Asian Markets Mostly Higher As 2018 Trading Opens

Asian stock markets were mostly higher Tuesday as 2018 trading began and investors looked ahead to whether the record-setting U.S. equity run will last.

KEEPING SCORE: The Shanghai Composite Index rose 1.1 percent to 3,342.98 and Hong Kong’s Hang Seng added 1.7 percent to 30,421.26. Japanese markets were closed for a holiday. South Korea’s Kospi added 0.3 percent to 2,471.08. Sydney’s S&P-ASX 200 shed 0.3 percent to 6,048.90 and India’s Sensex retreated 0.1 percent to 33,772.18. Benchmarks in Taiwan, Jakarta and Singapore rose.

WALL STREET: U.S. stocks slid on the final trading day of 2017 but turned in their strongest annual performance since 2013. Technology companies, banks and health care stocks accounted for much of the decline. Energy stocks fell, even as the price of U.S. crude oil surged to its highest level in more than two years. The Standard & Poor’s 500 index ended the day down 0.5 percent at 2,673.61. The Dow Jones industrial average dropped 0.5 percent to 24,719.22. The Nasdaq composite fell 0.7 percent to 6,903.39. For the year, the S&P rose 19.4 percent over 2016 and the Dow gained 25.1 percent. Nasdaq recorded the biggest advance, ending the year up 28.2 percent.

ANALYST’S TAKE: “U.S. equities ending the year off the highs may not be a bad thing and surely does not distract from the year’s stellar 19-28 percent gain depending on the stock market gauge. Question in 2018 is what it will take for more of the same,” said Mizuho Bank in a report. “And if there is a New (non-bullish) theme in town this Year, investors long in equities will be less Happy; even if equity bull run is getting long in the tooth.”

CHINA MANUFACTURING: A survey by Chinese business magazine Caixin found manufacturing activity in December accelerated by its biggest margin in four months. The magazine’s purchasing managers’ index rose to 51.5 from November’s 50.8 on a 100-point scale on which numbers above 50 show activity improving. The surveyed showed exports, total output and buying activity rising.

ENERGY: Benchmark U.S. crude rose 16 cents to $60.58 per barrel in electronic trading on the New York Mercantile Exchange. The contract gained 48 cents on Friday to close at $60.42. Brent crude, used to price international oils, advanced 22 cents to $67.09 in London. It rose 71 cents the previous session to $66.87.

CURRENCY: The dollar edged up to 112.70 yen from 112.68 yen. The euro was unchanged at $1.2009.

Bitcoin futures rebound, point to a run at $18,000; spot prices higher as well

January futures are up nearly 19% for the first full week of trading.

U.S. bitcoin futures rebounded on Friday, a day after closing below $17,000, as their first full week of trading was drawing to a close.

That bounce was reflected in the spot price for the cryptocurrency as well, with bitcoin BTCUSD, +7.13%  up 5% to $17,394.19, according to CoinDesk. Bitcoin has rebounded about 8% this week, from a drop on Sunday that took it all the way down to around $13,000.

Bitcoin futures expiring in January rose to $17,810, according to Cboe Global Markets Inc. Those futures closed down 1.5% on $16,800 on Thursday, after reaching a session high of $17,520.

On Monday, Cboe rival CME Group Inc. CME,  will start bitcoin futures trading. Cboe started trading its contract on Sunday at a level of $15,000, which means January futures are up nearly 19% for the first full week of trading.

So far, trading volumes on the Cboe have been fairly low. That may continue for a while as the initial margin required to get exposure on both Cboe and CME is so big, it confines participation to institutional and high net-worth traders, said Chris Weston, chief market strategist, in emailed comments.

But under a “perfect scenario” and barring any big collapse in price, participation should pick up over time, he said. That’s as increased liquidity reduces the bid/ask spread on futures and increases appetite for bitcoin futures among those players who use implied volatility as a means of assessing potential portfolio risk.

