Cheers!

I am in the process of editing my second book that will hopefully be published in late 2020. Don’t worry, I am not going to ask you for money for this one because the book will be published with the CFA Institute Research Foundation and be available for free to everyone.

The book is a serious book covering the interplay between geopolitics, economics, and investments – a topic that is increasingly important for investors but where a lot of pundits are not really helping investors understand the consequences of geopolitical events on their portfolios.

In my research, I sometimes came across some crazy papers that I couldn’t include in the book. One of them links economic policy uncertainty with alcohol consumption and smoking. The most popular measure for economic policy uncertainty is the Economic Policy Uncertainty Index (EPU) developed by Scott Baker, Nicholas Bloom, and Steven Davis. Ivalina Kalcheva, Ping McLemore, and Richard Sias use this EPU to show that higher economic policy uncertainty leads to more people in the United States drinking alcohol, more binge drinking and more alcohol consumption in general. They also show that higher economic policy uncertainty leads to more people smoking.

The effects are rather large. A 100-point increase in the EPU of the United States is associated with 1.6% more people drinking alcohol in the month of the increase. It also leads to a 0.86% increase in incidents of binge drinking and the average number of alcoholic drinks increases by a little bit more than one glass of wine.

To put that into context, a 100-point increase in the EPU is roughly what we have experienced since the election of Donald Trump as President of the United States. Though, one has to say that in November 2016, the election month, the EPU spiked by 170 points. I don’t blame Americans for drowning their sorrows in alcohol. I just find it ironic that a totalling President makes a nation drink.

But if you think policy uncertainty in the United States is high, then have a look at the UK in the chart below. Since the Brexit referendum, economic policy uncertainty in the UK has skyrocketed. I let you do the maths what that means for British drinking habits.

Economic Policy Uncertainty in the United States and the UK

Source: Baker, Bloom, and Davis (2016). Note: Indices are normalised so that the average of 2000 to 2010 is 100.

Of course, one should always be careful with these studies. They are based on data analysis of US consumers and it is not clear that the relationship between policy uncertainty and drinking is the same in other countries. But if it is, I can tell you that the people in China must be constantly hammered these days. At least if the Chinese economic policy uncertainty is something to go by…

Cheers!

Economic Policy Uncertainty in the United States, the UK and China

Source: Baker, Bloom, and Davis (2016). Note: Indices are normalised so that the average of 2000 to 2010 is 100.