying P for the masses, fair enough. But if Adobe were to remove P from the market it is inevitable that the unconnected parties would suffer loss of livelihood.

    Although Albert Camus said “it is a kind of spiritual snobbery for people to think they can do without money” those of us that voted leave, whether each individual can afford to or not did not opt for what in the short term is likely to be a bumpy path merely for it to continue downwards but because long-term we expect the UK to be better off – and quite possibly others too. Our collective concern for those adversely affected by the vote is not to have invoked revenge on the elite and EU advantaged but to show the world that sovereignty and parliamentary democracy are in the long run more important.

    The financial markets have taken a hit only because mostly the participants latch on to the idea of perennial growth. Without downturns, those that make their money when stocks and currencies and other ‘assets’ go down in value would have nothing to look forward to. The warning signs of a tumble have been rumbling for ages: the growth only addicts cannot say they were not warned. Critiicising Leave voters for their decision of a lifetime and beyond is just sour grapes.

    • Agnes says:


      I am curious if the example of Iceland was at all important to Leave voters.

  17. NotSoSure says:

    The answer is not very. Just witness another market ramp up.

  18. wholy1 says:

    Well, it’s still a leviathan T-Rex, wobbly for sure.
    Just hope ya’ll are positioned far from that flailing tail when the beast can no longer stand.

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