The Brexit shock and its aftershocks

I just spent some time looking at stock market reactions around the world, over the past three trading days.  I’m too lazy to compute all the exact numbers, but I’ll give you a rough sense of what I found:

1.  The FTSE100 is down less than almost any other market, but I originally misinterpreted this fact.  It’s dominated by large multinationals that benefit from the lower pound.  Vaidas Urba suggested looking at the FTSE250, which focuses on domestic British companies.  There we see a drop of around 10%.  Think of that as one bomb going off—the “British economic chaos bomb”.

2.  The German and French markets are down by about 8%.  Think of those as representing the heart of the eurozone.  The PIGS seem to be down about 13%. So the Brexit explosion detonated another blast in southern Europe, which we might call the “potential eurocrisis bomb”.  The 8% declines in Germany and France represent fallout damage from these two bombs.  The UK is not directly impacted by the euro bomb, and that explains why it suffered only slightly more than Germany and France.

3.  Sweden and Denmark are outside the eurozone, and declined by 4% to 6%.  This is collateral damage from generalized European risk.

4.  At a global level, you tend to see declines of around 3%, say in the range of 2% to 4% in places like the US, Canada, Australia, Korea, Hong Kong, etc.  So that’s collateral damage to the global economy.

5.  China actually went up, but they tend to follow their own drummer.

6.  Japan is down about 6%, and fell especially sharply last Friday.  I see this as a third bomb.  As the first two bombs detonated, there was a flight to safe havens, and for some reason I don’t understand very well the yen is considered a safe haven.  So the yen appreciated strongly and the “strong yen bomb” drove Japanese stocks down by more than other non-European markets.

7.  The FTSE250 did especially poorly on Monday (compared to other markets), which fits my political chaos theory, as the media portrayed the British government as being clueless about how to handle the situation.  Things were a bit better on Tuesday.

A few points I’d like to emphasize.  This general market pattern was somewhat predictable, conditional on the vote (which of course was not well predicted.)  In other words, prior to the Brexit vote, we’d seen markets rise on optimism that “Remain” would win, and so it was possible to clearly see how investors thought a Brexit vote would affect various markets.  The size of the declines (after the results were announced) were not really a surprise, given that markets had rallied strongly on small increases in the probably that Brexit would fail.  We knew this was a really big deal.

The second point is that I think it’s useful to view market reactions in terms of one bomb triggering another, albeit often for very different reasons. The hit to Greek stocks occurred for very different reasons from the hit to Japanese stocks.  Outside of the UK, this was an almost purely monetary story, and commenters tell me that even within the UK, markets rallied strongly on a statement of support by (BOE head) Mark Carney.  So I still think at a non-British level this is an essentially a monetary story, and within the UK it is mostly real, but partly monetary.

This article claims that almost all experts agree that this is basically a British problem:

Experts agree: When the dust settles, there will be a clear main victim of Brexit

After the Brexit vote, economists agree that the UK economy is going down.

Just to be clear, I think that is certainly a possible outcome—recession in Britain and no recession elsewhere.  But I also think we need to take these stock market reactions more seriously.  Even with the recoveries today, eurozone markets are down sharply from Thursday’s close; declines almost comparable to the UK (FTSE250), or (in the case of the PIGS) even steeper.  The markets are telling us that there are big risks for all of Europe, and non-trivial (but modest) risks for the global economy.

Because the shock to the UK is more of a real shock, perhaps the damage there is more unavoidable.  In that sense I agree with the article.  But if the eurozone damage is more uncertain (a crisis may or may not occur) the size of the stock price decline suggests that if a crisis does occur, it could well be worse that the recession that might hit the UK.  The 8% German/French stock price decline could represent a 1 in 5 chance of 30% or 35% declines, if a eurozone domino effect develops.  So we should not be complacent and assume that this is just a UK problem; the rest of Europe needs to take this very seriously.  Right now, almost no plausible amount of monetary stimulus from the ECB would be excessive.  It’s pedal to the metal time.

Fed stimulus would also help.  Perhaps a statement by Yellen that the Fed is ready to move very aggressively to address any global problems that could also impact aggregate demand in the US.


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66 Responses to “The Brexit shock and its aftershocks”

  1. Gravatar of Market Fiscalist Market Fiscalist
    28. June 2016 at 17:53

    Won’t the fall in sterling act as a stimulus to the UK economy and keep recession at bay ?

    Also, what possible economic interest could the remaining EU members have in making trade with the UK more restrictive ? It seems like a win/win to keep the UK part of the free trade zone. Of course you can’t rule out stupidity or malign politics, but you assume that there is a high probability than common sense will win out.

    Finally – as it was generally those with relative wealth and power who voted remain , and those with neither that voted Brexit – there is a good chance it will never happen anyway.

  2. Gravatar of foosion foosion
    28. June 2016 at 17:54

    Do you believe bond markets provide any info that would be useful for this analysis?

  3. Gravatar of foosion foosion
    28. June 2016 at 17:58

    MF, drop in sterling will help, but probably not enough.

    EU doesn’t want other countries to leave and seems to regard preventing that as a higher priority than a bit of benefit from trade.

