Italian Election Roils Markets: An Over-Reaction

With no party having gained sufficient seats in the upper house of the Italian legislature, analysts warned on February 25, 2013 of a “hung parliament,” which would make it even more difficult for structural and fiscal reforms to be passed. Even though the Democratic Party appeared to have gained a slim victory in the lower house, giving that party the majority of 340 seats out of 630, the upper and lower houses have equal law-making ability so even the possibility of a hung parliament roiled markets. I contend that this is yet another case of financial analysts over-reacting to political uncertainty. 

The full essay is at "Political Uncertainty Overstated." 

The British Pound Reacts to Secession

When the E.U. state of Britain held a vote in 2016 on whether to secede from the union, the British currency plummeted. On the day of the December 2019 statewide election in the U.K., that currency initially jumped and held on the day after as official results confirmed that the conservatives had won a majority and thus would be able to see the secession through. I submit that uncertainty itself was a major factor in both swings, and that the market put too much emphasis on the matter of uncertainty at the expense of the substantive economic effects of secession.

The full essay is at "The British Pound and Secession."

Political Risk Exaggerated on Catexit

On the day the Catalan parliament voted in favor of “Catexit” from Spain, the IBEX-35 stock-market index dropped 1.4 percent while the Stoxx Europe 600 gained 0.3 percent.[1] The IBEX-35 is an stock-index of companies based in Spain. Investors also sold state bonds; yields on 10-year bonds rose to 1.574% from 1.558. Even though these changes were hardly earth-shattering in magnitude, their directionality points to investor-anxiety. I submit that it was overblown, which suggests that investors generally tend to over-react to political events.

The full essay is at "Catexit: Political Risk."

[1] Jon Sindreu, “Stocks, Bonds Hit by Political Unrest,” The Wall Street Journal, October 28-29, 2017.

Business CEO’s Overstating Political Uncertainty in the United States

The impact on business of political uncertainty in countries that are seized by revolution can be substantial—so much so in fact that CEO’s and board directors are motivated to avoid the uncertainty itself. I submit that business analysts of political risk tend unwittingly to routinely overstate the uncertainty arising from incoming U.S. presidential administrations. If I am correct in this claim, CEO’s and board directors pay too much heed to political uncertainty itself in the making of major strategic decisions involving operations in the American context.

The full essay is at "Business CEO's Overstating Uncertainty"

Global Markets and London Overreact to the British Vote to Secede from the E.U.: Missing the Bright Spots

The world’s financial sector may be excessively sensitive to increasing uncertainty associated with major changes—that is, changes that impact how large institutions, including governments, relate to each other. In such cases, so much is at stake that forces (i.e., the major powers) tend to manage the large-scale change with a minimum of disturbance. In short, the status quo has too much at stake for the market’s feared uncertainty to actualize. The British referendum on whether the E.U. state should secede is a case in point.

The full essay is at "Essays on the E.U. Political Economy," available at Amazon.

Political Protests in Hong Kong: The Market Overreacts

Geopolitical risk is essentially uncertainty to the market. Given the nature of human fear, the psyche can add a “multiplier effect” to an objective calculation of uncertainty. Just as we are naturally so close to human nature that its most ubiquitous tendencies eclipse our notice, so too do we tend to assume that the market’s assessment of a political risk is accurate, given the efficiency and effectiveness of the stock market. The market’s initial reaction to the political protests in Hong Kong in September 2014 may demonstrate that the market’s participants even routinely overstate both the probability and severity of the downside of a mass political event.

The full essay is at “Political Protests in Hong Kong”