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