#matteosalvini

Political expediency will trump Coronavirus market rout. Await market manipulation

MARKETS YTD

Share markets have been decimated in recent weeks across the globe. This year to date (YTD) chart above shows the extent. It shouldn’t really have taken Coronavirus or plunging oil prices to lead to this. We’ve been living high on the sauce for two decades and even though GFC in 2008 was a rude hangover, our authorities thought doubling down on all those free money excesses would work again.

Let’s not get too carried away. On a 5-yr basis, shares haven’t exactly blitzed with the exception of the S&P500. The ASX has put on just under 7% in 5 years. Germany, Japan and Italy have gone down. So if one is 45% higher than 5-yrs ago with an S&P fund, is that a mass hysteria moment?

INDEX 5YR

Automotive stocks have been dud investments over the last 5 years. It didn’t take Coronavirus to expose the underlying trends. BMW is don 52% on 5 yrs ago. Ford down 60%. Volkswagen -40%.

Car stocks

Industrial bellwethers like Caterpillar and GE have also not escaped stagnation. YTD, all of these stocks have bloody noses. Boeing has held up surprisingly well despite the MAX problems.

Industrials

Yet if we look at the FAANGs (Facebook, Apple, Amazon, Netflix & Google), we can see that over 5 years, investors have made a bundle.

FAANGAs these 5 stocks make up 15% of the S&P500 Index by weight, if they fall the impact is greater. With the exception of Netflix, these monsters are down 15~20%.

FAANG 1M

Worried?

Fear not, our heavily indebted incompetent political class and complicit central bankers will concoct a new potion of even lower rates, more QE and further fiscal spending on wind farms, solar panels and roads to nowhere to keep the ship afloat. It may be a hapless task in the long run but just watch the printing presses move to full speed. The ride is about to get interesting.

We’ve been bearish for years based on the underlying tenet that financial market manipulation by authorities has merely distorted the most efficient clearing mechanism -free markets. The invisible hand will eventually win. Just not quite yet.

Italian Senator and former Deputy PM Matteo Salvini has called for a ban on short selling. Why? All he’ll do is exacerbate the sell-off by diverting capital from Milan to London. The politicians just don’t get it. That is why Milan FTSE All-Share index fell by 10.75% overnight. That market is down 23% YTD.

When the pandemic hit the economy, we should have known from last month that it would spread and impact global travel, trade and oil prices. Why did it take so long?

We wrote last week that the explosion in market chasing (especially levered) ETFs would exacerbate distortions on the downside. The main reason being is that options markets that hedge levered products see heavy delta bleed (pricing blowing out) during routs. The reason is in bull markets human nature is more comfortable taking risk. In bear markets, people panic hence needing larger insurance premiums to protect against the madness of crowds.

Essentially what that means is that when ETFs were a far smaller chunk of the market, today’s 7.8% drubbing may only have been -4% in equivalent terms. That is because the ETFs chase, not lead markets because their product design is to replicate the immediate past. Yet our first instincts are to compare these apples with oranges and equate them to 2008. Wrong. Furthermore, a larger part of the market is dominated by a smaller

So the question is, do we liquidate all of our shares into the falling knife or take the view that some wonderful opportunities will present themselves to get exposure to what we hopefully viewed as sensible long term investments.

We take the latter view. We need to separate Coronavirus (the disease) and the hysteria (eg hand sanitizer and toilet paper panic buying).

While the disease is problematic and will hit the economy hard in the coming quarters, the question is market hope pinned to government response will come back. The measures should continue to grow and grow until they have cauterized the wound. After all, we live in a market where financial TV programs are summoning the opinions of NY Mets baseball pitchers for their ideas on stocks.

Of course, it will be all academic, but confidence is the only thing that matters from here. As soon as we get on top of Coronavirus, markets will swing back into action and many will simply fall for the same tricks like Pavlov’s dog and the short squeeze will send stocks powering back.

Governments now have a legitimate excuse to blow out deficits and borrow to save us. In that sense, this pandemic is a blessing in disguise. That isn’t to trivialize Coronavirus but to note that politicians will do almost anything to stay in power, even if the long term consequences will linger long after they’re out of office.

