Scott Sumner  

It's the end of the world as we know it . . . and the FTSE100 feels fine

Some Random Reading... A Lesson in Opportunity Cost...

As I write this, Britain's FTSE100 stock index is soaring to its highest levels of the year. Admittedly, the domestic indices aren't doing that well, but they are also recovering. So what about all the gloom and doom associated with Brexit?

It's hard to know for sure, but here's one possibility. With today's shocking announcement that Brexit leader Boris Johnson is pulling out the leadership race, the oddsmakers have made (moderately) anti-Brexit Theresa May the favorite to head the Conservative government. Here's what she said today:

Mr Johnson's withdrawal puts Ms May in a strong position to campaign as a so-called 'safe pair of hands' candidate able to reunite a divided party and country.

Ms May confirmed that she would take Britain out of the EU. Although she was a low-key campaigner to stay in the EU, she said: "There can be no attempts to rejoin through the back door and no second referendum."

But she said the EU talks would last for a number of years and that formal divorce talks should not start before the end of the year, in spite of impatience in Brussels that the UK should start the process by invoking its departure under Article 50 of the Lisbon Treaty.

Ms May said that as prime minister she wanted to reassure business by creating a stable environment. There would be no emergency Brexit Budget in the autumn and she intended to govern until 2020, ruling out an early general election. (emphasis added)

Heh, if Brexit is the end of the world, then what's the rush? Here are some interesting questions:

1. Is Brexit a monetary or a real problem? I say mostly real for the UK, and almost entirely monetary for the global economy.

2. Is the real shock from uncertainty over what happens next, or the actual changes that would occur with Brexit? I'm not sure.

I suspect the real shock will be smaller than many predict, just as was the case with the Japanese tsunami, but I can't be sure. We are in new territory. One thing seems increasingly likely. If Ms. May gets her way then we are going to experience an almost perfect natural experiment. We are going to get at least several years of the "uncertainty" real shock before the "trade disruption" real shock kicks in (if it does, which is anyone's guess.) This is going to be an excellent test of various business cycle models.

Since we seem to be in for a long wait for the end of the world, I thought I'd provide you with some music to listen to while waiting, from a pretty great selection of pop songs:


Elvis Costello


Nick Cave

And the superb movie soundtrack on which the U2 and Nick Cave songs appear.

If you still have time, check out the (4 hour) film itself, as a reminder of a time when Europe had just become liberated from communism, there was optimism about globalization, and the idea of exiting the EU seemed a million miles away.

PS. And let's not forget Murakami's wonderful novel, if the end of the world faces further delays.

Comments and Sharing

COMMENTS (17 to date)
JT writes:

FTSE100 is made up of GBP-denominated stocks but the lion's share of its component companies have USD (or USD-correlated) revenues.

FTSE100 goes up because GBPUSD is down. QED.

John Thacker writes:

Even the FTSE 250 is back to its June 16 level (which is a bit below its June 8 level, to be sure.) So it seems like a lot of the "FTSE 100 doesn't count, look at the FTSE 250" critiques are somewhat less impressive than they were.

Mr. Econotarian writes:

I'm sure that having no idea what regulatory systems, patent & trademark rules, trade rules and tariffs, immigration status of employees, the potential installation of new land borders along Hadrian's wall and the Irish border will have no impact on English business...

John Thacker writes:

Mr. Econotarian:

Surely it's relevant that the Republic of Ireland is also not part of the Schengen area and it's already the case that UK visas do not allow one in the RoI and vice versa? I'm afraid I don't see that borders are eliminated between the UK and the RoI anyway at this point.

Britmouse writes:

I'm sure there is someone with a better grasp of the equities data than me, but if I sample a range of purely domestic-facing UK stocks (retailers, service sector, building firms) then still it looks pretty horrible since Thursday, prices are still down 15-20% today. I'm a bit worried about folks underestimating the domestic impact of this.

Scott Sumner writes:

JT, Read the post again.

John, Exactly.

Britmouse, I was told that the FTSE250 represents the domestic stocks. Is that wrong?

Britmouse writes:

The FTSE-250 is considered a much better representation of domestic stocks, but it's not defined that way; it's just the 250 largest UK firms by market cap after the top 100. So I think the currency issue is distorting things for the 250 as well, just not as much.

Couldn't be a better time to have N+RGDP futures markets.

Scott Sumner writes:

Britmouse, Amen.

James Alexander writes:

Something in what you say, especially property stocks, but they are quite leveraged. Far less than 20% for others. I am still waiting for you to comment on the great Carney-inspired UK NGDP slowdown ;-)

Not more than 2% NGDP growth for most of the last 12m meant that the Brexit vote hit a far less resilient UK economy.

James Alexander writes:

Scott, rather than repeating a load of pro-European super state propaganda read this, much more interesting.

(And I thought you'd said BoJo would make a good PM?)

ThaomasH writes:

Again, Krugman and Sumner are close to agreement.

DrC writes:

In local currency terms, FTSE 250 is down slightly more than DAX and CAC and slightly less than IBEX. In USD terms, it's not even close. FTSE 250 is down far more than the other three.

Markets expect BOE to help UK economy absorb any upcoming shocks through monetary policy and ECB monetary policy to (continue to) be ineffectual. Implied vol of EURUSD vs. GBPUSD further supports idea that investors expect more action from BOE than ECB going forward.

Scott Sumner writes:

James, I'm afraid I don't know enough about BoJo to have an opinion on whether he'd be a good PM.

Mr. Econotarian writes:

Mr. Thacker,

I've been told that since the Good Friday accords, people travel freely between Ireland and Northern Ireland, signage is scarce, and it’s often tough to tell where the border even sits.

mico writes:

The argument to disregard the FTSE 100 appears to have originated from pro-Remain journalists. I am yet to see numbers backing the claim that the FTSE 250 is more representative.

I doubt for instance that "JPMorgan Emerging Markets Investment Trust" (FTSE 250) is very representative of the UK economy. A lot of the FTSE 250 seems to be money managers of various kinds.

Maybe there really is a skew when considering all companies, but I want to see numbers, not just journalist assertions.

James Alexander writes:

I think you might be looking at the wrong index. The Bloomberg code is MCX. Whether it is representative or not is an interesting question, but becoming irrelevant in the Brexit debate as it is only 3% away from its pre-Brexit level. It is certainly an "odds and sods" index of often very illiquid stocks.

Weir writes:


Boris Johnson's idea of democracy is that voters get "to kick out their rulers at elections, and to choose new ones." The sort of thing you'd read in a dusty old book from the 1940s.

"In a democracy majorities may decide but everyone is of equal value." But I read on Twitter that old people shouldn't be allowed to vote.

"The only change - and it will not come in any great rush - is that the UK will extricate itself from the EU's extraordinary and opaque system of legislation: the vast and growing corpus of law enacted by a European Court of Justice from which there can be no appeal." This is all probably coded racist language.

"Yes, the Government will be able to take back democratic control of immigration policy, with a balanced and humane points-based system to suit the needs of business and industry." Sounds like the WSJ at the end, but "balanced" is just a racist code word meaning bigoted.

"Yes, we will be able to do free trade deals with the growth economies of the world in a way that is currently forbidden." Doesn't really sound like Trump, but the hair is the important thing. American observers should focus on the hair.

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