• Skip to primary navigation
  • Skip to main content
  • Skip to primary sidebar
  • Skip to footer

Fat Tail Daily

Investment Ideas From the Edge of the Bell Curve

  • Menu
    • Commodities
      • Resources and Mining
      • Copper
      • Gold
      • Iron Ore
      • Lithium
      • Silver
      • Graphite
      • Rare Earths
    • Technology
      • AI
      • Bitcoin
      • Cryptocurrency
      • Energy
      • Financial Technology
      • Bio Technology
    • Market Analysis
      • Latest ASX News
      • Dividend Shares
      • ETFs
      • Stocks and Bonds
    • Macro
      • Australian Economy
      • Central Banks
      • World Markets
    • Small Caps
    • More
      • Investment Guides
      • Premium Research
      • Editors
      • About
      • Contact Us
  • Latest
  • Fat Tail Series
  • About Us
Market Analysis

The Italian Financial Crisis Is Back: Italian Elections and the Markets

Like 0

By Nick Hubble, Saturday, 25 January 2020

In February 2018 I predicted markets would tumble in May due to the Italian elections. And again in a ‘Bloody October’ for stock markets later that year.

In February 2018 I predicted markets would tumble in May due to the Italian elections. And again in a ‘Bloody October’ for stock markets later that year.

Both played out, although the ECB managed to paper over the problems in the end. The crash of October, which began a little ahead of schedule, was still the worst since 2008 by many measures. The ASX200 lost almost 1,000 points.

These days, Italy’s bond market is suspiciously calm. But Bloody Sunday could change all that. And if we’re back to 2018 levels, that could sink markets all around the world once more.

So let’s look into what’s going on.

As I predicted in my book How the Euro Dies, Italy’s coalition government didn’t manage to hold up for long. But what I didn’t see coming is the reformation of a new coalition between mortal enemies Five Star and the Democrats, instead of new elections.

The most extreme anti-establishment party formed government with the ultimate establishment party, just to keep things ticking over. Just to keep the right wing out, despite them topping the polls at the time.

Unfortunately, democracy is a game of deadlines. There’s always another election. Lega was kicked out of government when the coalition failed, allowing it to consolidate support by not having to be politically correct and compromise anymore. And on Sunday, we’re going to get our first taste of what this means at the polls.

The elections are for the region Emilia-Romagna, where spaghetti Bolognaise comes from, I think. Now you might think that regional elections are hardly crucial. But don’t forget that financial markets think ahead. They price ahead too. And such elections add a lot of data to projections of the likely future.

[conversion type=”in_post”]

As Bloomberg sees it, the regional elections signal that ‘Italy Prepares Itself for Prime Minister Matteo Salvini’. Such a victory for Lega would ‘cement his role as Italy’s prime-minister-in-waiting’.

This is a man who called the euro ‘one of the biggest economic and social crimes ever committed against humanity’ and said it won’t survive…

But he’s polling at the same levels as the incumbent left in the region. Which doesn’t sound like a seachange, but it is. ‘Emilia-Romagna region has supported the left since World War Two’, Bloomberg points out. They call it Red Emilia for a reason. At least, they used to call it that. It’s about to go Lega black, ironically thanks to a lot of immigration from Africa…

With Five Star giving up its last vestiges of being anti-establishment, Salvini is soaking up the votes they once held. Alongside allies, he’s polling close to 50% in a threeay race on the national level. Hence the prediction he’ll win any national election and form power off his own back next time around.

Why does all this matter? Well, the prospect of a Salvini government sent markets into a tailspin in 2018, twice. The topic at hand is a major financial crisis similar to Greece’s, but on a much larger scale. And in a nation which never experienced the boom, Greece did before its bust.

The underlying issue is a devil that’s hidden in a lot of detail. The ECB’s capacity to print money to rescue Italy is beholden to certain conditions. One of them is compliance with an EU prescribed austerity program, or having their budget approved by the EU. In other words, to get access to the ECB’s printing press, you have to behave, or at least get permission to misbehave.

But not behaving is the one thing Lega is all about. It’s what Five Star used to be all about too. But when the two were in coalition, they calmed things down. And when Five Star changed sides, they gave up on looking populist altogether. While Lega has had free reign to claim whatever they like, outside of government.

Which leaves Italy’s legions of the upset to vote for Lega and Salvini if they want to make a point. And that’s what markets fear — Salvini making a point.

Back to our devil in the detail. Matteo Salvini may be paying lip service to the euro these days. But it’s pure showmanship. He’s going to present the EU as the power that forced Italy out of the euro by making the country choose between controlling its own fiscal policy outside the euro, or not controlling it inside the euro.

