Wow. A Record $11.7 Trillion Negative Yielding Sovereign Bonds Exacerbated by Brexit!

In barely a month, sovereign debt with negative yields has spiked by 12.5% from $10.4 trillion to $11.7 trillion! [updated: I revised growth figures to reflect  the numbers below]

Here is the updated report from Fitch: (bold mine)

Investors' flight to safe assets following the UK's EU referendum on June 23 pushed the global total of sovereign debt with negative yields to $11.7 trillion as of June 27, up $1.3 trillion from the end-May total, according to new analysis by Fitch Ratings. Brexit-related concerns drove more long-dated bond yields negative, with particularly big shifts in German, French and Japanese yield curves during June.

Worries over the global growth outlook, further fueled by Brexit, have continued to support demand for higher-quality sovereign paper in June. Widespread adoption of unconventional monetary policies, including large-scale bond-buying programs and negative deposit rates, have driven the large increases in negative-yielding debt seen this year…

The biggest drivers of the total increase during June were seen in longer-dated bonds. For example, German 10-year bund yields swung into negative territory and sub-zero yields moved further out on the curve for Japan -- now out to 17 years. Also, in Switzerland, virtually all sovereign debt carried a negative yield on June 27.

Japanese government bonds (JGBs) continue to represent about two-thirds of the global total ($7.9 trillion), while Germany and France each now have over $1 trillion in sovereign debt with sub-zero yields. Japan's negative-yielding debt total grew by about 18% during the month, while Germany and France's total grew by 8% and 13%, respectively. European negative-yielding debt increases were offset in part by an approximately $0.2 trillion reduction in the Italian total since May 31. This likely reflected investor risk aversion related to Italy leading up to and following the Brexit referendum.

The spread of negative yields into longer-dated paper was particularly evident in June. A total of $2.6 trillion in sovereign bonds with maturities of seven years or more now trade at a negative yield. This compares with the end-April total of $1.4 trillion.

The increasing amount of long-term negative-yielding debt underscores the challenges faced by large bond investors such as insurance companies that need to match long-term liabilities with similar maturity assets. As more of the global universe of safe assets drops into negative-yielding territory, income for these investors continues to fall.

Here is what I wrote last June 14:

This means that instead of borrowers paying lenders for the privileged to access someone else’s or the lender’s savings, negative yields means lenders are paying borrowers to borrow! Of course under the fractional reserve banking, lending is not a function of someone else's savings but from the central bank's digital press. 

Even more, any entity that owns a negative yielding instrument is guaranteed of losses. So the broadening of negative yields simply means that losses in the financial and economic system has been mounting! And all these for the sake of holding onto liquid instruments that ensures of the financing of spendthrift governments around the world. 

In short, negative yield is like a premium for the convenience yield. 

Think of what this will do to financial institutions, which are required to hold government debt as part of their Tier 1 Capital. 

And think of what this will do to pension and insurance funds. In order to match assets with liabilities these institutions are being forced out into the financial markets to gamble. And the yoke of the attendant risks from such speculative activities will be shouldered by depositors and pension beneficiaries…and eventually taxpayers and currency holders 

Notice that Brexit has only aggravated the spreading of negative yielding bonds yields.

The real reason for such dynamic has been Negative Real Rates Policy (NIRP). 

And notice too that bonds with a negative yield carry have been spreading faster than the growth in the government’s debt stock at $58 trillion as of 2Q 2014 based on McKinsey Global's estimates. This should be around close to $70 trillion today.

Uncharted here has been the concerted sharp flattening of the yield curves of developed economies in conjunction with negative yields.

Again, aside from mounting systemic losses and the increasing difficulties (growing imbalances) to match asset-liability gaps in balance sheets, the other outcome will be to deter credit activities which consequently should translate to further depletion of systemic liquidity. That’s aside from, to reiterate, losses being incurred by financial institutions. All these just to save the debt plagued governments.