“That said, that is the longer-term potential and what could be considered an almost perfect scenario for bitcoin futures,” said Weston. “We also need to recall that the futures market is still a derivative of what is currently an unregulated market, so much rides on the longer-term prospects of bitcoin.”

Cryptocurrencies, Bitcoin, and the Psychology Driving Global Currency Values

“There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.”

~ John Maynard Keynes, “The Economic Consequences of the Peace” (1919).

In 2008 MarketPsych’s CTO Thomas Hartman worked on a secretive software project in Panama.  The goal of that project was to disrupt and supplant the global banking system.  The fruits of such efforts are emerging in the increasing importance and acceptance of cryptocurrencies.

Last week Eurogroup chief Jeroen Dijsselbloem revealed that the Cypriot bank bailout package is a template for future euro rescues.  European bank depositors can expect seizures of uninsured deposits if their bank becomes insolvent.  In Cyprus today bank account holders, including accounts of a Russian MarketPsych team member living in Cyprus, are effectively frozen, limited to withdrawals of 300 Euro daily.

The freeze of Euro-denominated bank accounts in Cyprus corresponded with a spike in the price of gold and a massive bull run in the value of cryptocurrencies such as Bitcoin, LiteCoin, and Namecoin.  As the realization dawns that similar seizures could happen in Portugal, Spain, and Italy, capital will continue searching for a haven away from the sticky fingers of banking and government officials.

Cryptocurrencies are currencies without a government sponsor, composed of unique cryptographic codes (solutions to complex mathematics problems), and consensus legitimacy.  Their conversion value to national currencies depends entirely on supply, demand, security, confidence, and the whims of the investing crowd and businesses who accept them.  The most secure and popular cryptocurrency is Bitcoin.  Bitcoin was released in 2009 as the financial crisis smoldered, and there is now over $1 billion of Bitcoin in circulation today and hundreds of legitimate (and many sketchy) businesses who accept it.  In the first three months of 2013 Bitcoin has appreciated 6-fold versus the U.S. Dollar.  Cryptocurrencies are benefitting from the loss of public trust in fiat currencies issued by currency war-prone governments.

We are in a unique position to comment on cryptocurrencies and the psychology of currency valuations.

For one, our software team includes early crypto-currency speculators and Thomas – an evangelist in the development of Ripple – an early player in the alternate currency space whose assets were recently bought by investors with BitCoin-derived wealth.

Secondly, our psychological data is the world’s largest database of currency-related sentiment, and we have been mining that data for currency predictive models.

And thirdly, and unfortunately, one of our team members is a Russian living in Cyprus who is frozen out of his Cypriot bank account.  Needless to say, this week’s newsletter strikes close to home.

This week we’ll take a look at the amazing rise of the world’s first viable cryptocurrencies.  Then we examine the psychological and macroeconomic drivers of currency valuation and touch on a future where currencies are no longer solely under the control of governmental and banking officials.

Subverting the Banking System

When our CTO Thomas went to Panama, he was on a mission to help productize, an alternative currency money transfer scheme that aimed to disrupt our current banking system with a decentralized web of trust.  Ripplepay had communitarian roots and, some critics claimed, unrealistic utopian goals. With Ripplepay, anyone could back a new currency, or issue IOUs in existing currencies, and IOUs could be chained.  The Ripple platform was transparent and open by design.

While in Panama the Ripplepay developers became acquainted with many projects, and players, in the “alternative economy” space, including schemes that differed radically from theirs.  Of note they met developers from a software team working to replace global fiat currency – the BitGold team.  The BitGold team were libertarian and perhaps justifiably paranoid.  The below photo is Thomas in Panama.

