Notes From Underground: Back to Work … Assessing the Significance of the Italian Elections

The recent Italian elections wound up in a very inconclusive result. In a political lineup of the three Bs–(no Chuck, not Biggio, Berkman and Bagwell)–Bersani, Berlusconi and Beppe, the Italian populace dealt a massive defeat to Brussel-appointed technocrat Mario Monti. The vox populi raised its voice against continuing austerity and will look to whatever government is formed to be one of a pro-growth economic agenda. The biggest loser from the Italian election may in fact be another Italian, ECB President Mario Draghi. If European nations say no to more austerity then Draghi’s program of doing anything to stem the Euro crisis comes to an end. WHY? The Outright Monetary Transactions (OMT) are based upon ECB intervention and the quid pro quo of conditionality of acceptance of austerity budgets. If you accept that the basis of OMT is a form of quantitative easing and the recipients of the QE won’t accept the severity of conditionality that is demanded by the ECB, then emperor Draghi is truly naked and not dressed in a fine Italian suit.

Adding pressure to the Italian elections was the weekend news that Dutch unions oppose fresh austerity plans being debated in Parliament for the austerity budgets “will only worsen the Dutch economy and increase unemployment.” The present Dutch government is a coalition of the center-left and center-right. The right is in favor of public sector wage freeze and no tax hike while the center left favors just the reverse. Demands on governments to meet the stringent 3% deficit requirement are being met with public backlash. In Portugal, the weekend saw tens of thousands take to the street in opposition to further austerity plans. Portuguese citizens were calling for the removal of the Coelho government while also rallying against the IMF and the Troika.

The present Draghi program is under strain as the idea of CONDITIONALITY was a demand of the Germans, especially the Weidmann-led Bundesbank. The Germans cannot be happy about the recent Italian elections for if austerity is defeated at the polls and in the street what happens to President Draghi and “DOING WHATEVER IT TAKES?” The crown presented to Mario Draghi by the luminaries at Davos now rests very uneasy upon the head of the ECB. Your move, Mario.

***Tomorrow evening the Reserve Bank of Australia will announce its interest rate decision. Consensus is looking for the RBA to maintain rates at 3%. The economy has shown mixed signs. However, as commodity prices have eased, the recent softness in the Aussie dollar may support the consensus. But I have argued for the last few months that the inversion on the short end of the Aussie yield curve gives the RBA some latitude to cut rates. The overnight rate in Australia is 3% while the two-year note is yielding roughly 2.7%, thus the RBA has room to cut. There is recent selling of the Aussie dollar and if the RBA wanted to buy some protection against lower commodity prices it would be an opportune time to cut overnight rates. If the Aussies believe in the global currency wars it is now time for them to fire a shot.

***Question to the global macro traders: Can the global equity markets become a GOLD-type investment? I have discussed the idea that the GOLD BULL is tired having carried the weight of the investment community as the main haven asset–think preservation of value. Since October 2007, the S&Ps are virtually unchanged while GOLD is up nearly 100%. Are investors desiring to give equities a chance to be a haven and act as a store of value with possible upside potential? I am not making the argument for it as the correct action just merely opening it for DISCUSSION. Seeing how the equity markets have held up in the face of such massive global political uncertainty and the non-reaction to the SEQUESTER the question must be asked. Can the equity market attain a role of a HAVEN ASSET? The FED is going to stay the course as the Bernanke and Yellen group holds sway over the FOMC. This is just something to ponder especially as long-term debt is certainly not a haven.

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14 Responses to “Notes From Underground: Back to Work … Assessing the Significance of the Italian Elections”

  1. silverbug2155 Says:

    Stocks should do very well over the coming years as currency is debased and the pure fact that some companies are not bankrupt like govt. bonds.The US stock market rose over 50 % in the mid 30’s in the midst of the Great Depression. Why? Europe was being bombed, and we witnessed a Sovereign Debt crisis.Capital fled here to the U.S.Today we just have bankrupt Public Debt. Private investments like stocks, gold,collectibles should do well.

  2. Alex Says:

    Yra. Are you still looking for a big Gold buy signal if Super Mario announces QE? If so, does the recent Italian election results suggest we’re nearer to that day than we were pre election? Thanks.

