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.