So much for the Brexit! Now what?

For the most part, July was a decent month across the board. Almost everything did well with the Brexit in the rear view mirror.

However, as we know, the world is not all rainbows and unicorns. There were some areas of weakness and there remain concerns that we continue to analyse daily.

So what’s next?

Historically, we know that August and September typically have run with a coin toss type of outcome with regard to performance. The historical data shows that 55% of the time August was positive in the last 20 years. Over the same time frame, September shows a 50% history of positive returns for the Dow Jones. Generally, these are not great odds for making money. To compound this probability of outcomes, August, in the past 20 years has produced an average of a negative 1.3% return and September has added in another negative 0.70%. Once again, not a great environment. BUT WAIT! For those looking to buy longer-term assets, don’t we want lower prices? One would think so. If history repeats itself, should we be buying quality assets on down days over the next couple of months? Warren Buffet just called and affirmed the answer to that age old question as a YES…

Okay, but what about this US election?

Our view, right or wrong, is that the US is now faced with the lesser of two evils. On one hand we have “The Hair” and on the other hand, we have “The Liar”. Now clearly it is easy for us as Canadians to throw stones and use Trumpisms because we have arguably the best-looking leader in the free world – Right? We kind of have to chalk all of this up to political theatre. Whoever gets into the White House will have a rude awakening. There must be countless advisors, head chefs, dishwashers, backup dishwashers, etc. that at the end of the day account for a large part of the decisions that get executed on a micro, macro and global level. The DEBT clock did not get to $19 trillion dollars because of one man’s decisions. It would have taken a small army of decision makers to amass such a number.

See the real-time debt clock at:

We all wish we could count money that quickly.

Does it really matter who runs the US, of the two candidates? Will Coke sell more soda or less soda if Trump (The Hair) gets elected? Will people stop buying Fords if Clinton (The Liar) wins? I suspect the answers to these questions are similar to the Brexit experience. Once we know, we know. Will anything change that dramatically overnight? Likely not. So, it kind of looks and feels like more noise today. 

Show Me the Money

Now this is important. Why should the value of a company go up or down? If you make more money, your value in a company should be higher, and if you make less money your value in a company should be lower (super simplification). If we collectively get better earnings, the outcome generally should be better, and likewise, should earnings fall the outcome won’t be as good.  

Where are we today? This is important because it is kind of like political theatre. Consider that at the start of the first quarter in 2016, the growth estimate for earnings was -10.1%, while the previous quarter’s estimate was -6.7%. This is a negative number but reflects an improvement. Bad, but not as bad. This is where it gets a bit math related. There has been a sequence of lower lows, in which both the level of earnings and the rate of change were falling. So where are we now? At the beginning of the second quarter’s earnings season, the estimate was at -5.8%. Somewhat better again, but still negative. The best of the worst so to speak, or in really bad country grammar “less bad”… If we could see into the future, and saw more and more of “less bad”, someday the earnings expectation may turn into a positive number – right – maybe? 

Conspiracy Theory

Some people believe that the central banks around the world are orchestrated to keep the economies alive. True, maybe, sort of, I don’t know for sure…

These are all true. For our regular readers, we all now know there are negative interest rates in various parts of the world and this is not by fluke. This is a central bank operation to get money moving. Stimulus, one might say. Can and will there be more of it? Remember our old friend Mark Carney, Canadian Economist and now the head of the Central Bank of England? He just lowered rates in England – more stimulus. So yes, there is absolutely a bigger force at work to stimulate and help grow world economies. If the music ever stops, make sure you have your bum in a seat. Our view is that the music has a long time to continue playing. Why is this so? Consider that our debt clock above started playing in 1989. This sounds recent, but that was almost 30 years ago. Some of our readers likely have kids this age. For those kids, this is a lifetime of stimulus. Our kids and their kids may read from the same songbook in another 30 years.


We read this recently and it resonated with us. F.E.A.R.’s (False Evidence that Appears Real)

We think this is important for a number of reasons. First and foremost is that fear can be destabilising and can drive irrational decision making. This is typically very painful. There are always a lot of things to fear. In a recent earnings release, a US concrete company had poorer earnings due to bad weather (a lot of rain in key markets). The market discounted their price with the fear that the rain would continue into the future (build the ark) and they would never recover or have good earnings again. This is more of an example of real evidence that gets extrapolated into the future, but you catch our drift. Quick, get on the ark!

Final Thoughts

We have been looking at volatility for many quarters. One could say volatility is the new normal. However, there is a current trend that has our attention. There is a real decline in volatility. We understand that this is not a permanent condition. The reason we look at this is because we see it partly as a protection of capital mechanism. We realise that there is nothing perfect in this regard, but we continue to place a lot of importance on this as a measure of protection of capital. Here is a short-term view of volatility since the start of the year.

Source: VIP Wealth Solutions and Bloomberg

We want to have our bum in a chair if the music stops for any period of time.


The opinions expressed in this report are the opinions of the author and readers should not assume they reflect the opinions or recommendations of Richardson GMP Limited or its affiliates. Assumptions,opinions and estimates constitute the author’s judgment as of the date of this material and are subject to change without notice. We do not warrant the completeness or accuracy of this material, and it should not be relied upon as such. Before acting on any recommendation, you should consider whether it is suitable for your particular circumstances and, if necessary, seek professional advice. Past performance is not indicative of future results. Richardson GMP Limited is a member of Canadian Investor Protection Fund. Richardson is a trade-mark of James Richardson & Sons, Limited. GMP is a registered trade-mark of GMP Securities L.P. Both used under license by Richardson GMP Limited.