    There’s a lot of discussion over whether Brexit will actually happen. At the moment, no one really knows. Uncertainty is bad for business.

  4. Gravatar of E. Harding E. Harding
    28. June 2016 at 18:19

    The bond market’s crazy! The 10 year treasury is down to below 1.5%! First time since June-July 2012.

    If the Fed raises rates to 1%, I’m afraid that will bring on a recession. I still expect a recession to begin on or before Summer 2019.

    This is why I recommend quickly raising rates to bring on the election of Donald J. Trump!

  5. Gravatar of Student Student
    28. June 2016 at 18:29

    Harding, predicting another recession will happen at some point and he wants to bring it as soon as possible so we can elect a lImagin. Priceless.

  6. Gravatar of Mike Sax Mike Sax
    28. June 2016 at 18:32

    “This is why I recommend quickly raising rates to bring on the election of Donald J. Trump!”

    The Fed should deliberately tank the economy to elect Donald Trump?

    Seems to be the same kind of thinking that led Cameron to call for the Brexit referendum just so he could win in 2014-assuming it would never pass.

    Or Boris Johnson made Brexit his signature issue-but also assuming it would never pass but that it would elect him Prime Minister.

    Now that it actually passed everyone’s been wondering why he doesn’t want to be PM right away.

    Because he thought Cameron would deal with the problem before falling on his sword.

    But Cameron is not stupid-he’s going to fall on his sword now-why should he be the one to deal with this mess, let Johnson deal with it.

  7. Gravatar of ssumner ssumner
    28. June 2016 at 18:41

    Market, It depends why the pound fell. In this case, the pound fell because of expected economic weakness.

    Foosion, Yes, I think lower bond yields signal lower NGDP growth.

    Student, A recession right now would hurt Trump, as everyone would see it as resulting from Brexit, something TRUMP SUPPORTED.

    Trump better pray there is no recession in the next couple months. Otherwise people will blame him. I already blame him for supporting a vote that hit my 401k.

  8. Gravatar of E. Harding E. Harding
    28. June 2016 at 18:49

    “Trump better pray there is no recession in the next couple months. Otherwise people will blame him.”

    -Sumner. You wrote a book on the Great Depression. I read some of it. You are well aware of the causes of the decline of the two months before the November 1932 election. You know full well that is not how politics works. A recession is always and everywhere blamed on the presidency of the incumbent administration.

  9. Gravatar of E. Harding E. Harding
    28. June 2016 at 18:53

    “I already blame him for supporting a vote that hit my 401k.”

    -You should blame Obama. Trump is wildly unpopular in Scotland; if anything, his support for Brexit hurt the cause. The vote went for “leave” because of the migrant crisis. The migrant crisis was caused by Obama working through NATO. No war-for-oil-profits Obama policies=no migrant crisis=no Leave vote=less harm done to your 401k. See?

  10. Gravatar of Matthew Moore Matthew Moore
    28. June 2016 at 18:55

    Here’s a prediction based on these inferences.

    If both the UK and the EU strongly signal that they are moving towards continued Single Market access, the FTSE250 will regain about half of its losses, the bit based on trade opportunities.

    The remainder of the European stock markets won’t gain greatly, since the risk of a Eurozone member exiting was increased permanently by the Brexit example

  11. Gravatar of msgkings msgkings
    28. June 2016 at 19:03

    Harding going full retard again, happening a lot more lately. Must be the 97 IQ.

  12. Gravatar of TravisV TravisV
    28. June 2016 at 19:48

    Tyler Cowen linked to this brilliant analysis by Reihan Salam:

    http://www.slate.com/articles/news_and_politics/politics/2016/06/immigration_and_brexit_how_a_rising_tide_of_european_immigrants_fueled_the.html

  13. Gravatar of Ray Lopez Ray Lopez
    28. June 2016 at 20:30

    Sumner: “I’m too lazy to compute all the exact numbers, but I’ll give you a rough sense of what I found” … “but I originally misinterpreted this fact” … “and for some reason I don’t understand very well”… OK, we all have our off-days, with Sumner this being the rule, but how to explain this howler? Sumner: “the 8% German/French stock price decline could represent a 1 in 5 chance of 30% or 35% declines, if a eurozone domino effect develops.” What??? 8×5 = 40, not 30-35%. Sumner, can you use a calculator?

  14. Gravatar of Christian List Christian List
    29. June 2016 at 00:26

    I agree with Harding on this. A recession will nearly always hit the incumbent administration. It’s conventional wisdom that the ruling party has little to worry about if the economy is doing well and a lot to worry if the economy is tanking. That’s especially true in US elections.

