Bill Jamieson: Watch out for a MacMinsky Moment

There are at least a half-dozen reasons not to rule out a black swan event on 18 September. Picture: Getty

At public meetings across Scotland, and on television and social media, the independence referendum battle has been raging for months and is set to hit greater intensity in the final weeks.

Opinion polls point to a closer result than most had predicted a year ago. But across the business world and on financial markets, a studied calm prevails. There is barely a ripple on the surface: no wild swings in government bonds or in the sterling exchange rate, no panic-driven exit planning, no stampede out of the country by companies or investment institutions.

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A deceptive calm before the storm? A stillness across the pond before a black swan swims calmly into view?

Throughout the campaign there has been much concern over the impact on Scottish businesses and the uncertainties that a Yes vote would bring. Many have feared a movement of Scottish firms south of the Border.

But according to a survey by a leading financial services firm this week, the looming referendum vote has not triggered any rush towards emergency planning. It found that more than eight out of ten businesses in Scotland have not planned for a vote for independence.

The KPMG survey of 137 senior representatives from businesses in Scotland between April and May of this year, revealed almost 84 per cent of Scottish firms had not made contingency plans ahead of the 18 September referendum.

According to the KPMG release, 29 per cent of those questioned highlighted tax regime changes as important; 24.8 per cent raised the issue of a possible change in currency under independence; and 21.9 per cent highlighted the possible impact on cross-Border trade in the event of a Yes vote.

What is striking is not how high are these percentages but how low. If this is truly an accurate reflection of the strength of business concerns, the Yes campaign can be said to have had remarkable success in assuaging widespread fears of disruption. As Michelle Thomson, of the pro-independence Business for Scotland group, remarked: “Scottish businesses are relaxed about the changes independence will bring, with 84 per cent not feeling the need to make any plans for it and that suggests the positive messages about independence are getting through.”

Now it could well be that this reflects a pragmatic calculation – that in the event of a Yes vote it would be many months, years indeed – before the tax, finance and regulatory details of the independence settlement will be known.

However, the survey bears an alternative interpretation: that most Scottish businesses do not believe a Yes vote is a strong enough probability to worry about. Even with a narrowing of the gap in the polls between the Yes and No camps, business does not look at all convinced a Yes vote is likely. Why then rush to change business plans when the perceived risk of disruption is so low?

Nor is there any sign that financial markets are pricing in the possibility of a break-up of the UK. On the foreign exchanges the pound has been one of the strongest performing currencies over the past year. It has continued to climb against the euro and has edged higher against the dollar – despite predictions by investment analysts that sterling could fall by between 5 and 10 per cent in the event of a Yes vote.

The stock market appears equally unperturbed. Government gilt-edged stocks have been rock solid throughout the year while the FTSE 100 has climbed 466 points since October. Indeed, it came close to an all-time high earlier this month – hardly the behaviour of a market whose host country is facing the prospect of a constitutional, political and economic break-up.

So what is all this telling us about the likely outcome of the vote on 18 September? Financial markets have long prided themselves on their predictive powers and ability to discount events before formal confirmation of the outcome.

But market claims to infallibility must be treated with caution. We know from recent financial history how markets were badly caught out by the 2007-9 global crisis that brought household name banks to their knees and prompted massive government intervention. Share prices plunged as the sudden arrival of unanticipated news – the Black Swans of Nassim Nicholas Taleb’s analysis – triggered a market sell-off.

Such market routs have also been described as a “Minsky Moment” – named after Hyman Minsky, a lugubrious economist who argued markets are inherently unstable, with long stretches of good times ending in bigger collapses.

Arguably the most infamous example of financial complacency was in the run-up to the First World War in 1914 when markets blithely ignored the assassination of Archduke Franz Ferdinand of Austria on 28 June. It was not until almost a month later that there was a sharp realisation of the risk of a major European war: a “Minsky Moment” that triggered a scramble for cash. The London Stock Exchange closed on Friday 31 July and remained closed for five months. Of any forward or contingency planning there was none.

Concern that the markets may be altogether too complacent about the outcome of the referendum vote has caused some to take precautions. According to an article in the Wall Street Journal last week, there has been a pick-up in prices of sterling currency options due to expire on 19 September, suggesting that some investors are moving to hedge their bets against a potential surprise vote. The article quotes Cameron Millar, a trader at Scottish-based foreign-exchange consultancy Positive Gamma, saying speculators expecting a Yes vote “are buying one-year sterling ‘puts’ in the expectation of a big drop in the pound and a significant pickup in volatility”.

However, one financial “market” has long been pointing to a No vote – betting trends at bookmakers. And this, says Stirling University economist Professor David Bell, is a more reliable guide to the outcome than opinion polls.

He has looked at “prediction markets” including the gambling industry to forecast the outcome of the referendum and concludes these markets often produce more accurate results than the polls. In a study for the Future of the UK and Scotland project – an ESRC-funded programme bringing together academics looking at Scotland’s constitutional future – he says the latest data suggests there is 70 per cent chance of a No vote. “The use of prediction markets in relation to electoral outcomes is well-established,” he writes. “Their accuracy relies on there being a number of well-informed, dispassionate traders/gamblers who wish to profit from their trades/bets. Though these conditions do not always hold, prediction markets have a good record in forecasting future outcomes.”

His findings suggest investors should hold firm and that Scots businesses are right after all in not rushing ahead with alternative business plans. However, this runs the risk of an outbreak of panic should Scottish voters confound expectations – 18 September would then bring into view a Saltire swan – followed swiftly by a MacMinsky Moment in the markets.