Morning Brief – Tuesday 23rd

The Trichotomy

Having outgrown my degree in Political Economy, I thought I’d rescinded all ties to the so-called trichotomy. For those of you that don’t know, political economists are bloody obsessed with the phenomena, reducing the world into a series of three possibilities where only two can be simultaneously achieved at the expense of the third. As much as it pains me, that’s what we’ve got today:

Boris’ Trichotomy

Now we know Boris is no stranger to negotiating between three seemingly irresolvable stakeholders. Yes, in the interest of full disclosure, that’s a blatant reference to his habit of adultery. But let’s look at how he can perhaps cheat politically:

The figure above tells us that if Boris keeps his promise of leaving on the present legal deadline – Halloween this year – then he must forego either: a deal (in which case he needs to go for a no-deal Brexit and a hard border between Northern and the Republic of Ireland) or; Boris must sack the ‘no Irish backstop promise thereby de facto promoting May’s deal.

If Boris wants to keep his promise of a deal, he must give up the 31^st deadline and go back to the drawing board or he must, again, go back to May’s deal. OR! If Boris cares most about the Irish conundrum and his promise to avoid the backstop, he must forego either the self-imposed deadline or any deal. In that case he either achieves, again, a serious delay or a no deal Brexit.

Much as Boris, his first wife Allegra, and affair No. 1, Marina Wheeler, couldn’t all three coexist at the same time, so too the likely-soon-to-be PM won’t be able to mix the three commitments in blue listed above together. As today and the discovery of the UK’s next PM drew closer, the discount within the Pound grew. Yesterday, risk reversals continued to show the number of people betting on the Pound’s demise versus those betting on its fortune was growing ever more in favour of the doomsayers. What’s more is that implied volatility following the weekend climbed towards its highs when observed over the 31^st October-1^st November period. This shows that markets feel he’s likely to stick to his deadline commitment above all else. If this is true, the Johnson trilemma tells us he must either give up leaving with a deal or accept the backstop: not an easy choice or one that Sterling could enjoy regardless of the decision.

Those affected by the value of the Pound must look towards Johnson’s cabinet appointments in the coming days alongside any commitment to any of the three commitments in the blue boxes above. The consequent outcomes: May’s deal; an extension; or a no-deal will command different reactions from markets and early postings in the Johnson government will be crucial to getting a head start. 

Discussion and Analysis by Charles Porter

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