  15. Gravatar of Postkey Postkey
    29. June 2016 at 00:28

    “Fighting ‘currency wars’ with blanks: The limited role of exchange rates in export competitiveness
    Filippo di Mauro, Konstantins Benkovskis, Sante De Pinto, Marco Grazioli 29 June 2016
    In the ‘currency wars’ discussion, it is almost taken for granted that exchange rate depreciations will result in non-trivial export gains.  Using evidence from countries in Europe and Asia, this column argues instead that factors unrelated to prices/exchange rates often play a predominant role in shaping trade developments. Moreover, these factors affect export outcomes in a very diversified manner across countries, in part because of the interplay of global value chains.
    Conclusions
    By disentangling the impact of exchange rate changes on trade results, we have shown that the underlying assumption of the ‘currency wars’ discussion – that devaluations bring about substantial export gains – may be severely flawed. Non-price/non-exchange rate factors often appear to explain the lion’s share of export outcomes, and this is particularly the case when exports are measured in value-added terms. We have also provided rather compelling evidence that the extent of this non-price/non-exchange rate component is highly diversified across a sample of developed and emerging economies in Europe and in Asia. This amounts to a strong call for caution in trusting too extensively in the ‘power’ of the exchange rate.”
    http://www.voxeu.org/article/limited-role-exchange-rates-export-competitiveness

  16. Gravatar of Britmouse Britmouse
    29. June 2016 at 02:15

    Good post.

    The S&P 500 is at an all time high in GBP terms, this is the market telling you to retire to the UK, Scott. The weather is just like SoCal.

  17. Gravatar of Art Deco Art Deco
    29. June 2016 at 03:19

    All major exchanges were up on Tuesday and the main European exchanges are up so far today.

    Tomorrow’s another day. None of this matters much.

  18. Gravatar of Lars Christensen Lars Christensen
    29. June 2016 at 03:19

    Scott,

    You should have a look at inflation expectations in the UK and the euro zone. UK inflation expectations are RISING, while EZ inflation expectations are down.

    See here: https://marketmonetarist.com/2016/06/28/brexit-regime-uncertainty-at-the-zero-lower-bound/

    That said, this is not a big event from a global market perspective compared to Fed’s eagerness to prematurely hiking interest rates in December. There has been a sharp drop in inflation expectations in both the US and the EZ since January. That is the really story – not Brexit.

    And Fed response. Here is the right thing to do: https://marketmonetarist.com/2016/06/24/brexit-the-press-research-the-fed-should-have-put-out/

  19. Gravatar of Speaking up for the Euro Area | Historinhas Speaking up for the Euro Area | Historinhas
    29. June 2016 at 04:03

    […] part of the jigsaw is Euro Area monetary policy. Scott Sumner today tries to make sense of all the market movements and says, without […]

  20. Gravatar of ssumner ssumner
    29. June 2016 at 04:56

    Harding, You said:

    “Sumner. You wrote a book on the Great Depression. I read some of it. You are well aware of the causes of the decline of the two months before the November 1932 election.”

    Obviously you didn’t read all of it. The cause of the decline was Hoover’s incompetence, which led to a run on the dollar.

    You said:

    “You should blame Obama. Trump is wildly unpopular in Scotland; if anything, his support for Brexit hurt the cause.”

    It’s utterly laughable to think either Trump or Obama would sway UK voters either way. Would American voters care about what Cameron thought of an issue? I certainly didn’t blame Trump for the outcome, I blamed him for having poor judgment on an important policy issue. Trump favors policies that damage the global economy. Shouldn’t voters be concerned about that?

    Christain, You said:

    “A recession will nearly always hit the incumbent administration.”

    I completely agree, but that has no bearing on my claim. This would be the first time in US history that a presidential candidate publicly backed a crazy decision by the British voters, which then immediately resulted in a global financial crisis and global recession (by assumption).

    In that case, it will look to everyone like Trump has really, really poor judgment.

    Just to be clear, if the US has a recession but Britain doesn’t, then Trump will not and should not be blamed. But if they do . . . wow, he’ll look like an idiot. Oh wait, he already looks like an idiot and the voters don’t care. :)

    Ray, Have you figured out the AS/AD model yet? Hint, the graph has two lines.

    Britmouse, Maybe in Cornwall, the British Riveria?

    Art, The figures I gave included the increases on Tuesday. And did you just find out that stocks move around, or are you so dense that you think a later move in the market means a previous move was not meaningful?

    Lars, Thanks for the inflation data, that strongly supports my real shock/nominal shock distinction.

    I have to disagree about Brexit not being a really big deal. Those stock (and bond) market reactions were pretty large. It did significantly reduce expected global NGDP growth. The markets sort of expected the December rate hike, so it’s hard to know the exact market reaction, but I think they were probably in the same ball park, which isn’t to say the December rate increase might not have been a bit worse.

  21. Gravatar of Lars Christensen Lars Christensen
    29. June 2016 at 05:55

    Scott,

    The rate hike in December was not the tightening of US monetary conditions. The “hike” came in October when the Fed pre-announced the hike. As a consequence the hike was priced in in December. But effectively the Fed started tightening in 2014.

    Furthermore, in August 2015 concerns over China caused a further drop in global nominal GDP growth expectations.

    A easy way to look at this is look at the US stock market (implied) volatility (VIX).

    Since 2008 we have have had four “events”:

    Lehman in Sep-Oct: ViX goes from 20 to nearly 70.
    Euro crisis/ECB hikes: VIX goes from 20 to 40 (twice during 2010-2012)
    Fed becoming more hawkish and China worries 2014-2015: VIX goes from 15-30

    And the and one – Brexit: VIX goes from 15 to 23 (the spike on Friday). And now we are down below 19.

    The last “shock” is hardly a chok. In fact is it well within one standard deviation of the moves in VIX over the past decade.

