Tags: investors | brexit | risk

Investors Still Have Time Left to Evaluate Brexit Risks, Seek Appropriate Shelter

Investors Still Have Time Left to Evaluate Brexit Risks, Seek Appropriate Shelter
(Dollar Photo Club)

By    |   Tuesday, 10 October 2017 09:09 AM

The Swedish Nobel Committee awarded the Nobel prize for economics to the University of Chicago Professor and behavioral economist Richard Taylor for observing amongst other things that people are not rational.

The Royal Swedish Academy of Sciences said his “contributions have built a bridge between the economic and psychological analyses of individual decision-making.”

Despite the significant evidence of this fact, it is common for investors to cling to notions of rationality in markets and in economic behaviors as an underlying assumption when, for example, five minutes on a normal foreign exchange dealing floor would overturn any notion of rational markets.

Mr. Thaler said a takeaway from his research is that economic agents are humans and that economic models have to incorporate that.

In his book, co-authored with Cass Sunstein “Nudge: Improving Decisions About Health, Wealth, and Happiness” the following excerpt could be useful for investors getting a better view, in some way, on the financial markets at present: “Unrealistic optimism is a pervasive feature of human life; it characterizes most people in most social categories. When they overestimate their personal immunity from harm, people may fail to take sensible preventive steps. If people are running risks because of unrealistic optimism, they might be able to benefit from a nudge. (A nudge, as used in the book, is any aspect of the choice architecture that alters people’s behavior in a predictable way without forbidding any options or significantly changing their economic incentives.)

By the way, Professor Thaler appeared as himself in the 2015 movie “The Big Short,” which was centered on the collapse of the U.S. housing bubble that occurred after U.S. housing prices peaked in early 2006 and then started to decline in 2006 and 2007 for reaching new lows in 2012 that shook financial markets.

That said, and moving to the “Brexit” area where irrationality and behavior have of course played absolutely no roll, the British and the European Union have yesterday been arguing about where the tennis “balls” are with all the vigor of the tennis player John McEnroe.

British Prime Minister Theresa May told the House of Commons, which is the lower House of the Parliament of the UK, she hoped her EU partners would make proposals at a new round of talks: "Achieving that partnership will require leadership and flexibility, not just from us but from our friends, the 27 nations of the EU … And as we look forward to the next stage, the ball is in their court.”

European Commission spokesman Margaritis Schinas from her side was clear, telling at a regular briefing: “There is a clear sequencing to these talks and there has been so far no solution found on step one, which is the divorce proceedings, so, the ball is entirely in the British court for the rest to happen."

If nothing else, the UK-EU EU-UK divorce proceedings have produced a plethora of metaphors. The British government and all its talk of “balls” has set out its position for what “no deal is better than a bad deal” would actually look like as negotiations drag on in Brussels.

Nevertheless, I still think that the base case remains that there will be sufficient progress by the end of the year to allow markets to price in a viable deal.

Of course, the risk case is that if there is no progress by March 2018, then the no-deal scenario will have to be priced in.

Anyway, investors still have some time left for trying to define their choice of what to price in.

Believe me, it won’t be easy.

Economic data today are generally not of serious importance.

The National Federation of Independent Businesses (NFIB) small business optimism index is due today. The index is a composite of 10 seasonally adjusted components based on the following questions: plans to increase employment, plans to make capital outlays, plans to increase inventories, expect economy to improve, expect real sales higher, current inventory, current job openings, expected credit conditions, now a good time to expand, and earnings trend.

The respondents to the poll appear to rationally try to influence the outcome suiting their own ends. Investors irrationally regard the data as useful.

Neel Kashkari, President of the Minneapolis Fed is also scheduled to speak.

A couple of days ago, Kashkari said: “The Federal Reserve’s own actions, not transitory factors, are responsible for weak inflation, and the U.S. central bank should wait to raise rates again until inflation hits its 2-percent goal.”

Etienne "Hans" Parisis is a bank economist who has advised investors on financial markets and international investments.

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It is common for investors to cling to notions of rationality in markets and in economic behaviors as an underlying assumption when, for example, five minutes on a normal foreign exchange dealing floor would overturn any notion of rational markets.
investors, brexit, risk
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2017-09-10
Tuesday, 10 October 2017 09:09 AM
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