Monday’s fierce rally in share prices and Sterling’s sharp move up against the dollar proves just how much the market is watching the BREXIT vote closely and how much it wants the entire farrago to quietly melt away into history, as indeed the bookies (who following their previous election and referendum success are taken far more seriously than the polls) indicate it probably will.
However rather than telling us what Thursday’s outcome may be rational voices from the US have quietly pointed out how little (in relative terms) it would cost for major market participants to manipulate the bookies odds, say over the weekend before polling, in order to facilitate such a rally, where profits in the tens or even hundreds of millions could be made. A well made point which perhaps should make us sit back and thinks for a moment before moving on.
Right, having thought about it here is another view that has troubled many, particularly those who want to remain and that is the demographics of the referendum, where the old (much more Euro-skeptic) have a MUCH better voting record than the (Euro-happyclappy) young. The last thing these worriers want is that it looks certain that BREMAIN wins easily as this is likely to motivate the older skeptic even more and add a further blanket of lethargy to the idealistic-but-not-to-my-cost younger generation, conversely I thought last weeks polls showing BREXIT in the lead made remain a shoo-in. Time will tell.
As I said the outlook is uncertain, however as the febrile nature of Monday demonstrates volatility could be high either way and indeed a BREXIT vote could be the catalyst to start the inevitable correction in global asset prices and here is the rub (and why many investors should genuinely be VERY, VERY worried).
As we have said many, many times before, almost all asset prices are far too high, supported only by Central Banks and delusion (which amount to the same thing these days) and today we can simply show the latest chart from SG’s Equity Quant team to demonstrate just how high UK equity prices remain from a historical standard:
Source: Societe Generale Click/Tap to Enlarge
To this chart we can add some wise words from SG’s Andrew Lapthorne, whose team collate the analysis:
“Whatever the outcome of the Brexit vote this week investors will still be facing the prospect of negative rates and negative yields on a huge range of bonds, massive corporate leverage with worryingly rising delinquencies and of course expensive equity markets and falling profits. To that extent these political events are a distraction from the main event, weak global economic growth and perverse asset markets. So whilst the market preference for the status quo might be celebrated in the short-term, actually when the fog clears all of the problems will still be there.”
There really isn’t much to add to that.
As we recently pointed out HERE most of the arguments put forward by both sides of the BREXIT vote are at best fatuous and the vote is in reality part of the narrative of how the current ossified status quo finally ends because end it certainly will. However perhaps the most miserable thing about the final stages of this process (aside from seeing the tragedy of the violent death of an MP being dragged into the issue) has been the hysterical doom-mongering of the BREMAIN camp who have gradually become increasingly unhinged as they see their own cushy numbers come under threat, which sounds a little cynical but looking at the sociopathic behaviour increasingly on display really isn’t.
To be fair, and as pointed out above, should BREXIT win markets could get very dicey very quickly and the doom-mongers may seem justified (although thankfully Boy George should at least be rapidly out of a job), however the inevitability of markets adjusting to rational metrics is already fixed in reality, merely the temporal location of the event is open to question so that shouldn’t be a factor in anyone’s decision making.
In the end whatever happens on Thursday we approach a possible denouement for a lunatic monetary experiment that has kept both the long and more recent short wave debt cycles going far longer and more dangerously than they should have and if it gets difficult I’m afraid fate will simply ask “So what? You thought life was fair?”. Regrettably uncomfortable change is at times inevitable in markets as much as in life, whether we like it or not.
Hence in Prometheus’ view Thursday’s vote, at its heart, is whether or not we want to throw a grenade at the explosive barrels of fate sitting under the establishment, or step back from responsibility and simply wait to see which comes first, somebody else’s grenade or the slow burning fuse of inevitability.