The post-Brexit rally has hardly improved Japan’s Topix Banking Index, which has been drifting at a 3 year low

Stocks of Europe’s banks have currently been treading at 2008 crisis levels. A break below 2008 levels should ring alarm bells of a global banking crisis.

The world is complexly interconnected. 

While the US still operates on positive yield, exogenous developments from NIRP seem to have diffused into the US. 

Of course, internal dynamics from zero bound also plays a big factor.

So despite the furious two day rally in the equities, such has hardly diminish the reality that US bank stocks have been undergoing tremendous pressures!

And banking strains have been spreading too. This has been manifested in the Broker Dealer and Insurance indices

Add to these several more ominous writings on the wall: increasing incidences of global market crashes and magnified volatility (since 2013), the ongoing deepening anomalies in wholesale finance, the Chinese yuan's weakening, the US dollar strength, slowing global economy, swelling accounts of nationalism which may bring about heightened risks of protectionism and which subsequently means reduced social mobility and capital controls, intensifying geopolitical risks and more.

How much more pressures can the world absorb before the system becomes unglued?

 

Infographics: Billion Dollar Companies That Originated from Garages

From the Visual Capitalist:

The heroic story of going from somebody’s garage to being worth billions has got to be one of the most compelling tales within entrepreneur and startup folklore.

It shows that one potent idea can be so powerful that it eclipses all the other factors.

Entrepreneurs that are a part of this “garage-to-riches” story do not start with $20 million in the bank. They do not typically have proven and accomplished technical teams. They must resort to building their new enterprise with elbow grease and ingenuity. They must make up for a lack of capital with hard work and discipline – but most of all, conviction.

BILLION DOLLAR COMPANIES STARTED IN GARAGES

The following infographic shows the legendary companies that had humble beginnings with a close proximity to the toolbox and the family car. From media conglomerates to the world’s most visited website, here are the multi-billion dollar companies that were started in garages:

As a side comment: The garage to riches entrepreneur model is more than just a potent and powerful idea, in reality such signifies the conversion of transformative or even disruptive ideas into products and services that provided huge benefits to consumers  with which the same consumers had been willing to pay for. These products and services essentially delivered significant consumer surpluses. And their size and heft had merely been a manifestation of how consumers has rewarded them, or how consumers reciprocated with the products and services provided by the said entrepreneurs through magnified profits. Such are the wonders of the marketplace. 

Courtesy of: Visual Capitalist

Fed Warns On Vulnerabilities of Stocks and Commercial Real Estate, BIS Warns on Risks from Debt Fueled Growth

The other week the US Federal Reserve issued warnings on US commercial real estate:

From the Bloomberg: (bold mine)

The Federal Reserve warned that prices in the commercial real-estate market may have run up too far too fast.

Valuations in commercial real estate “appear increasingly vulnerable to negative shocks, as CRE prices have continued to outpace rental income,” the Fed said in its semiannual Monetary Policy Report to Congress. The Fed noted that prices exceed their pre-crisis peaks by some measures.

The Fed included a special section on financial stability risks in the report, which accompanies Chair Janet Yellen’s testimony. The report said that even given “moderate’’ financial vulnerabilities, risks of external shocks, such as the U.K.’s possible exit from the European Union, pose stability risks.

The FED also seemed worried over stock market valuations and credit conditions

The report also highlighted issues related to credit exposures to the energy sector, money-market mutual funds and stock valuations.

The central bank said price-to-earnings ratios on a forward-looking basis for stocks have increased to a level “well above” their median for the past 30 years.

“Although equity valuations do not appear to be rich relative to Treasury yields, equity prices are vulnerable to rises in term premiums to more normal levels, especially if a reversion was not motivated by positive news about economic growth,” the Fed said.

The Fed said “some structural vulnerabilities are expected to persist” in money-market mutual funds even after Securities and Exchange Commission reforms go fully into effect in October.

