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To favor creating a new state somewhere is to be a dirty nationalist. To favor keeping all existing national states precisely as they are is very progressive and enlightened and not nationalist at all.

How do these people believe this stuff? Even though independence would be bad for Scotland in the short to medium run, part of me hopes that they vote Yes today just to give the Westminster, Transatlantic, and Eurocratic establishments a good, hard kicking.

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Unless the polls are systematically biased or there is a late-breaking surge in support for “Yes,” the “No” campaign looks set to squeak by with a narrow victory in the Scottish independence referendum. On the betting markets, a “Yes” vote has plunged below an implied probability of 20%. What has this decline in the prospects for independence done to capital markets? In my last post on the subject, I found that British firms and the pound were nearly untouched by what was at the time significant momentum for “Yes,” but that a nine-firm Scottish equity index was hit hard. If those losses reflected unease about independence, then the latest news should have caused growth in my Scottish equity index.

The biggest decline in the Yes team’s chances actually came overnight September 11-12, when the chances of Scottish independence abruptly fell about 10 percentage points on the release of new polls in the evening of September 11. (For a full list of recent polls, see Wikipedia.) The Yougov poll showing “No” in the lead (a dramatic reversal from its previous poll) seems to have been leaked just before the closing bell on September 11.

betfair independence odds

Accordingly, I examine the performance of the Scottish equity index on the London Stock Exchange between 4:30 PM and 5:00 PM local time on September 11, when the odds of Scottish independence declined so rapidly. These are the nine stocks I include in the index: SL, SSE, FGP, WEIR, SGC, AGGK, WG, ADN, and MNZS. Of these, eight of nine rose on the poll news. Again, I weight by each stock by its market cap to create the index. The index rose 0.5% on the news, a rather small increase compared to the 1.7% decline after the shock Yougov poll showing “Yes” ahead. The overall patterns were pretty similar, though. The two transportation companies, Firstgroup and Stagecoach Group, were basically unchanged between the two. Energy-linked firms and Standard Life led gainers. Aggreko (temperature control systems) registered a small gain, and Aberdeen Asset Management a somewhat larger one.

Roughly a ten-percentage-point drop in independence likelihood led to a 0.5% gain in the value of Scottish equities, less than a third of the loss in Scottish equities after an eight-percentage-point gain in independence likelihood just a few days prior. On balance, these results suggest we should revise downward the costs of secession suggested by the prior post.

One objection to this interpretation might be that the leak of the Yougov poll just before the closing bell gave traders little time to respond. But this does not appear to be the case. The Scottish equity index was flat at the opening bell on September 12, suggesting that there was no new information for traders to consider.

Here are two more interpretations. First, betting markets are less liquid and well-capitalized than financial markets. The actual gain in the probability of Scottish independence after the first Yougov poll may have been greater than the immediate response on betting markets. Second, the shock of a poll actually showing “Yes” ahead may have led traders to overestimate the likelihood of Scottish independence, and perhaps even the costs of secession (in a moment of panic). Having been inured to the initial shock and its aftermath, traders then took later news with more equanimity.

Overall, though, the results are still suggesting net economic costs to Scottish independence. How much of the emphasis should be put on the “Scottish” part of that phrase and how much on “independence” remains a matter of debate, but clearly energy and financial firms are more affected than transportation and service ones.

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The Oxford Review of Economic Policy has a brand-new special issue on the economics of independence. The entire issue seems to be open-access right now, so check it out. (HT: Doug Irwin)

In Scottish news, polls have turned a bit against independence, and betting markets now price a “Yes” at around 22-24%. I will take another look at how this affected capital markets, and what that implies about the economics of independence, a bit later in the week.

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What can we learn from capital markets about the likely consequences of Scottish independence? A trio of recent polls has shown the “Yes” side to have pulled roughly even with “No.” With momentum on their side, it’s not unthinkable at all that “Yes” will pull it out, resulting in the first secession from a Western democracy since Iceland withdrew from Danish union in 1944. Most American commentators, from Paul Krugman to Tyler Cowen, oppose Scottish independence and forecast economic disaster for the new country. Are they right?

