The fear index (VIX) is rising. Volatility is back. Gold’s up. The Dow’s down. The All Ords had its worst performance in four months. Bond rates have fallen to historic lows.
What’s to blame for this latest bout of skittishness?
Let’s start with the easy reasons first.
The US Fed makes its announcement on interest rates on Wednesday (US time). The likely outcome is that rates will remain on hold. Janet’s rate rise in December 2015 was a ‘one and done’ deal. Nothing new will come from Janet.
The Bank of Japan announces its latest strategy on Thursday. God only knows what that will be. PM Shinzo Abe and Bank of Japan governor Haruhiko Kuroda are an economic Laurel & Hardy tag team.
The yen’s recent strength is being blamed for the latest slump in economic activity and falling inflation. The fact that Japan has the highest debt mountain in the world (as a percentage of GDP) obviously has nothing to do with the matter….yeah right.
So the duo of Abe & Kuroda may provide some more comic relief on Thursday. More money printing. More buying of shares. More financing of government debt. More rate cuts taking them further into the negative. More stupidity that, these days, passes for serious economic solution.
How they can deliver these discredited policies with a straight face is a credit to them. We wait and watch on Thursday. My guess is there will be no new comic routine on Thursday. Why? Brexit.
And that leads me to the underlying reason why volatility has increased in recent days. The UK polls are indicating the LEAVE camp is gaining the upper hand. The most recent poll gives the LEAVERS a 6% lead over the REMAINERS.
With just over a week to the vote, this is not the outcome pundits were expecting.
Perhaps the polling is not really indicative of how people actually intend to vote. The other day I engaged an English gent in a chat over a pint at the local. Initially he told me he was undecided. He could see arguments for both sides. A bit more truth serum (two pints later) and he confessed he’d already cast his vote and had opted to REMAIN.
While he wanted to remain, he also wanted a very, very close vote. A vote that would send a loud and clear message to Brussels, and the unelected Eurocrats, that treat Europe as their personal fiefdom. Smarten up and listen to what we are saying.
There appears to be widespread discontent with PM David Cameron. A number of people have said he is weak, and that he is Britain’s lackey to Europe. Bit harsh, but perceptions count.
Immigration — taking control of their borders — and restoring the British legal system, as opposed to being dictated to by Brussels, are the major issues being used to persuade people to vote LEAVE.
The REMAIN side’s major argument focuses on the prospects of an economic Armageddon should Britain leave.
The weekend Times led with a front page story: ‘Germany’s EU threat to Britain: Vote Brexit and you lose single market access’.
This is sheer nonsense. What about trade the other way? Will Britain retaliate and stop Mercedes, BMW, Porsche, VW and Audi from sending cars to the UK? Of course not.
German Chancellor Angela Merkel personally weighed into the debate, saying how Britain will lose the ability to negotiate better trade deals from the outside.
Merkel’s disastrous handling of the refugee crisis has made her unpopular at home and even less popular in the UK.
These types of threats, and the counter-threats they evoke, are not productive.
There have been endless debates on BBC and Sky News — talking heads from both sides putting forward the same arguments albeit with a twist.
One fellow I watched for the LEAVE side (a conservative politician from South London) made what I thought was a good point. He said to look at where the REMAIN camp is receiving donations from — the multinationals. JP Morgan, Goldman Sachs et al are very much in favour of the EU because the Eurocrats create more regulation. The greater the amount of red tape, the higher the barrier to entry. The last thing multinationals want is competition. There was no valid counter to this point from the REMAIN side.
He also asked those persons representing the REMAIN side to name the President of the European Parliament, the President of the European Council, the President of the European Commission and the current holder of the Presidency of the Council of the EU. Not one person could answer him. These are the governing — unelected — bodies that decide what the UK can and cannot do. No one knows who is deciding the rules for the UK.
If Australia joined an economic union with Asia, how would we like being told what to do by Beijing, Tokyo or Seoul — by people we had no clue about?
There is no question a vote to LEAVE will cause all sorts of upheaval. Currency markets will (for a period) punish the British pound and the euro. Behind closed doors German and British politicians would be secretly happy about this…it improves the competitiveness of their export goods into Asian and US markets.
Japan will not be too happy about that…especially the comedy team of Abe & Kuroda.
If Britain does leave, then you can expect the most bizarre reaction ever to come from Tokyo (and in the case of Japanese economic policy, that’s saying something). Abe &Kuroda may double down on printing, make home safes illegal, take rates to minus 5%, put one million yen cheques in the mail…seriously, who knows what new slapstick routine these two economic entertainers will come up with.
One thing is for certain, it won’t be responsible. It will be a magnified version of an already oversized and underwhelming solution.
This is nothing more than a feeling, but I think, when it comes to putting pencil to paper, the REMAIN camp will carry the day…and maybe by a bigger margin than most think.
The only thing in the next week that could sway voters is a terrorist attack on home soil. The anti-immigration sentiment would intensify.
Putting all that indecision and uncertainty to one side, the one thing the Brits are absolutely united on is their Queen.
Last weekend was one big party. There were street parties. Commonwealth food markets. Pubs giving away free pints. Union Jack flags outside of houses and buildings. The birthday parade in the Mall was something to behold…everyone was happy. It was a wonderful celebration for a much loved lady.
The British economy is much like the Royals.
While having its ups and downs, it will reinvent itself and endure.
Personally, I would vote to LEAVE and take my chances on surviving, and ultimately thriving, as the world’s fifth largest economy.
Being told what to do and how to operate by unelected and faceless Eurocrats would be enough for me to say au revoir, auf wiedersehen, adios or arrivederci to the EU.
For The Daily Reckoning