“Leverage for the non-financial corporate sector has stayed elevated and indicators of corporate credit quality, though still solid overall, continued to show signs of deterioration for lower-rated firms, especially in the energy sector,” the Fed said in its report.

Last week, the central bank of central banks, the Bank for International Settlements likewise warned that debt fueled growth is unsustainable.

From their Annual Report. From the first segment

The Conclusion

Judged by historical standards, the performance of the global economy in terms of output, employment and inflation has not been as weak as the rhetoric sometimes suggests. In fact, even the term "recovery" may not do full justice to its current state (Chapter III). But a shift to more robust, balanced and sustainable expansion is threatened by a "risky trinity": debt levels that are too high, productivity growth that is too low, and room for policy manoeuvre that is too narrow. The most conspicuous sign of this predicament is interest rates that continue to be persistently and exceptionally low and which, in fact, have fallen further in the period under review. The global economy cannot afford to rely any longer on the debt-fuelled growth model that has brought it to the current juncture.

The Unholy Trinity

Less comforting is the context in which those economic gauges are evolving and what they might tell us about the future. One could speak of a "risky trinity": productivity growth that is unusually low, casting a shadow over future improvements in living standards; global debt levels that are historically high, raising financial stability risks; and a room for policy manoeuvre that is remarkably narrow, leaving the global economy highly exposed…

Interpreting the evolution of the global economy is fraught with difficulties, but it is necessary if we are to identify possible remedies. As we have in recent Annual Reports, we offer an interpretation using a lens that focuses on financial, global and medium-term aspects. We suggest that the current predicament in no small measure reflects the failure to get to grips with hugely costly financial booms and busts ("financial cycles"). These have left long-lasting economic scars and have made robust, balanced and sustainable global expansion hard to achieve - the hallmark of uneven recovery from a balance sheet recession. Debt has been acting as a political and social substitute for income growth for far too long.

Risks

The first risk concerns the possible macroeconomic dislocations arising from the combination of two factors: tightening global liquidity and maturing domestic financial cycles. It is as if two waves with different frequencies merged to form a more powerful one. Signs that this process was taking hold appeared in the second half of 2015, when foreign currency borrowing peaked and conditions tightened for some borrowers, especially among commodity producers. After the turbulence at the beginning of 2016, however, external financial conditions generally eased, also taking the pressure off the turn in domestic financial cycles. And in China, the authorities provided yet another boost to total credit expansion in an attempt to stave off a drastic turn and smooth out the needed economic rebalancing towards domestic demand and services. As a result, tensions in EMEs have diminished, although the underlying vulnerabilities remain. Events often unfold in slow motion for a long time and then suddenly accelerate....

Even so, prudence is called for. In some of these economies, the increase in domestic debt has been substantial and well beyond historical norms. The corporate sector has been very prominent, and it is there that the surge in foreign currency debt has concentrated even as profitability has declined to levels below those in advanced economies, notably in the commodities sector (Chapter III). While the reduction in that debt appears to have begun, most notably in China, poor data on currency mismatches make it hard to assess vulnerabilities. The growth of new market players, especially asset managers, could complicate the policy response to strains by changing the dynamics of distress and testing central banks' ability to provide liquidity support. In addition, EMEs' greater heft and tighter integration in the global economy indicate that the impact of any strains on the rest of the world would be bigger than in the past, through both financial and trade channels (Chapter III). 

The second risk concerns the persistence of exceptionally low interest rates, increasingly negative even in nominal terms and in some cases even lower than what central banks expected. This risk has a long fuse, with the damage less immediately apparent and growing gradually over time. Such rates tend to depress risk premia and stretch asset valuations, making them more vulnerable to a reversal by encouraging financial risk-taking and raising their sensitivity to disappointing economic news (snapback risk) (Chapter II). They sap the strength of the financial system by eroding banks' net interest margins, raising insurance companies' return mismatches and greatly boosting the value of pension fund liabilities (Chapter VI). And over time they can have a debilitating impact on the real economy. This effect occurs through the channels just discussed, including by weakening banks' lending capacity. But it also arises by encouraging the further build-up in debt and by no longer steering scarce resources to their most productive uses. In effect, the longer such exceptional conditions persist, the harder exit becomes. Negative nominal rates raise uncertainty further, especially when they reflect policy choices (see below).

