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wub1234

Has There Really Been A Meaningful Market Crash?

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So there's been a massive market crash. Total disaster. Economic carnage. We'll be lucky if the general population makes it through the night in one piece. Is this actually accurate?

Hypothesis 1: the British stock market has crashed

This is the FTSE index of the top British companies (not that the share price of the top British companies helps me or 99% of the public in any way! But let's just ignore that argument):

ftse_1.png

You can see the quite dramatic losses, which were genuinely dramatic although entirely predictable, because markets are completely irrational casinos and bear no resemblance to anything rational or objective. All those losses have nearly been recouped already.

But it goes further than that.

This is the FTSE over the last month:

ftse_2.png

I've put a black line in this image just before 17th June. That's the point where it looked likely that remain would happen, and the market went up massively. That's because traders hate uncertainty, because they are essentially betting!

All that happened when the FTSE went down is that the increase in the market was eliminated. Even at its lowest point, the FTSE was still higher than on 16th June; now it is significantly higher.

I'll come back to the FTSE later.

Hypothesis 2: the pound has crashed

Let's look at the pound.

sterling1.png

Sterling did take quite a significant hit. Again, it's arguable how much difference this makes to the average person until they go abroad.

However, the extent of this decline was greatly exaggerated, and the media (as usual) failed to put it in any meaningful context.

Here is the performance of sterling against the dollar over the last roughly 9 years:

sterling_2.png

You can see that when the global financial markets nearly collapsed in 2008 (of course, nothing has improved since then, in fact the situation is worse now) the pound was absolutely hammered down to the level that it's at now, and even below that. And although this happened over a longer time period, it was a far bigger fall, from about $2.05 to just over $1.30.

Since then:

sterling3.png

Sterling has traded somewhere between $1.35 and $1.70, but for the majority of that time closer to the bottom of that range than the top. This has been quite consistent over a 7-year period. I know about this because I get paid in dollars from some of my clients, so I follow this market very closely. The exchange rate has been around $1.40-1.45 for several months now. Again, the pound only started to go up when it looked likely that remain would happen, reaching around $1.50; still historically much lower than it had been in the past. I think it is true that Brexit led to the biggest single-day fall in the history of sterling, but a lot of that is just wiping out false gains from the previous week, which were based on duff information.

Hypothesis 3: global stock markets have crashed

I'm going to make this one as simple as possible. Here is the NASDAQ over the last four years:

nasdaq.png

It has doubled in price in just four years. Here is the Japanese Nikkei Index:

nikkei.png

Same story. Here is the German DAX stock index:

german.png

Not quite such a strong pattern with the FTSE over the same period, although it has gone up, but here is the performance of the FTSE since the City of London was deregulated around 30 years ago:

ftse_3.png

All of these stock markets are in massive bubbles, caused by unnaturally low interest rates for the best part of a decade. It's taught in mainstream economics that interest rates and the bond market have an inverse relationship; if one goes up, the other goes down. The situation with stocks is more complicated, but the following is generally acknowledged:

So this is what has been happening for several years now, and that's why we've seen major stock indexes all going upwards almost without exception. All of these markets are in a massive, unsustainable bubble anyway, and sooner or later there will have to be a correction. Sooner or later, interests rates will have to go up, this is being desperately delayed as massive amounts of unchecked credit is the only thing keeping the system going, but when they do go up, God knows when that will be, the stock market will go down. That is guaranteed, as far as I can see.

And just to briefly touch on this...low interest rates only benefit speculators and borrowers. Such an environment creates an extremely unhealthy two-tier culture. The fact is that the stock market going down makes virtually no difference to the average person. Some investors will lose money, such is the risk of investing in stocks and shares.

Hypothesis 4: the housing market will crash

Good! Bring it on!

