Showing posts from June, 2016

Who is really to blame for Brexit?

Guest post by Tom Streithorst.

Brexit already looks a disaster. Sterling has plunged to the lowest level in thirty years, the FTSE fell more than 12% at the open, global equities lost $2 trillion in value in less than a day, and gold, the traditional safe haven in times of turmoil, has shot up. Uncertainly reigns. Firms are less likely than ever to hire or invest. It is going to get worse.

Who shall we blame?

David Cameron is the obvious villain. He did not need to call this referendum. When he promised a vote three years ago, there was no real call for Britain to exit Europe other than on the fringes of his own party, . Cameron made a purely political decision. He knew Brexit would be bad for his country, and still he promised a referendum merely to shore up support among Eurosceptics who might support UKIP in the general election. For momentary political advantage he gambled the prosperity of the nation. He lost. If history remembers him at all, it may well be as the Prime Ministe…

The snake oil sellers

The fallout from Britain’s historic decision to leave the European Union continues. Domestically, there are regrets, recriminations and accusations. Young people,particularly those aged 16-17 who did not have a vote, complain that the vote did not take their interests into account  A petition for a second referendum reached over 3m votes in a few days, although it was subsequently found to have been hacked: the true number is uncertain. The media have spent the weekend tracking down people who voted to Leave and now regret it, and publishing increasingly desperate schemes for avoiding Brexit. There is a sense of denial. If only we could turn back time....

But it's too late. The UK is now persona non grata in the EU, andEU foreign ministers are pushing for formal exit procedure to be triggered as soon as possible. The political meltdown in both main parties currently makes this impossible, but chaos can't continue forever. Eventually, Article 50 will have to be triggered, and …


I have reluctantly decided that there will be no more posts on Coppola Comment until after the referendum.

Since I have declared my support for Remain, anything I write about the UK and the EU is now inevitably seen as biased, and anything I write about any other subject is - equally inevitably - seen as avoiding the issue. I cannot, for example, write a balanced analysis of the likely effects on financial services of a vote in either direction, though that is my specialism. Nor can I cross-post the sensible, well researched article on immigration that I was sent earlier today. It is a measure of how toxic this campaign has become that stating my personal views has effectively silenced me.

This is the most unpleasant political campaign I have ever seen in the UK.  Both sides have behaved appallingly. Both have blatantly lied and misused statistics. Both have tried to frighten people into voting for them - the Remain side with scare stories about economic meltdown, the Leave side with…

The EU's greatest achievement

"The EU's greatest achievement is the Euro", said Michael Portillo on the BBC's This Week programme last Thursday.

No, Michael, it isn't. It is the EU's worst mistake.

As Yanis Varoufakis entertainingly explains in an interesting lecture published in the Australian Journal of Political Economy, the creation of the Euro led inexorably to the buildup of unsustainable debt - both private and public - in the Eurozone periphery countries:
The problem is that creating a monetary union is a little bit like invading Russia. At first, there is rapid progress, as the French troops, Napoleon or the Wehrmacht found when they stormed the country, taking large tracts of land without much resistance. Then slowly, as the heavy winter sets in, the Cossacks and the Russian partisans start blowing up your convoys. Eventually you end up with blood on the snow and a hasty retreat. Recall the 1920s – after the Great War the Gold standard had created ‘the Roaring 20s’. Similarly, …

Sisyphus,Tantalus and a prisoner's dilemma

Should Greece leave the Euro? That was the title of the Oxford debate at the Prague Summit in which I had the pleasure of participating yesterday.

But this is the wrong question. Unless there is a considerable shift in Eurozone politics, Greece WILL leave the Euro - eventually. The question is when, and how.

To see this, we need to look at the motivations of all the players involved in the negotiations. The Greek negotiations resemble a "prisoner's dilemma", in which the best outcome for everyone is achieved through collaboration but the participants don't trust each other enough to collaborate. Games are fundamentally psychological, and their outcome is often determined by unspoken or even unconscious drivers. In this case, despite the collaborative rhetoric of the Memorandum of Understanding, distrust and self-interest are the real drivers of the negotiations. In such a situation, true collaboration is impossible and the eventual outcome must be negative for all p…

If only we could return to the glorious 1990s.....

The chart below comes from the Rockefeller Institute's report on Public Pension Funding Practices (h/t @Silver_Watchdog on Twitter). It illustrates perfectly the point I have been trying to make for quite some time now. Pension funds are not taking on more risky investments because the risk premium has fallen, but because the risk-free rate has fallen:

In fact, as the chart shows, the risk-free rate has been falling steadily for over thirty years.  This is not a post-crisis blip. It is a secular trend.

Yet pension investors have not adjusted their expectations of returns as the risk-free rate has fallen. Rather than targeting a spread above the risk-free rate that reflects their risk appetite, they target an historic rate. The chart suggests that the rate they are targeting has not significantly changed since 1990. Thus the risk appetite of pension fund investors has increased.

In similar vein, the Wall Street Journal mourns the passing of the 100% bond fund:

There seems to be a h…

Schroedinger's assets

In a new paper*, Michael Woodford has reimagined the famous “Schroedinger’s Cat” thought experiment. I suspect this is unintentional. But that’s what happens when, in an understandable quest for simplicity, you create binary decisions in a complex probability-based structure.

Schroedinger imagined a cat locked in a box in which there is a phial of poison. The probability of the cat being dead when the box is opened is less than 100% (since some cats are tough). So if p is the probability of the cat being dead, 1-p is the probability of it being alive. The problem is that until the box is opened, we do not know if the cat is alive or dead. In Schroedinger’s universe of probabilities, the cat is both “alive” and “dead” until the box is opened, when one of the possible outcomes is crystallised.

Now for “cat”, read assets. In Woodford’s model, when there is no crisis, the probability of asset collapse is zero. But if there is a crisis, the probability of an asset collapse is greater th…