The effort to productize Ripplepay ended in late 2008, but the development team stayed in touch and continued to follow developments in the alternative economy space. When Bitcoin, an offshoot of BitGold, entered the alternative currency scene in 2009, it created a stir.  It used new algorithms to defeat the problems that had plagued and sunk prior cryptocurrencies. When a pizza was sold for 10,000 Bitcoin in 2010, this was a significant milestone, and when Bitcoin started trading against the US dollar Thomas bought some –  despite the uncomfortable feeling that a paranoid technology had won against the communitarian ideals his Ripplepay team held dear.

In contrast to Ripplepay and BitGold, Bitcoin had users: lots of them.  Additionally, Bitcoin had solved a problem that BitGold had not.  Bitcoin used an ingenious feedback mechanism that raised and lowered the difficulty of “mining” depending on how many CPU cycles were aimed at the hard cryptographic problems whose solutions yielded the coinage (the Bitcoin miners).   In short, Bitcoin was a significant step forward.

In 2013, the Ripplepay intellectual property was bought by a consortium of bitcoin millionaries, and a true commercial variant of Ripplepay was launched:  The prospects for Bitcoin are bright, and we are observing the situation with the new Ripple and the other cryptocurrencies closely.


In response to chronic debasement of currencies by governments, cryptocurrencies that live entirely in HEX codes and magnetic memory were pioneered over the past decade.  None of those cryptocurrencies had legs until now.  Yet following a massive recent bull run, some are holding virtual currencies worth in excess of $100 million (e.g., Butterfly Labs, a manufacturer of mining equipment).  This New Yorker article explores the murky origins of Bitcoin, which is also summarized on Wikipedia and in many online chat rooms.  The amazing appreciation of the value of Bitcoin versus the USD has continued up to today.  Below is a price chart of the past 1 year of Bitcoin value versus the USD, obtained from MtGox, the major currency exchange:


Do I Own Bitcoin?  Unfortunately Not

Really good investment opportunities contain what Nassim Taleb calls “Optionality” – enormous upside multiples and limited downside.  Given a few bubble-ready characteristics of cryptocurrencies (limited issuance, steadily increasing publicity, declining trust in the banking system), I knew the conditions were right for a massive Bitcoin bubble, and since early 2011 I wanted in.

Terrific investing insights cross my mind occasionally, and in my opinion I’ve honed a keen intuition for identifying the really good ones.  The problem is, I often don’t act on these golden insights.  But maybe once every two years an insight is so monumental that I tell my wife to hound me until I make a specific investment.  Bitcoin in 2011?  Yup, I knew it was set up to be a classic bubble.

Now to be clear, when I see the above price charts I feel the pain disappointment.  You see, I don’t own any Bitcoin.  I’ve watched Bitcoin bounce through $2 twice.  When it last was under $3 I asked my wife to PLEASE NAG ME to buy some.  I realize that most men don’t ask their wives to nag them.  But I’m a lucky man – my wife doesn’t nag – so if she were to nag, the logic went, I would be sure to pay attention.  But this wasn’t a foolproof strategy.

As I had requested, my wife did nag me at the appointed times, “Rich, buy Bitcoin.  Rich, did you buy Bitcoin yet?”  But somehow I stored her reminders in that empty space in my brain where most men seem to file non- emergent, quickly forgotten, and later regretted wifely reminders like: “Rich, please take out the garbage, the kitchen is getting stinky,” “Rich, please buy gas for the generator, another big snowstorm is coming,” and “Rich, don’t forget to brush your wild-man-just-rolled-out-of-bed hair before you present at that important meeting.”

But getting into cryptocurrencies isn’t so easy.  Back then it required wiring money to Japan, and trading on an exchange (MtGox) that was a frequent target of hacking attacks (true story:  the login and password of my first Bitcoin trading account at MtGox are displayed on the internet for the world to see).   In fact, I even bought a Bitcoin-derived domain name.  Ultimately, due to inertia, lack of urgency, and general busy distraction, I didn’t get around to buying any Bitcoin itself.   (But a disclaimer, I do own other cryptocurrency).

What drives currency values?

