Since the EU referendum, markets are doing exactly what they’re supposed to do.
Something has changed. The intricacies of Britain’s relationship with the EU and the simple fact that very few people understand all the processes and potential compromises involved in Brexit means that the range of outcomes and probabilities is still up in the air.
So we’re currently experiencing a scramble for price discovery. That’ll continue for a while, punctuated by highs and lows.
But beneath that, something that goes far beyond Britain’s relationship with the EU is slowly shifting.
And that’ll have far greater consequences in the long run…
Brexit isn’t what you might think it is
Brexit is being tied into part of a “populist” movement that is deemed to encompass everything from the rise of Donald Trump to Syriza in Greece.
The problem is that while these sorts of broad-brush arguments sound convincing, and can be fun to write about, the devil is in the detail.
Jonathan Allum of SNBC Nikko neatly dispatches the “populist revolution” idea in his Blah! newsletter. Change is indeed sweeping the world. But in certain parts, it’s a tide of change that has swept away populism. Look at South America. From Argentina to Brazil, “South Americans have turned against the populists”.
So it’s probably more accurate to say that across the globe, people are voting for change. They’re voting to do things differently. That’s not necessarily a vote for populism, or a small-minded, or a negative thing (although in some cases it is). So it’s a mistake to paint all of these movements with too broad a brush.
I’d argue that this desire for change is a direct psychological reaction to the disruption caused by the 2008 crisis. I’d also argue that people are getting fed up with governments passing the buck to central bankers.
Voting for change and, in some cases, to shift power closer to “the people”, represents a desire to wrest some sort of control back from the technocracy that has dominated since the crisis. Or simply a request that governments – the representatives of the people – actually “do something” constructive, rather than just messing about with interest rates.
This is a valuable lesson in contrarian thinking, by the way. When you see a consensus, pick at it. Look at the details. Examine the assumptions. Most people don’t bother – that’s why the consensus is often surprisingly obviously flawed.
A bubble usually starts when some enterprising person uncovers a genuinely good deal or a promising trend. They make a lot of money, and other people follow their example. As prices rise, more and more investors climb on board.
But those investors aren’t doing their own research. They’re copying the early investors. They take it for granted that the story behind the investment is still true – after all, the price is still rising, so someone must know something. And at an even more basic level, they are kicking themselves for not getting in earlier, and over-compensating by being too enthusiastic at a later stage.
Eventually, rising prices – rather than any fundamental reason – become their own justification. Investors buy in because prices are going up. And this can continue long after the original rationale has ceased to make any sense.
Finally, the whole thing collapses. It’s never easy to point to a trigger point. But something reveals incontrovertibly that the whole edifice is built on sand, and that’s the end of your bubble.
Here come the helicopters
Anyway, what does this drive for “change” mean?
You could argue that it’s another step towards markets losing faith in central banks. Belief in central bankers has, after all, become bubble-like over the last 30-odd years, which have encompassed the birth of the “Greenspan put” and – not coincidentally – the biggest bond bull market in history.
But I’m not sure that’s it. If anything, it’s more representative of a shift towards demand for more muscular monetary policy. We seem to be getting to a point where “everyone agrees” that monetary policy as we’ve seen it so far has reached its limits.
But that doesn’t mean the money-printing and the low rates stop. It means it gets political.
Take a look at the Tory leadership election. Stephen Crabb may have dropped out of the running, but one of his promises was to create a £100bn infrastructure fund if he was elected. That’s basically Jeremy Corbyn’s “QE for the people” right there.
Meanwhile, chancellor George Osborne has stepped back from the idea of austerity altogether (which is amusingly causing a lot of cognitive dissonance in people who criticised him for austerity in the first place, but also want to argue that Brexit has therefore wrecked the public finances).
What’s going on? Quite simply, it’s stimulus time. It’s taken a while, but politicians – encouraged by a confused and irritated populace – are now thinking: “Look at all this free money. Why don’t we spend a whole load more of it?”
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What can you do? We’ll see how it all unfolds. But one immediate suggestion – hold on to your gold.