Arguably people with mortgages benefit from a low interest rate environment, but on a deeper level it just encourages people to invest unwisely in housing to 'get on the housing ladder', and leaves the British housing stock extremely vulnerable to foreign investors. This is particularly true of London, where it is almost impossible for anyone under the age of 35 to buy a house if they don't already own one, unless they are given money by their parents. There was actually a story recently which pointed out that if the so-called 'Bank of Mum and Dad' were a mortgage lender, it would be in the top ten in the UK. That is what we have become reliant on.

And it's no surprise, particularly in London.

house_prices.png

(BTW that image only goes up to 2015, house prices have increased further still this year).

Wouldn't you say that house prices are due some form of correction? Don't you think it would be a healthier situation if we didn't view houses as investments, but instead as places for people to live?

Regardless of whether you agree with this or not, the fact is that house prices cannot go much higher without dropping a little again, as it's becoming impossible for people to get on the bottom rung of the so-called ladder. The only thing keeping the market going now is foreign investment. For example, I live in a flat owned by someone who lives in South Africa, who has never been to the UK! That is perfectly normal now.

For the average Briton, a fall in house prices would undoubtedly be a good thing. Investors I have no sympathy for, those relying on equity release to fund their extortionate lifestyles, tough luck, those in negative equity I do feel sorry for, but inevitably housing will rise in value again, as it did after the last crash.

So just to summarise:

Hypothesis 1: the British stock market has crashed

Reality: The British stock market has been in a massive bubble. It's still in a massive bubble, and has almost returned to its peak level.

Hypothesis 2: the pound has crashed

Reality: The pound has fallen significantly, but has fallen far more in the recent past. The level it is trading at now is only very slightly less than it was trading at just a couple of weeks ago, and all that has been wiped out are gains made when investors thought Britain would vote to remain in the EU.

Hypothesis 3: global stock markets have crashed

Reality: Global stock markets have been in a massive bubble, largely caused by unnaturally low interest rates, which has helped create a climate of speculation. Global stock markets have fallen somewhat. They are still in a massive bubble. The average person in the street is completely unaffected by this, unless there is a total collapse, which will not be caused by Britain leaving the EU, but by much deeper and more profound systemic problems and corruption.

Hypothesis 4: the housing market will crash

Reality: Housing is already in a massive bubble, overpriced, and will fall in price in due course regardless of the EU. Although there will be some losers among the general public if this happens, overwhelmingly it will be a positive thing for the society in general, and particularly for the younger generation.

Don't hold your breath waiting for the media to tell you any of these things.

I'm not an expert on economics, I just did a bit of research to see whether the climate of fear being created by the media is justified. In conclusion...I don't think that it is.

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Spot on, it had all been priced in, some bets had been placed in the run up, some speculators made a few quid, some others lost a little bit now we are back to where we were just a few weeks before. The media manipulated the figures and as you say used everything with no time context and delivered it to the general public as some sort of disaster.

The propaganda machine is becoming a transparent embarrasment on an epic scale.

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On Friday morning at work I had some amusement telling people that "the stock market has crashed to its lowest level for the past ten [pause for dramatic effect] days".

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Spot on, it had all been priced in, some bets had been placed in the run up, some speculators made a few quid, some others lost a little bit now we are back to where we were just a few weeks before. The media manipulated the figures and as you say used everything with no time context and delivered it to the general public as some sort of disaster.

The propaganda machine is becoming a transparent embarrasment on an epic scale.

I didn't see what ITV or sky were saying but the BBC were presenting it as a disaster. Their timescale was £ at its lowest level since 1985

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Yes its complete and utter nonsense. Just shows how biased the mainstream media is. In fact all stock markets fell after Brexit - and the UK fell the least. So on that basis we outperformed the world !

Its just as much ******** as the idea that we won't be able to trade with the EU. Try telling German car manufacturers that - good luck on that one Merkel.

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Nicely put.

As you say its all caused by interest rate manipulations.

There used to be a risk free rate for cash. That is say 6% on money in the bank b soc.

In order to find return there are equity bond and housing bubbles. Add to increasing money supply and debt double bubble.

Simples.