Given that Bitcoin has appreciated 40x over the past 12 months, I’m keen to know how much longer this rally might continue.  Now the first warning sign that a short-term bubble top is near is the excited tone of this newsletter itself.  Also, bank research reports will no doubt be issued on cryptocurrencies in the next month or so.  That doesn’t mean the top is here today, but it does mean that the recent surge of attention, largely based on the amazing price appreciation, is probably overdone and a retreat will happen at some point… (don’t ask me when).


In our investigations of the psychological forces that drive currency valuations, we performed yearly and weekly studies on our Thomson Reuters MarketPsych Indices (TRMI).  As you may know, the TRMI contain 15 currency and 35 country-specific sentiments derived from social media and news from 1998 to the present.  The list of currency TRMI is below.  Each of these is extracted in references to the currency through a process of text analytics.  You’ll see how this is relevant to cryptocurrencies below.

Of the 15 TRMI, using the past 12-months TRMI average and the next 12-months currency return, 5 are correlated with future currency price direction with high confidence (p-value < 0.01).  Significantly for our newsletter today, Trust in a currency expressed in news is inversely correlated with future currency price direction.  When the news media expresses high trust in a given currency, you’d be better served moving to a currency with less expressed confidence.  Keep in mind we’re looking at the top ten global currencies based on past year’s Buzz in the News, so known unstable currencies such as the Zimbabwe Dollar are not included.

After the simple regression, we decided to look at the results of a long-short arbitrage.  The below is an equity curve of extremity arbitrage, 12-month holding period, in which we selected the 10 currencies over the past 12-months with the most Buzz, then bought the 4 with the lowest Trust and shorted the 4 with the highest Trust expressed.  As you can see, trading against what everyone else trusts is generally profitable.


Similarly, PriceMomentum (direction of price trend) reported in news is inversely correlatedwith future return direction. So when you read that a currency is trending strongly in one direction, it is likely to be nearing a reversal.

What does this mean for cryptocurrencies?  Given that Trust in cryptocurrencies is low and Uncertainty is high while fundamentals are strong, we have a positive set up.  But there are some short-term headwinds coming from the recent strong uptrend.

Currency Trading Recommendations

Using our currency research, we pulled the best TRMI into a final model.  We see a fairly good distribution of currencies selected by the strategy.  The annual currency forecast of this model as of March 1, 2013 is below.  Long Australian, Singaporean, and Canadian dollars and the Japanese Yen.  Short South Korean, Israeli, Egyptian, and South African currencies.


We also developed a weekly currency trading model with more than double the returns of the annual model (assuming no transaction costs).  I’ll write more about our weekly currency trading model in a subsequent newsletter.  We have a new website hosting our annual and weekly currency forecasts with strategy construction explanations.  Please email me for more information or access.

Buying Cryptocurrency

Lenin is said to have declared that the best way to destroy the capitalist system was to debauch the currency.” 

~ John Maynard Keynes, “The Economic Consequences of the Peace” (1919).

Cryptocurrencies based on digital bits are emerging as a real phenomenon, used for actual transactions, beyond the pale of government regulations.  Cryptocurrencies have the potential to upend banking systems and central banks.  If you think banks are OK as is, then consider that most wouldn’t have survived 2008 without TARP.  And take a look at the 720,000 Euros in “Blocked Funds” in this guy’s bank account in Cyprus.

Cryptocurrencies have their problems of course.  The transaction history of each unit of currency is becoming quite long, leading to delayed transaction times as each unit of coin is reconciled.  Additionally, there may be disputes along the “Blockchain,” leading to forked transaction histories and multiple species of the same currency (although this has not happened yet).  And of course, some day, with enough computing power and ingenuity, additional vulnerabilities may be discovered and exploited.  With Bitcoin’s market cap now $1 billion, the incentive to find and exploit vulnerabilities is present.  Yet one could say something similar about physical currencies – they are inconvenient for large purchases, can be counterfeited, and are subject to devaluation.  Of course, with physical currencies there is physical punishment (prison) for those who counterfeit or sabotage.  Not so with cryptocurrencies.

