Submitted by Bill Blain of Mint Partners
"One of these mornings you’re gonna rise up singing…."
Queue jumpers on the train again this morning! Most folk politely line-up on the platform for the packed Southampton to London train, but not the young “lady” who brazenly barged in front of everyone and then spread her luggage over a couple of chairs, or the bald city-looking bloke who pushed through utterly oblivious to anyone else. Its moments like this when I wonder if its worth it anymore. Things are not improving... 30 plus years of paying my taxes and I’m still not allowed to shoot arrogant little s**ts off the train...
Anyway.. enough about my gripes.. what about markets?
Strip away the political noise and the short-term alarms, and its difficult to discern anything particularly real about direction or trend at present. What we do have are a host of conflicting cross-tides and currents - bond yields slowly edging higher, equities still range driven, and fears about weakening economic data lessening. The news flow is dominated by a host of factors ranging from Italy, US/China, Oil prices and what’s next.
The fact US Treasury Secretary Steve Mnuchin said “we're putting the trade war on hold” will be perceived as a positive - but the devil will be in the details. The real issues to solve are IP and services. Meanwhile, Mnuchin’s name is now high on the Trump deadpool list as White House staffers brief against him.
Strip away the noise, and the macro numbers tell us the underlying environment remains positive. The global agenda is about trade agreements. There is an intact underlying global growth trend – although it gets buried in political noise. Analyse it carefully and the right strategy is to invest in long-term growth assets, remaining risk-on in stocks, and negative bonds. But, then there is that nagging doubt pinging away at the back of your head - might equities be about to stage a massive correction, what if we’re wrong about bonds and growth? And what about the indications the world economy is slowing, business cycles have peaked, and maybe its time to go defensive? Who knows, who can tell? This is heaven, but this is hell…
And the big worry now is Italy, or so the papers say…
How much should markets worry? The Five-Star League (FSL) government has become the game changer - but its far more complex than just sell BTPs and Italian Banks. (One should always be a seller of Italian banks! Its basic common sense.) What’s occurring in Italy is a question of Europe - not just an Italy thing.
To understand the new threat posed by Italy, ask why its happened. “Because no one expected it” is a really stoopid answer - a populist Italian government has been looking a nailed-on bet for a long time, reflecting populist trends, pent-up economic and political frustration, and the Italian electorate looking to pin the blame. Apply same logic across the whole continent. It’s not worth speculating on what might or might not be said about debt write offs, or Italexit - structural change to monetary union, or a technical exit is going to prove just too dang difficult and isn’t going to happen.
The real issue about Italy is the braking strain of the European narrative and its ability to survive rising political exhaustion. It’s just too easy for politicians to pin their woes on Europe, even though Italy clearly benefits from Europe in terms of minimal interest rates which have kept its unsustainable debt load manageable. But it wants more - which Europe can’t and wont give.
My conclusions are two fold:
- We face yet another wasted decade for Italy as a populist government wriggles to deliver anything meaningful. The reform agenda will stall. The only reason to buy Italian government bonds is when they look cheap relative to the implicit put to the ECB. As previously said, there are absolutely no reasons to buy Italian banks - ever!
- An unengaged and distracted Italy will mean Macron’s attempt to relaunch the European dream will also stall, the Germans will become increasing detached from the whole process, and the rest of Europe will actively look over its shoulder for other solutions.
Folk are wondering why Europe has lumbered itself with the behemoth of monetary union. FSL are right – they want to go back to what European Union originally was: separate successful nations with shared economic goals in a common free-trade market. For all the right or wrong reasons, the Euro and hence the EU/ECB will continue to be blamed for economic failure. As we are seeing across the fringes of Europe the project is under pressure because of the lack of shared values or common heritage- from Poland, Hungry, and the far right in Germany and France.
I’d rather the European thing works - but its going to come under increasing pressure, because thats what populist politicians do... they spot someone else to blame. Although the Euro is enormously popular across Europe - the younger generation are proud Europeans, and the older generation want script that is secure as the Deutschemark – I suspect it eventually dies, not with a bang, but with a whimper…
Meanwhile, I am informed by a chum from a Surpranational that the UK will make its first positive Brexit return shortly - saving the couple of hundred million it would have taken to stage the next MEP elections. Whoopee!