Going Long on Uncertainty

At least there's a lot of it to go around.

The natural resources of the United Kingdom, according to the CIA's World Factbook, are coal, petroleum, natural gas, iron ore, lead, zinc, gold, tin, limestone, salt, clay, chalk, gypsum, potash, silica sand, slate and arable land.

But that arguably misses the most important one: comedy. From Geoffrey Chaucer to William Shakespeare, from Monty Python to Ricky Gervais, a good laugh has long been one of England's most influential exports. Especially to America, where knock-offs are produced quickly but rarely deemed as funny as the original. 

In our Friday review of the most important financial news of the week, it's obvious that the comedy column of the current account is showing a huge trade surplus for jolly old England. That the humor is happening hand-in-hand with perhaps the darkest moment in the nation's postwar history is not a bug, it's a feature of British comedy. Gervais, in describing British humo(u)r five years ago, said: "Failure and disappointment lurk around every corner. This is due to our upbringing. Americans are brought up to believe they can be the next president of the United States. Brits are told, 'It won’t happen for you.'"

It's certainly not funny to everyone involved. Not to the British millennials whose passports may be far less powerful in the future. Or to global financial firms whose ability to keep passporting services to all of the EU from London headquarters is at grave risk.  It's probably not funny to non-British CFAs who were forced to turn away from dividend discount models to take a crash course on the Benny Hill slapstick that is British politics. 

On the syllabus for that course should be Sarah Lyall's portrait of Boris Johnson this week, as well as her 2002 profile: ''Beneath the carefully constructed veneer of a blithering buffoon,'' Johnson said of himself, ''there lurks a blithering buffoon.'' Also on the must-read list before you hit the beach is BuzzFeed's wrap-up of the memes being produced following "The Most Ridiculous Morning British Politics Has Ever Seen," with some speeches in Parliament carried live even on U.S. cable news channels, as lawmakers got down to the crucial work at hand. You know, like inviting Lindsay Lohan to turn on the Christmas lights in Kettering this year, "thus redeeming her political reputation." 

Comedy doesn't work if you know what's coming, so perhaps the one variable most correlated to humor is uncertainty. Analysts and academics have tried to quantify the unquantifiable nature of uncertainty to determine how important it is as a catalyst in markets (it appears to be very important). So many turned to obscure gauges known as economic policy uncertainty indexes, which scour newspapers for references to policy uncertainty.  

And everywhere you looked, there was a bull market in uncertainty. Needless to say, uncertainty spiked to a record high in the U.K.: 


A gauge of economic policy uncertainty in the United Kingdom has quadrupled this year

Source: Baker, Bloom & Davis via Bloomberg (ticker: EPUCUK Index)

The uncertainty gauge for Europe also reached a record (impressive for a continent that's long been exporting vast amounts of uncertainty).  Even the reading for the U.S. reached one of its highest levels ever: 

 ̄\_(ツ)_/ ̄

An economic policy uncertainty index set a record for all of Europe, while the gauge for the U.S. was at one of its highest levels ever

Source: Baker, Bloom & Davis via Bloomberg (tickers EPUCCEUM and EPUCCUSM Index)

There is some irony here because all of the uncertainty surrounding Brexit has caused a consensus of certainty about Federal Reserve policy makers, at least when it comes to the binary issue of "will they or won't they" raise rates anytime soon. Spoiler alert: They won't.

As a result of this uncertainty and its more-certain policy implications, the big news at the end of the week was Treasury yields setting a record low with soothsayers at places like BlackRock and Vanguard expecting them to go even lower.

Yielding to Uncertainty

Rates on 10- and 30-year Treasuries touched record lows toward the end of the week

Source: Bloomberg

That's made the traditional defensive corners of the stock market (where dividend yields are not only high but considered safe) one of the preferred ways to engage in the Trade of the Week and go long on uncertainty. So utilities, telephone and consumer staples companies led the way, along with real estate investment trusts, which are still grouped with financials for the rest of the summer, reducing losses in that sector:

Defensive Game

Sectors traditionally considered defensive have led the U.S. stock market since Britain's referendum

Source: Bloomberg

Note: Shows returns for S&P 500 industry groups in the first five trading sessions following the U.K. referendum vote.

These sectors are getting crowded, pushing valuations to levels rarely seen, if ever, for utilities and consumer staples:

American Values

Valuations for S&P 500 utilities and consumer-staples sectors are at or near all-time highs as defensive groups lead the stock market

Source: Bloomberg

So here we are at week's end, going into the Independence Day holiday in the U.S. to ponder the "Independence Day" in Britain, with a cloud of uncertainty pushing the S&P 500 to within spitting distance of that elusive record despite the prospect of Article 50. (And by that I mean, the 50th article on Brexit that I'll feel compelled to read today.) 

If you want to jump straight to the take from the week's most alarming alarmist, George Soros thinks Brexit has unleashed "a crisis in the financial markets, comparable in severity only to 2007/8." And judging by the page-view stats on that article, people really like reading the most alarming takes, no matter how far-fetched.    

But it's a long weekend, so why not end with an optimist and read John Carney's contrarian view  that all this uncertainty could increase U.K. economic output and cause a "brexspansion." 

It's a fun theory. Though I trust Ricky Gervais and young Brits are being told: "It won’t happen for you."

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

    To contact the author of this story:
    Michael P. Regan in New York at mregan12@bloomberg.net

    To contact the editor responsible for this story:
    Daniel Niemi at dniemi1@bloomberg.net

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