The takeaway from this newsletter is to make a psychological shift to treating the ongoing cryptocurrency revolution as real and not something that can be ignored indefinitely.

If you want to buy cryptocurrencies, it’s important to get cash in place to buy even if you don’t plan to so do for months.  The cash placement problem is one of the deterrents that kept me out of Bitcoin early on.  If you’re a busy person, find someone you trust who is technically sophisticated and understands cryptocurrencies.  Keep in mind that most people feel inertia around this, and even with nagging, we often wait to make the obvious investment after it has been proven valuable (and we are too late in entering).

I’m personally waiting for a major sell-off on bad news.  But that’s what I’ve been doing since Bitcoin was $10 (now it’s around $90).  The past year has been notably absent of bad news such as hacking attacks and trading problems, hence the rally.  But with Bitcoin over $1 billion in market cap, the incentives for crytocurrency crime (counterfeiting, hacking accounts, etc…) have increased as rapidly as the value.

The future of banking is likely to look far different than it does today.  If Bitcoin is in fact the first secure and accepted cryptocurrency, then it is likely to appreciate much further and destabilize national currencies that are debauched in the service of debt payment (i.e., through inflation).  Bitcoin may not be the ultimate cryptocurrency – for example it has major delays such as transactions requiring at least 10 minutes to be verified and the price is very volatile – but it is certainly a huge step in the direction of currency outside of governmental control and the various complexities such a world will introduce.

This article was reproduced from the November MarketPsych newsletter

Week Ahead: Hammond’s first Autumn Budget, Barnier’s Brexit deadline

The British government is at the heart of things again with both the Budget and Brexit on the agenda, while on the corporate front, earnings season comes to a close on Wall Street.

Here’s our full look at the week’s main events in the markets.

UK Budget
Chancellor Philip Hammond delivers the first full autumn Budget on Wednesday, November 22nd. The set-piece event comes at a pivotal moment, with the government facing a possible backbench revolt and Brexit talks still leaving a lingering cloud of uncertainty over the financial outlook for UK plc.

For forex traders the most important element will be the broad economic outlook from the Office for Budget Responsibility. Also of note will be whether Mr Hammond chooses to loosen the fiscal straitjacket a little in order to boost spending – such a move would be net positive for growth, but could concern foreign investors and bondholders. According to reports, the Chancellor says he will keep to his own rules as there is no room for manoeuvre.

Any large-scale giveaways are off the agenda. With forecasts for the economy less optimistic, the chancellor’s £26bn Brexit war chest faces wipe-out and any spare cash will be needed in case the UK and EU fail to agree on a smooth transition deal.

Nevertheless there are still several specific domestic policy issues that the Chancellor may attend to that would impact a range of individual equities. For example:

Housebuilders & estate agents: Expect further support on the demand side, but anything like a more radical strategy to borrow £50bn to pay for state-backed housebuilding is unlikely to make the chancellor’s red box.

Retailers, pubs and restaurants: Action on business rates is expected but the question is how much relief is on offer. National Living Wage increases may be accelerated to help low-paid deal with rising living costs.

Airlines & travel companies: Faced with Brexit, the Chancellor may soften the blow for airlines and families by cutting the tax on trade that is Air Passenger Duty (APD).

Construction: The Chancellor is determined to raise UK productivity and further investment in infrastructure projects may be on the cards.

Brexit deadline
After the last round of Brexit talks ended on November 10th, the EU chief negotiator Michel Barnier said Britain had just two weeks to clarify or concede on key points of the divorce or face failing to move on to discuss future trading arrangements in December. That two-week deadline is up on Friday, November 24th.

Will Britain deliver the goods? It’s not hopeful: David Davis, the UK’s chief negotiator, has dismissed the deadline. The EU wants concrete proposals on citizen’s rights, the Irish border and the all-important alimony payments before it will allow the talks to progress.

