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Weekend reading: Italy pushes me to the tipping point

Weekend reading

Great reading from around the web.

Europe hasn’t bothered me much these past few years – unless you count my terror this summer when I was quizzed by a tussle-haired French waiter in jeans (even scarier than the old-fashioned variety) in a hip Parisian eatery1.

No, I’ve carried on investing despite more prophecies of doom than you’ll find in a Tolkien trilogy.

That’s not to say Europe’s problems aren’t immense. However:

  • I wasn’t surprised by them, because I never supported the Euro. It’s the flaws of the original currency union – not the particulars of any one country – that are ultimately threatening Europe.
  • I believe it’s in Germany’s interest to save the Euro, and that it can do so.
  • I can’t do anything about it, anyway.

But my measured bonhomie towards Europe’s woes was pushed to breaking point this past week.

First Italy’s Silvio Berlusconi turned away the IMF because the restaurants in Rome were full (really). Then he didn’t quit when I bet he’d have to. Next Italian bond yields soared after margin requirements by a key broker were increased – and the ECB at first stood by and did nothing. Finally, numerous ECB officials ruled out intervention by Europe’s Central Bank.

Meanwhile the idea of Greece leaving the Eurozone began to be discussed as a plausible option by the core decision makers. Greece doesn’t matter much – it amounts to 1% of European GDP, and most of its debt has already been written down – but the dangers of precedent setting loomed large.

I was so bothered that I finally sold out of some of my defensives in the trading portion of my portfolio on Tuesday. They are well up over six months and didn’t look likely to go much higher in a surprise rally, and I wanted some cash to buy bargains in a rout.

Happily, however, Europe, the ECB, and me all stepped back from the brink.

Berlusconi got the boot in Italy, austerity measures were approved, and a new technocratic government is on the way. Germany’s big bluff against Greece worked, too – it called off its referendum and it’s getting a wise council of wonks to push through reforms.

Best of all, the ECB stepped back into the bond markets and pulled the Italian 10-year bond rate well under 7% again. Having proved it can do it once, the clamour for it to do so again will surely be irresistible.

On Friday morning I bought back in with the cash I’d raised, roughly equal on the deal and without tax consequences thanks to glorious ISA protection.

I still believe market timing is a mug’s game, incidentally, even though being more active has helped me over the past 3-4 years. Regular meddling looks clever until a big surge one way or the other wipes out the profits you made (after expenses) by fiddling – and that’s assuming you’re even good at it in the short-term, which most people aren’t.

I far prefer to remain invested at all times (though I actively tinker with asset / geography / sector allocation, even in my passive portfolio). My going part-liquid on Tuesday was a measure of how much risk Vs. reward had finally tilted for me.

Now I’m back to a watchful vigilance. While I read as much about Europe as the most avid doomster, I still believe this sort of drama is more likely to yield opportunities for equity investors with a sufficient time horizon. Time will tell.

Here’s some special cuts on Europe to help you make your own mind up:

  • Martin Wolf: Thinking through the unthinkable – FT
  • Eurozone turmoil: Enter the technocrats – FT
  • Leaving the Euro is hard to do – Planet Money
  • Darling: What Europe must do, now, to avoid calamity – Independent
  • Staring into the abyss – The Economist
  • Sorry, there is no Euro break-up plan (yet) Telegraph
  • Germany will rethink its views on printing money – Independent
  • Seven reasons Italian shares could fall further – Market Watch

From the money blogs

Deal of the week: The new Steve Jobs biography is less than half-price at Amazon. There’s also a Kindle edition.

Mainstream investing news

  • 3 wealth-sapping myths about the ‘best buy’ tracker – Motley Fool
  • Most diversified stock portfolio on the planet – CBS News
  • How a financial pro lost his house – New York Times
  • The extraordinary delusion of believing what you read – WSJ
  • The market is catching up with the Santa Claus rally – Market Watch
  • Former richest man in Ireland declared bankrupt – BBC
  • The inequality map – NY Times
  • Beware the high TER of private equity funds – FT
  • Flexible drawdown pensions have IHT benefits – FT
  • The case for solar after the government slashes FiT’s – Guardian
  • Aussies going home – Guardian
  • Investing in a 7 billion-strong world – Telegraph
  • War hero gives winter fuel allowance away – Independent

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{ 5 comments… add one }
  • 1 ermine November 12, 2011, 4:40 pm

    in Italy, austerity measures were approved, and a new technocratic government is on the way. Germany’s big bluff against Greece worked, too – it called off its referendum and it’s getting a wise council of wonks to push through reforms.

    Doesn’t that kinda scare you, in a non-economic way, ever so slightly? Normally you have to park tanks on the lawn to change other countries’ governments 😉

  • 2 The Investor November 12, 2011, 5:43 pm

    @ermine — Yep, it’s not particularly democratic, although ‘democracy’ in the case of Italy in recent years is a pretty imperfect label. 😉

    As you know I hate debt; loss of options, if not self-determination, is one of many reasons why. But that’s what happens when you borrow up to the hilt, whether you’re a country or a person.

    My bet is that the Germans know what they’re doing. They are prepared to take things to the brink to get concrete measures / concessions out of these countries.

    Ultimately it’s in their interest to do so — they / the ECB could even make a profit on Italian debt assuming it gets repaid. It’s not a one-way transfer of wealth, it’s a loan. But for that to hold they have to create a credible big stick to wave around the carrot, and I think that’s what they’re doing.

  • 3 ermine November 13, 2011, 6:36 pm

    They are prepared to take things to the brink to get concrete measures / concessions out of these countries.

    I wonder if that is sustainable. Obviously they can get concessions to fix the immediate problems, the total eurozone debt is tractable when viewed as a whole. However, it won’t make the different nations’ productivities converge, so the problems will simply grow again as the running deficits are turned into debts.

    The German nation has had two experiences unique in the Eurozone that will make them loath to either act as a lender of last resort (=enlarging the money supply, what on earth could go wrong there) and much more recently, the extra taxation that is associated with a transfer union, when West Germany bought out East Germany at par WestDeutschemark = OstDeutschemark. This happened in the 1990s, and there was common cause between east and West Germany – family ties, historic ties and a shared language. The extra taxation wasn’t universally well received by West German taxpayers.

    The EU technocrats are keen to get Germany to do one of these things, and yet Germany knows the costs only too well.

  • 4 Salis Grano November 13, 2011, 8:06 pm

    Much will hinge, methinks, on the political question of whether it will be possible to leave the Euro and stay in the EU. Germany/France will try to say no to that whereas, I suspect Clubmed, at some point, would prefer it to be yes. There is going to be a lot of bluffing. Germany can’t export so well without a big Eurozone to pull down the Euro w.r.t to other currencies.

    Unfortunately, I think that means a lot of FUD in the markets for quite a time yet.

  • 5 The Investor November 14, 2011, 10:48 am

    @Ermine — I agree that the relative uncompetitiveness of Italy and Spain is at the root of the problem (and to the extent it matters from our economic perspective, Greece and Portugal).

    This is why I think the German’s are playing such frightening hardball. They need to force these countries into half-credible structural reforms; if not going the full Anglo-Saxon route to free up their labour markets, etc (the growth side) then at least down the more Germanic route of getting their annual budgets into order (the tax/austerity/entitlements side) (something Italy isn’t too far away from, anyway, compared to say the UK).

    If you want to win by bluffing, you have to be prepared to ultimately go through with the bluff.

    As Salis Grano says above, that means more fearful conditions for a while, and the outside (though as I keep saying I believe a very low probability) chance of a blow up.

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