The third risk concerns a loss of confidence in policymakers. The more time wears on, the more the gap between the public's expectations and reality weighs on their reputation. A case in point is monetary policy, which has been left to shoulder an overwhelming part of the burden of getting economies back on track. Once the crisis broke out, monetary policy proved essential in stabilising the financial system and in preventing it from causing a bigger collapse in economic activity. But despite extraordinary and prolonged measures, monetary policymakers have found it harder to push inflation back in line with objectives and to avoid disappointing gains in output. In the process, financial markets have grown increasingly dependent on central banks' support and the room for policy manoeuvre has narrowed. Should this situation be stretched to the point of shaking public confidence in policymaking, the consequences for financial markets and the economy could be serious. Worryingly, we saw the first real signs of this happening during the market turbulence in February.

Debt Trap

This more symmetrical policy over financial cycles could help moderate them and avoid the progressive loss of policy room that is arguably a serious shortcoming of current arrangements. One symptom of that loss is the relentless increase in the debt-to-GDP ratio, both private and public. Another is exceptionally low policy rates. While part of their decline in real terms surely reflects secular factors beyond policymakers' control, part probably also reflects policymakers' asymmetrical response, which can contribute to the build-up of financial imbalances and to their long-term costs for output and productivity. This raises the risk of a debt trap, whereby, as debt increases, it becomes harder to raise rates without causing damage. And it means that, over sufficiently long horizons, low interest rates become to some extent self-validating. Low rates in the past help shape the economic environment policymakers take as given when tomorrow becomes today. In this sense, low rates beget lower rates (see below).

Huge anomalies (from another BIS study)

Financial markets experienced alternating phases of calm and turbulence in the past year, as prices in core asset markets remained keenly sensitive to monetary policy developments. Investors also closely followed growing signs of economic weakness in the main EMEs, especially China. Bond yields in advanced economies continued to fall, in many cases to historical lows, while the share of outstanding government bonds trading at negative yields reached new records. Low yields reflected low term premia as well as a downward shift in expected future short-term interest rates. Investors turned to riskier market segments in a search for yield, thereby supporting asset prices despite already high valuations. Unease about such valuations, coupled with concerns about the global outlook and about the effectiveness of monetary policy in supporting growth, resulted in recurring selloffs and bouts of volatility. Markets appeared vulnerable to a sharp reversal of high valuations. Some outsize bond price movements point to changes in market liquidity, but lower leverage should support more robust market liquidity under stress. Financial markets also exhibited persistent market anomalies that spread further, such as a widening cross-currency basis and negative US dollar interest rate swap spreads. These anomalies partly reflected market-specific supply-demand imbalances, sometimes reinforced by the impact of central bank actions on hedging demand. They also reflected shifts in the behaviour of large dealer institutions, which are now less active in arbitraging the anomalies away.

Lasting legacy of boom bust cycles and coming changes (from a third study)

Global growth of GDP per working age person slightly outpaced its historical average and unemployment rates generally fell in the year under review. Perceptions of economic conditions, however, were defined by further falls in commodity prices, large swings in exchange rates and lower than expected headline global growth. These developments hint at a realignment of economic and financial forces that have unfolded over many years. In EME commodity exporters, the downturn in the domestic financial cycle mostly compounded the fall in export prices and currency depreciations, with economic conditions becoming weaker. In general, tighter access to dollar borrowing amplified these developments. The anticipated rotation of growth failed to materialise, with activity in advanced economies not picking up as much as needed to offset slower EME growth, despite some upturn in domestic financial cycles in the advanced economies most affected by the Great Financial Crisis. Lower oil and other commodity prices have not yet triggered the expected fillip to growth in importers, possibly because some parts of the private sector are still nursing weak balance sheets. The scars of repeated financial booms and busts and debt accumulation also hang over global potential growth: factor misallocation appears to be holding back productivity, with debt overhang and uncertainty seemingly restraining investment.

