Groping around

FT View writers are gloating that the markets have punished the ‘stupid’ Theresa May for her hard talk on Brexit. They have latched on to the infinite wisdom of financial markets to support their case.

They conclude their piece on this note:

investors are marking down the UK’s economic prospects by selling its currency. [Link]

Is that so? How do we know? We do not know. It is our ex-post guesswork of the market action. Short-term movements could be noise. Brexit would, ironically, prove to be a problem at one level, for the UK, only if its example is followed by continental European nations. Then, all countries can and will engage in competitive devaluation -something that Europe wished to put an end to. Particularly, Germans.

But, on the other hand, if they hang together, then it might be to the advantage of the British, because it is somewhat inconceivable that the Eurozone would undertake structural reforms. There is neither political will nor credibility nor the mandate to pursue tough reforms that would, for a while, cause economic pain only with a promise of some future redemption. The populace is not ready for that. This is the age of instant gratification.

So, if they hang together with scelerotic economies that stagnate and if the currency (Euro) remains uncompetitive, UK has an opportunity to get back some manufacturing mojo, if it works hard at it. No guarantees but together with robotics and a weak currency, it might work.

Therefore, it is a bit too premature to ‘gloat’or to warn – in diplomatic and civil language – that the markets are indeed marking down UK economic prospects and that they would be right.

Markets – to the extent something like that still remains in the Western world with central banks’ policy interventions in bond markets (and potentially in stock markets) and with sovereign wealth funds active in all asset classes – get things wrong more often than they get right.

Well, that is an entirely different story as to why they frequently get asset prices wrong. We must ask some of FT’s favourite central bankers.

At the least, FT View writers should read the paper, ‘Stock Returns over the FOMC cycle’.  The authors of the paper have been civil. But what they have uncovered is nothing short of a scandal. No less than that of deleted emails.

Since it is the season of commentary on ‘groping’ and since the FT has been second to none in writing about it, it is delightful to see their vain grope here for some elusive logic and objectivity.


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