Make sure you follow the right crowd

Over at Econlog, I have a post explaining why Brexit is not about Britain.  That’s clearly not the conventional view, if you read the pundits.  Philo asked this question:

Scott, you really do think for yourself, rather than just following the crowd–for example, the crowd of economists. (That means you are a genius or–somewhat more likely–a crank.) All the more surprising, then, that, in some of your epistemological posts, you advise *us*, your readers, to *follow the crowd*!

The best way for me to explain this issue is to point to those European stock markets that fell by 3 times as much as British stocks.  The French and German markets were down around 7% or 8%, while the southern markets fell even more sharply. In contrast, the British market was only down 2.75%.  This has been called the biggest day in British history since WWII, but it’s probably not that big a deal for the UK economy.

So yes, pay attention to the crowd, but make sure it’s the crowd who puts their money where their mouth is.  That would be the asset markets, plus Bryan Caplan.

I’m also seeing a lot of confusion about the nature of uncertainty.  Unlikely things happen every day; it’s no big deal.  Every time the Dow moves more than 1% in a day, that’s an unlikely event.  A couple weeks ago, Cleveland was down 3-1, and had about a 5% chance of winning it all.  They did.  So when something with a 25% chance occurs, it’s no big deal.  One in every 4 elections sees an upset of that magnitude.

Let’s think about what the markets are telling us.  In my view the 7% or 8% fall in European stocks should be viewed as a 20% chance of a catastrophic eurozone breakup as a result of Brexit (as compared to the previous probability) in which case markets might plunge 30%, and an 80% chance that this crisis will be papered over, as previous Greek crises were papered over, and markets recover. I think this confuses people, as the 7% or 8% fall is almost certain to be “wrong”, ex post.  Either stocks should have fallen 30%, or almost not at all.

Those who see Brexit as a “real shock” that disrupts British trade are missing the big picture.  (Here I agree with Krugman; changes in trade rules at the margin are not of much macroeconomic significance, although they are certainly unwelcome if protectionist.)  The conventional pundits who focus on Britain have no explanation for the stock market figures I cited, and probably attribute it to “irrationality”, or “fear”.  It much simpler than that—the eurozone is a dysfunction monetary regime, and the UK pound is not.   (I suspect that’s why the Japanese market fell sharply—the BOJ is an increasingly dysfunctional institution, which has recently seemed to give up on its goal of 2% inflation.)

I know that we like certainty, but the truth is that we just don’t know what will happen.  We don’t even know whether Britain will leave the EU.  I think it will, but I’d guess there’s at least a 25% chance that Scotland won’t, and at least a 5% chance that the negotiations about how to do so will drag on for several years, by which times the voters will be asked once again.  The young favored staying by a 3 to 1 margin, so time is on the side of those Brits who favor a cosmopolitan UK. Every day another Little Englander dies off, and another pro-EU Brit turns 18. Recall that in Europe, every time the voters of a country voted the “wrong way” on an EU referendum, they were asked to re-vote until they “got it right”.  Again, I think Britain will leave, but nothing is certain in the world of politics (as I learned when I said Trump had no chance of getting the nomination.)

Here’s the wisest way to view market forecasts:

1.  Market reactions will almost always later be shown to have been “wrong”.  But which way?

2.  Nonetheless, market forecasts are the best read we have on the implications of any shock, including Brexit.

PS.  If you believe the claims I made in my earlier “You’re not special” post, then objectively speaking it’s more likely that I’m a crank than a genius.  Keep that in mind, and read all my posts with a very skeptical eye.

PPS.  Those who claim that Britain may have done the rest of the world a favor by providing a cautionary tale for a withdrawal from globalization better take another look at those stock markets.  There are cautionary tales of illiberalism out there, like Venezuela, but don’t assume the UK will become one of them.


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111 Responses to “Make sure you follow the right crowd”

  1. Gravatar of Art Deco Art Deco
    24. June 2016 at 10:30

    The young favored staying by a 3 to 1 margin, so time is on the side of those Brits who favor a cosmopolitan UK. Every day another Little Englander dies off, and another pro-EU Brit turns 18.

    The EEC was approved by 2/3 of the British electorate in 1975, and 48% last night. Wouldn’t put too much stock in the arc of history.

  2. Gravatar of John Hall John Hall
    24. June 2016 at 10:30

    One quibble: UK stocks were down less in pounds than Eurozone stocks were down in euros. If you put everything in dollars, then UK stocks fell by more. However, European Financials (broadly, including UK) were down more than anything else.

  3. Gravatar of Art Deco Art Deco
    24. June 2016 at 10:45

    Just to point out:

    1. The Italian and Spanish bourses crashed, losing 12% of their value

    2. The German and Japanese bourses lost 7-8%

    3. The French bourse lost about 4%

    4. The Russian, Indian, and Brazilian exchanges lost about 3%

    5. The Chinese and (thus far) Canadian index have lost < 2%.

    The intense reaction of the Japanese market is a puzzle given its distance and against the milder reaction of China and Russia.

  4. Gravatar of Ben P Ben P
    24. June 2016 at 10:50

    @ John Hall

    That’s kind of the point I think. Euro is inflexible & dysfunctional so the pain moved to asset mkts. In UK most of the impact was to the currency.

  5. Gravatar of J Mann J Mann
    24. June 2016 at 10:50

    On issue on politics is that when you see a young-old split, it’s possible that people change their opinions as they get older.

    Of course, it’s more likely that additional data on how the EU functions will change opinions one way or the other, but it doesn’t necessarily follow from the age distributions that anti-unification sentiment will age out.

  6. Gravatar of Tom Brown Tom Brown
    24. June 2016 at 10:54

    Scott, it would be interesting to see what would happen if the vote were repeated today. Already the pro-Brexit leaders have backtracked on three main issues:
    http://www.mirror.co.uk/news/uk-news/3-brexit-promises-campaigners-wriggled-8271762#rlabs=2%20rt$category%20p$4
    http://www.mirror.co.uk/news/uk-news/nigel-farage-admits-wont-extra-8271594
    What’s the downside to having hugely important votes like this done in rounds? Perhaps with the last digits of your national health service # dictating which round you vote in (so essentially uniformly distributed in each round). Then latter round voters could witness the real time effects of the vote in earlier rounds, and let that sink in a bit before casting their ballots. It seems to me voting in rounds would have a moderating effect, and if you’re an incrementalist who values stability, order and sanity (i.e. conservative, in the truest sense of the word), instead of a wild eyed bomb throwing revolutionary/reactionary who wants to whip up emotionalism to cause chaos (like Trump supporters) that’s a good thing. But I’d be interested in hearing your opinion (although I’ll probably get Art’s opinion instead).

  7. Gravatar of Art Deco Art Deco
    24. June 2016 at 11:23

    Scott, it would be interesting to see what would happen if the vote were repeated today.

    You lost. Suck it up.

  8. Gravatar of Scott Freelander Scott Freelander
    24. June 2016 at 11:25

    Scott,

    A better example of why you’re largely correct is the magnitude of the US response versus that of the UK. At times today, the US market response has been even more severe than that of UK markets. I can’t figure out how that’d make sense in real terms. Likely, it mostly reflects the fact that the UK has better monetary policy.

  9. Gravatar of Tom Brown Tom Brown
    24. June 2016 at 11:39

    Coming next: a petition for a 2nd Brexit referendum already has over 125,000 signatures. A new petition to keep London in the EU is gaining signatures as well. How about Northern Ireland? What about Scotland? Birmingham? Will this vote dissolve the UK?

    Max Planck’s “Science advances one funeral at a time” echos your comment about old Brexiters dying off while new Bremainers are being born. If the UK unravels over this, it’ll be interesting to see how far and what will become of the pieces.

    I see all this Brexit excitement has left Erick Erickson with a hard on today for Rick Perry’s idea of Texit. I’m inclined to be for it off hand. Throw in the rest of the Old Confederacy too. Good riddance. Let ’em hit Texas up for their beer money. Do we really want that rabble on our welfare rolls?

