Boris Johnson has made one thing clear – it’s Brexit or bust
Boris Johnson is not for messing around. He’s taking Brexit seriously. John Stepek looks at his options, and what it all means for the markets.
It seems that Boris Johnson is not for messing around.
Fresh from meeting with the Queen, the new prime minister gave his big speech on the steps of Downing Street.
He then proceeded to fire just about everyone in the Cabinet who could have been viewed as a Remainer or a Jeremy Hunt fan, and replaced them with a lot of high-profile Brexit supporters.
So if nothing else, at least we now know he's taking this seriously.
You don't make money by trying to predict the future
Making money in investment is not about predicting the future, because the future is unpredictable.
Don't get me wrong it is possible to improve your forecasting skills (read the work of Philip Tetlock and colleagues to understand how). But it's not easy and even if you get really good at it, it's still no basis for investing.
Instead of trying to predict the future, you need to build a portfolio that can withstand a range of different outcomes. In other words, you need to diversify. And you need to pay attention to the one thing you genuinely do have control over your cost of investing. So whatever you invest in, make sure you're doing it cheaply and efficiently.
I'm reminding you of this because, clearly, a lot of what we do here in Money Morning is based on analysing current events and chatting about what might happen next in the world.
I won't lie I think that people in general consume too much news and get too hung up on minutiae as a result. Indeed, I suspect (and I must find if there's a study to back this suspicion) that the more news you consume, the more prone you become to confirmation bias and other behavioural biases.
However, I also think that it can help you to keep a level head as an investor if current events aren't constantly taking you horribly by surprise. So I think it's worth unpacking events that are likely to have some sort of effect on your investments, so that you can be mentally prepared when they do.
And I also think it's worth understanding what might already be priced into market expectations, so that when you do spot the occasional opportunity to take advantage of highly-skewed odds which does happen (the Brexit vote in 2016 was a classic case of markets being overly confident of the outcome) then you can at least consider it.
Anyway. With that in mind, let's get back to Boris Johnson.
Put simply, Johnson has thrown down the gauntlet in no uncertain fashion. He's fired 17 cabinet ministers. Their pro-Brexit replacements, along with the appointment of Dominic Cummings a key architect of the Leave campaign make a very clear statement: if Britain doesn't leave the EU, then it's not down to me.
In short, we now have a pro-Brexit prime minister, with a pro-Brexit management team. We also very probably have a significant volume of aggrieved backbenchers. So what does that mean?
This looks like the best of a limited set of options for Johnson
Well, let's think it through. The big threat to Johnson is that his weak parliamentary majority ends up forcing a general election before Britain leaves the EU.
If Britain does end up having a general election before it leaves the EU, then all the polls suggest that it will end up being in effect a second referendum on Brexit.
The risk then has been that the Tories would be hamstrung by the Brexit Party, while the LibDems (who for now, could rename themselves the "Remain" party) would do the same to the Labour vote.
So this clear mission statement from Johnson does two things. Firstly, if there is any chance of convincing people who had planned to vote for Nigel Farage that the Tories could be trusted to get Brexit done, then this is the way to do it. He can't neutralise the threat from the Brexit Party, but he's taking all the steps possible to lose fewer votes to them.
Secondly, it really does force the potential rebels in his party to put up or shut up. Partly driven by her own lack of conviction, Theresa May tried to compromise, and to keep everyone happy. We can safely say it didn't work. So rather than put up with passive aggressive sniping and backroom grumbling every five minutes, Johnson is making his position very clear.
So he's basically saying to the rest of Parliament, in front of the electorate: "I'm going to do what the people told us to do in that referendum three years ago. Stop me if you dare."
That's also his message to Brussels. "I want a deal, and I'm sure we can come to one, but one way or another, we're leaving at the end of October."
Which all boils down to: "If we don't get Brexit, or we get a no-deal' Brexit, then it's not my fault."
Given his minuscule parliamentary majority, and the general messiness of everything, then this is probably the best plan. Will it work? In general terms, I'd bet on the self-preservation instincts of MPs who don't want to get voted out. Today, it's all very close, and for some it may not even be clear whether it's riskier to take a stand or to fall in line.
It's something to keep a close eye on. But if they want to make their move, they need to make it fast.
As far as markets go, they aren't telling us much. The pound hasn't reacted too badly to the pro-Brexit line so far, but chances are that's because markets like the added certainty of an apparently higher-conviction leader, and aren't yet taking the no-deal talk all that seriously.
The first big clash with the EU will no doubt cure that. As I've already said, trading currencies is a daft idea for most of us anyway, but trying to do it with the pound in this environment is particularly ill-advised.
Oh, and just as an aside, on the normal business of government Johnson is planning to splash the cash on all sorts of things to keep the general electorate (and the various department heads) happy in the meantime.
That's probably not something we need to worry about as yet (Britain's finances aren't great but nor are they the worst in the world right now). But just as with the debt ceiling deal in the US, it shows you the direction of travel whether you're on the right or the left, austerity is out and money printing for the people is in.
Anyway, if you don't already subscribe to MoneyWeek magazine, now is probably a good time to do so if you want to stay abreast of events during what promises to be a much more "newsy" August than usual. You can get your first six issues free here.
Oh and before I go if you're in Edinburgh for the festival next month, or if you're thinking about going, then don't miss the Adam Smith themed show, The Butcher, the Brewer, the Baker and the Commentator. This year, Merryn and Dominic will be sharing hosting duties (Dominic is doing the first half, Merryn from 17 August onwards). It was a big success last year and a lot of fun, and tickets sold out fast. So book yours now!