Salvini will promise voters to present the EU with a choice on the Italian government’s budget. Our way or the lira. Either you let us take control of Italy’s budget, or we take control of our own currency.

The question is when. And the election in Emilia-Romagna, along with the resignation of Five Star’s leader, are two events this week which bring the date much closer.

Conveniently, the EU is set to review the Growth and Stability Pact and the ECB’s governing rules in coming months. In other words, the rules of the eurozone are up for grabs just when having to apply them could force Italy out of the eurozone.

But which way will the rules be changed? To toughen them up, or loosen them?

Last time around the rules got tighter in precisely the way mentioned above — they made ECB bailouts conditional on compliance with EU budget rules.

Either way, as far as markets are concerned, the risk of an Italian meltdown is back. And the Italian bond market has turned the corner as a result:

Port Phillip Publishing

Source: Bloomberg

[Click to open in a new window]

Italian bank stocks fell and bond yields spiked over the last few days.

Welcome back to 2018’s Italian drama. The canned tomato may be too big to kick down the road this time…

Until next time,

Nick Hubble Signature

Nick Hubble,
For The Daily Reckoning Australia

PS: Discover how some investors are preserving their wealth and even making a profit, as the economy tanks. Download your FREE report by clicking here.

All advice is general advice and has not taken into account your personal circumstances.

Please seek independent financial advice regarding your own situation, or if in doubt about the suitability of an investment.

Comments

Subscribe
Notify of
guest
guest
0 Comments
Inline Feedbacks
View all comments
Nick Hubble

Nick Hubble found us at Fat Tail Investment Research in 2010 after a stint inside Wall Street’s most notorious bank, Goldman Sachs, during the 2008 GFC. That’s where he saw the true nature of the investment banking business. Since then, he’s been the editor of the Daily Reckoning Australia and the UK-based Fortune & Freedom and Gold Stock Fortunes.

He’s delighted to work as Investment Director and Editor for Jim Rickards’ Strategic Intelligence Australia. Here he helps turn Jim’s big-picture views into specific actionable advice and ideas for Australian investors.

Nick’s Premium Subscriptions

Publication logo
Jim Rickards’ Strategic Intelligence

Latest Articles

  • Ride Mining’s Profitable ‘Curve’ this Way
    By Callum Newman

    All week we’ve been on a mission. We’re unpicking the dynamics around gold, and gold stocks. Here’s a bit of advice on this opportunity,

  • Silver & Platinum Squeeze Higher
    By James Cooper

    Cycle Turns: Silver and Platinum on the move… Is it their industrial or precious metal angle that’s getting investors interested?

  • One forecast for gold: 10k per ounce!
    By Callum Newman

    Gold was long considered a “chaos” hedge, and protection against market sell offs and financial crisis. It can be that, for sure. But for now, the markets are bidding on both, because it’s inherently protection against currency depreciation. This is why bitcoin is surging toward new highs as well.

Primary Sidebar

Latest Articles

  • Ride Mining’s Profitable ‘Curve’ this Way
  • Silver & Platinum Squeeze Higher
  • One forecast for gold: 10k per ounce!
  • Three men, $20.8 million, and a $230 million rally… all in a day
  • Jamie Dimon’s warning means one thing only

Footer

Fat Tail Daily Logo
YouTube
Facebook
x (formally twitter)
LinkedIn

About

Investment ideas from the edge of the bell curve.

Go beyond conventional investing strategies with unique ideas and actionable opportunities. Our expert editors deliver conviction-led insights to guide your financial journey.

Quick Links

Subscribe

About

FAQ

Terms and Conditions

Financial Services Guide

Privacy Policy

Get in Touch

Contact Us

Email: support@fattail.com.au

Phone: 1300 667 481

All advice is general in nature and has not taken into account your personal circumstances. Please seek independent financial advice regarding your own situation, or if in doubt about the suitability of an investment.

The value of any investment and the income derived from it can go down as well as up. Never invest more than you can afford to lose and keep in mind the ultimate risk is that you can lose whatever you’ve invested. While useful for detecting patterns, the past is not a guide to future performance. Some figures contained in our reports are forecasts and may not be a reliable indicator of future results. Any actual or potential gains in these reports may not include taxes, brokerage commissions, or associated fees.

Fat Tail Logo

Fat Tail Daily is brought to you by the team at Fat Tail Investment Research

Copyright © 2025 Fat Tail Daily | ACN: 117 765 009 / ABN: 33 117 765 009 / ASFL: 323 988