    This to me shows that this shock on its own is rather small. It is not good news, but it is not good news because monetary policy is not credible in the euro zone and the US.

    In fact I think the risk of a US recession is substantial, but that is because the Fed has send the US into recession already before the Brexit shock. While I think there is little reason to fear recession in the UK in the near-term.

    The EZ is a constant worry, but it is not the Brexit crisis on it own, which is to blame. It is the fact that the ECB has allowed inflation expectations to once again to be de-anchored.

    And finally – yes, the drop in stock prices on Friday where quite dramatic, but look at the week-on-week changes in stock prices in Europe and the UK then it is in no way dramatic compared to the sell-off we have in January-February, which in my view was caused by Fed’s insane idea of hiking rates this year.

  22. Gravatar of Lars Christensen Lars Christensen
    29. June 2016 at 05:57

    …and I then should had that that does not mean that the ECB or the EU Commission or the BoE for that matter cannot mess this up badly, but that is potential shocks that we haven’t seen yet.

  23. Gravatar of Art Deco Art Deco
    29. June 2016 at 05:58

    Art, The figures I gave included the increases on Tuesday. And did you just find out that stocks move around, or are you so dense that you think a later move in the market means a previous move was not meaningful?

    No, I think precisely what I’ve said, that is that short term flux in markets is not important. I’ve said this repeatedly. Reading comprehension appears to be strictly optional at Bentley.

    If you don’t make a living trading securities, what happens from day x to day x + 4 in the market is likely to have a minimal effect on your welfare, no matter how histrionic you elect to be about your 401k.

    As for the effects in Britain, unless there’s a trade embargo organized by the Juncker-Merkel cabal, Britain will be facing an ad valorem tariff on it’s merchandise that averages 0.8%. JP Morgan has offices in 15 EU countries outside of Britain and Citi offices in all of them, so I don’t imagine that HSBC or Barclay’s or the Royal Bank of Scotland are going to be kicked out or priced out of continental markets. Some British expatriates may have trouble getting their residency permits renewed; however, half of them live in Spain, who do not make a practice of ejecting law-abiding people who’ve been there for at least 5 years.

    All the whinging over Brexit has little to do with dollars and cents except for thin slivers of the business sector.

  24. Gravatar of Art Deco Art Deco
    29. June 2016 at 06:03

    I blamed him for having poor judgment on an important policy issue. Trump favors policies that damage the global economy. Shouldn’t voters be concerned about that?

    The policy issue is whether or not Britain is governed by its elected officials and whether Britain is a country or a hostel. Trump’s judgement on such questions is not ‘bad’ however much it irritates bourgeois cosmopolitans. As for the ‘damage to the world economy’, you’re the princess objecting to the pea under her mattress.

  25. Gravatar of Maybe it’s just me… Maybe it's just me...
    29. June 2016 at 06:34

    The real test of a public policy is its ability to balance the needs of the moment with the claims of a better future to our children. Sorry, but it is how I feel.

  26. Gravatar of Benjamin Cole Benjamin Cole
    29. June 2016 at 07:04

    David Beckworth has a post reminding the Fed is effectively central banker to more than 40% of globe. The dollar is up, tightening money globally.

    The Fed needs to think about sending in the helicopters….

  27. Gravatar of Gary Anderson Gary Anderson
    29. June 2016 at 07:07

    I don’t even think the refugees would have been such an issue had the EU done something about youth unemployment. It is massive, except, of course, in Germany, where it is 6.9 percent. It is 20 percent almost everywhere else. Why these citizens put up with this high youth unemployment is beyond me. You have to have your own currency to grow the GDP. So says Lars Christensen. You can’t be a pegger. You have to be a floater: http://www.talkmarkets.com/content/global-markets/currency-hegemony-gdp-growth-and-why-brexit-was-good-for-the-uk?post=98496

    But now we hear talk of the Single European State. That is the reason the Brits can never go back, as the pound, the nuclear deterrent and all things British will be abolished in favor of the Superstate.

    I never thought I would see the globalists attempt to colonize the home of globalization, the UK. They would globalize their own children.

  28. Gravatar of james elizondo james elizondo
    29. June 2016 at 07:28

    Thanks for the post.

  29. Gravatar of Tom Brown Tom Brown
    29. June 2016 at 08:15

    “You are well aware of the causes of the decline of the two months before the November 1932 election.”

    Wait, you mean the one in Germany?

  30. Gravatar of Doug M Doug M
    29. June 2016 at 08:25

    You shouldn’t be concerned with the day-to-day fluctuations of the value of your 401(k). The only thing that matters is it valuation after you are retired and begin to draw upon it. In the meantime the path it takes along the way to that date is irrelevant.

  31. Gravatar of Doug M Doug M
    29. June 2016 at 08:32

    E Harding,

    “The bond market’s crazy! The 10 year treasury is down to below 1.5%! First time since June-July 2012.”

    The bond market is quite rational. The US has the highest yielding bond market in the the developed world.

    The Fed is on hold. We already have tight money. Inflation is subdued. Growth prospects are slowing. Why would the Fed tighten from here?

