It’s Starting to Feel a Lot Like Brexit

Tax cuts in the UK and the emergence of a conservative governing coalition in Italy have spooked European markets and spilled over in the US. This is like the baseless panic over Brexit in 2016, which proved to be a very temporary market correction driven by politicized media narratives. UK tax cuts are not as large as advertised, because they are in part only cancelling tax hikes already scheduled. They will not be a deadweight loss to government revenues because they will encourage employment and investment; the same amount of spending increases, which would have been applauded by the media, would be more costly. The Bank of England has had to reverse its plans to actively sell bonds, which is a useful brake on the global race to the bottom in tight monetary policy. The Italian coalition is neither fascist, nor seeking to exit the European Union or the euro. These developments are a glimmer of much needed growth opportunity at time when both equities and bonds are deeply undervalued.