Failure to move on to trade by December would be a body blow for Theresa May’s embattled premiership and would shorten the odds of a no-deal exit. Businesses from banks to airlines need to know where they stand and may have to resort to their worst-case scenario plans.

Weekly crude oil inventories from the US take on added significance as we approach the semi-annual OPEC meetings in Vienna at the end of the month. Crude prices have surged of late, with Brent, the international benchmark, climbing above $64 a barrel for the first time in two years.

Oil price gains have been driven by expectations of rising demand and output curbs beginning to bear fruit. Saudi Arabia’s crackdown on corruption has further fuelled gains as investors fret over instability in the region.

European airlines have faced a turbulent year with three of their number going under. But while some struggle, the likes of IAG, Ryanair and Wizz Air are posting record profits. On Tuesday it’s the turn of EasyJet to report full-year results.

In its October trading update, management guided profits to be at the upper end of forecast at between £405m and £410m, despite a £100m hit from currency headwinds.

Load factors improved to a record 95.6%, undoubtedly helped in the final month of the quarter by Ryanair’s travails (Sept load factor – 93.6% from 91.1% a year before). As Carolyn McCall points out; the ‘current turmoil in the sector provides easyJet with opportunities’ to capitalise on its offering.

However, low fares and overcapacity remain bugbears. In October EasyJet reported a reduction in revenue per seat of 3.7% during the fourth quarter, making for a fall of 1.4% in the second half from a year before.

US Dollar Stumbles Ahead of Inflation and Retail Sales

German data surprise boosts EUR

The US Dollar is trading lower against a mix of major currencies on Tuesday. Positive data out of Germany has boosted the single currency. The better than expected advance German gross domestic product (GDP) reading at 0.8 percent is further proof that the largest economy in the EU is firing in all cylinders. The Eurozone’s GDP met the estimate at 0.6 percent with the market now awaiting inflation and retail sales data out of the United States.

The US Bureau of Labor Statistics will publish the change in consumer prices on Wednesday, November 15 at 8:30 am EST. At the same time the US Census Bureau will release the monthly retail sales data. Core inflation is forecasted to come in at 0.2 percent on a monthly basis adding up to a 1.7 percent year to year comparison. Core retail sales are expected to have gained 0.2 percent in October.

The EUR advanced more than 1 percent versus the USD even though the US Producer Price Index (PPI) released in the US beat expectations with a 0.4 gain in October. The rise in producer price inflation failed to spark a dollar recovery as the U.S. Federal Reserve December rate hike is already priced in, and the data just validates the telegraphed decision by the central bank.

The EUR/USD gained 1.07 percent on Tuesday. The single currency is trading at 1.1792 and threatening the 1.18 price level. The growth story in the EU pushed the EUR ahead of the USD. The eurozone could beat the US for the second time in a row driven by strong German GDP growth, but also a stable pace from the rest of the member states. The economic recovery hasn’t convinced the European Central Bank (ECB) to fully remove its stimulus spending, but after announcing its tapering plans an end to negative rates could be close.

The US tax overhaul remains shrouded in uncertainty as the market digests the different versions and its impact on the economy. There is vote planned for Thursday by House Republicans with the idea that there will be two bills that could pass before they are reconciled. The year end deadline could be reached if this strategy is used as there is still plenty of resistance to some part of the tax proposals. The US senate would be ready to approve their version after US Thanksgiving.

The price of crude fell 2 percent on Tuesday. West Texas Intermediate is trading at $55.54 after the International Energy Agency lowered its crude demand forecast and earlier weaker than expected economic data out of China gave credibility to the demand downgrade. Oil had risen after the arrest two weeks ago in Saudi Arabia and optimistic forecasts by the Organization of the Petroleum Exporting Countries (OPEC) as well as a pledge to extend its production cut agreement with other major producers.