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No there hasn't, you might argue we are still in the downtrend from April 2015 on the FTSE and there have been many, much bigger moves in the meantime although perhaps not on the same day. "Making liquidity available" is by my reckoning equivalent to previous rounds of QE and given the event and the apathetic attitude towards monetary stimulus that still exists, it wouldn't surprise me if the floodgates were opened further in coming weeks. The last 7 years have taught me that when they say they are pumping money in, they are pumping money in. Does anybody really think this is the end of the UK property boom? I think it will bloat further from here and when it goes it will go with a bang. None of the estate agents will be forecasting it.

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There will be an interest rate cut and quantative easing under the pretext of boosting the economy. The political establishment already know they have lost 52 percent of the electorate. If house prices crash they will lose a good proportion of the 48 percent of those who voted remain. If sterling is toilet paper, and the poor suffer disproportionately from inflation, they will consider that a price worth paying in order to keep the ponzi debt scheme going until something hopefully turns up.

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Thanks wub for the well written and researched post. I was thinkng the same as you but its good to see others with the same opinion.

Thanks, no problem.

Posted in the other thread but probably more relevant here.

:D

Thanks for posting this, I will circulate it as widely as possible.

I was just trying to imagine this appearing on the BBC, and how much the presenters would s*** themselves...

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Your analysis is right in some respects, wrong in others.

The fall in Sterling was dramatic and of a scale not seen for 30 years. Far from being irrelevant to most people (as you suggest) if this fall is sustained it will feed through to higher prices very quickly. Many of our daily essentials are globally traded in dollars so it is not true that "it's arguable how much difference this makes to the average person until they go abroad. " For the same reason I'm not sure that "the extent of this decline was greatly exaggerated". On the plus side it should help UK exporters. Having accused the media of manipulation you then present an innacurate and misleading 9 year graph of sterling:dollar which leaves out Friday's fall to $1.36! More importantly, you point out that the pound fell much more after the 2008 crash than after the brexit vote. The 2008 fall in Sterling took months - we have only had a day's trading since the vote!

On the FTSE100 you're absolutely right, Friday's movements were nothing of note, and as RK has posted the FTSE100 ended the week up. There are reasons for this however, and they are again to do with Sterling. Most of the components of the FTSE100 are international companies which derive a large proportion of their revenue in non-UK currency. Therefore their revenues are increased by the falling pound. If you look at the FTSE250 (which draws a higher percentage of its revenue in Sterling)the picture was far less rosy. Your claim that the FTSE100 has been soaring into bubble territory is not supported by your own graph, which shows that the index has fallen ~10% from its peak in 2000 over the last 16 years!

The suggestion that the "not that the share price of the top British companies helps me or 99% of the public in any way" is again misleading. Anyone who saves into a defined contributions pension is likely to be directly affected. That's an awful lot more than 1% of the population.

The simple truth is that the economic effect of Brexit will take months and years to unfold. Not one day's trading.

Finally, I utterly agree that the mainstream media have been biased. Here are some headlines:

Sterling pounded in market bloodbath as UK votes to leave EU, Cameron quits

Brexit vote wipes $2 trillion off global stocks and knocks pound to 31-year low

Brexit vote will plunge UK into a new recession, warn City economists as they slash growth figures for next two years

Edited by InlikeFlynn

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Posted in the other thread but probably more relevant here.

:D

An entertaining post Spunko. Thanks for posting. Has anyone checked any of the figures he quotes? For example the one where he claims that the UK imports 10 times more than it exports to the EU. Perhaps the reason the BBC doesn't post anything like this is because they have checked the figures and found them wanting.

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I was just trying to imagine this appearing on the BBC, and how much the presenters would s*** themselves...

I dunno, he has a touch of the dandy about him. The BBC might make him the new Izzard.

Pahaha.

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So there's been a massive market crash. Total disaster. Economic carnage. We'll be lucky if the general population makes it through the night in one piece. Is this actually accurate?

Great post, if only a few more people would take a few hours of their life to research the reality of economics then the world would be a better place.

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Equity price dislocations have historically proved to be buying opportunities on a 3-6mth time frame. Thereafter risk returns to "normal".

