Yesterday I met a fellow who expressed mild frustration at his inability to lose weight. I inquired about his diet, which consists of Five Guys frappes and bacon burgers, and his exercise pattern, which reaches its pinnacle when the TV channel needs changing. He did voice one victory in that he now only buys the small French fries with the burger and frappe – a life-changing diet indeed!
This conversation reminds me of so many of the economic policy prescriptions I see implemented around the world, both at home and abroad. They could not possibly work, yet, when enacted, policymakers wonder why things are not improving.
As with my recent acquaintance, inappropriate balance is often the culprit of failed policies and practices. In all aspects of our lives we need balance. Loss of balance starts with a stumble and culminates with a fall. This is happening in the U.K. with Brexit. It is also happening in the U.S. with our recent political paralysis.
On Thursday evening, June 23, just as the Brexit polls were closing, world equity markets were trading up, and the pound was trading at new highs of around $1.50. That evening I was stunned to see the demise of the pound and the crumbling of every major stock index throughout the entire planet. I then discovered the sober reality that “leave” had carried the day.
I knew of no one who expected a “leave” result. The economic analysis by every think tank and economic department I know, both public and private, indicated that a “leave” vote would not be in the U.K.’s best interest. Even the gambling odds strongly favored a “remain.”
Herein lies an interesting case of balance. For those unfamiliar with gambling, the odds of an event occurring are determined by cash flow. If a larger flow of cash comes into the bookies favoring “remain,” odds move from 50-50 to, say, 60-40, to balance the flow. Odds continue to move until the bookies see a balance of money on each outcome.
During the run-up to the referendum, cash flow significantly favored “remain.” Yet, the actual number of bets (not the amount of money) in favor of “leave” exceeded by a fair margin the number of bets placed on “remain.” Markets are about money, while democracy is about votes. The money flow to “remain” exceeded the money flow to “leave.” But more (smaller) bets were made in favor of “leave.”
Gambling establishments are like other markets: “one dollar, one vote.” But referendums should reflect democracy: “one person, one vote.”
As we have mentioned recently in this column, we give voting rights equally to each individual to balance the power of markets, to balance the power of governments, and to show respect for the worth of each citizen.
The Brexit gambling markets illustrate the difference between markets and democracy. But this fails to explain why the majority of voters would ignore the analysis of experts and vote contrary to their own and others’ best interests. This brings to mind another balance.
The U.K. suffers from an imbalance that the U.S. is also experiencing. During the past three decades, prosperity has roughly doubled in both countries. Yet the median wage rate has barely moved. The progress in prosperity has gone to the very top income earners. Our miraculous improvements in the overall standard of living have not been distributed in a balanced fashion.
I suspect that this imbalance has contributed not only to a disenfranchisement among voters, but also to a feeling of incredulity toward policymakers and experts who have presided over the redistribution from the middle class to the very wealthy.
Some commentators also attribute the Brexit vote to an imbalance in immigration. To be sure, as family sizes have diminished, their economy and ours need immigration to balance the requirements of growth, job formation, and meeting the costs of Medicare and social security for the elderly. Yet too much of a good thing is anything but good.
Speaking of immigration, I saw a meme on social media this week expressing the belief that undocumented persons in the U.S. should not receive health-care services, public education, and other safety-net provisions. This subject also needs balance.
Many migrants flee across the border to the U.S. for safety. Their home villages are overrun by heavily armed gangs who receive funding through the drug trade. Such gangs owe their existence and success to the U.S. consumption of prohibited products including cocaine and marijuana. In short, our drug consumption destabilizes several Central and Latin American countries.
As such, do we owe something back to the law-abiding citizens of these nations who flee to the “safety” of the U.S. because our drug habit has made their neighborhoods deadly? This is a complicated issue which needs balance. We appropriately establish pollution standards to ensure that one man’s emissions does not harm others’ breathing. Economists refer to this as correcting an inefficient externality. Yet we allow our drug consumption to penetrate deep into the lives of our foreign neighbors, to generate a cross-border externality.
But getting back to Brexit — what will happen? No one knows, save Almighty God. And he’s not telling. The vote is legally nothing more than a highly formal survey. Lawmakers are not bound by it. And lawmakers don’t want to leave the EU. David Cameron has resigned. A new prime minister will be appointed in October, coinciding with the Conservative Party Conference.
Cameron refuses to invoke Article 50, the EU’s exit article. So the can will be kicked down the road, perhaps into perpetuity.
What will this mean for markets? We begin with the most likely and move to the more murky. Most likely we will have “lower-for-longer” interest-rate policies throughout the world. As of this writing, nearly $12 trillion of sovereign debt throughout the world carries a negative yield. This means that holding bonds carries a very high risk with little upside potential. As a result, investors are stuck with a choice between the traditional asset classes of cash and stocks, and the nontraditional investments of metals, other commodities, real estate, and hedge funds.
Now we move to the more murky. The U.S. election, which appears to be moving along the lines of Brexit (in which the analysis of genuine experts is held in contempt), and the uncertainties of Brexit itself will generate significant volatility for several months.
I would assign a 65 percent likelihood that we get to November and realize that we have had several sell-offs and several rallies, without going anywhere in the equity markets. I would assign a 20 percent chance of notably higher prices, and a 15 percent chance of notably lower prices by November. These are my best guesses and do not represent The Lincoln County News.
I assign such a low weighting to significant stock sell-off because the lower-for-longer interest-rate policy gives investors less choice among traditional investment vehicles. The current riskiness of traditionally less risky bonds makes stocks more attractive. As such, my trading background and instincts have me buying vicious sell-offs and lightening positions when relief and euphoria return. This seems balanced to me.
Next week, we will return to our subject of the balance between efficiency and equality.
(Marcus Hutchins is a former economist, treasury-bond arbitrage trader, and hedge fund manager. He retired to Southport in 1997, where he resides with his wife, Andrea, and youngest daughter, Abbey. He welcomes feedback at coastaleconomist@me.com.)
