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Italy's Bad Plan

Written by Briton Ryle
Posted May 30, 2018

So it's not like we didn't have anything to worry about.

The S&P 500 had failed at resistance at 2,740. Rhetoric on North Korea was going right back down in the gutter. Trade issues with China and NAFTA had taken a turn for the worse. Turkey was having an inflation-related semi-currency crisis. The inflation/interest rate situation here in the U.S. was uncertain at best. Stock valuations were too high if profits have really peaked. And the Baltimore Orioles were 21 games below .500 — 21!

So of course stupid Italy had to go wingnut on us. 

There's an old saying that stocks take the stairs up but the elevator down. It's amazing how little time it can take for all hell to break loose. 

OK, so maybe a 400-point drop for the Dow shouldn't count as “all hell breaking lose.” That's just a 1.6% decline. No big whoop, really. Maybe a different chart would help...

Oh yeah — 6% yesterday? 15% in less than two weeks? That's better! Or worse...

That bottom chart is a 10-day chart of the iShares MSCI Italy ETF. Each glyph represents an hour. (The top one is the Dow Industrials, same settings.)

Italian stocks are getting creamed after a Eurosceptic (I just learned that word yesterday) coalition announced its choice for prime minister, a move that was summarily dismissed by the current president.

So, Eurosceptic. Spelled with a "c" instead of a "k" — that's just so European. But the term itself describes people who think maybe the European Union isn't such a hot idea.

These days, there seems to be a lot of people who could be described as Eurosceptics. Especially in Europe.

That's why England voted to leave the EU. France and Spain each have pretty big anti-EU segments of their population. Heck, Spain almost had a secession by Catalonia a year ago. But Italy just voted a coalition into power that could actually lead Italy out of the EU. I don't know who came up with the term "Quitaly," but that's a good one. 

Italy is No England 

Italian bonds and the euro itself are getting creamed. For the euro, it's an existential thing. Italy is the third-largest EU economy. If it leaves, it could mark the beginning of the end of the Union and the shared currency. 

But the rout in Italian bonds is very much a referendum on the country's future. Global markets are telling Italy in no uncertain terms that leaving the EU is a bad plan. And not England bad, either. 

England's economy and banking system is much stronger than Italy's. London is a global financial powerhouse. At least it will be until Brexit actually happens and international banks move their operations to Frankfurt. Italy, not so much. Italy's banks are exposed mostly to Italy. Which means a very high percentage of bad loans (14%!!!). 

And the new ruling coalition wants to raise spending. Spend more and leave the EU. Bad plan. 

Here's the thing: When global investors buy Italian bonds and fund the government there, that investment isn't just a bet on Italy. It's a bet on the economic strength of the European economic zone. Italy gets the benefit of the doubt because it’s tied to the economies of Germany, France, etc. Sever those ties, and the whole formula changes. 

It is remarkable to me that voters continue to vote for such unrealistic policies. This populism thing is just pandering. Politicians are lying when they promise that you can have your cake and eat it, too.

The populist crap in Italy is the same as it is in France and Germany. A portion of the population doesn't want to share the wealth with weaker economies like Greece. But they fail to see the connection between the strength of a union and their own prosperity.

It's no different here in the U.S. In our last election, the two candidates that provoked the strongest emotional response were Donald Trump and Bernie Sanders. Their message was virtually identical: “You've been screwed. I can fix it.”

Sure, the screwed and the screwer were different. For Trump, it was coal miners and factory workers who had been screwed by bad trade policies. For Sanders, it was the generations following the boomers who had been screwed by those elitist bastard boomers. 

The solutions? Bring high-paying factory jobs back and give everyone free college! How awesome is that???

Kernel Truth and Major Malfunction

There's a kernel of truth in every good lie. Have colleges and the government totally screwed up the college tuition thing? Yes, yes they have. Is the solution free college? Ummm...

Has the U.S. entered into bad trade deals? Why yes, yes we have. Does killing these deals mean an explosion in $45K-a-year factory jobs? I'll believe it when I see it. 

I want to be very clear about two things. One: Yes, trade deals and college tuition are issues that need to be addressed. Two: All-or-nothing solutions never work. 

Whatever happened to compromise, middle-of-the-road solutions? Remember when we had moderate politicians on both side of the aisle? Newt Gingrich worked with Bill Clinton. Tip O'Neill drank sherry with Ronald Reagan.

This populist crap we have around the world now, masquerading as thoughtful policy, is an obvious power and wealth grab by amoral orators. But we're falling for it. Point fingers all you want, but this is our major malfunction today. 

Now, here's the thing I find fascinating. In this age where money talks, corporations are actually stepping up and addressing issues that our childish politicians won't. There's a reason the next round of presidential candidates might include Starbucks’ Howard Schultz on the left side and Bloomberg’s Michael Bloomberg on the right. 

There are a couple very good reasons for this. For starters, it's knowing your customer. Now, clearly, politicians know their voters. They know exactly which lies we will fall for. Corporations can't get away with lying to their customers. At least not for long. 

Then there's the financial aspect. Companies deal with real numbers and real money. Balance sheets, earnings reports, dividend payments, etc. Any corporate promise has a price tag on it. Government numbers are complete fantasy. And so there's no price tag on its promises. Our escalating government debt is a perfect indicator that government promises are out of touch. 

One more thing and I'm done: Howard Schultz and Starbucks. I included Starbucks because I know people have some pretty strong thoughts about Schultz closing all his stores yesterday to address racial bias. Personally, I'm not sure I would have a business with a policy that allows people to sit in my establishment without buying stuff. But whatever. It's not my business.

Still, there can be no doubt at all that Schultz has been a wildly successful businessman. Why are people so quick to tell him he's wrong? I mean, with a track record of success like Schultz’s, maybe it would be a better plan to ask why he is right.

Until next time,

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Briton Ryle

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A 21-year veteran of the newsletter business, Briton Ryle is the editor of The Wealth Advisory income stock newsletter, with a focus on top-quality dividend growth stocks and REITs. Briton also manages the Real Income Trader advisory service, where his readers take regular cash payouts using a low-risk covered call option strategy. He also contributes a weekly column to the Wealth Daily e-letter. To learn more about Briton, click here.

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