1987, 1998, 2011, 2014, 2015 as examples.

Dislocations are usually caused by new information (Remain win was base case), low liquidity, cascading sell offs, margin calls etc. In essence a rush for the exits, which tends to blow itself out within a few days.

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Great post, if only a few more people would take a few hours of their life to research the reality of economics then the world would be a better place.

No. not a "Great Post", see why at post #13 here

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Your analysis is right in some respects, wrong in others.

The fall in Sterling was dramatic and of a scale not seen for 30 years. Far from being irrelevant to most people (as you suggest) if this fall is sustained it will feed through to higher prices very quickly. Many of our daily essentials are globally traded in dollars so it is not true that "it's arguable how much difference this makes to the average person until they go abroad. "

Firstly, thanks for the response.

That is a valid point. But, as I said in the OP, the value of sterling has been between $1.40 and $1.45 since the beginning of 2016. It is now $1.36. Is this the catastrophe that the TV news has made it appear? No, it isn't. Obviously if the pound lost all value in a Zimbabwe-type situation then it would be disastrous, but at present I would suggest that for the average person the fall in sterling of a few percent, much of which is wiping out gains made when the market believed that the UK would remain in the EU, will be barely noticeable.

Having accused the media of manipulation you then present an innacurate and misleading 9 year graph of sterling:dollar which leaves out Friday's fall to $1.36!

I think I made it 100% clear that sterling has fallen to $1.36, and that this is a low level, but that since the 2008 crash it has been trading in the ballpark of this value for the majority of the time.

More importantly, you point out that the pound fell much more after the 2008 crash than after the brexit vote. The 2008 fall in Sterling took months - we have only had a day's trading since the vote!

I said in the OP: "this happened over a longer time period".

Your claim that the FTSE100 has been soaring into bubble territory is not supported by your own graph, which shows that the index has fallen ~10% from its peak in 2000 over the last 16 years!

I did say that the picture with the FTSE is different to the others. In my opinion, stocks are massively overvalued across the planet, and have been falsely inflated by the ridiculous credit environment. Even if stocks haven't gone up in the UK, I still think they've overvalued because they're not operating in a rational interest rate environment. We don't see their true worth because the market conditions in the UK are just intended to artificially maintain credit and liquidity in order to keep things going; effectively like zapping a heart attack patient with a defibrillator.

And already the solution to this 'crisis' being floated is for the Bank of England to lower interest rates further still. I can easily see the UK ending up with negative interest rates, but as long as the stock market holds up we'll be told by the BBC that the economy is functioning superbly and in the public's interest. Not really the case, in my estimation.

I appreciate many people disagree with that view.

Anyone who saves into a defined contributions pension is likely to be directly affected. That's an awful lot more than 1% of the population.

Thanks for mentioning this, I don't know anything about this at all. I haven't really given any consideration to this because, the way I see it, only a privileged minority of my generation will be able to retire. The rest of us will probably work until we die.

The simple truth is that the economic effect of Brexit will take months and years to unfold. Not one day's trading.

I agree with that, but, as you say yourself, the media isn't really putting things in those terms! This was categorically presented as an economic disaster.

Thanks again for the thoughtful response.

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No. not a "Great Post", see why at post #13 here

Nobody is perfect but right/wrong or however many shades of grey in between, a few hours study to understand the world financial situation will open a lot of people's eyes to the extent of the madness that has gone on in the last 30 or so years. The responses including yours are also great to read. We need more of that kind of debate, preferably taught in every school...

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..

Regardless of whether you agree with this or not, the fact is that house prices cannot go much higher without dropping a little again, as it's becoming impossible for people to get on the bottom rung of the so-called ladder. The only thing keeping the market going now is foreign investment. For example, I live in a flat owned by someone who lives in South Africa, who has never been to the UK! That is perfectly normal now.

