When will the penny drop?

We have spoken many times, you and me, about how market prices are a reflection of the ongoing assimilation of all the future paths of probability. Right now we are going through a path of “interest rates continue to be lower for longer and any issues with that can wait for another day”. In a perfectly rational world, of course, the far future would be discounted and weighted alongside the near future. In other words, we would price in everything, now. But sometimes that far future feels too distant. Its weighting is too small. It just feels too unlikely and too irrelevant. This is where we can be suddenly surprised, even by an event that we know about. Donald Trump for President? Nah, it’s priced at only 25% and November is cold and wintry, whereas today I’m all about cooling off with my pina colada.

Thus we saw a 10% decline in GBP on the Brexit result. That’s where the unexpected future comes careering into the present. But now we are into a new zone with the Great British Pound. This is where the reality starts drip feeding into the present. We are only just starting to get data from the post-vote period; and decisions on investment are only in the process of being taken. The UK packaging firm DS Smith have said today that losing single market access might cause them to move abroad. House prices are falling, but slowly – down this month but still up on last year.

Then beyond that, the politics. Theresa May has already had to issue a warning to her Brexiteer ministers to “stop playing games“, in a potential sign of the chaos to come, as the UK embarks on a negotiation process with an end-result that is as yet unclear.

Now, Blondemoney isn’t making a judgement on all of this; whether it will be good or bad for the economy, or the rights and wrongs of the decision. But the point for the markets is that the probabilities of the outcomes are not  yet fully reflected in the price of UK assets. Yes, GBP has suffered, but is it a full reflection of the potential future path of the economy, with so much still unknown? Yes, the BOE cut interest rates, but how much further down could they go? There seems to be a sense that “The Brexit Adjustment” has happened. But no, we just priced in a risk that Brexit could happen. Now we have to price in what it might actually look like.

The penny is only just starting to drop.

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