Where will they spend? The automotive sector has been in the doldrums for ages. Expect to see EV related subsidies which will be a boon for the EV battery plays – we’ve bought Jervois Mining (JRV.AX) which is about to start a cobalt mine in Idaho.

Think of support to the aviation industry when the crisis is under control. Boeing and Airbus. Don’t forget that American Airlines renewed 900 aircraft soon after it announced Chapter 11 bankruptcy back in 2011.

Think construction – cement companies and construction machinery companies tend to benefit from public works programs. We continue to hold gold (have done since 2001) as the ultimate insurance policy when the whole system can no longer heal with band-aids.

So get ready to buy some bargain-basement names with cash flow survivability, especially if you have a self-managed super fund.

Yes the underlying economic backdrop is dreadful but there will be one last hurrah!

Which part of failed EU don’t the UK politicians get?

Which part of the failed EU project don’t British politicians get? Why would anyone want to remain a member in a club which is so badly failing them? 40m more Europeans under the poverty line since 2007. 118 million in total or 22% of the EU population. Did they forget the Swiss handing back its free pass to enter the EU because they saw no value in joining a club anyone can join. Are the Brits wanting to ditch the pound in favour of a forced euro currency? What merits lie in remaining?

Two more clear examples emerged in the last week to show how more member states are rejecting the elites in Brussels.

League head and Italian Deputy PM Matteo Salvini has seen his party unseat the Democratic Party in Basilicata which had a strong hold on the region for 25 years. At the last election 60% of Italians voted for parties that rejected the EU. This poverty stricken area south of Italy has now endorsed League to take care of its affairs after decades of failure by the pro-EU centre-left incumbent.

Switch to The Netherlands. The anti immigration eurosceptic Forum for Democracy (FvD) Party, established only 2 years ago, took the largest number of seats (13) in the upper house election from zero. The FvD stripped the centre-right of its Senate majority, with PM Rutte’s party losing 7 seats to 31.

Throw on top that, former darling of the left, President Macron, has authorized the army to shoot unarmed yellow vest protesters who are rejecting nose bleed cost pressures for 19 straight weeks. Let’s remain in the EU to endorse such progressive behaviour.

If the board of directors of the EU Club live in denial and fail to listen to the grievances of a growing swell of disgruntled members there can only be one outcome. The club will go out of business. Best that the UK doesn’t renew its membership.

Grazie Mille?

German MEP Elmar Brok has apparently told German media that Nigel Farage has secured Deputy PM Matteo Salvini’s assurance that the Italians will block the plan to extend the Brexit deadline. All 27 EU nations must unilaterally agree to such terms. Nice to see one nation state honour the democracy of another.

Note that even left-leaning UK House of Commons speaker John Bercow has said that May’s mildly altered versions can’t be brought before the House again for another vote. He’s right. Nothing short of wholesale change would alter the current drubbings.

How quickly can Eurocrats back down to offer the deal they probably ought to have done in the beginning? Did the British public ask for a watered down relationship with the EU at the time they voted to leave? No.

Hopefully Farage’s plan works. Sad to see that it takes a foreign leader to uphold democracy in the UK than the very people elected to do so.

Or do we cynically need to consider the idea that the EU will cut Italy some generous concessions to vote with the herd. Although siding with the British forces much needed change within the EU which probably can achieve the same result.

Over 60% of Italians voted for eurosceptic parties

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For a country that has 24 prime ministers in 40 years, Italians are no stranger to volatile politics. However this election, according to the exit polls puts the eurosceptic 5-star (M5S) as high as 32% from initial suggestions it would win 28%. Former Prime Minister Berlusconi’s Forza Italia and Matteo Salvini’s right-wing League (formerly Lega Nord) taking between 32% in the lower house and Senate. Lega’s leader Matteo Salvini has said, “We don’t have a euro in our pockets. We have a German mark which they called the euro.”. The incumbent PD is looking to finish a distant 3rd place With 20-23% of the vote.

Italy requires a 40% lead to form a majority. M5S vows it won’t form a coalition. What is clear is that 60% of Italians voted for parties that are anti EU. While the EU believes it is a club worth its weight in gold, a growing number of its members seem to be rejecting much of what it stands for.