Monday, 27 November 2017

Brexit and Game Theory

I have recently discovered Epsilon Theory with Dr Ben Hunt and his use of game theory to analyse life and markets. I have to read the notes at least three times and the same with listening to the podcasts, but I definitely feel smarter after I’ve done so! The Epsilon Theory manifesto is really interesting I would urge you to read into it further.

One game theory game which features frequently is the common knowledge one. Read his note on this, it’s a million times better than what I could do, but in summary the game works by having a truth or a notion, which is known internally by the population but it’s not shared amongst the people in the game until someone comes along and starts articulating this fact openly, and it is only when this common knowledge becomes publicly shared and accepted that behaviour changes. The information is articulated by a “missionary”, someone who has enough clout, influence and respect to be taken seriously enough to facilitate the behaviour change.

So, Brexit. The negotiations aren’t going well because of… well, lots reasons really, but don’t worry because… German-car-makers-will-make-the-EU-give-us-a-good-deal, so that’s okay…

The current state of play is that growth forecasts are down, inflation is up, earnings growth is negative when adjusted for inflation, the UK savings rate is about 2% and the economy plods on because of consumer spending. A chunk of significant tax payers will start leaving soon and a chunk of low paid people who staff the NHS will not move here which will cause a fairly nasty build-up of bad headlines in the next year or so.

Cabinet Brexiteers are therefore capitulating on their red lines to try and get over to the trade deal, or show any sign of ‘making a success of Brexit’. David Davis stood up and said that there would be a meaningful parliamentary vote on the final deal but a ‘no’ would mean no trade deal and calamity… or, as it could otherwise be put; a bad deal is better than no deal… which is a bit of a change of tack. Add onto that the border issue in Northern Ireland and you have to be a serious glass half full person to think it’s all going well.

I think Brits know it and feel this slow down more because they also see the rest of Europe, if not the more developed countries in the rest of the world all outpacing the UK economy. Naturally enough when Europe does well, we want to be part of it. The reverse of which was seen in the period after the Great Recession and the Leave vote when Europe was struggling under comparatively large levels of unemployment and the UK economy was rocking along – did Brexit cause this reversal of fortunes? Not by itself, but it would have contributed.

The OBR downgraded the growth forecasts in the budget last week, potentially because they had been over optimistic in the past, so maybe this time they’ve under-cooked it and the economy will do better… history is no guide, but its interesting to take a look at the Monetary Policy Committee’s forecasts for GPD growth in the run up to the Great Recession – recency bias, maybe? Forecasting is a mugs game but there’s previous when it comes to being behind the curve on the way down.

Along with the general gloomy economic backdrop there’s how an average person might be feeling:
-       I’m feeling poorer and I’m struggling to pay for the car I bought a year ago on credit.
-       That £350m a week for the NHS and promise of an easy and quick trade deal are ringing very hollow / complete BS.
-       That Boris Johnson, David Davis and Liam Fox team aren’t really smashing it out the park and all their positive predictions are failing to materialise.

Yes there’s austerity, maybe some antipathy directed at the EU for not immediately caving in, but I think a lot of people are seeing the proof that the UK’s utopia will not be created quickly and easily by leaving the EU and it would only take a small percentage to switch their way of thinking to turn the tables.

But how do you go about turning those tables. If this change of view is happening why isn’t there a clamour to reverse course? Going back to the Common Knowledge game who can shout loud enough that the Emperor has no clothes? There was a half-hearted shout in the snap election in June when May lost her majority seeking a mandate for a ‘hard’ Brexit but equally the electorate couldn’t vote in Comrade Jezza and the issue was confused. There is no missionary able to communicate with enough authority to support such a change of behaviour.

Politically, Labour are led by a Brexiteer pretending to be a Remainer, the Tories are led by a Remainer pretending to be a Brexiteer whilst also being split down the middle and the Lib Dems are AWOL. The SNP, another pro-EU party, suffered at the last election and aren’t the force they were a few years ago. Parliamentary remainers across the board won’t and can’t oppose it because of their political diversity and because the Brexiteers have a good line in not trashing the Largest Mandate Ever Received.

Who else is trusted enough? The Bank of England was part of Project Fear so is discredited, newspapers are tribal and increasingly shrill, foreign heads of state would be painted as biased and interfering, the Queen can’t and won’t get involved in politics. Celebrities and business leaders might have the clout but would probably be seen as biased as many stated their preferences before the first referendum. Even if Boris, Gove and Davis said it shouldn’t be done the needle might move, but they would just be consigned as failures and traitors by those who hold true to The Way.

It seems the only group powerful enough is the British public and another referendum.

Look at Greece a few summers ago. The party in power were voted in to stick it to the EU and stop the large payments being made which they argued were holding the country back, the EU held firm (sound familiar?) and the resulting deal on offer was too difficult / politically toxic to be taken by Tsipras alone so he went for a snap referendum advocating a rejection of those terms, effectively falling out of the EU... yes, there many differences, but it is not too much of a stretch to see this happening in the UK in the next 12months or so if the economy does go downhill.

Maybe there will be a resurgence of UK economic activity and Brexit looks more rosy, though I don’t hold out much hope of that. So when we get to the sharp end of Brexit the view may well be: is that we're about to pay a huge amount of money now, against a backdrop of hated austerity, to have a relationship that is similar to, but fundamentally not as good as, the one you are trying to leave with still spurious benefits of leaving. With those facts established, rather than the never never of the first referendum campaign, how many people would still stick to their original Leave vote?

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