For the average Briton, a fall in house prices would undoubtedly be a good thing. Investors I have no sympathy for, those relying on equity release to fund their extortionate lifestyles, tough luck, those in negative equity I do feel sorry for, but inevitably housing will rise in value again, as it did after the last crash.

...

...

Hypothesis 4: the housing market will crash

Reality: Housing is already in a massive bubble, overpriced, and will fall in price in due course regardless of the EU. Although there will be some losers among the general public if this happens, overwhelmingly it will be a positive thing for the society in general, and particularly for the younger generation.

How has the landlord done on his investment vs South African ZAR?

I just thought I would mention all renter savers I know... renting at full whack before and after 2008. Aand all the millions of young-middling renter-savers just like them, for no-one else ever does, in the sympathy-fest. Sympathy fest of 2008 was followed by Mortgage Rescue, SMI eligibility cut to much shorter waiting time, and then everything thrown at it in 2009 with QE and rates floored to 0.5% and held... leading to HPI and foreign buyers/BTLers, leaving those 2008 owners around here having just about seen 50% HPI, and that includes all the oldies who've owned since 1950s, and the BTLers.

Since then, another 8 years of rent paid out - that's sort of our/their negative equity you realise but no one ever sympathies that up ever vs those who may see houses they chose to buy and outbid others for, dip into negative equity, on the losing side of market vs ever madder HPI - and those who outbid them again during all those years, BTLers or homebuyers with bomad, made their own choices.

Yeah, so bring it, as you say. HPC= overwhelmingly positives, although I don't want it followed by HPI and progress would be if it wasn't. FT has a thread of newbuild losers, and woe, houses sold for less than they originally bought them for - life moves on.

..New Mills/Glossop also quite appealing but understand traffic to be a nightmare, rains a lot (hence the mills?) and New Mills yet another area looking a bit expensive now.

We're popping up again over Easter weekend, staying in Warrington, to have another good ol' nosey around various places, budget would be 250k ideally for a standard 3 bed in a decent area which pretty much means the nice parts of Manc are out of reach and a fair commute will be needed, missus doesn't drive (yet) so a railway station is ideal.

I just have a bad feeling the optimism on here for a housing price correction with everything going on in the World still won't reverse the 50% increases i've seen in areas around London I hoped to *just about* be able to afford back in 2012 whilst saving a deposit, now that I've finally got my 10% together I despair at what i'm seeing and continue to pay my £1k in rent per month with no way out :(

Aye. Last house we had our eyes on... right next to huge electricity substation, I hoped would fall to some sort of value. Sold for £300,000 in January 2016 and just came back onto rental market, after standard BTL refurb with hard-wearing wooden flooring everywhere. Although plenty more bought with Bomad help. In fact one such younger buyer around here, with Bomad help, just bought himself 2016 Merc. Nicey nicey. He's in the market as is everyone else.

Edited by Venger

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Firstly, thanks for the response.

Thank you for your response too wub. I broadly agree with much of your original post, but as we both have said we do need to be really careful about extrapolating anything from the initial day of trading. The movements in UK share markets as a whole were not that drastic (although some individual shares, such as financials and house builders, took a major pounding ). The movement in currency was truly historic however. The next few weeks and months will be very interesting, and in all honesty I really don't have a clear idea where the markets are heading!

Over the past few months both the leave and stay campaigns have peddled a lot of demonstrable lies on the economy, immigration etc. Much of the media has an agenda (surprisingly not all for remain) and has therefore been very lax in challenging these untruths. We need to be very careful about believing everything we read in print and on the internet. There are more reliable sources of information but you need to know where to look.

In my first post on this thread I quoted some hysterical media headlines to demonstrate clear "Remain" bias.

Nobody seems to have checked them. Here are the quotes again but now with their attributions

"Sterling pounded in market bloodbath as UK votes to leave EU, Cameron quits" - Russia Today

"Brexit vote wipes $2 trillion off global stocks and knocks pound to 31-year low" - Daily Telegraph

"Brexit vote will plunge UK into a new recession, warn City economists as they slash growth figures for next two years" - Daily Mail

The common factor to all three is that they were released by pro-Brexit media organisations!

