Germany up. France up. Italy up. Hungary, Iceland and the Republic of Ireland on fire in the football. Everything’s coming up Europe today!
Stockmarkets on the continent have not let last night’s thunderstorms in Britain dampen their spirits. The late polls broke for Remain. Sterling volatility peaked, and sterling itself rose against the dollar. All of those are market signals that Remain will win the day.
But prices only measure certain kinds of exchange. Voting is not an exchange. That’s the risk with using market indicators to measure what is fundamentally an emotional and political decision. If Leave wins, expect a lot of hand wringing and opinion columns about how badly the bookies got it wrong.
The future of the EU
I have a final comment on the way the Brexit debate was conducted and what it may mean for the rest of the year. Don’t read it if you’re easily offended. But before we do any more political discussion, let’s have a look at the chart below. It may tell you about the future of the European Union, post-Brexit.
The STOXX Europe 600 is a broad market index for 18 of Europe’s largest economies. Think of it as the S&P 500 of the EU. And now look at its performance going back 20 years. The red line, by the way, is the 200-week moving average. The blue line is the 50-week moving average. When they cross, it’s the infamous “death cross” traders love to love.
What do you see?
When I look at it, I see three distinct bubbles. Or really, three bubbles caused by the same long-term trend of lower interest rates. Those low rates always leak credit and money into a particular asset class. You never know which one it’s going to be. But the price action tells you.
The first great bubble trend was the tech boom. Note that the index peaked in 2000. The 50-week moving average nose-dived first. When it crossed the 200-week moving average (the death cross), the move down accelerated.
If you’re sceptical of technical analysis think of it this way: the chart just tells you what people know, at least what they think about what they think they know. The technical don’t cause things to happen, although traders try and use them to anticipate changes in behaviour.
The second great bubble trend began on 6 March 2003. That’s the day the S&P 500 made an intraday low of 666. Led by Federal Reserve chairman Alan Greenspan, central bankers began slashing and burning interest rates. The Fed cut its benchmark interest rate to 1% and left it there for a year, planting the seed for America’s subprime housing bubble and all the attendant destruction it would wreak when it came a cropper in 2008.
Again, the index peaked before the moving-averages (which are lagging indicators of a sort) confirmed it. It was only the adoption of QE and new asset purchase programmes in 2009 that reflated the bubble. This time, the bubble was squarely in stocks and bonds – and in eerie fashion, it took the index right back up to what begins to look suspiciously like a ceiling around 400.
Keep in mind that the value of the index doesn’t tell you whether an individual stock is cheap or expensive right now. And the value of the index doesn’t tell you anything about the quality or the sustainability of the earnings of a listed stock. You can still make decisions on whether to buy or sell given securities based on their own merits, but not based on the trend in the index.
What is the index good for, then? Well, trends do matter. The weight of money in the market has driven values up. If that weight of money shifts – deflation instead of inflation – the trend changes. And as you can see, we’re at a really intriguing point in the broadest measure of European stocks.
The 50-week moving average turned sharply down earlier this year. This was evidence of Leave gaining momentum. But now it looks like a head-and-shoulders pattern. Everything looks set for a fall in Europe’s stocks. How can you reconcile that with a Remain win?
The EU is doomed anyway
Here’s the important post-Brexit point: a win for Remain does absolutely nothing to change the fundamental structural problems that have long-since condemned the European project (in its current form) to failure. A win for Remain will be a Pyrrhic victory for David Cameron and Jean-Claude Juncker.
Sometime later this year – probably in Italy, Portugal or Spain – the EU’s fatal flaw will be revealed again. A banking crisis will emerge. Another sham bailout (or bail-in) will be done. And the original sin of the EU project will resurface. That sin?
The EU foisted monetary union on member states as the path of least resistance to a superstate project. Now, the high-water market has been reached for the political project. But the monetary and fiscal project remains troubled, crippled and unable to move beyond its current problems.
Those problems are familiar to the point of boredom: high unemployment, high government debt, low productivity growth, and the inability of monetary policy to give a damn about any of it.
The European Central Bank goes straight into the spotlight
What will Mario Draghi and his team do to try and reach inflation targets? They will almost certainly follow the lead of Haruhiko Kuroda in Japan and buy more bonds. Perhaps they’ll buy other financial assets, the way the Bank of Japan has become a huge player in the Japanese exchange-traded fund market.