The IEA cut its growth forecast by 100,000 daily barrels due to warmer weather and in contrast still sees some producers taking advantage of current prices to increase production levels. Brazil, Canada and the United States are big producers not part of the OPEC deal and are expected to ramp up their supply levels. Investors sold off crude positions on the back of the news and ahead of the weekly release of US crude inventories. After the surprise buildup last week, stocks are expected to show a 2.1 million barrel drawdown on Wednesday, at 10:30 am EST when the Energy Information Administration (EIA) releases the report.

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US: Tax reform expected to be unveiled today – BBH

The US tax reform is expected to be unveiled today and analysts at BBH remain struck by how fluid the issues seemed to up until the last moment.

Key Quotes

“Even the one-day delay, while not material, makes for poor optics.  The market will have a knee-jerk reaction to the headlines as markers are placed on expected winners and losers.  Sharp moves are unwarranted, as it is very early on in the process.  Health care reform also passed committee.  The immediate reaction to initial proposals may create opportunities for investors looking for particular assets (either to buy or to sell).”

Talk Of ‘No Deal’ Brexit Rises As Divorce Negotiations Stall

As Brexit negotiations between Britain and the European Union stutter and stall, one question looms larger and larger: What if there is no deal?

It’s an increasingly plausible prospect that stirs fear in many U.K. politicians and businesses — and hope in the hearts of staunch Brexit supporters.

Divorce talks have limped through five rounds without a breakthrough, and Britain is due to leave the EU in less than 18 months, on March 29, 2019. When it does, thousands of laws, agreements and regulations covering everything from trade to crime-fighting to aviation will cease to apply. Unless a new deal is struck, the U.K. will crash out of the EU single market and trade with the bloc on World Trade Organization terms, which would mean tariffs on goods and uncertainty for services.

The OECD economic think-tank forecast this week that switching to WTO rules would cut U.K. growth by 1.5 percentage points in the first year, push down the already-devalued pound, deter investment and trigger a downgrade to Britain’s credit rating.

“Only fantasists and fanatics talk up no deal,” U.K. Labour Party Brexit spokesman Keir Starmer said Tuesday.

But committed euroskeptics like John Longworth of pro-Brexit lobby group Leave Means Leave believe such talk is merely defeatism.

“The U.K. has been far too weak in the negotiations, far too accommodating,” said Longworth, a former head of the British Chambers of Commerce.

“I think that the EU will string out the negotiations as long as they possibly can in order to extract the maximum of benefit for them. In which case the best possible option for the U.K. is to go to World Trade Organization rules from March 2019 — and declare it now.”

Both Britain and the EU downplay, though don’t rule out, the possibility of a no-deal Brexit. U.K. Brexit Secretary David Davis said this week that “we are straining every sinew” to reach an amicable divorce, followed by a new free trade deal.

A deal — at least on the divorce terms and a two-year transition period Britain is seeking — would have to be clinched months before the March 2019 deadline to give individual EU national parliaments time to ratify it.

The impact of failure could be profound. The flow of goods could be disrupted, imperiling thousands of jobs. Three million EU citizens living in Britain and a million Britons elsewhere in the bloc would be in limbo. British finance minister Philip Hammond has said it’s even conceivable air traffic will be grounds — though he insisted such an outcome is highly unlikely.

Even the milder forecasts predict major economic fallout. About half of Britain’s trade is with the EU, and research by economic think-tank the Resolution Foundation and the University of Sussex said a “no deal” Brexit would mean price increases for food, clothing and vehicles costing the average family 260 pounds ($342) a year, and could put hundreds of thousands of jobs at risk.

Longworth dismisses such gloomy forecasts. He believes Britain can thrive by rejecting the EU’s myriad economic regulations and becoming more like Singapore, with “a lower tax, lower regulation, lower tariff, more enterprise-friendly economy.”

