Outside the Box

Putting the Boot into Italy

December 7, 2016

When Charles Gave, paterfamilias of Gavekal, chooses to express displeasure over an economic trend, an asset class, or what have you, he does not exactly mince words. If you happen to be in the room when he does so, he can sound like the Voice of God Himself, declaring from on high. And with his longish flowing white hair, he actually looks like central casting setting over to play the part.

Today Charles is exercised about Italy. He first reminds us that when Italy adopted the euro in 1999, he had argued that Italy would change from being an economy with a high probability of many currency devaluations to one with the certain probability of eventual bankruptcy. Now, he says, the fateful moment is not far off.

He gives us a couple of before-and-after charts: before March 1999 and from March 1999 to the present, in which he compares Italian and German industrial production and the performance of their respective stock markets. He notes that from 1979 to 1998, Italian industrial production outpaced Germany’s by more than 10%, and Italian equities outperformed German equivalents by 16%. That’s after taking into account the devaluations. Northern Italy is actually a production powerhouse, or was…

Then came the euro. Since 1999 Italian stocks have underperformed German stock by 65%, and since 2003 Italian factory output has lagged Germany’s by 40%. Thus, summarizes Charles, in this short essay,

The diagnosis is simply that Italy has become woefully uncompetitive, and as a result, is not solvent. This much is clear from the perilous state of its banking system, which is always the outcome when banks lend to firms that have been rendered uncompetitive by some reckless central banker….

This has to be the most well-telegraphed, and now inevitable, national bankruptcy that I have seen in my 45-year career.

Which is exactly what I have been saying for years in my books and Thoughts from the Frontline. It is getting ready to happen, and when it does it will affect all of Europe and then the entire world.

The timing for all such things is difficult. It is possible that the Germans blink and the ECB allows Italy one more opportunity to kick the can down the road – and drive up their debt-to-GDP to well over 150% at the same time. From the point of view of the bureaucrats in power, putting the problem off for another few years is a good thing because maybe they won’t be around at that point and somebody else can deal with it and take the blame.

Winter finally decided to show up in Dallas. It will actually get below freezing either tonight or tomorrow night. And I will be flying into winter weather in DC and New York this weekend. I am doing something that for me is extremely unusual. I really hate early mornings and especially hate to get on early flights. But I have to be in DC, so I am taking a 6 AM flight Friday morning. I have so many friends (like Dennis Gartman or Olivier Garret) who can sit down in a plane seat and immediately go to sleep. It doesn’t work that way for me, no matter how often I try.

But a last-minute opportunity came up to spend some time with Dr. Woody Brock on Thursday night at a small gathering, and that is something I just simply can’t pass up. There is too much to talk about, and I have so many questions. Woody may be wrong from time to time, but he is seldom in doubt. And the rest of the table, which is one of those I can’t talk about, is pretty impressive, too. I get invited from time to time to provide comic relief.

Then I will see other good friends flying in from around the country for a quiet, fun dinner and conversations along the lines of what the heck do you do with assets in markets like these? That will also be a topic for this weekend’s letter. Until then, you have a great week, and I will be writing from DC.

Your wondering how bad Italy will get analyst,

John Mauldin, Editor
Outside the Box

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Putting the Boot into Italy

By Charles Gave
December 6, 2016

Matteo Renzi has joined a long line of Italian prime ministers who failed to “reform” their country. This is another way of saying that he could not wave a magic wand and make Italy competitive with Germany. The grim reality is that no Italian leader stood a chance of changing their country once the fateful decision was made to peg its currency…

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Comments

Hugh Ryan

Yesterday, 7:12 p.m.

I do not disagree with Gave, how could one do so. Why does the FT keep saying there is no problem here, minor fixes. It seems hard to understand such conflicting views. What is the difference in perspectives?

jack goldman

Yesterday, 6:59 p.m.

I am sickened and saddened at comparisons that women are not men and Italy is not Germany. We are all unique and bring unique characteristics to the game. Women and men, Germans and Italians, all bring different aspects to life. Let’s all celebrate our own special qualities. Americans are not Europeans. Men are not women. Blacks are not whites. Jews are not Christians. We must celebrate our differences. The rich are not poor. We need everyone, black and white, Jew and Christian, male and female, to be the best they can be for the sake of the children. Let’s compliment and complete each other instead of launching wars.