Sorry for the trick, but it shows that we shouldn't believe anything we read on the internet!

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How has the landlord done on his investment vs South African ZAR?

I can't really comment, but my boiler broke down in January (a thoroughly depressing time!) so that was several thousand down the drain for him!

I'm sure a lot of these investments don't work out, but people are told over and over again that you can't lose with property (and there's no moral reason preventing you from doing so).

I actually could buy a flat now, I looked at a couple recently. I've got a lot more money in the bank than most people (not a huge achievement considering virtually no-one saves anything, and many can't anyway), and investments as well. I now wonder if this is the right time and if the market might correct a little. So I'm not sure what to do, really. But I will probably hang on a bit.

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Thank you for your response too wub. I broadly agree with much of your original post, but as we both have said we do need to be really careful about extrapolating anything from the initial day of trading. The movements in UK share markets as a whole were not that drastic (although some individual shares, such as financials and house builders, took a major pounding ). The movement in currency was truly historic however. The next few weeks and months will be very interesting, and in all honesty I really don't have a clear idea where the markets are heading!

Over the past few months both the leave and stay campaigns have peddled a lot of demonstrable lies on the economy, immigration etc. Much of the media has an agenda (surprisingly not all for remain) and has therefore been very lax in challenging these untruths. We need to be very careful about believing everything we read in print and on the internet. There are more reliable sources of information but you need to know where to look.

In my first post on this thread I quoted some hysterical media headlines to demonstrate clear "Remain" bias.

Nobody seems to have checked them. Here are the quotes again but now with their attributions

"Sterling pounded in market bloodbath as UK votes to leave EU, Cameron quits" - Russia Today

"Brexit vote wipes $2 trillion off global stocks and knocks pound to 31-year low" - Daily Telegraph

"Brexit vote will plunge UK into a new recession, warn City economists as they slash growth figures for next two years" - Daily Mail

The common factor to all three is that they were released by pro-Brexit media organisations!

Sorry for the trick, but it shows that we shouldn't believe anything we read on the internet!

One of the big problems we have nowadays is that all of the 'media organisations' just want to attract traffic. The Daily Mail is a particularly strange publication that contradicts itself routinely! But they just use sensationalism to make people click on their articles, and according to what I have read it works extremely well.

What I object to is the way that the media has reported on this, particularly TV and especially the BBC, and the general climate. I expected nothing else, but it has been worse than I anticipated. I feel that the establishment, whether economic, corporate or political, always wanted a 'remain' vote, and now that they haven't got what they wanted, they're just out to scare people using the media.

If you sat in front of the TV news, again particularly the BBC news, you would get the impression that there is now a state of total chaos. Much of this chaos is avoidable political opportunism, and they've exaggerated the economic impact and explained none of the potentially positive economic aspects of leaving the EU, as outlined in a video someone linked to earlier in this thread.

I consider this fundamentally deceitful. And it's helping to create an almost frenzied atmosphere in which some people who voted 'remain' can't accept the result. It is disgraceful that people are pushing for another referendum and the SNP are threatening to veto the verdict. I voted 'leave', but although I would have been disappointed if 'remain' had won (a result I was largely resigned to), I definitely wouldn't have insulted anyone, and not for one second would I have demanded another referendum. I believe in direct democracy, this sort of process should take place far more often. It's extremely sad that some people can't respect the result. I have seen the most ridiculous and reprehensible comments online regarding this.

And it doesn't help when the media (you're right that pro-Brexit publications can be equally sensationalist) go out of their way to scare the crap out of everyone. And I think a lot of their assertions don't stand up to any merit at this point in time. Whether it will turn out to be a good or bad thing economically in the long run remains to be seen, and is a very nuanced issue.

But I think, as a public service broadcaster, the BBC in particular has a responsibility to inform people calmly what is going on and put it in a meaningful context. That is a country mile from what they are actually doing.

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  • The Prime Minister stated that there were three Brexit options available to the UK:   100 members have voted

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