At this point (midnight) the global economy has been hit by a negative monetary shock, one of the biggest in years. Here’s what to watch tomorrow:
1. Does the crisis show signs of spreading to the PIIGS?
2. What do the world’s central banks do, especially the ECB and the BOJ?
Janet Yellen has to be really, really happy that they got a bad jobs number and didn’t move in June, as a rate increase in June combined with this would have been a huge shock to the global economy. If I read the fed funds futures correctly, they are now forecasting low rates for essentially forever. T-bond prices must be soaring. David Beckworth says we are a monetary superpower—well we are now a lot more super than even 3 hours ago.
I’d emphasize that this is an almost purely a monetary shock—in real terms it makes little difference whether the UK is in or out of the EU (especially in places like the US and Japan). It’s monetary. That means the ultimate effect depends ENTIRELY on how the central banks react. Do they show imagination and leadership, or . . . do they keep acting the way they’ve been acting since 2007. We won’t have to wait long for an answer. (Obviously the markets believe that the central banks will not rise to the occasion.)
The odds of a global recession in 2017 just increased, by at least a few percentage points (albeit still less than 50-50). I think this also makes it slightly more likely that Trump will win, although he’s clearly still the underdog. We saw the second straight example in the UK of the right outperforming the polls–ironically this one will probably cost Cameron his job.
Because it was possible to watch markets move as Betfair prices change, we can see that the vote represented a 120 point swing on the S&P 500, which is almost 6% (as compared to a definite remain vote—say 2010 vs. 2130 on the S&P).
Can’t wait for tomorrow! Lots of excitement ahead.