  10. Gravatar of E. Harding E. Harding
    24. June 2016 at 11:40

    “I’m also seeing a lot of confusion about the nature of uncertainty. Unlikely things happen every day; it’s no big deal. Every time the Dow moves more than 1% in a day, that’s an unlikely event.”

    -Really? I’m pretty sure that’s happened at least twice every year since the beginning of the Dow.

    I agree with Scott that the monetary shock theory makes best sense of why Japan’s stocks fell so sharply.

    “Likely, it mostly reflects the fact that the UK has better monetary policy.”

    -You can call it that. It’s the falling demand for the Pound Sterling.

    Art Deco’s first comment is a winning one.

  11. Gravatar of Matthew Moore Matthew Moore
    24. June 2016 at 11:55

    “PPS. Those who claim that Britain may have done the rest of the world a favor by providing a cautionary tale for a withdrawal from globalization better take another look at those stock markets. There are cautionary tales of illiberalism out there, like Venezuela, but don’t assume the UK will become one of them.”

    Yes, likely Britain will become more globalised / neoliberal, not less. Which is going to be a substantial disappointment to most of those who voted Leave.

  12. Gravatar of ssumner ssumner
    24. June 2016 at 12:21

    John, I’ve never found those comparisons to be very informative.

    Art, It’s not about geographical distance, it’s about exposure to monetary shocks.

    The CAC 40 was down 8%—isn’t that the French bourse?

    J Mann, Yes, it’s possible, but I doubt it in this case. As an analogy, the young are far more pro-gay rights. Would you expect them to become anti-gay as they age?

    Tom, Not a big fan of that sort of gimmick.

    Scott, There’s a flight to the dollar as a safe haven, that’s actually bad for the US market.

    Harding, Of course it happens many more than two times a year, but less than 50% of the time.

  13. Gravatar of Vaidas Urba Vaidas Urba
    24. June 2016 at 12:39

    Scott,

    FTSE 100 is skewed towards international companies and is not a good indicator of the domestic economy. Since FTSE 100 is denominated in pounds, companies with overseas earnings received a boost when pound crashed. FTSE 250 with more domestic companies has dropped by 7.2 percent.

  14. Gravatar of nickik nickik
    24. June 2016 at 12:39

    The ‘young’ wanted into the EU wants in Switzerland. Some people saying that in 5 years we would be in and ‘beg on our knies’.

    Now many of those young people would laugh in your face, if you suggested joining the EU. In Switzerland the EU has dicredited itself.

    Give them 10 years more and the British young will have the same opinion. You can always relay on the EU to fuck up.

  15. Gravatar of Vaidas Urba Vaidas Urba
    24. June 2016 at 12:43

    Some stuff from Bloomberg and Reuters:

    “Futures on the FTSE 100 had tumbled as much as 9.7 percent as the prospect of Brexit became certain. ”

    “Several traders said one principal reason for the recovery over the course of the day included a pledge by Bank of England governor Mark Carney to support the market.”

    “Homebuilders were the worst performers, with Persimmon Plc and Taylor Wimpey Plc plummeting at least 27 percent”

  16. Gravatar of Michael Michael
    24. June 2016 at 12:48

    “Those who claim that Britain may have done the rest of the world a favor by providing a cautionary tale for a withdrawal from globalization better take another look at those stock markets.”

    Exactly! The market reaction is nothing but underwhelming given the magnitude of the political issue. (Still, the risk reward ratio is judged unfavorable, and that’s what markets are REALLY there to assess.)

    I would claim Britain HAS done us all a favor. There is no way Europe (‘s political system) will change of its own accord. Gradual erosion of democracy (via populist parties) seems to cause accommodation rather than rejection. A serious, but non-lethal, but HUMILIATING defeat may be our (Europe’s) best shot at avoiding degradation.

    However, as far as I can see, NOT ONE of the talking heads has said “mea culpa”. They’re still in denial. And the sharks are circling…

  17. Gravatar of Ray Lopez Ray Lopez
    24. June 2016 at 13:00

    Good post by Sumner. Yes, Sumner is likely a crank, and I agree with this (and said the same before I read Sumner): “I’d guess … at least a 5% chance that the negotiations about how to do so will drag on for several years, by which times the voters will be asked once again”

  18. Gravatar of Art Deco Art Deco
    24. June 2016 at 13:37

    Art, It’s not about geographical distance, it’s about exposure to monetary shocks.

    What’s Japan’s exposure? Are Japanese companies larded up with Spanish bonds?

  19. Gravatar of Art Deco Art Deco
    24. June 2016 at 13:38

    Yes, likely Britain will become more globalised / neoliberal, not less. Which is going to be a substantial disappointment to most of those who voted Leave.

    Your basis for this assessment is what?

  20. Gravatar of Gordon Gordon
    24. June 2016 at 13:40

    “There are cautionary tales of illiberalism out there, like Venezuela, but don’t assume the UK will become one of them.”

    I can’t remember who provided the following link, but an economist who was commenting upon Brexit like you saw it as an example of the global rise of illiberalism:

    https://www.commentarymagazine.com/articles/illiberalism-worldwide-crisis/

    And I find it highly ironic that the far left is complaining about the idiocy of the far right today when the far left peddles just as much illiberalism as the far right.

  21. Gravatar of Libertaer Libertaer
    24. June 2016 at 13:45

    Any idea why betting markets got this one so wrong? http://www.economist.com/blogs/graphicdetail/2016/06/polls-versus-prediction-markets

  22. Gravatar of Art Deco Art Deco
    24. June 2016 at 13:48

    Coming next: a petition for a 2nd Brexit referendum already has over 125,000 signatures. A new petition to keep London in the EU is gaining signatures as well. How about Northern Ireland? What about Scotland? Birmingham? Will this vote dissolve the UK?

    Like the dialogue in a Flintstones episode. “Let’s make it 2 out of 3, Barn”.

    How about Northern Ireland?

    The portions of Antrim, Down, and Armagh dominated by protestants voted for Brexit. The rest voted to ‘remain’, but with larger margins. Your nationalist parties won 38% of the vote in Ulster the last election. Not enough to take the whole territory into the Irish Republic. It’s partition or suck it up for Martin McGuinness unlike he’d like to go back to running his sweet little Cosa Nostra operation.

  23. Gravatar of Art Deco Art Deco
    24. June 2016 at 13:50

    However, as far as I can see, NOT ONE of the talking heads has said “mea culpa”. They’re still in denial.

    Christine Amanpour’s on air meltdown was mildly amusing.

  24. Gravatar of Major.Freedom Major.Freedom
    24. June 2016 at 14:25

    ” Those who claim that Britain may have done the rest of the world a favor by providing a cautionary tale for a withdrawal from globalization better take another look at those stock markets.”

    Sumner, serious question, is there any room in that razor thin worldview of yours that could ever, even in principle, interpret a nominal stock market decline as anything other than a bad thing?

    There is no possibility at all that increased economic health would be associated with a temporal decrease in stock indexes?

    E. Harding is right, you’re inconsistent in your reactions to stock market indexes. They’re innocuous when the circumstances can’t fit into your worldview, and they are something ominous when they can. Also, your inconsistency is on multiple levels. If the recent stock market movements are “almost purely nominal”, then how the heck can you claim that the stock market reactions should give supporters of Brexit pause? Make up your mind.

  25. Gravatar of Tom Brown Tom Brown
    24. June 2016 at 14:55

    http://www.usnews.com/news/articles/2016-06-24/inspired-by-brexit-disgruntled-texans-look-to-texit

    Maybe they can get it done by October. I’d be OK with a wall in that case.

  26. Gravatar of E. Harding E. Harding
    24. June 2016 at 15:41

    “Any idea why betting markets got this one so wrong?”

    -Why would they get it right? Participants in prediction markets on referendum outcomes have no more access to relevant information than you or I do (literally). Anyone could see it was a close race; the only question was on which side the coin would land. The participants on election day were probably either assuming momentum toward remain, undecideds breaking for status quo, or were just looking at only the latest polls. Turns out momentum was weak, undecideds didn’t vote, and polling averages are far superior to looking at only the latest polls.