  32. Gravatar of E. Harding E. Harding
    29. June 2016 at 08:46

    “Would American voters care about what Cameron thought of an issue?”

    -Scott, did you read my comment? If Cameron helped Honduras start a civil war in Cuba with Obama’s cooperation, causing a massive wave of Cuban migration to Canada and Mexico, that would be pretty impactful on U.S. nationwide elections.

    “The cause of the decline was Hoover’s incompetence, which led to a run on the dollar.”

    -Sure, but the policy uncertainty created by FDR’s lack of cooperation with the Hoover administration didn’t help, either.

    Art Deco is right. You are making a mountain out of a molehill.

    “I blamed him for having poor judgment on an important policy issue.”

    -And I praise him for having excellent judgement. He correctly predicted a Leave victory, and, unlike elites with too much smoke up their butts, praised it as the rightful decision of the majority of British voters. He only gets a thumbs-up from me and all his supporters for that.

  33. Gravatar of Market Fiscalist Market Fiscalist
    29. June 2016 at 09:00

    interesting – all Brexit losses made up

    http://www.bbc.com/news/business-36660133

  34. Gravatar of Mike Sax Mike Sax
    29. June 2016 at 09:43

    “And I praise him for having excellent judgement. He correctly predicted a Leave victory, and, unlike elites with too much smoke up their butts, praised it as the rightful decision of the majority of British voters. He only gets a thumbs-up from me and all his supporters for that.”

    What is this ‘he predicted it’ stuff? Two weeks ago he didn’t know what Brexit was. Just like he opposed Iraq after it was over.

    Anyway, he’s running for President not market forecaster. He keeps saying Hillary and Obama got it wrong.

    No. They were not predicting how the vote would go but that the vote was a bad idea.

    That’s already been borne out.

    Electing Trump wold be like Brexit, just many times worse.

    “What I find surprising is that US and global markets and financial policymakers seem much less sensitive to “Trump risk” than they are to “Brexit risk”. Options markets suggest only modestly elevated volatility in the period leading up to the presidential election. While every Fed watcher comments on the implications of Brexit for the central bank, few, if any, comment on the possible consequences of a victory for Mr Trump in November.”

    “Yet, as great as the risks of Brexit are to the British economy, I believe the risks to the US and global economies of Mr Trump’s election as president are far greater. If he is elected, I would expect a protracted recession to begin within 18 months. The damage would be felt far beyond the United States.”

    “First, there is a substantial risk of highly erratic policy. Mr Trump has raised the possibility of more than $10tn in tax cuts, which would threaten US fiscal stability. He has also raised the possibility of the US restructuring its debt in the manner of a failed real estate developer. Perhaps this is just campaign rhetoric. But historical research suggests that presidents tend to carry out their major campaign promises.”

    https://next.ft.com/content/84ebe1b2-29a8-11e6-8ba3-cdd781d02d89

    The very fact that there is all this uncertainty whether he means what he says or not is terrible for world markets and diplomatic and international relations.

  35. Gravatar of E. Harding E. Harding
    29. June 2016 at 09:58

    “Electing Trump wold be like Brexit, just many times worse.”

    -Indeed. But for who? Not me.

    “What is this ‘he predicted it’ stuff?”

    -He did.

    “The very fact that there is all this uncertainty whether he means what he says or not is terrible for world markets and diplomatic and international relations.”

    -Ever heard of Nixon? Eisenhower? Strategic ambiguity?

    “Just like he opposed Iraq after it was over.”

    -And after it started, too. Way earlier than Her.

    In any case, the last person I want appointing Supreme Court justices is Her. Trump seemed like the best candidate out of the bunch during the primaries. He still does.

    Doug, you are correct.

  36. Gravatar of Gary Anderson Gary Anderson
    29. June 2016 at 10:18

    I don’t believe the vote was a bad idea. I think Trump is a very bad idea, however. He could be the smartest man who ever lived, which he isn’t, and his hatred of Muslims alone is enough to disqualify him for dog catcher.

    The vote was against colonization. You don’t think the Germans would one day dominate the UK in the Single European State as it dominates everyone else?

  37. Gravatar of collin collin
    29. June 2016 at 10:23

    Of course the hardest thing about the market reaction on Brexit is we still don’t have a real plan of what Brexit hopes to accomplish. My guess the negotiations go SSSSLLLLOWWWWLY and accomplish very little. (Britian gets to vet Polish immigrants longer?) And given Merkel is the master of wait and see strategies to get your negotiating partner in line, who knows if much is decide upon one or two years from now. Countries have a way of backpedaling with the threat of loss markets.
    I am with Tyler that there is good chance nothing truly happens and the vote accomplishes nothing more than an loud internet comment.

  38. Gravatar of Gary Anderson Gary Anderson
    29. June 2016 at 10:30

    Collin, the behavior of the Eurozone towards the UK already since the vote, should make the Brits aware that they are dealing with a bunch of snakes. France ordered this, and Germany orders that and before long, the UK is buffeted by bad behavior from the EU. That should wake the Brits up and keep them determined to go on with the break.

  39. Gravatar of Matthew Moore Matthew Moore
    29. June 2016 at 10:35

    As of right now, the FTSE 100 is back above pre-Brexit Wednesday levels.

