They say markets don’t like uncertainty, but it’s better characterised as the unknown. Given that each price everywhere is always an ongoing discount of all future information, difficulties arise when that “future information” looks a bit shaky. That’s why they love anything that can be quantified: inflation data, central bank comments about hiking or cutting, commodity prices, etc. But why they hate anything as messy as a human personality: a politician, or an election, or a company suddenly firing its chief executive. There has been a few sticky patches over the past few years, with central bankers wading into forward guidance, but given that the response always became “lower-for-longer”, there was no need to bother with nuance any more. Indeed even the ECB and BOJ’s latest policies became so complicated that it was easier just to earmark them as “business as usual, lower-for-longer”, rather than look into how each of them is trying to extricate themselves from that exact policy.
Well 2017 is about to be a masterclass for the markets in managing the unknown. Falling back on old heuristics is going to be painful. It’s not #FOMO but #FOTU, as regular readers already know. And if you thought that Trump’s Tweets already have the market on guard… what are we to make of the Brexit negotiations?
It seems obvious to point out that Theresa May is the antithesis of Donald Trump – but what’s more important for investors is how their opposing methods of communication will both rile market price discovery. Trump shoots from the hip, meaning we don’t know timing, but we do know the general direction of the comment (slap down any US company trying to invest overseas/slap down China/cheerlead for Russia). Theresa May is the opposite – biding her time, but also keeping direction close to her chest.
Argh! For the market, this feels like the worst of both worlds. Too slow to provide an answer, and too coy to provide the chance to assess a range of outcomes. Last week’s Economist front page is grist to the mill:
Is it indecision? Or just a classic poker game? In a multi-dimensional poker game with many players, not least her own cabinet, her own party, her voters, the electorate at large and most specifically the 52% who voted to leave…. oh and that’s before we look at the who’s on the other side of the negotiating table: 27 different countries, of whom 2 of the biggest will likely change their negotiating stance within the next 9 months (due to elections).
Of course, it would be nice to know that Brexit will lead to “x”, and then markets can work backwards from there. But that’s hugely unrealistic, and, Blondemoney would wager, rather unfair. However until markets accept that, GBP and UK assets will no doubt get punished for this ‘uncertainty premium’. Which is really just an inability to appreciate that the unknown, in all its messy unpredictable glory, exists. Patience, friends, patience…