  27. Gravatar of Lorenzo from Oz Lorenzo from Oz
    24. June 2016 at 15:58

    Since 2010, the UK has created more jobs than the rest of the EU combined. (Hands up who thinks monetary policy and supply side factors might be relevant to this.)

    Great post: one take-away is the large healthy EU economy has voted to leave so the EU is looking worse.

  28. Gravatar of Christian List Christian List
    24. June 2016 at 16:20


    Every day another Little Englander dies off, and another pro-EU Brit turns 18.

    Like Art Deco I don’t find this theory to be very convincing. People change their minds. Opinions like these are hardly fixed. Around 1991 only 17% wanted to leave the EU, but then every day another “Little Englander” died off and look were it lead us according to your theory: 52% wanted to leave in 2016. Was this really about Englanders dying off? No. It’s only about people changing their minds.

    http://www.thetimes.co.uk/redbox/topic/the-europe-question/how-have-british-social-attitudes-towards-the-eu-changed


    So yes, pay attention to the crowd.

    Exactly. You could predict the split-up even by paying attention to the crowd here. A bit more than 50% of the commenters are pretty standard liberals. I assume most people here are academics nevertheless around 30-40% are sceptics, Trumpistas, Pro Brexit supporters, worried about mass immigration or something very similar.

  29. Gravatar of Christian List Christian List
    24. June 2016 at 16:25

    Even though I “won” this vote, I have to say that I always find it a bit weird that people can force such huge changes on other people just because they won a vote by a very close margin. Maybe they should change the rules in such referendums. Both sides in the range of 41-59% should result in some kind of compromise. Only in the case of winning by (for example) 10% or more the winner should win it all.

  30. Gravatar of Benjamin Cole Benjamin Cole
    24. June 2016 at 16:31

    If the EU and ECB are so great, why not One World?

    Governments are always clunky, and the larger they get the clunkier they get. Ossification and imperiousness become norms.

    In addition, globalism is not working for large swaths of the populations in developed nations, probably as free trade is combined with tight money and property zoning.

    Were the Hawaiians better off losing control of the islands?

    Many are moving to Las Vegas where it is cheaper.

    The globalists are a little glib.

  31. Gravatar of Market Fiscalist Market Fiscalist
    24. June 2016 at 16:32

    ‘The French and German markets were down around 7% or 8%, while the southern markets fell even more sharply. In contrast, the British market was only down 2.75%. ‘

    To what extent is this because the UK CM stepped in with assurances in a way that individual EuroZone CBs were unable to ? Wasn’t the FTSE in free-fall before Carney’s pronouncements , after which a sizeable recovery took place ?

  32. Gravatar of engineer engineer
    24. June 2016 at 16:38

    likely Britain will become more globalised / neoliberal, not less. Which is going to be a substantial disappointment to most of those who voted Leave.

    “Your basis for this assessment is what?”

    Britain is more globalized/neoliberal than the continent. They have more ex-pats than any other developed nation. Not being attached to Europe, can only make it more likely that this will result in more globalized/neoliberal policies…at least with US and the commonwealth…their membership in the EU has prevented this….

    The EU is a disaster…even most of the better together side readily admitted this…which is probably why they lost. “It’s a disaster..but it could be worse” …is not a great campaign slogan (listening Hilary). Looking back, their decision not to join the Euro was obviously the right choice and I suspect that they will have no regrets over this decision in 10 years as well… as Europe slides in further decline. There are strong political reasons to be in the EU, given the history of the continent…but I don’t see any strong economic reasons.

  33. Gravatar of Tom Brown Tom Brown
    24. June 2016 at 17:16

    Were British expats allowed to participate in this vote via mail in ballots or some other means? How many million votes would that have amounted to?

  34. Gravatar of Tom Brown Tom Brown
    24. June 2016 at 17:24

    Scott, in light of the global market reaction to the Brexit vote, can you hazard a guess as to the reaction to a Trump victory?

  35. Gravatar of Zathrus Zathrus
    24. June 2016 at 17:37

    Hi Scott, I’m a macroeconomist and a big fan of your blog and your ideas. I’ve got some serious questions about prediction markets though which I’m hoping you could give thought to. The poor job that prediction markets (and financial markets in general) did in predicting Brexit seems to have has dented people’s confidence in prediction markets. For example, I just read this comment here on Bloomberg:

    “It turned out my anecdata from the airport did better than the polls. And way, way better than the betting markets, which as late as 7 p.m. in the Eastern U.S. gave “Remain” a 96 percent chance of winning. Betting markets failed worse than polls, worse than a casual survey in an airport. They failed, because as the blogger Epicurean Dealmaker pointed out on Twitter, “Markets distill the biases, opinions, & convictions of elites,” which makes them “Structurally less able to predict populist movements.””
    From http://www.bloomberg.com/view/articles/2016-06-24/-citizens-of-the-world-nice-thought-but

    First, do you have any explanation for why the market was surprised by Brexit? Other than to say that the markets were as right as they could have been all along given the available information? Even if that explanation is true, it is a bit of an unsatisfying answer given that there is no way to verify it, and a simple average of the polls would have seemingly done a better job. And I doubt the bad result was because of market illiquidity. This site, for example, had upward of 25 million GBP matched and still gave “remain” a 93% chance a few hours before results came out. http://politicalodds.bet/eu-referendum?time=1#i

    Second, moving from Brexit to NGDP futures targeting, how could it be politically sustainable to set monetary policy with NGDP futures markets if there is a perception out there, even among market commentators like the one above on Bloomberg, that prices are being set by the elites? I would think that as soon as the market started doing something politically unpopular there would be overwhelming political pressure to detach monetary policy from the futures market and go back to what we have now (discretionary policy, bound by some rules). If market participants believed this was a possibility, a monetary regime attached to even a highly liquid NGDP futures market would never have the credibility to be successful in the first place. How could these political credibility issues possibly be overcome?

  36. Gravatar of Zathrus Zathrus
    24. June 2016 at 17:39

    Also, E. Harding, your answer to Libertaer isn’t very convincing. If anyone could see it was a close race, why did the prediction markets put a 90% chance on remain a few hours before the results started coming out? And if looking a polling averages is far superior to looking at only the latest polls then why weren’t prediction markets doing that? Prediction markets with big money on them shouldn’t make these basic mistakes. If it was a close race they should have been pricing closer to 50/50, not irrationally choosing one side.

  37. Gravatar of Bob Bob
    24. June 2016 at 18:02

    Are those percentages accounting for the rather significant FOREX differences of the day? Yesterday an euro was worth 0.76 pounds. Today, 0.81. So wouldn’t it be far to account for that difference when evaluating the losses? From the perspective of a European investor, every holding they have in the British market is down 7%+ just in ForEx. Same on the other direction: A company down 7% in euros is pretty much even when you are accounting for it in pounds.

    So from that perspective, what the stock market is saying is that, while the world is not collapsing, Everyone loses, and the ones that lose the most are, as usual, Southern Europe.

    Spain has elections on Sunday. Chances of this election getting a result that lets anyone form a government are slim to none. Of course Southern Europe takes a beating: they are asleep at the wheel.

  38. Gravatar of Negation of Ideology Negation of Ideology
    24. June 2016 at 18:10

    “It much simpler than that—the eurozone is a dysfunction monetary regime, and the UK pound is not. ”

    I think this is the key. The eurozone needs to fix its monetary regime as quickly as possible or breakup.

    On the larger issue of Brexit, I think people are overreacting. The UK was half out of the EU anyway. It kept its currency, and had a bunch of carve-outs and a rebate. The advocates of more integration and even EU federalism should be happy the leading opponent of integration is leaving.

    It’s not like the UK passed Smoot-Hawley or the Tariff of Abominations, the UK and EU will probably end up with a similar trade deal as other independent nations in Europe.

  39. Gravatar of Market Fiscalist Market Fiscalist
    24. June 2016 at 19:07

    Negation of Ideology: Good post.

    We will see how the EU leadership reacts to Brexit.