    Scott is right that it is not British-specific, but I wonder what the change in sentiment is due to?

  40. Gravatar of Alex Alex
    29. June 2016 at 13:33

    Professor,a note:UK Labour Market in June.

    https://www.ons.gov.uk/employmentandlabourmarket/peopleinwork/employmentandemployeetypes/bulletins/uklabourmarket/june2016

    In page 39/65 the employment rate or participation rate for those aged 16 to 64 is estimated at 74.2%.

    In US the participation rate is estimated around 62-63% the last years.

    https://www.docdroid.net/ug5PpG2/employment-status-of-the-civilian-noninstitutional-population.pdf.html

    But if compare 2006 with 2016 in US:

    The civilian non institutional population increased 24.359 mil people,but the number of civilian labor force increased only 7.038 mil people.

    If those 24.359 mil people the vast majority are under 16 years old, or have retired this may be logical. If not then 7/25 means a 28% participation rate.

    With a participation rate at 60% (25 mil people X 60 % =15 mil)

    US should have (15-7)=8 mil more people working which means that the civilian labor force should be around (158.466+8.000)=166.466 mil people and the unemployment rate around 4.5%.(7.436/166.466)

    Now those 8 mil people are inactive, or working a second job, which is not presented or stated in statistics or they are not recorder as people seeking job for various reasons.

    The UK Labour Market link in page 4/65 define them as inactive.

  41. Gravatar of Christian List Christian List
    29. June 2016 at 15:12


    This would be the first time in US history that a presidential candidate publicly backed a crazy decision by the British voters, which then immediately resulted in a global financial crisis and global recession (by assumption).

    The Brexit decision proved that with the right narrative and the support of just a few media outlets you can basically achieve anything, especially in a winner-takes-all system.

    I don’t think it would be a good narrative for Hillary to blame a major depression in the US on British democracy and “the stupid British voters”.

  42. Gravatar of Scott Freelander Scott Freelander
    29. June 2016 at 16:25

    It appears some of the key leaders of the Brexit movement engaged in outrageous lying on behalf of the cause. Now, Farage is saying that there won’t be anything like the kind of money freed up for the NHS as was advertised on a Leave bus that toured the country. Johnson admits this too, and both Johnson and Hannan now say that net immigration may not fall at all.

    Brexiteers seem to be as gullible as Trumpistas. They traded relative prosperity for very little additional freedom, given that they want to maintain similar terms of trade.

    Of course, right-wing lies and incompetence are certainly not surprising. However, unfortunately, it appears Corbyn may be guilty of not caring much about whether Brexit occurred. He appears to be extremely incompetent, and perhaps even as incompetent as Syriza in Greece.

    I wish I could put it all off on right wing populists and the crooks who are manipulating them, but it appears the left wing extremists are causing serious problems too.

  43. Gravatar of Tom Brown Tom Brown
    29. June 2016 at 16:37

    Scott F., agreed.

  44. Gravatar of John Thacker John Thacker
    29. June 2016 at 16:41

    Ambrose Evans-Pritchard has a far more sensible take than many: http://www.telegraph.co.uk/business/2016/06/29/was-brexit-fear-a-giant-hoax-or-is-this-the-calm-before-the-next/

    “The eurozone authorities never sorted out the structural failings of EMU. There is still no fiscal union or banking union worth the name. The North-South chasm remains, worsened by a deflationary bias… Contrary to the supposition of Mr Rutte, the fall in sterling is a blessing for the British economy, and a headache for the eurozone. The exchange rate is acting as a shock-absorber, just as it did in 1931, 1992, and 2008, all bigger falls, and all benign.

    Devaluation strikes no fear in a chronic deflationary world where almost every major country is trying to push down its currency to break out of the trap, and largely failing to do so. It would facetious to suggest that Britain has pulled off this trick. Crumbling investor confidence is never a good thing. But the UK has stolen a march of sorts, carrying out a beggar-thy-neighbour devaluation by accident.”

    I don’t agree with him 100%, but much better than most of the commentary.

  45. Gravatar of Major.Freedom Major.Freedom
    29. June 2016 at 16:42

    Sumner wrote:

    Because the shock to the UK is more of a real shock, perhaps the damage there is more unavoidable.

    That’s better.

  46. Gravatar of Major.Freedom Major.Freedom
    29. June 2016 at 16:49

    Funny about how in how in just a few short days, this blog goes from the “almost purely nominal” stance to the “more of a real shock” stance.

    Sort of like markets. Somewhat erratic.

  47. Gravatar of Joe Calhoun Joe Calhoun
    29. June 2016 at 17:16

    Scott,

    The rise in the Yen during “risk off” periods is probably due to the closing of Yen carry trades. The Yen is certainly not a safe haven.

  48. Gravatar of E. Harding E. Harding
    29. June 2016 at 17:27

    “They traded relative prosperity for very little additional freedom, given that they want to maintain similar terms of trade.”

    -Should Australia join the E.U.? And what’s good about the E.U. anyway? Never got that from you Remainers.

  49. Gravatar of Major.Freedom Major.Freedom
    29. June 2016 at 17:50

    Sumner, given your worldview, you should explain why the capital markets did not just react with a one time price adjustment up or down “within minutes” of the vote, and then that’s it. In other words, you should explain why there are price fluctuations over a number days after.

