The media in the U.S. have gotten Brexit wrong. The real story requires an excursion to Europe, and then back into markets. Briefly, stock markets have recovered on expectations that central banks will ease anew. Bond markets, on the other hand, have held their deep declines in yield — it is strange not to have some bounce-back, and not explained by prospects for central banks. Yields as low as these reflect anxiety.

The media in the U.S. have gotten Brexit wrong. The real story requires an excursion to Europe, and then back into markets.

Briefly, stock markets have recovered on expectations that central banks will ease anew. Bond markets, on the other hand, have held their deep declines in yield — it is strange not to have some bounce-back, and not explained by prospects for central banks. Yields as low as these reflect anxiety.

The U.S. media decided that Brexit is all about Donald Trump. Right-siders are pleased by any anti-government action, and left-siders are horrified by racist, nativist, xenophobic Brexit.

We can find those bad traits in any nation or tribe on earth, but they were not central to Brexit. Nor a sign of Trumpism or mis-named “populism” sweeping the globe.

The European Union (EU) began as the Common Market in 1957, a customs union intended to reduce tariffs and facilitate commerce across borders. It succeeded.

Flash forward to the 1990s, the Cold War ended and Germany and France pushing “one Europe,” EU mission-creep into a super-sovereign in Brussels. Germany believes that unity will keep the peace, although a mystery why it could not just control itself (lipstick on bathroom mirror: “Stop me!”). Germany is a unique collective, rules upon rules but mutually negotiated and happy Germans.

French government is also unique, run by technocrats (Google: “les énarques”) who stay in office no matter who is elected. These two traits — rules and technocrats — are the basis for the new and oppressive EU. Ancient imperial impulses are in play by non-violent means, but in hopeless conflict among 28 different nations, cultures, languages, and sub-cultures.

Then in 1999, the euro currency appeared, half of the EU smart enough to stay out.

The EU Parliament has the appearance of democracy, but the root of democracy is consent by the governed. Imagine a Europe-wide election: “Do you surrender sovereignty to the EU Parliament?” Even in Germany it would be laughed off the continent. The EU is based on treaties, not citizen assent.

Two events have ripped the covers off twenty years’ resentment at mission creep: the euro currency, a disaster punishing to everyone in Europe but Germany, and second Merkel’s decision last year to allow entrance to one million Middle Eastern refugees.

Under EU open border rules, once these people have EU status they may migrate anywhere within the EU and qualify for all government aid.

Britain for more than a thousand years has been a trading state welcoming to immigration. Current migration to the UK is 0.6 percent of new population annually — in population-weighted US equivalent, 1,900,000 per year. It is inconceivable to endure such pressure without control, control taken away by a phony Brussels sovereign.

Trump says, “Take America back,” but is silent as to, “From whom?”

For Brexiters, no doubt: take the UK back from Brussels. Most Brexiters were sad at the outcome. Thirty percent of Labor voted to leave, and 38 percent of Scotland.

The vote will not be re-done or un-done. In real democracy a 52 percent to 48 percent verdict is acceptable, durable, and we move on.

By far the most important consequence is to the euro. Financial markets knew it had failed in 2011 and traded accordingly. That was the cause of the previous all-time low in bond and mortgage yields.

The ECB saved the euro then and repeatedly since, successfully bluffing markets. Complacency died last Friday morning. No one can know when the euro zone will shrink or collapse, but it will. These are large new forces of deflation which will pull down on global interest rates.

For those who think the EU is a real union, and the UK has lost its marbles, three stories.

First, Italy’s banks have had it, at the end of their ability to conceal and hold bad debt.

Italy’s PM Matteo Renzi this week proposed a $44 billion bailout (a start), and one which would not wipe out all private investors — contrary to “bail-in,” the German-pushed, suicidal EU rule, guaranteed to produce bank runs. Merkel jumped down Renzi’s throat, insisting on the EU rules. Renzi, furious, replied that “We are not here to be given a lesson by the schoolteacher.”

Second story: Scotland threatens to vote to leave the UK and join the EU. Spain’s PM Rajoy (holdover, no government there, still) said this week that Spain would veto Scotland’s membership because it would embolden Catalonia to secede from Spain.

Third: German 10-year “bunds” Friday yield minus-0.12 percent. Spain, 1.14 percent; Italy, 1.23 percent; Portugal, 2.98 percent; Greece, 7.68 percent. A union of dominoes. Measures of global anxiety and deflation risk: Japan’s 10s are minus-0.27 percent, and Swiss minus-0.66 percent.

Last, for all of those angry with Britain, take a moment after the Fourth of July to mark the 100th anniversary of the Somme, and the 1.1 million Britons who died in two wars to make the continent free.

image1

U.S. 10-year T-note five years back. In a dead heat with the all-timer in 2012.

image2

U.S. 10-year in the last 90 days, showing the violence of the Brexit move.

image3

U.S. 2-year T-note, Fed predictive. Chart two years back, Fed off the table.

image4

Stock prices of Italy’s largest bank, UniCredit. From $6/ share to $2.50 in eight months.

image5

Italy’s debt-to-gross domestic product (GDP) is 133 percent and rising, beyond recovery without rapid growth, which is impossible on the euro. Italy’s GDP has not grown since 2008. Its capacity to bail out its own banks is questionable.

Lou Barnes is a mortgage broker based in Boulder, Colorado. He can be reached at lbarnes@pmglending.com.

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