    To take 2 extremes

    1. EU really only wanted an enhanced free trade area, and while sad that the UK is leaving – they will do what they can to maintain free trade, and the losses will be minimized. In this case leaving is probably the wrong choice but costs are quite low and Brexit is not a big deal.

    or

    2. The EU is a political organization with the aim of instigating a superstate serving the interest of an un-elected elite. They will try and punish UK for Brexit by imposing trade barriers, and both UK and rest of EU will pay the price. In this case – despite the costs – better to get out now to preserve democracy and hopefully inspire others to do the same.

    We’ll see.

  40. Gravatar of Art Deco Art Deco
    24. June 2016 at 20:12

    The advocates of more integration and even EU federalism should be happy the leading opponent of integration is leaving.

    If they actually manage to leave, they’ll have popped that cherry. Political cartels keep issues off the agenda, and that one’s now conceivably on the agenda various irritated portions of Europe: Hungary, Austria, Lombardy, &c. NB, polls are all over the map, but they seem to indicate that the Front National may be on the verge of displacing both the Socialist Party and Les Republicans, the omnibus center-right party, from pride of place in popular balloting in France.

  41. Gravatar of James Alexander James Alexander
    24. June 2016 at 21:51

    Libertaer
    In the betting the weight of money was for Remain. By number of bets it was for Brexit. I read that before the vote and was more sceptical of the betting markets, but not rich enough to influence them.

    Market Fiscalist
    Re Carney’s intervention. As Ben P said, that’s the point. Britain’s monetary policy is more flexible the the ECBs. A Carney intervention or currency collapse helps a bit.

    But UK monetary policy is still very tight looking at NGDP growth over the last several quarters and the implied NGDP outlook from various market measures.

    The ECB has been better recently in term of monetary policy, though still very far from perfect.

  42. Gravatar of James Alexander James Alexander
    24. June 2016 at 22:07

    Britmouse
    Big Euro bourses are almost as international as the FTSE.
    http://m.citywire.co.uk/money/study-reveals-higher-proportion-of-ftse-revenues-derived-overseas/a716388
    The big Euro bourses had no monetary offset on Friday. Why not?

  43. Gravatar of James Alexander James Alexander
    24. June 2016 at 22:09

    Well, to be fair, the Euro dropped 2% vs the USD.

  44. Gravatar of Anand Anand
    25. June 2016 at 01:56

    Excellent post. I note that Larry Summers, on his blog, also sees more risk to Europe than Britain from Brexit.

  45. Gravatar of Christian List Christian List
    25. June 2016 at 01:57

    @Negation

    the UK and EU will probably end up with a similar trade deal as other independent nations in Europe.

    That would be the obvious and easy way out. But then other nations would realize that the bureaucratic hydrocephalus in Brussels and Straßbourg is redundant. So the European bureaucrats and most European politicians will do everything in their power to prevent such a deal.

    The UK needs to stay in the EU as long as possible to keep and obtain the necessary leeway and bargaining chips for the difficult negotiations ahead. EU bureaucrats react to massive pressure only. If you got no good bargaining chips against them, you are lost.

  46. Gravatar of Thiago Ribeiro Thiago Ribeiro
    25. June 2016 at 05:48

    “If the EU and ECB are so great, why not One World?”
    If the United Kingdom is so great, why not an United Kingdom of the World? It is hard to believe an ideal size for the union includes the IRA, but not France. Havig said so, I am happy “Leave” won– it makes no sense keep people in an unhappy union: let the English go and the Scottish remain, if it is what they want.

    “Were the Hawaiians better off losing control of the islands?”
    If by Hawaiians, you mean the masses of natives, no, but no one asked their opinion, it was a coup (as far as I know, no one England). Now, if you want to know if people actually living in Hawaii today (“The state’s population identified as 38.6% Asian; 24.7% White (22.7% Non-Hispanic White Alone”–https://en.wikipedia.org/wiki/Hawaii) have it better than they would were it not an American state… the answer is obvious. But Americans are free to give their country back to the Indians, if they feel like that–I am sure Mr. Trump could buid great casinos. All I can say is, we will hold onto our part of the continent. Our orefathers stole it fair and square from the Indians,the Spanish and the Portuguese and no one will ever take it from us.

  47. Gravatar of Thiago Ribeiro Thiago Ribeiro
    25. June 2016 at 05:50

    * As far as I know, no one annexated England.

  48. Gravatar of Art Deco Art Deco
    25. June 2016 at 06:23

    The UK needs to stay in the EU as long as possible to keep and obtain the necessary leeway and bargaining chips for the difficult negotiations ahead.

    How do they acquire chips from delaying their exit?

  49. Gravatar of Gary Anderson Gary Anderson
    25. June 2016 at 06:35

    I totally agree with this article, because it is clear that the Eurozone wanted to pillage the wealth of the UK and put them on a path to austerity, which had already been established by Cameron, who was really an employee of Brussels, anyway.

  50. Gravatar of ssumner ssumner
    25. June 2016 at 06:38

    Vaidas, That makes sense.

    Art, You asked:

    What’s Japan’s exposure?”

    It’s a safe haven currency. Concern about eurozone stability increases the demand for yen. The yen soared higher on the news. That’s deflationary for Japan, unless offset by BOJ actions. But the BOJ has recently become quite passive.

    Gordon, I thought that was an excellent article.

    Libertaer, I think they put too much weight on the Scotland vote last year. Scots failed to pull the trigger once they got into the voting booth. They expected something similar on this vote.

    Christian, I’d like to see a threshold of at least 60% or 2/3rds for secession referenda.

    Market, You said:

    “Wasn’t the FTSE in free-fall before Carney’s pronouncements , after which a sizeable recovery took place ?”

    If so, that strongly supports my argument that it’s mostly monetary, and that the eurozone’s monetary system is more dysfunctional than the BOE.

    Tom, The market reaction was totally predictable, as we’d seen wild swings in the days before the vote, on small shifts in the poll numbers. If the race is close in the fall, we’ll just have to look at how markets swing on poll numbers. I doubt the market reaction would be as large, but who knows.

    Zathrus, You said:

    “The poor job that prediction markets (and financial markets in general) did in predicting Brexit seems to have has dented people’s confidence in prediction markets.”

    I’ve seen those sorts of comments here as well, but they are really stupid. There’s a lack of understanding of statistics 101. Unusual things happen all the time.

    As far as NGDP futures targeting, my current proposal would not be subject to the concern you mention. Under my current proposal, the Fed would still be able to use discretion to set interest rates and the money supply, but the’d have to take the short or long position with traders who did not trust their decision. My goal is to make it easy to get rich if the Fed screws up, as in 2008. Because my instincts tell me that it will never be easy to get rich, a system that makes it easy to get rich if the Fed screws up is likely to lead to very few Fed screw-ups. Maybe I’ll do a post on this.

    On the same day polls, even the leader of the UKIP said they had apparently lost, based on same day polls. The polls were biased in the same direction as the 2015 election polls. Shy Tory syndrome. Yes, I know, why didn’t the betting markets account for that? I’m not sure.

    Bob, I’m not a fan of looking at stock price changes in terms of another currency.

    Negation. But recall the problem in Switzerland, where they must allow open borders to continue to get free access to the EU market. The negotiations will not be easy.

    James, Yes, and I’d add that the fall in the euro was not easy money, but rather fear of a breakup of the euro, which is now slightly more likely (albeit still less than 50-50.

    Christian, I agree with your last comment.

  51. Gravatar of E. Harding E. Harding
    25. June 2016 at 08:04

    “I’ve seen those sorts of comments here as well, but they are really stupid.”

    -No, they’re not.

    “There’s a lack of understanding of statistics 101.”

    -No, there isn’t.

    “Unusual things happen all the time.”

    -This is not a refutation of those who, like I, claim prediction markets are useless. If anything, it’s a confirmation of their views.

    “On the same day polls, even the leader of the UKIP said they had apparently lost, based on same day polls.”