  50. Gravatar of Brexity Brexity
    29. June 2016 at 18:11

    Sumner, what you think about that

    http://www.adamsmith.org/the-liberal-case-for-leave/

  51. Gravatar of Art Deco Art Deco
    29. June 2016 at 19:19

    It appears some of the key leaders of the Brexit movement engaged in outrageous lying on behalf of the cause.

    Look at the map. Even if your rendering of anything they said was minimally fair, there’s no indication it motivated 10 people. The protestant section of Ulster did not vote Brexit while the Catholic sections were voting for the EU because the one is fixated on petty parts of the NHS budget and one is not.

  52. Gravatar of Gary Anderson Gary Anderson
    29. June 2016 at 19:27

    @Freelander You said: “Brexiteers seem to be as gullible as Trumpistas. They traded relative prosperity for very little additional freedom,”

    That is not true. As I have said at the link to my name, the Brexit destroyed a certain attempt to force all EU members into the Euro currency. Also, GDP growth in the Eurozone is very low. Also, the nuke deterrent would go to technocrats.

  53. Gravatar of Scott Freelander Scott Freelander
    29. June 2016 at 20:28

    Gary,

    Do you really think the EU would have ever forced the UK out for not joining the monetary union, or for not giving up its nuclear control? That’s silly.

    As far as Eurozone growth is concerned, that affects the UK whether inside or outside the EU. I don’t even hear Brexiters wanting to end free trade with the zone. It’s still the UK’s biggest trading partner.

  54. Gravatar of John Thacker John Thacker
    30. June 2016 at 03:17

    Major.Freedom:

    At the very least, I’d say that there’s a lot of uncertainty about how both the monetary authorities of the world and the politicians of the EU and UK are going to react. The reaction is likely to have much greater effects than per se Brexit, so every indication of how the response will go matters.

  55. Gravatar of Dan W. Dan W.
    30. June 2016 at 04:58

    Remarkable that the “invisible hand” that guides free markets is so visible to some. Who knew the day would come when a Dr. Sumner would be competing with Jim Cramer on who could best explain the gyrations of world stock markets.

  56. Gravatar of ssumner ssumner
    30. June 2016 at 08:46

    Lars, This is a different type of shock. As a monetary shock, Brexit will end up being much bigger, or more likely nothing at all.

    Doug, You said:

    “You shouldn’t be concerned with the day-to-day fluctuations of the value of your 401(k). The only thing that matters is it valuation after you are retired and begin to draw upon it. In the meantime the path it takes along the way to that date is irrelevant.”

    I’d suggest you and Art might want to read “A Random Walk Down Wall Street.”

    Harding, You said:

    “Scott, did you read my comment? If Cameron helped Honduras start a civil war in Cuba with Obama’s cooperation, causing a massive wave of Cuban migration to Canada and Mexico, that would be pretty impactful on U.S. nationwide elections.”

    Even by your standards this is idiotic, almost a Ray level comment.

    You said:

    “-Sure, but the policy uncertainty created by FDR’s lack of cooperation with the Hoover administration didn’t help, either.”

    So FDR was supposed to cooperate with Hoover in the 2 months before the election? Seriously? What have you been smoking?

    Collin, You said:

    “I am with Tyler that there is good chance nothing truly happens and the vote accomplishes nothing more than an loud internet comment.”

    In the short run you will be right.

    Christian, You said:

    “I don’t think it would be a good narrative for Hillary to blame a major depression in the US on British democracy and “the stupid British voters”.”

    Fortunately, it’s not likely to happen. But if it did she’d be an idiot not to blame Trump for supporting Brexit.

    Brexity, I’ve always argued there is a strong liberal case for Brexit. I just happened to think the liberal case for Remain was even stronger, a view strengthened by today’s events.

    Dan, And so we find out that the Dan ,who thinks slave-owning Jefferson was a “Libertarian”, also doesn’t have any idea what the “invisible hand”, metaphor refers to.

  57. Gravatar of AIG AIG
    30. June 2016 at 12:15

    Scott, a few pointers:

    1) You’re an economist. So I assume you know how things like an event study works…

    …right?

    Do you just look at how much an asset moves at the point of the event????

    Or do you calculate…cumulative abnormal returns? How do you calculate CARs? In comparison to the highest point of a run up in price, leading to the event?

    Lets just say, you know why you’re wrong, and why all the journalists are wrong. Wrong in the sense of the..magnitude…or the reaction.

    Stocks ran up in most markets in anticipation of a Remain vote. Falling from that isn’t the magnitude of the “loss” from Brexit.

    2) Alas, US stock markets are up again to where they were in pre-Brexit days. So much for that.

    3) Pro tip number 3: maybe wait a few days before declaring the magnitude of the losses, or if there are any losses at all. These things tend to change rather dramatically, by the minute.

    You know…never reason from a price change…and all that 😉

  58. Gravatar of ssumner ssumner
    30. June 2016 at 13:01

    AIG, The world doesn’t come to an end after an “event”. There are further “events,” some of which clarify the meaning of the first event, and some might make it even less clear.

