No One Saw Brexit Coming… Except Jim Rickards

I’m going to share something Jim Rickards wrote two days before the Brexit vote.

The day before Britons went and voted, the Bloomberg Brexit Tracker looked like this:

Source: Bloomberg
Click to enlarge

The pollsters didn’t bank on the Brexit vote happen. In fact, I’ll bet most politicians and other elites didn’t see it coming.

They weren’t alone. The markets didn’t see it coming either. When the futures markets opened late Thursday evening AEST, it was up 20 points.

As they were counting votes, the Footsie traded on like nothing was happening.

Yet Friday morning, it finally dawned on the world that the vote was ‘Leave’.

The Footsie dropped 533 points at the open. A few hours later, the Dow Jones followed suit, dropping an incredible 501 points in the first few minutes of trade. The Dow closed last night at 17,140. A massive 4.8% fall from last Thursday morning. The Footsie is down a total of 5.6% since the morning of the vote.

You know what this tells you? No one was prepared. The polls said the Brexit wouldn’t happen. So no one took cover ‘just in case’ it did.

Then there is Jim Rickards.

Last week, Jim and I explained to subscribers of Strategic Intelligence and Currency Wars Trader that the polls were wrong. That the elites were wrong. Jim said the elites are so far out of touch with what the people want, that they were unprepared for the outcome.

The last few days of market trading prove that.

In a special update exclusive for Currency Wars Trader subscribers, Jim said that this market mayhem is only the start of what is to come.

Today, I’m going to leave you with something Jim wrote last week, only two days before the polls opened.

It’s going to get worse over the next few weeks. And we are going to see ‘where the bodies are buried’.


Shae Russell,
Editor, Strategic Intelligence


The Curious Case of the Brexit Polls and the Bookies

There is something odd going on in the forecasting process around Brexit.

Polls are showing the contest between ‘Leave’ and ‘Remain’ about 50/50, a statistical tie. It’s definitely too close to call. Betting venues are showing the odds of Remain winning at about 75%, with Leave about 25%.

How can we explain this huge discrepancy?

There’s an old saying that ‘A little learning is a dangerous thing’. It means it’s OK to be ignorant of something as long as you know your own ignorance and act accordingly. It’s also OK if you’re a true expert and use your expertise.

The danger is when you think you’re an expert, but you really aren’t — or, at least you don’t know as much as you think you do. That’s when you get into trouble. That’s a good summary of how a lot of presumed experts are misinterpreting the UK referendum betting odds.

The first thing to understand is that betting venues such as Ladbrokes try as hard as possible not to take a view on the referendum. They are middlemen trying to balance interest between two sides. The odds you see are not bettors versus bookies. They are bettors versus bettors with bookies just trying to balance the money flows in the same way a market maker in stocks balances interest between buyers and sellers by moving the price up or down.

The next point is that the odds do not reflect a balanced number of bets between Remain and Leave.

In fact, there are far more bets for Leave than Remain. It’s just that the Remain bets are larger on average than the Leave bets. This probably reflects the fact that Remain bettors are bankers and elites, while Leave bettors are everyday UK subjects. If all bets were weighted equally, the odds would be heavily in favour of Leave.

Another problem is to understand what it means when bettors give a 75% probability to Remain. It does not mean that 75% of the voters will vote Remain according to bettors. All it means is that 75% of bettors believe Remain will get at least 50.01% of the vote. In other words, Remain bettors might see a close race, but a preponderance believe that they can foresee the outcome. That’s a very risky bet and probably reflects a lot of cognitive biases (confirmation bias, risk aversion, herding, denial, etc.) rather than cool objectivity.

Finally, and most importantly, a betting pool is only a good reflection of the outcome if it’s a good representation of the voting pool. A poll tells you what the voters think. Betting odds tell you what bettors think the voters think. That’s two-steps removed from the actual vote, with exponentially more ways to be wrong.

If the bettors do not resemble the voters, and if bets are not equally weighted (like votes) then betting odds can skew wildly away from the outcome at the voting booth. A good example of this was the 2015 election for Parliament when the betting odds showed an 85% chance of a ‘hung Parliament’ when, in fact, the Tories emerged with a resounding victory.

Fans of betting odds often turn to a theory called ‘the wisdom of crowds’ which was proposed by a book of the same name, written by James Surowiecki. The idea is that the average opinion of a large group of everyday citizens can produce more accurate estimates than those of individual experts. This can be true in some instances, but not all.

Generally, the easier the problem, the more likely that the crowd will produce a better estimate than the expert. Classic cases include contests like ‘Guess the Weight of the Cow’ or ‘Guess How Many Jelly Beans are in the Jar’. These are simple problems. The average of a large group of guess filters out noise and comes close to an accurate estimate. There are also no barriers to entry in these problems; no one has to pay money to play the game.

This wisdom of crowd’s theory does not transfer well to betting odds on Brexit where you have to put up some real money to bet — and be able to afford to lose it — and where there’s nothing simple about the arguments pro and con.

Just requiring a money bet filters out those who cannot afford to bet or cannot afford to lose, which describes many eligible voters. Also, much betting is done online or with mobile apps, which also filters out some older voters who may be less agile with smartphones and apps.

I spent 10 years building market prediction engines for the CIA, so I’ve studied these dynamics closely. All things considered, it seems likely that the polls have this right and that the outcome really is too close to call. The betting odds reflect a lot of biases and filters that cause them to diverge from the actual view of the electorate.

Why does this matter to you if you’re an investor?

Because markets are putting great weight on the betting odds. In recent days we have seen rallies in stocks and sterling, and declines in gold. Markets are re-pricing risk based on a Remain victory as reflected in the betting odds. This may even be a feedback loop in which markets are set by wealthier bankers and institutions who themselves favour Remain and are among those placing bets.

If markets are priced for Remain when the actual odds are 50/50, then investing in assets that will benefit from a Leave victory is an excellent risk/reward trade.

All the best,

Jim Rickards,
Strategist, Strategic Intelligence

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Since starting out in the financial markets over a decade ago, Shae has extensive experience across various aspects of the industry. Shae cut her teeth in the derivatives industry, teaching clients basic trading techniques with technical analysis.

Joining Fat Tail Investment Research eight years ago, Shae has worked across a number of publications, such as Australian Small-Cap Investigator, Gold Stock Trader and Microcap Trader. She’s spent the past two years however, honing her macro analysis skills alongside Jim Rickards, showing Australians how to invest and profit form global macro trends.

Drawing on her extensive experience, Shae is a contributor to Money Morning, and lead editor of sister-publication Markets & Money, where she looks at broad macro trends developing around the world, combining them with her distaste for central banks and irrational love of all things bullion.

Money Morning Australia