    The poll was off by 4 points. That’s (apparently) smaller than the margin of error (and the results of the past few days had quite a few results suggesting a Leave win):

    https://yougov.co.uk/news/2016/06/23/yougov-day-poll/

    “Bob, I’m not a fan of looking at stock price changes in terms of another currency.”

    -Why not?

  52. Gravatar of Steve Steve
    25. June 2016 at 09:15

    “Every day another Little Englander dies off, and another pro-EU Brit turns 18.”

    I point out the fallacy of this with a different analogy: young people preferred Bernie by 3-1 over Hillary. Does this mean we will have free college, universal healthcare, and an FTT in 8 years, as the Hillary supporters die and are replaced by Bernie supporters?

    No, not necessarily. Young people grow up (and grow cynical) and when this happens they develop a preference for capitalism and local sovereignty.

    So does the EU represent a likely permanent social change (e.g., gay rights), or a political hydra that appeals mostly to young idealists?

  53. Gravatar of Steve Steve
    25. June 2016 at 09:30

    Were betting markets efficient?

    Some newscasts made an interesting observation the day before the referendum: the majority of bets were for “Leave” but the great majority of dollars were for “Stay”. So did the markets make a mistake? Maybe, since it is one person one vote, not one dollar one vote. On the other hand, big money has historically been able to purchase its preferred election outcomes (thru pr and fear mongering) so maybe this betting pattern was somewhat rational.

    The big decline in European peripherals represents a normalization of the idea that a populist movement can hold strong in the face of institutional and elite resistance. Future prediction markets will be less confident.

    The betting markets probably did make a small mistake, by relying too heavily on the opinion of those with big money, but there wasn’t anything systematically exploitable.

  54. Gravatar of Art Deco Art Deco
    25. June 2016 at 09:36

    It’s a safe haven currency.

    So’s the dollar. American stock exchanges declined by 3%.

  55. Gravatar of Steve Steve
    25. June 2016 at 09:40

    Christian List,

    The flaws with direct democracy are well known and institutionalized. That’s why we have bicameral legislature with staggered terms, federalism, or 3/4 of states for a constitutional amendment.

    Unfortunately we live in a world full of democracy fetishists, who seek to legitimize 40% plurality winners (Trump) or 52% referendum winners. The uneducated and the press (but I repeat myself) rush to declare victory while ignoring the importance of compromise, process, and minority protections.

  56. Gravatar of Art Deco Art Deco
    25. June 2016 at 09:48

    Christian, I’d like to see a threshold of at least 60% or 2/3rds for secession referenda.

    Why? Newfoundland joined the Canadian confederation with a margin of 52%; that precedent left some Quebec particularists cheesed when Canadian federalists were trying to claim a supermajority should be required in Quebec. How many European countries held referenda ‘ere joining the EU? Where have referenda rejecting EU initiatives been respected?

    The one reason to place impediments in front of secession would be the prospect of Germany as it was prior to 1806. That’s not addressed by requiring super-majorities. What would be addressed is spelling out demographic and geographic criteria in constitutions ‘ere a petition for secession could be entertained.

  57. Gravatar of Art Deco Art Deco
    25. June 2016 at 10:00

    The flaws with direct democracy are well known and institutionalized. That’s why we have bicameral legislature with staggered terms, federalism, or 3/4 of states for a constitutional amendment.

    We have a bicameral legislature with staggered terms because it was conventional to have bicameral legislatures and there were disagreements about principles of representation which could be bridged by having two chambers selected differently. Supermajorities are required for constitutional legislation because it is superordinate to ordinary legislation and because it’s a rule set within which conflict and competition occur. We once had a federal system for a variety of reasons: it was conventional, there were local loyalties, and it was conceived of as a neutral means of protecting minorities by providing refuges for people dissatisfied with the social and political arrangements where they were reared.

    None of that has anything to do with the deficiencies of direct democracy. Direct democracy is a problem because you’re asking people over-and-over to address questions they know nothing and care nothing about. Also, there is no oversight mechanism incorporated within referenda themselves. So, you have instances of noncompliance by office holders conjoined to a mass of rent-seeker initiatives put on the ballot through commercial signature gathering. California’s initiative madness is an example of this.

    Regularized legislation by initiative is not at issue here. A discrete once-in-a-generation binary question about the constitution of Britain is, and for that, a referendum is not only appropriate, but a requirement.

  58. Gravatar of Art Deco Art Deco
    25. June 2016 at 10:04

    Unfortunately we live in a world full of democracy fetishists, who seek to legitimize 40% plurality winners (Trump) or 52% referendum winners. The uneducated and the press (but I repeat myself) rush to declare victory while ignoring the importance of compromise, process, and minority protections.

    Mr. Trump was selected by the standard process, with just as much compromise as every other nominee selected in the last 50-odd years, and with just as much regard for minorities as in those other contests. If Donald Trump is not the ‘legitimate’ nomineee, who is?

  59. Gravatar of Art Deco Art Deco
    25. June 2016 at 10:08

    Negation. But recall the problem in Switzerland, where they must allow open borders to continue to get free access to the EU market.

    And we should take an interest in ‘free’ access just why? American exporters pay the bloody tariff. It’s not Smoot-Hawley.

  60. Gravatar of Tom Brown Tom Brown
    25. June 2016 at 10:16

    “If Donald Trump is not the ‘legitimate’ nomineee, who is?”

    He won the most delegates fair and square. But on the other hand, the party can do what it wants. If they want to change the rules and force any nominee to disclose their tax returns (for example) (something Donald will almost certainly not do), then they can force him out.

  61. Gravatar of Art Deco Art Deco
    25. June 2016 at 10:26

    If they want to change the rules and force any nominee to disclose their tax returns (for example) (something Donald will almost certainly not do), then they can force him out.

    The convention will be populated with Trump delegates. And, of course, you’ve no clue what he’d do under that contingency.

  62. Gravatar of Tom Brown Tom Brown
    25. June 2016 at 10:28

    “Our orefathers stole it fair and square from the Indians,the Spanish and the Portuguese and no one will ever take it from us.”

    Don’t forget the Mexicans. Where I live in the US was stolen from them (after they stole it from Spain, which in turn stole it from the Chumash). Also the Russians and the English made a play for it, but didn’t get far.

  63. Gravatar of Tom Brown Tom Brown
    25. June 2016 at 10:55

    “The convention will be populated with Trump delegates. And, of course, you’ve no clue what he’d do under that contingency.”

    Sounds like the number of these delegates has been growing steadily to about 400 now:

    https://www.washingtonpost.com/politics/new-anti-trump-movement-grows-to-include-hundreds-of-gop-delegates/2016/06/20/88fb25cc-36f7-11e6-9ccd-d6005beac8b3_story.html

    Only a week or two ago it was just about 30. Plus the rules committee is less than 150 in size and meets prior to the main convention. I understand that changes they make have to be ratified by the rest of the delegates. So yes, it’s a long shot, but it could happen. For example, what if Trump says something really stupid between now and then that causes his poll number to start tanking and makes his fellow Republican candidates want to shun him. Based on my observations of Mr. Trump’s behavior so far and the reaction to them withing his own party, I think there’s a non-zero probability of that happening. =)

  64. Gravatar of Art Deco Art Deco
    25. June 2016 at 10:56

    Don’t forget the Mexicans. Where I live in the US was stolen from them (after they stole it from Spain, which in turn stole it from the Chumash). Also the Russians and the English made a play for it, but didn’t get far.

    Forget the Mexicans. The population of Mexican peninsulares, criollos, mestizos, and mission Indians living in that territory did not make it out of five digits.

    To say that ‘Mexico’ ‘stole’ the territory from Spain is incoherent. To attribute ownership to a discrete aboriginal tribe is bizarre. To attribute it to a collective of tribes is anachronistic.

  65. Gravatar of Art Deco Art Deco
    25. June 2016 at 11:00

    Sounds like the number of these delegates has been growing steadily to about 400 now:

    Messrs. Cruz, Rubio, and Kasich won about 900 delegates, some of whom are using WaPoo reporters as talk-therapists. There are over 1,500 Trump delegates. Barbie says ‘math is hard’.