Let’s look at the behavior of capital markets in Britain since these polls’ release to find out. First, let’s set the stage by looking at how betting markets price the probability of Scottish independence. Unfortunately, there are no nice InTrade-style charts for implicit probabilities anymore, at least not that I can access from the United States. From oddschecker.com, I am able to pull odds from different exchanges from the beginning and end of each day. Looking at the markets with most liquidity, it looks as if the odds for independence moved from about 19.5% Friday night to about 25% Saturday night, after the release of the YouGov and Panelbase polls (the Panelbase poll suggested “No” might still have a small lead). On Monday morning the odds stood at about 23.3%. After the release of the TNS poll Monday evening (confirming the dead heat), the odds moved in to 26.0%.

Next, let’s look at the behavior of capital markets over this period. Here is how the pound has fared against the euro:

euros per pound

Not much of a correlation. To be sure, the pound fell against the euro when trading opened Monday morning, following the shock weekend poll from Yougov and the somewhat-reassuring poll from Panelbase, but the TNS poll released late Monday night appears to have had zero effect on the pound, even though it did have a small effect on the betting markets.

Now, the pound has fared a little worse against the dollar, because the euro has also dropped against the dollar. This may reflect that traders believe Scottish independence raises the probability of British exit from the EU. But this would not be a direct cost of Scottish independence, and it would ultimately be up to English, Welsh, and Northern Irish voters whether they want to withdraw from the EU.

What about the stock market?

dowftse

I’ve got the Dow in there for comparison (in green). So the FTSE fell about 0.3% on opening Monday, then drifted downward throughout the day, finally recovering all that ground except the initial 0.3% drop. On opening Tuesday after the TNS poll, it actually rose. As of this writing is down just about 0.4% from Friday’s close. This looks like a muted response to me.

But what about Scottish-exposed stocks in particular? I took the list of top 25 Scottish companies here and winnowed the list down to those listed as having Scottish ownership and being publicly traded. Nine companies fit that test. I then constructed a weighted average of their share prices at Friday close, Monday open, Monday close, and Tuesday open, the weights being each stock’s market cap according to investing.com. Recall that there were two surprise polls, one over the weekend and one released Monday evening, the former having the greater effect on betting markets.

The Scottish index I created lost 1.7% of its value on opening Monday morning, a noteworthy drop because it happened right away. It’s plausible to attribute this drop to the increased risk of independence. However, today it lost nothing on opening – in fact, it was up 0.1%. Still, the total loss to these nine firms’ market value amounts to about $800 million. The fact that there was no further response of capital markets to the TNS poll, even though betting markets did respond, weakens our confidence somewhat that investors are responding negatively to the prospect of independence, but let us work with the assumption that they are.

What would happen to these firms’ value if independence were dead certain? Expected utility analysis helps us here. They lost $800 million in value on an increase in the probability of independence of 5.5+2.7=8.2%. We can infer that an increase from 20% to 100% would wipe out $800 million*8/.6=$7.8 billion. That’s a fair proportion of their existing value: about 16%. Of course, investors are risk averse, and the very uncertainty of the outcome might be driving a fair proportion of the losses.

A closer look reveals that different stocks responded differently to the poll news. Two transportation companies, FirstGroup and Stagecoach Group, lost virtually nothing, and Aggreko, which rents temperature control systems, lost absolutely nothing. Financial and energy/power companies were pounded. An engineering company closely linked to the oil industry, the Weir Group, took a more modest 1.0% loss.

How to sum up? So far (more…)

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And there’s real money behind it, with more (hopefully) to come:

As for its goal, here is how Day put it in his news release:

“Crushing debt, unfunded entitlements, the government takeover of healthcare, overregulation, the decaying of our public schools, and massive government intrusion into our private lives are a direct assault on our liberty and individual rights.

“What if we could prove that liberty works? What if we could transform the Republican Party into a party of liberty that embraces the millennial generation? What if we could break the cycle of failed Republican candidates who support the expansion of the welfare state and position the country for a Goldwater/Reagan Republican in 2016?”