  3. yra harris Says:

    Alex–not a simple answer.If the Italians get into trouble in the credit markets ,Draghi will be pushed but the Italian government may be hard pressed to meet the standards of Conditionality,thus either causing Draghi to back off conditionality and angering the germans or preventing a majot OMT—this is the difficulty for the ECB President.

  4. chris Says:

    The stock market as a safe haven…hmmm. That’s like a wayward fly being caught in a spider’s web. It may feel comforting at first, but ultimately will lead to his demise. This cycle has repeated itself so many times in the past, it’s ridiculous Yra! Short term, yes, I think stocks could go up more. Would I be a long term investor with SPX at 1500? Not a chance.

  5. Ted Says:

    I dont think the question you pose is that outlandish. Is really a matter of private assets versus public/government ones. With policy makers leading us down a very dangerous road it makes sense that capital will flow into private non government controlled assets like stocks and corporate bonds versus anything under direct control of reckless governements. I recognize the relationship is not perfect as stocks are under heavy influence of the govenernment, but in a world with so much money sloshing around capital will gravitate to the pirvate sector in “refuge”. My two cents anyway.

  6. yra harris Says:

    Thanks for all the responses–Chris I don’t disagree with you about the long term and the idea of a safe haven was the only point and that of course is never a long term strategy for equities.But the ZIRP of the FED makes it a realm for trying to generate some return,especially as the market has been sideways for over the last five years—of course with much volatility

  7. Alex Says:

    Thanks Yra, and yes it’s never a simple answer in this game, well not most of the time anyway.

  8. Dustin L. Says:

    Yra- The short and sweet of my view is yes equities are and will continue for a few more years to play a role as a “safe haven” against global monetary debasement. However, equities will likely under perform several other asset classes, in particular gold and commodities. You have probably heard this view a million times and I have a certain dislike for popular views but, it rings true until the world’s debt problems are inflated away. Hello NGDPT.
    Now, how about the Yen? We had several discussions before about when the BOJ and MOF would finally act. Now, I wonder when we will finally see this market have a secondary reaction and force the mass retail shorts to cover? I suspect the institutional money has already started to reduce their size. Just how many aggressive sellers are there at these levels without a rally first?

  9. yra harris Says:

    Dustin L.–in terms of the YEN the easy money has been booked–we are coming into year end for Japan–a March,31st calendar year so there will be a great deal of volatility this month—if you want to get short do your work and find a level you would WISH to sell at and put the order in everyday

  10. BarbRelic Says:

    The anti-austerity results in the Italian and Dutch elections appear to be more than a passing theme. Heck, the new 5 Star Movement received 23.79% of the vote (compared to Bersani’s 31.42% and Berliusconi’s 30.58%). No small gnocchis!

    “Though Italy’s annual borrowing — its budget deficit — is relatively small compared with other euro countries at 3 per cent of its annual gross domestic product, its overall debt stands at a colossal €2 trillion.”

    Yikes. I’m guessing that any political party in the US that attemps to impose meaningful austerity will be shown the door as well. The self-preservation instincts of the political class won’t miss this data point.

  11. rob syp Says:

    Here’s a 10 year US$ chart.

    If the dollar gets strong from here doesn’t that hurt equities chances?

    You’ve brought up the Swiss National Bank’s policies and story of being pegged to the Euro any fresh comments on that with the pullback vs. the greenback?

    Hope you had a time away from this madness and reading Mr. Connolly’s book is going well.

    Thanks 4 sharing.

  12. yra harris Says:

    Rob–I don’t believe it is as straight forward with the strong dollar and equities at this juncture—foreigners can put money into u.s. equities as a haven which is of course dollar buying—the strong dollar /weak equity is a leftover of the RO/RO paradigm–risk on risk off—remember that it is important to see the markets relationship as dynamic and understand when they are changing.before I left for vacation I cited the fact that the u.s. 2/10 curve put in its low at 117 basis points on the same day that the dollar index made its up of .8401—that was the risk on risk off working its way thru the market.Now as the Dollar index rallies we are not seeing any real flattening in the yield curves in the U.S. or Europe–just something to pay attention to.

  13. rob syp Says:

    here’s someone else proposing your idea on the Dow-stocks being a safe haven.

    and yesterday with Langone, Warsh and Drunkmiller was one of the best!

  14. yra harris Says:

    Rob–that CNBC hour was truly one of the best ever–no yelling or shouting just level headed discussion

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