But we’ve learned a simple thing from Japan’s experiments under Kuroda since 2013. They can be wildly entertaining and pump up asset prices for a bit. But they can’t do much to outweigh the drags of huge public and private debt, ageing populations, and the wage-deflationary double blow of automation and globalisation.
Central banks are fighting battles they can’t win in a war they’re doomed to lose. Markets win every time. It’s just a matter of time. The Brexit vote allowed us to take our eyes off the bigger monetary story and focus on the political side of it. But the monetary side of it hasn’t changed one bit.
If anything, the endgame is now closer. With Britain safely back in check, we’ll find out if the EU is chastened and reformed or hell-bent as ever on its project of “ever closer union.” Last night David Cameron said, “If we stay in the European Union, reform continues on Friday.”
The prime minister will be eager to heal gaping wounds in his party, all of them self-inflicted. But he’s kidding himself if he thinks he’ll have willing partners in Europe. “Out is out” said EU Commission president Jean-Claude Juncker last night. He elaborated:
We have concluded a deal with the prime minister, he got the maximum he could receive; we gave the maximum we could give. So there will be no kind of renegotiation, nor on the agreement we found in February, nor as far as any kind of treaty negotiations are concerned.
It’s a shame, then, the prime minister didn’t ask for anything of substance when he went through the charade of negotiating a deal in February. Perhaps he thought he’d have more influence within the EU, having led the Remain side to win in the referendum. But that’s not the way Jean-Claude Juncker sees it.
It’s possible, of course, that anti-federalist forces in Europe will be emboldened by the British vote, even if Leave loses. In France, Germany, the Netherlands and Denmark, there may be momentum for reforms that roll back the political ambitions of the EU and focus on the alleged benefits: free trade.
Yet now the truth has been laid bare: EU political disintegration is more likely now regardless of the result of today’s vote. The likeliest victim of that disintegration, in market terms, is the euro itself. That may be the big story of the rest of this year. Stay tuned.
The politics of shame
As an outsider to British culture, I hesitate to make any comment about what’s happened in the last week. But for what it’s worth (which is probably not much), I’d say that there are certain things you simply don’t say out loud in political discussion today; no matter what you think. People are scared to speak their mind for fear of being publically shamed.
The “virtue signalling” of social justice warriors, using their social media accounts like a righteous sword, has made civil political debate increasingly rare in most Western countries. Hence the situation since the murder of MP Joe Cox last Friday. No one in Remain came out and said it. But when they talked about the “climate of hate” they were really saying, “If you vote for Leave, you might as well have pulled the trigger yourself.”
Thus, a Remain vote has now become, in emotional terms, about proving you’re not a racist, a xenophobe or a fascist. Your legitimate concerns about legal immigration, about EU law replacing British law, about whether the EU is good for big business and big government while being bad for small business and personal liberty – none of those matter, because you’re a small-minded and immoral person if you want to leave.
I’m not sure how it happened. But civil political discourse with respectful differences of opinion is hard to find these days. My own personal theory is that the political elites have aligned themselves with big business, the City, and those who coddle them in the media. This has created a very real division between the governed and the governors.
But there’s also the sense that the people who make the laws, set economic policy and change interest rates, are immune from the consequences of those decisions. It’s real people who bear the brunt of those decisions. And while I personally think some of those decisions – free trade and movement of people – are powerful forces for economic growth and the progress of civilisation, there’s no doubt that some people in the Western world find themselves on the wrong end (economically) of those forces.
Those most affected find their concerns are not addressed or even taken seriously. Even worse, their legitimate concerns are dismissed as the petty belly-aching of small-minded and hateful provincial rubes. And you wonder why they’re turning to outsiders for a voice in the political debate.
If Leave stuns the bookies, the pollsters and the pundits, it will be because the establishment has badly underestimated how disaffected people are with the status quo. It will also tell you something about Donald Trump’s chances later this year.
Then again what do I know? My sense is that the British people will walk calmly into the voting booth, assess a known known (remain) vs a known unknown (leave) and vote for the devil they know. Just remember, the devil always takes the hindmost.
Category: Brexit