  66. Gravatar of Tom Brown Tom Brown
    25. June 2016 at 11:08

    … I guess the rules committee has 112 members. Kendal Unruh is on the committee and leading the charge on this (not the tax return idea, but a move to unbind the delegates):
    http://www.politico.com/story/2016/06/gop-unbind-convention-delegates-224774
    Definitely something fun to watch from the sidelines whichever way it goes.

  67. Gravatar of Major.Freedom Major.Freedom
    25. June 2016 at 11:08

    Christian List:

    Even though I “won” this vote, I have to say that I always find it a bit weird that people can force such huge changes on other people just because they won a vote by a very close margin. Maybe they should change the rules in such referendums. Both sides in the range of 41-59% should result in some kind of compromise. Only in the case of winning by (for example) 10% or more the winner should win it all.

    If you find it weird that people can force changes on other people, then selecting 10% as the cutoff winning percentage will still encompass some people forcing changes on others. It doesn’t matter what percentage you select. Winning 99% to 1% will still contain some people, namely those in the 99%, forcing changes on other people, namely those in the 1%.

    Only anarcho-capitalist ethics can you be honest and serious about finding it weird that some people can force changes on others. That is Democracy!

  68. Gravatar of Tom Brown Tom Brown
    25. June 2016 at 11:41

    “To attribute ownership to a discrete aboriginal tribe is bizarre.” Actually, like I said, where I live (not the whole state) was 100% Chumash prior to the arrival of the Spanish. They had permanent villages here and on the Channel Islands. The Mexicans and the Spanish before them had both a mission and a presidio here (granted the Mexican soldiers manning the presidio surrendered to Frémont without a fight).

  69. Gravatar of Art Deco Art Deco
    25. June 2016 at 11:51

    So yes, it’s a long shot, but it could happen. For example, what if Trump says something really stupid between now and then that causes his poll number to start tanking and makes his fellow Republican candidates want to shun him.

    Michael Kinsley visited Des Moines during the 1984 Democratic donnybrook. He found the reporters and political staffers at their favorite watering holes a hoot with all their speculative talk which ran to, “If Alan Cranston comes in 3d in the Iowa caucuses, and Walter Mondale is run over by a truck….”. Maybe an enraged cousin of Alex Odeh will cap Trump while he’s campaigning in the Detroit suburbs. It’s a long shot, but it could happen.

  70. Gravatar of Tom Brown Tom Brown
    25. June 2016 at 13:15

    For those of you who would like to #DumpTrump (AKA #Trexit) at the convention, here are some links:

    http://www.delegatesunbound.com/

    http://delegaterevolt.com/

    an add they’ll be running on Fox:
    https://www.youtube.com/watch?v=tFlgP1hnU10

    Kendal Unruh’s page:
    [https://www.facebook.com/KendalUnruhfounderofFTD/]

  71. Gravatar of Jose Romeu Robazzi Jose Romeu Robazzi
    25. June 2016 at 13:25

    Prof. Sumner you said: “The young favored staying by a 3 to 1 margin, so time is on the side of those Brits who favor a cosmopolitan UK.”

    Don’t bet on that. Young people are most likely seduced by meaningless ideas such as “belong to a united Europe”, as opposed to worry about things like “who pays for the bureaucracy in Brussels” or “Who dates my daughter” that younger people will worry in the future when they get older …

  72. Gravatar of Tom Brown Tom Brown
    25. June 2016 at 13:37

    Don’t bet on that. Young people are most likely seduced by meaningless ideas such as “belong to a united Europe”, as opposed to worry about things like “who pays for the bureaucracy in Brussels”

    This expat Brit calculates that about 1% of UK taxes currently go to the EU and that the UK gets back more than it contributes overall:
    https://www.youtube.com/watch?v=HUm36PYvvzw

    More:
    https://www.youtube.com/watch?v=33BDDAUV8vg

  73. Gravatar of Effem Effem
    25. June 2016 at 13:47

    Scott,
    You have to compare equity prices in a common unit of value. Let’s take two companies, each is nothing but a warehouse full of gold (equal amounts). The company listed in the UK would have seen it’s share price fall less than the company listed in Germany. And yet, a set amount of gold has equal value no matter where it’s domiciled. The share prices in a third currency would have had identical moves.

  74. Gravatar of Art Deco Art Deco
    25. June 2016 at 13:49

    This expat Brit calculates that about 1% of UK taxes currently go to the EU and that the UK gets back more than it contributes overall:

    Creative accounting, without a doubt.

    Young people are most likely seduced by meaningless ideas such as “belong to a united Europe”,

    I’ve had occasion to be puzzled by the voting behavior and social attitudes of the young, which seem to have undergone a rapid ecosystem shift over a period of not more than about 10 years (1997-2008). Bar one, the young in my family are a tad older than this, or are somewhat resistant to the herd, or are not opinionated, so I do not get much insight as to their thinking.

  75. Gravatar of Tom Brown Tom Brown
    25. June 2016 at 13:59

    “Creative accounting, without a doubt.”

    Can you tell me specifically what’s wrong with it?

  76. Gravatar of Tom Brown Tom Brown
    25. June 2016 at 14:34

    Total number of UK civil service employees: 448,840
    Total EU employees: 25 to 50k

    Way to go UK (… er… probably I should start just calling it “K” once Scotland leaves) you really trimmed the fat on the bureaucracy there! The chaos created to trade one set of imperfect trading rules for another is sooooooooo totally worth it. And be sure to remember to give credit where it’s due: Nigel Farage and Boris Johnson. Never forget!

  77. Gravatar of Ray Lopez Ray Lopez
    25. June 2016 at 14:39

    I’m sick of Sumner. Why I continue to read this blog beats me. Sumner, please ban me, put me out of my misery!

    Look at Sumner’s answer to Zathrus: You said: “The poor job that prediction markets (and financial markets in general) did in predicting Brexit seems to have has dented people’s confidence in prediction markets.”

    I’ve seen those sorts of comments here as well, but they are really stupid. There’s a lack of understanding of statistics 101. Unusual things happen all the time.

    Then later: (Sumner) “ On the same day polls, even the leader of the UKIP said they had apparently lost, based on same day polls. The polls were biased in the same direction as the 2015 election polls. Shy Tory syndrome. Yes, I know, why didn’t the betting markets account for that? I’m not sure.” (thus Sumner contradicts himself)

    Then this: (Sumner) “As far as NGDP futures targeting … Under my current proposal, the Fed would still be able to use discretion to set interest rates and the money supply, but the[y]’d have to take the short or long position with traders who did not trust their decision. My goal is to make it easy to get rich if the Fed screws up, as in 2008. Because my instincts tell me that it will never be easy to get rich, a system that makes it easy to get rich if the Fed screws up is likely to lead to very few Fed screw-ups. Maybe I’ll do a post on this.”

    Yes, please do post on such a bizarre proposal. Tell us how pushing on a string is effective. With all the QE, the Fed could not boost NGDP in post 2008 times. Maybe more QE would have boosted NGDP? But then you risk hyperinflation. Again, my model: balance an eraser on a textbook. Tilt the textbook on one end. The eraser remains (pushing on a string), until such time that the coefficient of static friction fails and the eraser slides off the textbook (hyperinflation). That’s your “current proposal” in action. Simple model, easy to understand.

  78. Gravatar of Art Deco Art Deco
    25. June 2016 at 14:45

    Can you tell me specifically what’s wrong with it?

    What, of the John Oliver clip? I take it you’d like a literature review and scholarly treatment of the pub talk of your pal Morty too.

  79. Gravatar of Art Deco Art Deco
    25. June 2016 at 14:49

    Total number of UK civil service employees: 448,840

    Strange as it may seem to you, Tom Brown, most public employees (about 60% in the US) work for local government. The people who collect the trash and plough the snow where I’ve lived are not the people who gave you flash mobs of Syrian rapefugees. And, of course, regulatory agencies and appellate courts employ comparatively few people, and can do quite a bit of damage to markets and social fabric.

