Aftermath of the Italian Elections: The Canary in the Coal Mine

Stock Market

Stock Market (Photo credit: Tax Credits)

There is such a disconnect between what the U.S. stock market is doing and how it is performing vs. the economic contraction in Europe and some weaker than expected numbers out of China lately.  I am reminded of the movie with the title, “Something’s Got To Give.”  Right now, the U.S. stock market has all the appearances of a trader’s market — buy the dips and sell the rips.  If you are a long-term investor you are better off staying heavily invested in equities right now — taking into consideration your risk tolerance, time horizon, etc.  Stay well diversified.  That said, I think that the election outcome in Italy is more problematic to our stock market than what we’re seeing today.  The risks of a “Euro car crash & implosion,” is real.  For the first time since Euro break-up fears of 18 months ago, there was a real push back against someone from outside the country (Germany, France, etc.) pushing those in another country (Italy) to “get with the program.”  Perhaps it is a good thing in the end — pushing austerity onto an already bad economy only makes things worse.  We here are on the opposite end — we’re taxing & spending like there is no tomorrow and we’re going apolectic over $85B in cuts from a $16T economy.  Granted, these cuts aren’t the ones needed nor appropriate — entitlement reform is where the elephant in the room roams.  A good place to be is somewhere between the austerity polices of Europe and the free wheeling spending and taxing we’re doing here.  One can only hope.

     One wonders if we will look back two years from now and say that this Italian election was a watershed and marked the begining of a serious fracture in the fabric and ecosystem of this grand Euro experiment.  Sovereignty does matter.  I defer to those who follow Italy on a daily basis; but, a political landscape conducive to further structural and fiscal reform in Italy is not likely.  Italy needs a market-oriented and fiscally responsible leadership — Rome’s debt to GDP ratio is currently 120% (2T Euros) and it is projected to hit 132% by year’s end.  Youth unemployment is near 40%. They are running a budget surplus at this time.  If foreign debt holdings begins to waver or is destabilized (foreign-owned Italian debt instruments amounts to 700B Euros), look out below.  Thankfully, there is no sign of that for now.  We’re likely looking at a prolonged period of uncertainty in Italy and maybe new elections this summer or early fall  Until then, barring some kind of grand bargain — not likely — the Italian parliament will be in paralysis mode.  In 2008, Silvio Berlusconi’s center-right government didn’t take the helm till 24 days after a landslide election.  There is no “Silvio Lining” to this movie.  One reason why gold went on a tear today — a flight to safety.  The bias or momentum in this market is still to the upside for now; but, uneasy lies the bull. 
     The cyber security firm RSA is hosting a cyber security gathering (350 different companies from around the world) in San Francisco this week and one theme emerging is that cyber thieves are stealing corporate information and using that knowledge to their personal financial advantage — making trades in the stock market on information that would not otherwise be available to the general public.  No surprise that this problem is particularly acute in the mergers and acquisitions area. Marrying cyber expertise with market and SEC type insider trading expertise is tricky and not easy to do. I suspect there is more going on here than understood and it is likely to get worse and proliferate globally  — if it hasn’t already.  Perhaps inputting fake data and a cyber honey-pot might deter some of this activity; but, that isn’t easy to do either, and has its own downside consequences.  Sorry for the long note.  V/R, R.C. Porter.


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