We visited this
country over 20 years ago a couple of times when we were in Europe. Except
being advised to watch rampant pocket pickers (but non-violent), we were really
impressed by the deeply rooted culture and historical heritage everywhere we
went. The lavish beauties with exuberant colorfulness in their churches were
especially impressive and attractive and I’d highly recommend anyone who has a
chance to visit there if possible. But the impression drastically changed when
we went to visit again last year. The big city where we landed with our flight
was full of garbage, apparently a sign of fast declining and decaying with no money
to even clean the streets by the government. Our main destination was an island
just cross the city and even the Airbnb host told us that no local people would
want to go to the city unless no choice to work there. That’s the current state
of the city but also the reflection of the whole country status that I’m
talking about today. It is Italy, once one of the most powerful countries in
the world!
The recent hard
selloff of the stock market was triggered by a renewed concern about the Euro.
If you have followed my blogs long enough, you must remember I have been
consistently bearish about the Euro for years, as early as nearly 8 years ago
in 2010 (see
here). I was even making a bold prediction in Aug
2012 that the Euro might not survive 5 years: "it (Euro) won't survive in its
current format within 5 years." My timing was off the
chart obviously although there had been several occasions that the Euro was
really on the verge of collapsing but was finally saved. Pondering it over why
Euro could survive so many life-threatening events, I think I have put too much
weight on the economic reasoning but largely underestimated the political will
that is persistently gluing the Euro zone intact.
So why I have been so
bearish about the Euro in the first place? Well, the Euro is created via a “marriage”
by a bunch of drunks to say in a plain language. Just think about it, what will
a drunk typically do? He is usually delusional without knowing where he is and
what he is doing, right? But more importantly he is usually persistent in
pursuing his own doing under the delusion. So when such drunks are put together
to form a marriage, what will happen? They won’t know how to respect the
marriage rules and will continue to do what they think is he or she needs to
do. At the end, the marriage is constantly on the verge of breakup, as they
simply cannot go towards the same direction for long. Among the 27 Eurozone countries,
very few, probably only Germany, are less drunk and know they at least need to
operate under the basic rule of making more incomes than expenses. Most of the
others just want to take advantage by abusing the Eurozone benefits and
continuing with their own agenda by borrowing as much as they can without
concerning how they could pay back. They even think the Eurozone financial
policy is too strict for them and binding their hands too much for extravagant
spending (i.e. they cannot print their own money at their wish as before).
That’s why we got a situation 2-3 years ago when bankrupted Greece almost broke
up the Euro. It was finally got saved by the EU central bank (ECB) by printing
enormous money and the wakeup (maybe just temporary) of the Greek government
that they could not stand alone without the Euro. This time we are seeing a
similar situation in Italy as they have just elected two extremely anti-Euro
parties (extreme left and right) for their coalition government. This
government is still in the drunk stage and thinking that they can cut
oppressive taxes and establish a universal basic income for Italy's poor and
unemployed. It all sounds great but the problem they seem to not be able to
understand is where is the money coming from. Italy's already got over $2.3
trillion in public debt, more than 100% of its GDP and has never been able to
recover from the 2008 recession, not mentioning to grow economically. What they
have been doing is simply piling up more and more debt, wishing (as a drunk
always does) that the debt somehow would disappear some day. Of course this is
just a delusional thinking that will never materialize. To be honest, in the
past half a century, the US is pursuing on the same route and is becoming more
and more like drunk countries in the EU by borrowing and spending without a
limit. That’s why I have become increasingly bearish for the future of the US
even though the current administration could slow down the process a bit but I
have no faith on all the politicians in the years ahead. Of course, this will
be another topic for later. Back to the EU, the situation is becoming much more
severe than the Greek event at the moment. If you don’t know yet, Italy is the
3rd largest economy within the Eurozone and the 10th
largest economy in the world actually. If they really want to pull themselves out
from the Eurozone, there is no way the Euro could survive and the impact would
be enormous not only in the EU but around the globe. That’s why the current
drama in Italy has got Soros so scared by saying "Everything that could go wrong has gone
wrong," and "It is no longer a figure of speech to
say that Europe is in existential danger; it is the harsh reality". Don’t take his words lightly as he is putting
his money where his mouth is: he is holding 7% of his portfolio – worth nearly
$400 million – in put options. Specifically, per his 13F disclosure, Soros’ family
fund holds a 5% stake in puts on the SPDR S&P 500 Fund (SPY) and a 2.2%
position in puts on the PowerShares Nasdaq 100 Fund (QQQ).
So how do I think the situation will evolve?
Well you may think I would be more bearish for the Euro and think its end is
coming, right? Actually, I have learnt my lesson by not underestimating the
political will this time. While the situation is indeed very serious with the
potential to tip the whole world upside down, I do believe that the ECB will
again do whatever it takes to try to save the Euro. The risk is simply too high
for EU to let the Euro fall apart. But the cost will also be gigantic and
colossal! What ECB can do is the same as they did last time but in a much
larger scale, i.e. continuing their QE by printing more money as part of
package to induce Italy into an agreement to stay within the Euro. Obviously,
it also requires the Italian drunk to be less drunk and awakening enough to
understand that they have no way to stand alone as of now.
In other words, I think the chance is higher
that the Euro will survive this time again but will be a very challenging time
in the next few months for the Euro as the process is for sure very bumpy and
long. It is almost like a water torture: painful and often near death type of
feeling but still surviving. I still believe overall the market will be doing
fine this year but one thing is virtually given is that the Euro will be
suffering a lot during the water torture process. Betting against the Euro is a
safe way to make some money in the next few months!
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