  80. Gravatar of Art Deco Art Deco
    25. June 2016 at 14:51

    By the way, IIRC, the operating budget of the Federal Reserve system is something on the order of a couple billion $. What’s Sumner always talking about them for?

  81. Gravatar of Art Deco Art Deco
    25. June 2016 at 14:52

    Megan McArdle nails it.

    http://www.bloomberg.com/view/articles/2016-06-24/-citizens-of-the-world-nice-thought-but

  82. Gravatar of Tom Brown Tom Brown
    25. June 2016 at 15:14

    “What, of the John Oliver clip?”

    No, Phil Mason’s figures. He calculates that the EU costs each Brit about 100 pounds per year.

  83. Gravatar of Major.Freedom Major.Freedom
    25. June 2016 at 16:02

    “He calculates that the EU costs each Brit about 100 pounds per year.”

    Hahahahahaha

  84. Gravatar of Tom Brown Tom Brown
    25. June 2016 at 16:26

    “He calculates that the EU costs each Brit about 100 pounds per year.”

    Hahahahahaha

    The Brexit people claimed that the UK sent 350 million pounds a week to the EU. That is until the day after the vote, when Nigel Farage admitted that was a bullshit number. Although it was publicized before the vote that it was bullshit as well:
    http://www.huffingtonpost.co.uk/entry/boris-johnson-and-vote-leave-slapped-down-for-misleading-voters-about-cost-of-eu-membership_uk_5748255be4b0ebf6a3299bab
    Phil Mason estimates it to be about half that figure. So, 175 million times 52 weeks, divided by 65 million people. Yep, that’s about right. 100 pounds. Even if we use the BS number promoted by the Brexit propaganda, it’s no more than about twice that figure.

    What’s you calculation?

  85. Gravatar of Tom Brown Tom Brown
    25. June 2016 at 16:31

    Anyone want to take a guess who wrote this and how long ago?

    We are now closer to having an economic community in the best sense of the term — we work with each other for the benefit of all.

    I think we’ve all become aware of the fact that our cultures and economics are intertwined. It’s a complex mosaic that cannot be approached with a simple formula for the correct pattern to emerge. In many ways, we are in unchartered waters.

    The good news, in one respect, is that what is done affects us all. There won’t be any winners or losers as this is not a competition. It’s a time for working together for the best of all involved. Never before has the phrase “we’re all in this together” had more resonance or relevance.

    We will have to leave borders behind and go for global unity when it comes to financial stability.

  86. Gravatar of Jacky Jacky
    25. June 2016 at 18:34

    The London stock markets response perhaps doesn’t mean what u think it means.

    Look at some of the top constituents of th ftse100:
    HSBC
    Glaxosmithkline
    Shell
    BAT
    Prudential
    AstraZeneca
    Reckitt Benckiser
    BP

    These stocks have a big part, if no most, of their businesses outside the UK. So it’s more a reflection of global economy/market sentiment more than just UK alone

    For a starter, just look at the difference between Lloyd, a U.K. focuses bank, and HSBC, with most of its profits outside uk most notably in Asia.

    Lloyds -21%
    HSBC -1.4%

    Enough said

  87. Gravatar of engineer engineer
    25. June 2016 at 20:40

    Yes… “what is good for the World is good for Trump and vice versa.”

    I am surprised economists do not look at Brexit as essentially a pooled risk that has been broken apart. The parts that remain have greater risk of default than the original pooled asset and therefore have a lower price.

    How about solving the Euro problem: Create 2 Euros…A&B…northern Europe is on A and Southern Europe (Spain, Italy, and Greece) uses B and the currencies float…countries can graduate from B and go to A if their economies become more advanced. Everyone trades their Euros for Euro A or Euro B depending on their citizenship at an even trade to start out. Everyone debts are also denominated in the currency based on their citizenship…So if a Greek bank owes money to a German bank..it is terms of Euro Bs…(basically that is haircut to creditors)

  88. Gravatar of Major.Freedom Major.Freedom
    25. June 2016 at 22:14

    Tom Brown:

    I was laughing at the fact that you believe the costs are limited to the pounds being paid.

  89. Gravatar of Tom Brown Tom Brown
    25. June 2016 at 23:01

    @Major.Freedom,

    The UK also gets direct benefits back though, for example the UK’s science funding: about half of it is financed from the EU. Fat chance that’ll be made up for by little England. I wonder if there’ll be a brain drain?

  90. Gravatar of Jose Romeu Robazzi Jose Romeu Robazzi
    26. June 2016 at 04:50

    @Tom Brown
    Ok, I assume the numbers you gave are annual, so every year Britain sends 5+ billion Euro to the EU, and gets back 8+ billion in “funding”. I am not sure the “funding” are direct expenses, but let’t assume they are. So basically the UK is paying 3 billion Euro a year to regain “some” sovereignty ? I used “some” in quotes because that may seem little things today, but could be a huge thing if the recent trend is extrapolated 2 ,3 decades away. And that is “stupid” ?!?!

    Scientific research is very specific. If those scientists are in Britain, will they be fired at once? I doubt it.

    UK has current account deficit, countries in the EU have current account surpluses. A lot of those savings from continental Europe will continue to flow to the UK, regardless. I doubt any of the two sides will change much in their capital account rules…

    You do get that the arguments in the video go both ways, right? If the EU has so little impact in the UK but instead it bothers a lot the majority of the population why remain in the EU then ?

    I think the message is very clear to the EU advocates: it should remain a federation, instead of try to grow as a unified state. Why do people need four levels of government (europe, countries, provinces, cities) in a “unified europeu” ?

    Thank you Brits for getting that message out so clearly.

  91. Gravatar of Benjamin Cole Benjamin Cole
    26. June 2016 at 05:09

    http://www.bloomberg.com/news/articles/2016-06-26/in-the-face-of-turmoil-bis-warns-of-overreacting-to-brexit?cmpid=google&google_editors_picks=true

    This link will push a Scott Sumner over the edge.

  92. Gravatar of Art Deco Art Deco
    26. June 2016 at 07:15

    Tom Brown:

    I was laughing at the fact that you believe the costs are limited to the pounds being paid.

    I get a chuckle that Tom Brown fancies that the EU’s second largest economy, with a nominal domestic product per capita twice the EU mean, is on the collective dole (on the authority of a Youtube posted by Joe Blow).

  93. Gravatar of Tom Brown Tom Brown
    26. June 2016 at 07:21

    @Jose,

    If they actually do go through with the Brexit (enact Article 50, which has not been done yet, and will not be done for months, because Cameron won’t do it), then I’ll bet you Scotland leaves. N. Ireland isn’t happy either. So no more UK, it’ll just be K. Lol. All that for a chance (and just a chance) at an incremental improvement in their trade laws? Sounds like they were played for chumps by nationalist chest thumpers trying to advance their own careers to me. Frances Coppola (from the UK) agreed with my characterization: a self serving tabloidocracy whipped people into an expensive chaotic frenzy. And for what? If things go sour (like they’re already started to do) those same tabloids might turn on the Brexit pushers to sell a bit more of their product. Plus if you have 2 million angry UK expats living in the EU return home, it’ll be fun to see who they’re going to blame.

    On a different topic: suck on this chumptards:
    https://www.washingtonpost.com/page/2010-2019/WashingtonPost/2016/06/26/National-Politics/Polling/release_428.xml?tid=a_inl

    There’s still a sliver of a chance of a #Trexit. More info here:
    http://hotair.com/archives/2016/06/24/trexit-ousting-trump-at-the-convention-via-the-gop-rules-committee-just-got-harder/

    What to do? For me it’s clear: get the popcorn.

  94. Gravatar of James Alexander James Alexander
    26. June 2016 at 08:29

    Steve and Jose
    Young people who voted did indeed vote 75/25 for Remain. But only 35% voted. So only 25% of young people voted for Remain. Who knows what the 65% who didn’t vote really think. They’d have to get out of bed or off Facebook or WoW first. Most young people think politics uncool.???