    Markets also don’t stop. Sometimes they keep moving in the same direction as after the first event, and sometimes they reverse. I can think of lots of cases of each type. It’s hard to predict which will occur

    Market reactions are always provisional, one never reaches the end of time. All market moves are eventually shown to be “wrong” in the sense that later new information will once again move the market.

    Some people can handle that level of complexity, and some cannot.

    BTW, You forgot to mention the very important point that US interest rates did not return to pre-Brexit levels, which has important implications for stock prices, as well as future growth in the US economy. Whatever Brexit is, there is no indication yet that it is a non-event.

  59. Gravatar of ssumner ssumner
    30. June 2016 at 13:02

    BTW, your “never reason from a price change” comment suggests that you don’t know what the phrase means, as it does not apply to my recent posts. Whatever I’m doing, I’m certainly not reasoning from price changes.

  60. Gravatar of AIG AIG
    30. June 2016 at 13:32

    I didn’t say it is a non-event.

    I said the way you (and almost everyone else) is trying to figure out the effect or magnitude, or even if this was of any significance…is flawed.

    The logic is the same as an event study. You don’t simply look at the movement of the asset price.

    You know why…and you know what the implications of this are. If that were the case, we wasted a perfectly good Nobel Prize on Fama 😉

    Your response didn’t actually address this point: that the movement of the price is not actually the way to examine the magnitude of the effect.

  61. Gravatar of E. Harding E. Harding
    30. June 2016 at 14:12

    “Even by your standards this is idiotic, almost a Ray level comment.”

    -Uh, no. This is one of my more sensible comments. And if you’d have bothered to comprehend it, you’d have understood it was not only perfectly reasonable, but patently obvious.

    “So FDR was supposed to cooperate with Hoover in the 2 months before the election? Seriously?”

    -Uh, yeah. It was pretty clear he was going to win, anyway. What’s your proposal for what FDR should have done for minimum economic damage?

    “And so we find out that the Dan ,who thinks slave-owning Jefferson was a “Libertarian””

    -If Jefferson wasn’t a libertarian, who at the time was?

  62. Gravatar of Gerry Quinn Gerry Quinn
    30. June 2016 at 15:42

    Investors are worried that Brexit might have bad consequences.

    We KNEW that.

    Thus the predictable market wobbles tell us absolutely nothing new.

    We won’t know anything until we see what actually happens.

  63. Gravatar of AIG AIG
    30. June 2016 at 16:38

    “AIG, The world doesn’t come to an end after an “event”. There are further “events,” some of which clarify the meaning of the first event, and some might make it even less clear.

    Markets also don’t stop. Sometimes they keep moving in the same direction as after the first event, and sometimes they reverse. I can think of lots of cases of each type. It’s hard to predict which will occur

    Market reactions are always provisional, one never reaches the end of time. All market moves are eventually shown to be “wrong” in the sense that later new information will once again move the market.

    Some people can handle that level of complexity, and some cannot.”

    I’m not sure if that last sentence was directed at me, or a general statement.

    Either way, the arguments you have put forth here is PRECISELY why we look at…abnormal returns…over some particular window…in order to gauge the magnitude of an effect.

    And not at momentary movements of prices after the event.

    Now, I know you’re not an applied guy, or an asset pricing guy…but maybe you should consider the way they calculate the magnitude of an event, and why they look at windows prior to the event, and why they look at multiple windows after the event, out to 10 days for example.

    I know these are not identical examples, looking at the whole market reaction vs. an asset…but the logic is the same. It’s the same logic in a Diff-in-Diff as well, if you don’t like the CAR example.

    What can we conclude in a Diff-in-Diff if we see an effect that only lasts 1 time period, and then disappears after that?

    We conclude that, in the long term, the effect is zilch.

    Again, I’m not claiming it to be so. Simply that this is no way to gauge the event. It’s a fine way for journalists and finance talking heads on TV to examine the event. It’s not fine for economists to do so.

  64. Gravatar of foosion foosion
    1. July 2016 at 01:32

    @Harding, that voters approved something does not mean there’s a coherent plan for implementing that thing.

  65. Gravatar of Gary Anderson Gary Anderson
    1. July 2016 at 06:08

    @Freelander you said: “Do you really think the EU would have ever forced the UK out for not joining the monetary union, or for not giving up its nuclear control? That’s silly.”

    It was independently confirmed by Zero Hedge that this was exactly what would happen. All EU nations will be bound by the Euro.

  66. Gravatar of ssumner ssumner
    1. July 2016 at 09:52

    AIG, Well have to agree to disagree on event studies, market prices respond immediately to new information. If you look at a 10 day window, you are looking at the event, and then many more events. That can also be important, but it’s necessary to keep in mind what you are doing. The follow up events (like the ECB move yesterday or Boris pulling out) are often related to the initial event, but can still be analyzed as separate events. The markets also move on these follow up events, which suggest they did not follow deterministically from the initial vote.

    Harding, You said:

    “If Jefferson wasn’t a libertarian, who at the time was?”

    Certainly the many Americans who opposed slavery were more libertarian than Jefferson. Or do you think the tax on tea was a more important issue facing America than the enslavement of millions of men, women and children under brutal conditions?

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