In short, all these studies from the BIS represent technical gobbledygook euphemism of the global financial bubble

Brexit Represents Another Pin to the Gargantuan Global Financial Bubble and Exposes on Central Bank’s Existential Crisis

Volcanic Tremors: Escalating Signs of Market Crashes and Volatilities!

If you haven’t noticed, there have been three major tremblors that have hit global financial markets in a span of almost just a year. Let me repeat three events in ONE year!

First was in August 2015 (this was blamed to China’s weakening yuan), the second was in January 2016 (also blamed on yuan and on oil price weakness) and the seeming third would represent last Friday’s Brexit inspired selloff.

Yet market tremblors goes all the way back to emerging market crash in May of 2013, the “flash crash” in US treasuries in 2014 which coincided with the weakening of global stock markets and likewise a spike in volatility in global stocks in December of 2014.

Or haven’t you noticed of the growing frequency and intensity of tremors that has been afflicting global financial markets?

Well, one way of predicting volcanic eruption is to identify what they call as “harmonic tremors” or a series of minor earthquakes (or an increase in pressures within the system) that serves as precursor to a major eruption.

So if I am not mistaken, given the amplifying frequency and intensities of market turmoil, the real thing—the equivalent of a major financial eruption—may not be so far ahead.

As I recently wrote, the increasing incidences of market crashes (since 2013), the ongoing deepening strains in wholesale finance, the $10 trillion+ and growing negative yielding bond markets, sustained crashing of European-Japanese banking stocks, the Chinese yuan's weakening, US dollar strength and more, all combine to look like preliminary manifestations of "volcanic or harmonic tremors" in motion, only that these applies to the sphere of the global financial markets.

And Brexit could just be the one of the probable spark. Or Brexit could be one of the aggravating factors that will contribute to an eventual financial market eruption soon.

Brexit: Another Pin to the Gargantuan Global Financial Bubble

My late Dad used to lecture me that I should develop a keen sense of observation. Well, unless I am missing something, predicting earthquakes and predicting financial catastrophe may have similarities. Besides, as noted above, there are many fundamental and market footprints that has been pointing at such direction.

Just take a look at how central banks and financial authorities responded to Brexit. Central banks have essentially panicked!

Central banks of India and Korea reportedly intervened in their respective currency markets last Friday, in support of their currencies. The Swiss central bank, the SNB, admitted to their fx interventions while Norway’s central bank injected $1.6 billion in liquidity in their financial system. The US Federal Reserve (offered swap lines), UK’s Bank of England, the Bank of Japan, the ECB, the People’s Bank of China and the Swedish Central Bank all said that they are ready to adapt measures necessary to ensure liquidity.

The G-7 announced that their central banks “have taken steps to ensure adequate liquidity and to support the functioning of markets. We stand ready to use the established liquidity instruments to that end.”

In short, global central banks have already launched a massive tsunami of stimulus to forestall Friday’s black swan…yet these measures has initially failed to calm the markets.

But why shouldn’t it fail?

At the week’s inception, global markets have essentially powered significantly higher in anticipation of a status quo through the expected victory by the “remain” camp. Such optimism had mainly been based on misleading (or perhaps manipulative) polls and bookies odds.

In other words, the financial market consensus bought hook line and sinker the political kool aid which served as motivation to spike the markets up. Or Bremain was seen as having entrenched the establishment’s position.

Yet the portrayed factitious relationship was majestically debunked! Financial markets didn’t represent the majority! Or England’s majority voted against the establishment’s interests!

Thus massive trade and arbitrage positions that had been built on this one way trade had to be unwound…violently!

