- Britons voted for Brexit against polling results in run-up to voting day
- Resulting sterling shock was bigger than in global financial crisis or 1992 ERM exit
- Rejection of status quo calls into question QE, NIRP and ZIRP paradigm
- Brexit proved a startling failure of status quo bias
- Japan nearing inflection point; could that spark Japanese version of Brexit?
- Trump candidacy a walking, talking rejection of status quo in the US
- FX markets likely to remain unsettled; central banks' power is waning
- Brexit will prove warm-up for global convulsions
The status quo was resoundingly rejected by the UK vote to leave the European Union.
By John J Hardy
The UK voted strongly in favour of leaving the EU, a shock to the market that was intensified by the market leaning hard on expectations of a "Remain" result in the days ahead of the vote. The resulting earthquake in sterling exchange rates easily outpaced the most intense phase of the global financial crisis or 1992’s Black Wednesday, when the pound was torn away from the European Exchange Rate Mechanism.
Most observations on the meaning of the Brexit vote are like the Indian parable of the blind men and the elephant. In that story, several blind men reach out and feel various parts of an elephant, each telling a wildly different story as to what they feel with their hands, and a heated argument ensues over what they are touching. So it is with Brexit. Some observers write it off as a xenophobic reaction to immigration policy and recent terror attacks. Others point to the burden of nanny-state European Union regulation and the cost of transfer payments to the EU.
But the EU itself is not even the elephant in the room. Rather the elephant in the room is government and central bank policymaking and the endless push to extend and pretend their way out of every crisis. These policies have fast-tracked us to our current underworld of quantitative easing and zero and now even negative interest rates — policies that were unthinkable 10 years ago.
The insidious march of QE and NIRP/ZIRP has been a boon to already powerful elites as asset markets have boomed on the zero cost of money for those with good credit. But together with the march of globalisation, labour’s share of the cake has shrunk, and the wild mispricing of money has left the business landscape crawling with unproductive companies and unproductive behaviour, such as highly profitable companies borrowing at almost zero cost to buy back their own stock and enrich shareholders.
Brexit was merely a remarkable opportunity for UK voters to voice popular disapproval of the “powers that be” — to say "No", not just to prime minister David Cameron or the EU, but to the whole shebang of the current paradigm. And one of the remarkable things about Brexit was the failure of the status quo bias, the behavioural tendency to prefer the known, no matter how miserable, to the unknown.
Ahead of the referendum, there was no clear vision for what a post-Brexit UK would look like, and it seems clear that the vote will likely lead to the UK losing Scotland and possibly more. Ahead of the vote, many pointed to the recent Scottish independence referendum and the 1995 Quebec referendum on independence from Canada as precedents, as in both cases the final vote saw a significant jump in favour of the status quo on voting day relative to previous polling. That so many in the UK were willing to leap into the unknown suggests shades of revolution, as the status quo was given the boot.
And from here, Brexit speaks very loudly for the outlook for currency and all financial markets on two fronts: political risks and the risk that central banks are losing control.
The evidence of the latter has already been clear this year with the yen’s strengthening despite the enormity of the Bank of Japan’s quantitative easing programme. Now Japan is rapidly nearing an inflection point where its policymakers feel they must break ranks with recent summit agreements and devalue the yen again. Would that set in motion Japan’s version of Brexit? And what would that look like? A popular rejection of the BoJ’s and government’s attempt to devalue the currency and a sovereign debt crisis?
Elsewhere, the broad outlines of the forces that led to Brexit are glaringly evident in the US presidential election, where the Republican candidate Donald Trump is a walking and talking rejection of the status quo. Brexit should teach us above all to distrust the polls ahead of the November 8 general election. Motivated revolutionaries apparently turn out to vote more than the disengaged.
Looking to 2017, a possible French revolution lurks in the elections there. Currency markets are likely to remain unsettled as central bank signals aren’t what they used to be and as we all try to understand what comes next. Indeed, Brexit will prove to be the warm-up for a global revolution against the current market and policy paradigm.
There's a whiff of revolution in the air. Photo: iStock
— Edited by John Acher