Crossing the Rubicon – VII

Spaghetti Western World

I meant to talk about the current stock market rally but have been taken aback (and so was the market) by the Italian elections. On election day, stock markets surged on optimism when the first polls said Bersani was going to win and to subsequently invert when actual results failed to declare a winner. The market is, in its way, a voting mechanism. Only instead of the discrete one man one vote rule, it is the continuous weighted average of investors willing to buy or sell at given levels that counts. The important thing to notice was stock markets were fast to act on a projection and slow to recognize reality which gives us a good measure of what is the prevailing sentiment.

But enough of animal spirits, as the only purpose of the concept is to describe what we don’t understand or can anticipate. After all, if one thing separates man from the rest of the animal kingdom is the use of reason and those who act upon the market on hunches or spirits will pretty soon find themselves out of business (bar some very unlikely nearly impossible event, happening under the law of large numbers, also known as a huge amount of luck). This means a tentative explanation for the general positive sentiment on stocks is fuelled by something, that something being a purposeful destruction of value in other asset classes by forcing liquidity into the economy (again).

But going back to Italy, there were several interesting things coming out of this election. First and foremost, that the most voted party was made by people whose only quality is never to have been a politician before. Not that that is not commendable, it is, very much indeed, is just that nobody really knows what they would do if they get elected. Come to think of it, nobody knows what any other party will do once they get elected, it’s not like they usually keep their electoral promises, but you got the point: that 1 out of every 4 people that bothered to go and cast a vote chose this lot says much about what holds together the current foundations of society – fear of violence. But if the Italian establishment got a nice rant from the electorate it was not nearly as hard as the beating the EU had. It is true that whoever forms government, Berlusconi or Bersani, will not sever their ties with Europe, so a run on the Euro sounds premature, and that could even be said from Grillo as it is not like he would leave the European Union if he got the job. But by that measurement, whatever the outcome yesterday, would always sound like victory to Brussels. In an event with such limited options, it was the outcome that mostly resembles a defeat. The fact remains EU bureaucracy run in this election and lost. Even if they did not expect to come out winners they thought they would be in a position where they could call the shots by endorsing whoever bowed to their will the most. Local politicians, and not only in Italy, became more expensive if the EU wants to force their way.

The EU managed quite successfully to bring down troubled governments in Greece, Italy and Spain that were not complying with their plan. But now the electorate in Italy failed to vote the right way (not the first time it happens, voters will probably be given another chance to do the right thing) and justify the realm of peace, prosperity and social justice well-meant rationalists in Brussels designed for them. Not that it was happening, but Eurocrats like to believe it will…in the long run. Since central bankers think they can get away with just about anything by printing money (lending against top quality collateral or even Greek bonds is the actual procedure) I’m expecting them to pretty much do that, not only in Europe but elsewhere, as the devaluation of the Euro pleases none of them, further fuelling a rally on equities while maintaining a stable demand for government bonds, to make believe everything is still alright.


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