Meanwhile, a battle between proponents of “hard” and “soft” Brexit is raging within the British government. Prime Minister Theresa May, weakened after losing her parliamentary majority in a June election, is trying to reconcile Cabinet ministers like Hammond who want compromise and conciliation to soften the impact of Brexit, and gung-ho leavers including Foreign Secretary Boris Johnson and Trade Secretary Liam Fox.

This frustrates EU officials, who wonder whether May has the authority to strike and deliver on a deal. European Parliament president Antonio Tajani said divisions within the British government are “not good for good work in the next months.”

Most economists and politicians believe it in the interests of both Britain and the EU to make a deal. Failure would hurt both sides, though Britain would suffer more because its economy is smaller.

But the longer talks drag on, the more likely failure becomes.

Leaders of EU nations meet in Brussels on Thursday and Friday, and are likely to say there has not been enough progress on divorce terms to begin discussing future trade relations and thetwo-year transition period Britain is seeking.

The main roadblock is money. The EU estimates Britain must pay something over 60 billion euros ($70 billion) to settle its financial commitments to the bloc. Britain thinks that is too much, and won’t commit to any figure until the EU agrees to move talks on to future relations.

Those hoping for a breakthrough are now looking to another EU summit in December.

Jonathan Portes, a professor of economics at Kings College London, said the impasse means there could be “a pause, a hiatus or indeed a complete breakdown in negotiations over the next couple of months.”

Portes doesn’t think such a breakdown would necessarily be final. He says that in the long run, a deal remains likely — though not certain.

“I still think that it is clearly in the interests of both sides to have a deal, and that there is not a majority in the U.K. Parliament or the country for a really destructive, chaotic ‘no deal,'” he said. “But politics is strange.”

Stock record ride ‘has reached epic proportions,’ Morgan Stanley says

Wall Street isn’t just in a bull market, it’s in an “epic” one.

That is according to Morgan Stanley, which on Tuesday wrote that the equity market rally “has reached epic proportions.”

“We say this not as hyperbole, but based on a quantitative perspective,” the investment bank explained. “Dispersions in valuations and growth rates are among the lowest in the last 40 years; stocks are at their most idiosyncratic since 2001; and equity hedge fund beta is at its highest since March 2008.”

Simply from the perspective of price moves, the “epicness” of recent trading activity should come as no surprise to investors. The Dow DJIA, +0.31% S&P 500SPX, +0.23% Nasdaq COMP, +0.11% and Russell 2000 RUT, +0.30%  have all hit repeated records this year alone, notching dozens of all-time highs. Those gains have been widespread and “perpetual,” to use Morgan Stanley’s description. Only two of the 11 primary S&P 500 sectors are in negative territory for the year, and for broader indexes, even mild pullbacks of 3% have basically been nonexistent for months. Volatility is near record lows. Beta refers to a measure of an assets tendency to fluctuate compared against a benchmark like the S&P 500.

Other regions have also reported strong gains: European equities are up more than 20% this year, as are emerging markets. Basically every country—as gauged by the most popular single-country exchange-traded funds—is positive on the year.

The move higher hasn’t been without controversy, given concerns over valuations, the pace of global economic growth, political uncertainty, and questions over the effect of the Federal Reserve’s effort to unwind its balance sheet and increase the cost of borrowing.

However, the relentless march higher has defied bears, who argue that the too-lofty valuations aren’t supported by fundamentals, and emboldened bulls.

“While investors have at times appeared reluctant to embrace the recent rally, there is evidence from last month that risk appetites are increasing,” Morgan Stanley wrote.

The investment bank noted that cyclical sectors, which are more closely correlated to the pace of economic growth, have been outperforming defensive ones, just as small-capitalization stocks have outperforming larger companies.

“Momentum is now strongly correlated with high beta globally, and the presence of this cohort of investors could produce continued risk-seeking behavior,” wrote the team of analysts, led by Brian Hayes, an equity strategist.