In essence, the mirage of asset inflation through central bank policies of invisible wealth redistribution to the establishment institutions was exposed as the emperor with no clothes.

Brexit served as another pin to have popped the humungous global asset bubbles that have been spawned, fostered and nurtured by central bankers. 

While central banks have inflated asset prices, they cannot manipulate people in perpetuity. Such policies have only been widening the wedge between centralized political institutions benefiting from such policies and the average people. Hence, the backlash from invisible wealth transfers has virtually hit a critical inflection point!

Brexit Exposes Central Bank’s Existential Crisis

The priest of inflationism John Maynard Keynes once presciently wrote,

By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method they not only confiscate, but they confiscate arbitrarily; and, while the process impoverishes many, it actually enriches some. The sight of this arbitrary rearrangement of riches strikes not only at security but [also] at confidence in the equity of the existing distribution of wealth.

Those to whom the system brings windfalls, beyond their deserts and even beyond their expectations or desires, become "profiteers," who are the object of the hatred of the bourgeoisie, whom the inflationism has impoverished, not less than of the proletariat. As the inflation proceeds and the real value of the currency fluctuates wildly from month to month, all permanent relations between debtors and creditors, which form the ultimate foundation of capitalism, become so utterly disordered as to be almost meaningless; and the process of wealth-getting degenerates into a gamble and a lottery.

Lenin was certainly right. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose. 

ZIRP, QE and NIRP has essentially represented “all permanent relations between debtors and creditors, which form the ultimate foundation of capitalism, become so utterly disordered as to be almost meaningless; and the process of wealth-getting degenerates into a gamble and a lottery.”

Asset inflation, which has been signified as the principal channel of central bank policies, have turned financial markets into a “process of wealth-getting degenerates into a gamble”

And because such “process engages all the hidden forces of economic law on the side of destruction” even when “not one man in a million is able to diagnose”, the indirect and incremental devastation of the real economy through its various symptoms (inequality, Middle East wars, refugees, sclerotic economies, mounting debt burdens, systematic excess capacities on bubble sectors, stagnant wages, and more) which has incited on the “overturning the existing basis of society” has now boomeranged.

Brexit and its potential domino effect or contagion will likewise expose on the latent fragilities brought about by central bank policies.

For instance, Italy’s debt crisis will unravel again when bids on Italy’s bonds dissipate. Importantly, any further “exits” from EU will further undermine the ECB’s ability to conduct its monetary policies. Such would magnify debt problems of crisis afflicted nations as Italy. 

As analyst David Stockman explained

Since Italy owes upward of $2 trillion on it government accounts alone, its bond market is an explosion waiting to happen. And that means its bedraggled banks are, too.

That’s because one feature of the Draghi Ponzi was that national banks in the peripheral nations started buying up their own country’s rapidly appreciating sovereign debt hand-over-fist. Italy’s banks own upwards of $400 billion of Italian government debt.

That’s the one and same Italian government that cannot possibly cope with its existing 135% debt to GDP ratio. And that’s also before the populists take power and are forced to bailout the country’s already insolvent banking system. The latter will suffer from a shock of capital and depositor flight after the current government falls(soon), and Prime Minister Renzi joins Cameron and Rajoy at some establishment rehab center for the deposed.

In short, Brexit and the political risks from further dilution pose as an EXISTENTIAL crisis not only for the EU but importantly for the European Central Bank. This would also present as a clear and present danger for central bank policies around the world as the political economic and financial infrastructure that has underpinned the current policy transmission mechanism will likely undergo radical changes.

What is Unsustainable Won’t Last

Some may deny to say that a day’s event may not signify a trend. Well, while this may partly true, such perspective in essence would redound to a reckless dismissal of swelling signs of impending disaster. Just think of a dam whose walls have been affected by spreading of cracks and crevices through increased leakages. Brexit is just one of them.

And of course, expect the establishment to fight tooth and nail to keep retain the status quo. Aside from a tsunami of stimulus of global central banks, some segments of the British population have already pushed for second referendum.