The PAC first wants to elect “the first pro-liberty, millennial governor (Andrew Hemingway)” and “win a pro-liberty majority for the Republicans in our 424 person state Legislature.”

Day is chair of the Republican Liberty Caucus of New Hampshire, which has endorsed 12 GOP candidates for the state Senate, including five who are taking on sitting GOP Senators in primaries. Hemingway is former chair of the RLCNH.

Stark360 proposes “a statewide, data-driven grassroots campaign that will endure beyond 2014 and address a fundamental structural weakness of the Republican Party,” and then “position New Hampshire to elect a Liberty Republican candidate in our crucial 2016 first-in-the-nation primary.”

“New Hampshire is the single best investment to demonstrate and spread liberty throughout the rest of the country through New Hampshire’s critical first-in-the-nation primary status,” said Philips.

“The people of New Hampshire inherently embrace liberty” and in the state, “elected officials are accountable,” he and Day said.

Quoting former Gov. John H. Sununu that, “Iowa picks corn; New Hampshire picks Presidents,” Day said that in recent primaries the state has actually picked “losing presidential candidates.”

“A small, elite group of the New Hampshire Republican establishment, corrupted by D.C. interest groups, has disenfranchised New Hampshire voters, alienated the youth vote, and manipulated party rules for personal advantage. In particular, the treatment of Ron Paul in New Hampshire and the egregious manipulation of the rules aimed at harming Ron Paul delegates in the 2012 Presidential race, needs to end now. Our data-driven grassroots infrastructure will restore the Republican Party back to the liberty loving citizens of New Hampshire and serve as a model for the rest of the nation,” Day said in a statement.

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UK Labour MP and former Chancellor of the Exchequer Alistair Darling and Scottish First Minister and Scottish National Party MSP Alex Salmond last night debated independence for Scotland as part of the campaign leading up to a referendum on September 18. While the “Yes” camp remains slightly behind in the polls, they have been catching over the past several months, and it is likely that the vote itself will be close.

Watch the debate here. It features many themes common to debates over secession in the Western world: risk and uncertainty, self-determination, ideological distinctiveness of the secessionist region, and economic costs and benefits of independence. It’s a sparkling and entertaining debate; Mike Smithson of politicalbetting.com called it “by far the best TV debate there’s been in the UK.”

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Marc blogged the other day about the New York Times editorial board’s endorsement of repealing federal marijuana prohibition, just months after having rejected that step. Now, this isn’t quite the same as endorsing marijuana legalization – just returning it to the states – but it is a significant step nonetheless. Still, they are well behind the rest of the country. An absolute majority of Americans favor legalizing, taxing, and regulating marijuana more or less like alcohol. Liberal Democrats are overwhelmingly in favor.

Fivethirtyeight recently showed how out-of-step the New York Times is by comparing their position to that of representative Americans with a similar demographic profile. Money quote:

[P]eople with this demographic profile are somewhere around 25 or 30 percentage points more supportive of marijuana legalization than the average American. That implies that back in 2000, when only about 30 percent of Americans supported legalization, perhaps 55 or 60 percent of these people did. The margin of error on this estimate is fairly high — about 10 percent — but not enough to call into question that most people like those on the Times’ editorial board have privately supported legalization for a long time. The question is why it took them so long to take such a stance publicly.

The political class everywhere, regardless of left-right ideology, has been vastly more opposed to marijuana legalization than equivalent Americans. Here in New Hampshire, Democratic governor Maggie Hassan has not only opposed and promised to veto recreational marijuana legalization, she has also opposed and threatened to veto marijuana decriminalization and even allowing terminally ill patients to grow their own medical marijuana plants. Her spineless copartisans in the state senate have gone meekly along. And is anyone really surprised that government bootlicker David Brooks opposes legalization? It’s no accident that the only two states to legalize recreational marijuana so far have been states with the popular ballot initiative. It’s also no accident that medical marijuana started in states with the popular ballot initiative. The people have had to go around the controllers and neurotics in office.

Now the Brookings Institution has come out with a study of marijuana legalization in Colorado. Their quick synopsis? (more…)

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