On Sunday, I said the following regarding the likely market consequences of UK PM Theresa May’s decision (communicated in a speech delivered on Tuesday) to pursue what she calls a “clean and hard” split with the EU:
You can argue for protectionism and against progressivism and multiculturalism all you want, but what you can’t do is stop the market from rendering its own judgement. In this case, the verdict appears to be “guilty as charged.”
The title of that piece was “‘Expect A Correction’: Big Brexit Speech ‘May’ Sow Chaos.”
My prediction was correct. The details of May’s speech (as outlined in The Sunday Times) tanked sterling. Just hours after the piece linked above was published, the pound plunged in early Asian trading. Cable dipped below 1.20 for the first time since the October flash crash. Overnight vol. soared.
By the time May actually delivered the speech, the market had overshot. In a fantastic example of what we might call “sell the rumor, buy the news,” the pound had its best day since 2008 on Tuesday as markets cheered May’s decision to put the country’s Brexit deal to a vote in Parliament. You can find all of the highlights from the PM’s speech here.
Here’s Bloomberg’s summary of Tuesday’s action:
- Sterling rose to near 1.2400 after May’s speech outlining Brexit proposals offered nothing fresh beyond details released at the weekend, thus providing sterling bears with no new fodder to support previously set short positions
- As sterling rose, stale shorts against the dollar, the yen and other currency pairs were forced to cover as P&L management overcame sentiment, which still sees the so- called hard Brexit as a longer-term sterling negative, traders said
- At the same time, USD remains lower vs all of its G-10 peers and down ~1.1% as measured by the Bloomberg dollar index, close to its low of the day and broadly defensive after Trump said that the currency remains too strong, while offering few specifics beyond stating that the strength made it difficult for U.S. companies to compete against their Chinese counterparts
- The sterling buying and dollar selling represented a “perfect storm” for stale positions set late last year, a trader in London said.
I bring all of this up again because it is in many respects a microcosm of a wider phenomenon that’s helped to propel the push towards populism and nationalism both in Europe and the US.
Rather than focus on the societal consequences of turning our backs on decades of progress with regard to global trade and governance (i.e. cooperation), “experts,” pollsters, the media, and folks like myself have instead tried to effectively scare people away from supporting the populist cause by predicting dire economic consequences. There were certainly plenty of analysts who predicted stocks would crash if Trump won the election (and they did, by the way, if only for a few hours).
When these predictions of economic turmoil didn’t play out, it reinforced the notion that the status quo were a dishonest bunch of elitists hell-bent on preserving a world order from which they disproportionately benefit.
“It’s just like that time the Treasury Secretary and the Fed Chair told us the world would end if we didn’t bail out Wall Street,” average Joe will say.
Of course the truth of the matter is that Hank Paulson wasn’t so much spooked by the banks as he was by the fact that General Electric found itself unable to roll its commercial paper. Similarly, the truth is that economists are concerned about the long-term consequences of an epochal shift away from globalization, not by how FX markets will interpret election results. As Chinese President Xi Jinping put it in his historic speech in Davos on Tuesday, “pursuing protectionism is like locking yourself in a dark room.”
But perhaps trying to frighten voters away from the populist cause by referencing dire economic consequences isn’t the best way to go about things when there are plenty of other common sense arguments for preserving a progressive agenda and for cultivating multiculturalism. In other words, perhaps we (and I say we to include myself) screw up when we publish pieces with headlines warning of “chaos” in financial markets.
With all of that in mind, consider the following excerpts from an FT piece out Saturday:
If you have two strong arguments, the surest way to lose a debate is to add a third one. The superfluous argument of our time is, more often than not, the finger-wagging warning of economic doom.
Brexit has been a particularly bitter experience. Not only were the economic forecasts electorally disastrous, but some of them were wrong. It was gracious of Andy Haldane, Bank of England chief economist, to admit the limitations of economic forecasting. But he is an exception.
The curse of our time is fake maths. Think of it as fake news for numerically literate intellectuals: it is the abuse of statistics and economic models to peddle one’s own political prejudice. More often than not, there is a kernel of truth in those forecasts, as there was in the BoE’s prediction of what could happen after Brexit. The fakeness of the maths lies in an exaggerated inference. Economic models have their uses, as do opinion polls. They provide information to policymakers and markets. But nobody can see through the fog of the future. Fake maths has given us, the liberal establishment, the illusion of certainty. Once the illusion crumbles, we are left with an uncomfortable question: is it possible that some populist demagogues will end up producing better economic policy than our friends in Davos?
The populists could succeed simply by undoing the mistakes of the present regime. They will not succeed in the long run. But they may succeed before they fail. The political and economic regime change we are undergoing constitutes the most serious assault on our values I can remember. We would be foolish to deny that it could just be possible, from the perspective of the median voter, that the odious populists are getting the economy right when the liberal elite did not.