Besides, Brexit is bound to happen. As I wrote in 2012:

In reality, EU’s economic integration serves merely a cover for covert plans to establish political fantasyland. Eventually the path towards centralization will lead to unnecessary violence and the self-implosion of an unsustainable and unviable political system

Also in another of my Prudent Investor blog post in the same year:

Yet political solutions (bank and sovereign bailouts, ECB’s interventions, surging regulations, higher taxes and etc…) will not only hamper economic recovery, they will lead to more social frictions which increases the risks of the EU’s disunion—as evidenced by the snowballing secession movements—and of the escalation of violence.

Finally, financial math indicates that what is unsustainable will have to end.

Interviewed by the Mises Institute, Godfrey Bloom, a British politician who served as a Member of the European Parliament(MEP) for Yorkshire and the Humber from 2004 to 2014 has this foreboding revelation: (bold mine)

The ECB is broke 3 trillion pounds. The Germans have 900 billion pounds owed to them by shadow banking. The ECB are buying 80 billion pounds worth of junk bonds every month. They’ve already bought something like 380 billion. You simply can’t go on like this forever and our own government in the UK and nobody’s talking about this, Jeff. Nobody is talking about this. We are the second most indebted nation in the world after Japan and I see pundits talking about our debt being 80% of the GDP, but they’re not taking into consideration unfunded public pensions and public funding initiatives which have been running for about 10 years. If you take everything into consideration and of course, the businessman listening to the cast, will know that if you leave off international accounting standards, your liability for your pension fund and anything else, it’s illegal, it’s a criminal offense and you’d go to prison. It doesn’t really matter what we vote on Thursday. The clock is ticking and the whole thing will collapse in a few years.

In the movie series the Matrix, the Oracle counseled on the leading character Neo on how to beat his opponent,

Everything that has a beginning has an end

 

 

Brexit: The Day After: Financial Market Damage Far Worst in Europe than in UK!

During the campaign period, fear mongering became the centerpiece of advocates from the contending parties of the remain and leave camp. While the “leave” camp focused on immigration, the “remain” camp fixated on economics. For instance, PM David Cameron warned that a choice in favor of Brexit would mean a “self destruct option” for Britain. 

Well the day after Brexit, the financial markets have rendered their preliminary verdict. 

First, UK’s FTSE was down 3.15% (see green rectangle below), which was bad, but not as bad as the PIGS. 

Portugal’s PSI 20 tanked 7.0%, Spain’s IBEX 35 crashed 12.4%, Italy’s MIB collapsed 12.5% and Greece’s Athen’s 20 was smashed by 15.8%. (quotes from Euroinvestor.com)

It has not just been the PIGS though, the French CAC 40 cratered by 8% while the German DAX plunged 6.8% 

chart from investing.com

Next, Europe’s banking stocks spearheaded the mayhem. The Stoxx 600 banks was crushed by a horrifying 14.5%. Credit Suisse and Deutsche Bank shares plummeted 16.11% and 17.5%!!!

Brexit only rubbed salt to the extant wounds.

Additionally, yields of 10 year bonds of the peripheral crisis afflicted nations spiked. (charts from Bloomberg)

This comes as UK’s Gilt soared to record highs or yields at record lows. 

This only means that the yield spread between the periphery and UK has significantly widened. 

What yesterday's actions has shown us: It hasn’t been UK that is in trouble but the EU, specifically banking system and the PIGS!

Has Brexit reopened the old wounds from the European debt crisis in 2011? 

While it is true that the British pound fell to set new a record low yesterday, what’s more interesting has been the record volatility encountered by the GBP (see chart below from Bloomberg). 

The spike in the GBP’s volatility surpassed previous episodes of heightened financial distress, particularly the Great Recession 2008 and in 1992, or when George Soros’ "broke the Bank of England".

Positive for global mainstream markets eh?