It was so predictable, the market had priced it in before it was even mentioned. Then, when it was confirmed, they priced it in some more!
The promise of more monetary sugar from both the Bank of England and the European Central Bank overnight saw stocks soar again.
The FTSE 100 jumped 2.3%, but the broader FTSE 250 was more subdued, climbing 1.7%. The Euro Stoxx 50 index was up 1.15%, while US stocks increased around 1.35%.
Once again, US stocks are less than 1% below their all-time highs. As you can see in the chart below (on the far right), the Brexit palaver was a mere blip for US stocks.
[Click to enlarge]
Somehow I don’t think this is the last you’ll hear of the Brexit effect on global stocks. But for now, global stock markets are experiencing a standard Pavlovian response to a potential economic crisis. That is, they’re rallying in the expectation of monetary stimulus. The Financial Times reports:
‘The Bank of England is preparing to unleash another round of monetary stimulus as it battles to contain the economic fallout of The UK’s decision to leave EU.
‘In a stark warning to politicians, governor Mark Carney said a downturn was on its way and Britain was already suffering from “economic post-traumatic stress disorder”.
‘He said the central bank would take “whatever action is needed to support growth”, which probably included “some monetary policy easing” in the next few months, in an attempt to reassure the markets and the general public.’
Not to be outdone, the ECB ‘leaked’ news that it is considering loosening the rules for bond purchases in the wake of Britain’s decision to leave the EU.
However, being the EU, it’d be a while before any rule changes would take effect. Which is probably why European stocks were more subdued overnight.
While stock markets obviously love the prospect of more stimulus, it will do nothing to fix Europe’s structural problems, or to help Britain’s transition.
It will, however, help stock prices through increased speculation, therefore making the market more prone to panics.
I’m re-reading Nassim Nicholas Taleb’s 2014 book, Antifragile, Things That Gain From Disorder. It’s an apt topic given current global events.
Taleb argues that over time, without the occasional stressor (like recessions), systems become more fragile and prone to crises. Over the past few decades, the aim of policymaking has been to alleviate signs of stress as soon as they appear.
This approach appears to ‘work’ in the short term and, as such, garners widespread support. It becomes so ingrained as the ‘solution’ that even major displays of fragility, like the crisis of 2008, need ‘fixing’ by the very actions that caused the problem in the first place.
Taleb calls the people who believe in this approach ‘fragilistas’:
‘In short, the fragilista (medical, economic and social planning) is one who makes you engage in policies and actions, all artificial, in which the benefits are small and visible, and the side effects potentially severe and invisible.’
These are the people who think that they must ‘do something’, no matter what the situation. In relation to the economy, Taleb says this person ‘mistakes the economy for a washing machine that continuously needs fixing (by him) and blows it up.’
The problem is that the people tinkering with our economic systems have no skin in the game. They are ultimately not responsible for the decisions they make. Think back to the sub-prime debacle of 2008. It wreaked economic havoc across the global, yet no corporate leader was charged with a criminal offence.
Banks are continuously getting into trouble for bad behaviour, yet no one is held responsible. Instead, banks pay large fines for gaming the system…and then carry on gaming the system. The fine is just a cost of doing business.
Taleb says this absence of ‘skin in the game’ is the ‘largest fragilizer of society, and greatest generator of crises.’ He tells the story of how Roman engineers were made to spend some time under the bridges they built; in England, engineers had to spend time under bridges with their families.
They definitely had skin in the game. As a result, those bridges were made to last.
But today, things are different. Alan Greenspan and Ben Bernanke are swanning around the world, dispensing ‘wisdom’ and getting handsomely paid for it. Yet they have contributed to the fragile nature of the global economy more than anyone else.
As Taleb writes:
‘We are witnessing the rise of a new class of inverse heroes, that is, bureaucrats, bankers, Davos-attending members of the I.A.N.D (International Association of Name Droppers), and academics with too much power and no real downside and/or accountability. They game the system while citizens pay the price.’
Unfortunately, the vast majority don’t see things this way. They are fragile too, and demand central bank action whenever minor stresses hit their equally fragile portfolios.
So enjoy it while you can. The Aussie market had a great day yesterday, rising around 1.8%, and looks like having another strong day today. It’s all thanks to policy support from the fragilista class.
It might look good, and it might feel good, but all the while it’s slowly weakening the foundations of the global economy.
For The Daily Reckoning