Italy - Missing The Point

Posted by On 11:19 AM

Italy - Missing The Point

I have seen lots of articles on the Italian elections with virtually all of them missing the main point. The salient feature of the elections is that the Five Star Movement captured 32% of the vote while the Silvini/Berlusconi bloc received 37% of the vote. This equates to 69% of the votes that went to nationalist or populist parties. It means that when the EU wants something done that the Italian Parliament will have plenty of votes to stop it, should it choose to do so.

Right or left will have a say in local Italian politics, as always, but the center of this result rests upon the rejection of the European Union's policies in both groups. It may not be today, and it may not be tomorrow, but soon enough, in my opinion, the Italians are going to be faced with an issue where they will refuse to do the bidding of the European Union. It may be too soon to know if "I-Exit" is in the cards but it is not too soon to know that "I-Refuse" is coming.

This, in my opinion, is the real takeaway from the Italian elections and it represents a "clear and present danger" to the entire EU construct as the Brits wrangle about the terms of their departure. Brussels, of course, under the tutelage of Berlin, is assuring the Continent that nothing of the sort will happen. They claim that there will be a hung Parliament and they are hoping for one more technocrat government to rule the country. I do not buy this argument. I think that there is a real possibility of fireworks and then, possibly, a parting of the ways.

Good night, good night! parting is such sweet sorrow, That I shall say good night till it be morrow.

- William Shakespeare, "Romeo and Juliet"

This will take some time to play out but play out it will. I would be quite cautious about any ownership of Italian bonds or equities now and especially any securities co nnected with their banks. They have engaged three times now in the "mis-sold bonds to the locals" scam. I make the further point that if they can do this with bank bonds that they can do this with other bonds as the extreme rise in nationalism may lead to all kinds of shenanigans, in the days ahead.

If this concern was not enough then we have President Trump and his trade war. He says, "China" but then he points at the rest of the world. Retaliation is coming and soon, in my expectation, and the markets will not be happy with the oncoming threats. It is an "Art of the Deal" tactic which President Trump has used many times before and sometimes with success and sometimes not. It is anyone's guess why this is all happening now, but it is certainly a diversion from solely American issues, which may be the point of it, after all is said and done.

Mr. Cohn's departure from the Administration is also a market negative, in my view. He h as been a solid and guiding hand for our government and his loss is a decided loss, in my estimation. The moderate Mr. Cohn may well be replaced with some hardliner who will back the President's ambitions, much to the chagrin of Canada, Europe and China. There is no way to know, at this point, whom it might be, but uncertainty and the fear of the unknown are never market friendly ingredients.

As I watch the markets I am always cautious about what might up-end things. I had a fascinating discussion with one of the brighter guys on Wall Street at dinner last night. He is the CEO and Chairman of the Board of a successful hedge fund and we shared our observations with each other.

I stated that it might be possible, given the viewpoint of the Trump Administration, that the central bank, the Fed, would be reeled in. By this I mean that with the American governments desire for growth that the current policies of the Fed, to raise interest rates, might be curtailed either in Congress or behind some closed doors. Just the whiff of something of this sort, in my estimation, would cause a massive rally in the American bond markets that would stun just about everyone. It would be a huge "pain trade," for many institutions.

Raising rates, as we all know, also means rising costs for borrowing and this could slow, or stop, any kind of growth in the economy. In my mind the Fed and the government are headed off in two opposing directions and it will be quite interesting to see how this all plays out. Also, given the yields in Europe and in Asia, our current yields are so much higher than theirs that just the flow of foreign money might come into play as a card holder, in pushing yields back down.

I further point out that the $21.7 trillion in central banks "Pixie Dust" money is still in play and that approximately $24 trillion of it will be around by September. If Europe does start to come unglued the ECB may step back in an d not taper its program but actually increase it, to off-set the effects of the Italian election. Mr. Draghi may find himself under the gun in the next several months and the ECB is much more tied to Brussels than the Fed is to President Trump, at present.

In any event, I expect more volatility to come and not less of it. The calm days of 2017 are but a memory now. I suggest finding yield and monthly payments where you can and emphasizing that strategy, and not appreciation, as much as last year. Remember Grant's Rules 1-10, "Preservation of Capital." They should ring in your ears now as the pushing and shoving ensue.

Source: Google News Italy | Netizen 24 Italy

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