  95. Gravatar of ssumner ssumner
    26. June 2016 at 08:43

    Art, You said:

    “Why? Newfoundland joined the Canadian confederation with a margin of 52%;”

    What a wonderfully insightful argument.

    Effem, That reminds me of commenters who insisted Japan was in a Great Depression when the yen went from 80 to 125, as the US dollar value of the Japanese economy plunged.

    PPP applies to gold, but little else.

    Jacky, Vaidas already raised that point.

  96. Gravatar of Tom Brown Tom Brown
    26. June 2016 at 08:43

    @Jose,

    You write:

    You do get that the arguments in the video go both ways, right?

    Sure. I see this move as akin to refinancing your house to get a 0.25% better rate ARM, but you end up paying $5k in costs, points and fees, not to mention the time and trouble it causes you. Was it really worth it in the end? Plus it’s not even clear how long the rate advantage will be there. Plus you might end up in divorce (i.e. Scotland leaves). Maybe a better analogy is deciding to build your own house a couple of miles from the house you already own. Nothing much changes, except there’s lots of cost and trouble and it ends in divorce a fair percentage of the time.

  97. Gravatar of Tom Brown Tom Brown
    26. June 2016 at 08:49

    I get a chuckle that Tom Brown fancies that the EU’s second largest economy, with a nominal domestic product per capita twice the EU mean, is on the collective dole (on the authority of a Youtube posted by Joe Blow)

    I don’t fancy they’re on the dole. Sure, I believed the UK scientist about science funding, but I don’t think he has any special knowledge about the rest. I don’t know the figures. Why don’t you enlighten us?

  98. Gravatar of Art Deco Art Deco
    26. June 2016 at 09:41

    I don’t fancy they’re on the dole.

    Then what’s the point?

    Sure, I believed the UK scientist about science funding,

    Tell him money’s fungible and the EU has no resources not derived from the business activity of its member states.

  99. Gravatar of Tom Brown Tom Brown
    26. June 2016 at 10:32

    Scotland to veto #Brexit POPCORN ON STANDBY!
    https://www.youtube.com/watch?v=9WY-tWsNKDY
    If the logic of the UK Brexit proponents was that the UK shouldn’t have to support poorer countries in the EU, then why should Scotland (5 million), Northern Ireland (2 million) and London (9 million) have to support the poorer areas of the UK? London itself has a larger population than 13 EU countries, so why not?

    Who wants to make a bet on Article 50 actually being invoked?

  100. Gravatar of ssumner ssumner
    26. June 2016 at 11:10

    Tom, Scotland and Northern Ireland are “the poorer areas of the UK”

  101. Gravatar of Tom Brown Tom Brown
    26. June 2016 at 11:16

    “Tom, Scotland and Northern Ireland are “the poorer areas of the UK”

    I believe that. I should have restricted that list to just London.

  102. Gravatar of Art Deco Art Deco
    26. June 2016 at 11:53

    Tom, Scotland and Northern Ireland are “the poorer areas of the UK”

    Wales is the least affluent part of the UK. Ulster ranks just above. The north of England and the Midlands are below the mean by about 15%. Scotland, East Anglia and the West Country are about average. The southeast is above average, but I think that’s a mix of Oxfordshire and the densely settled areas of the Home Counties on the one hand, and the remainder on the other. The one is quite affluent, the other about average. The London boroughs are about 75% above the mean. Close to 20% of the population lives in the London metropolitan settlement, of which about 2/3 are in the London boroughs, 1/3 the Home Counties. That and Oxfordshire are the fancy parts of the country.

    Within southern England, remain won in the London boroughs, Oxfordshire, and some bits and fragments (e.g. the area right around Cambridge and Bristol). Within the London boroughs, the low-rent districts voted Brexit.

    The only impecunious part of the country which voted Remain was the Nationalist portion of Ulster (Fermanagh, Tyrone, Derry, south Down, south Armagh, and the Catholic neighborhoods in Belfast). The London boroughs have been an intense collecting pool of immigrants and native British are now a minority there. The Irish Nationalists have always been disaffected. Scotland’s been striking attitudes for about a decade now. And, of course, Oxford and Cambridge are chcok-a-block with people who fancy they’re above all that. The map says the vote was an expression of British patriotism.

  103. Gravatar of Art Deco Art Deco
    26. June 2016 at 12:04

    then why should Scotland (5 million), Northern Ireland (2 million) and London (9 million) have to support the poorer areas of the UK?

    Countries have an urban hierarchy and the higher order activities tend to be concentrated in the larger cities. The different strata of the urban hierarchy are functionally differentiated. Britain and France have a high degree of concentration you don’t see in Italy or Germany or the United States. The economic relationship between London and 2d tier cities like Leeds will go on; you’re just insisting they be politically separated.

    As for Scotland, they’re of middling affluence and support no one. I suspect if you ran the numbers you’d find they’re getting net transfers.

    And, no, Fermanagh, Tyrone, and Derry are not supporting anyone. Ulster’s been getting net subventions for nearly 50 years.

  104. Gravatar of Emerich Emerich
    26. June 2016 at 19:46

    Scott, if you haven’t heard yet, the IMF has come out with a post-Brexit diagnosis and prescription that will drive you up the wall, here: http://www.reuters.com/article/us-bis-annualreport-policy-idUSKCN0ZC0FP.

    Two samples:

    “In an apparent nudge to the U.S. Federal Reserve, the BIS said in its report that policymakers needed to put more focus on raising rates when they have the chance so that they have room to cut them again when the next downturn comes”.

    And: “We need to abandon the debt-fueled growth model that has brought us to this predicament. It is essential to relieve monetary policy, which has been overburdened for far too long.”

    Paraphrasing: “We have to abandon Keynesian fiscal policies because monetary policy has been overburdened too long”. The IMF doesn’t know the difference between fiscal and monetary policy??

  105. Gravatar of James Alexander James Alexander
    26. June 2016 at 21:49

    Scott
    The 2% drop in the Euro probably was easier money. You shouldn’t keep ignoring the huge QE underway by the ECB. It is much easier money than the US right now. Look at 40% base money growth YoY, for instance. Velocity may be falling, but not that much! Japan is a plaything of the US, but not the Euro Area.

  106. Gravatar of Jose Romeu Robazzi Jose Romeu Robazzi
    27. June 2016 at 04:31

    @James Alexander
    In England voting is not mandatory, is it? I recall most people find that a sign of progress….

    I do think that it is a good thing that Scotland and North Ireland separate from England. I would argue in favor of Wales getting of as well, I would argue that London get rid of the rest of England as well, I would argue that Catalunya get rid of Spain, I wish Venetians get rid of the rest of Italy too.

    To me, the smaller and more local government, the better

  107. Gravatar of José Romeu Robazzi José Romeu Robazzi
    27. June 2016 at 05:22

    @ Zathrus
    Market microstructure could potentially explain why right before the vote implied probability of remain was 90%.

    With the error margin of polls, the vote became a digital option. Digital options are easy to price, but hard to hedge …

  108. Gravatar of ssumner ssumner
    27. June 2016 at 06:40

    James, You said:

    “The 2% drop in the Euro probably was easier money.”

    That’s very unlikely, unless the ECB was meeting on late Thursday night. And if it was expectations of easier money in the future, then European stocks would have risen on the news, not fallen sharply. I am very confident that NGDP expectations in Europe declined, which means tighter money.

    Thanks Emerich, I might do a post.

  109. Gravatar of James Alexander James Alexander
    28. June 2016 at 02:06

    How do you explain the sudden 5% drop (1.14 to 1.09) in the Euro relative to the USD on the Brexit news? Why not easier money in the Euro area relative to the USD bloc? Admittedly, not easier enough, given the drop in stocks.

  110. Gravatar of ssumner ssumner
    28. June 2016 at 08:17

    James, I think it reflected fear of a eurozone crisis, not easier money. If it had been easier money then eurozone stock markets would have risen. Instead they plunged sharply.

  111. Gravatar of James Alexander James Alexander
    29. June 2016 at 01:52

    I don’t know what “a eurozone crisis” means.

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