Welcome we will be reviewing macro events from this past week from The Post I made at the beginning of this week on 7/18/22.
I have added a Definitions page which will include all of the terms and abbreviations that I use from now on and will be referred to on every post.
Substack has launched an iOS app for those of you using apple devices. I am an android peasant and can’t tell you if its good or not, but check it out if you have an iPhone or some other such trappings of royalty.
Please feel free to skip around or ignore certain sections if it does not apply to you. The Table of Contents is made to preserve your time in this manner. You can always simply read the conclusion if you are in a hurry.
Table of Contents
Italexit?
European Interest Rates
Royal Bank of Australia
Japanese Interest Rates (lol)
Crypto Macro
Conclusion
1. Italexit?
Italy’s Prime Minister Resigned on Thursday.
An interesting note, Mario Draghi was the Chairman of the ECB before it’s current Chair, Christine Lagarde. If anyone knows just what Thursdays ECB interest rate decision means for Italy, it’s him. I don’t think that’s specifically why he resigned, but we’ll talk some more about what it does mean, and what it could mean.
While reading this section, please be cognizant of my general thesis of the Euro-zone countries breaking up over austerity or potential austerity as Italy is one of those countries that has very toxic government debt that has been funded by ECB money printing. Also be mindful of my words from Monday.
Or, more likely… Germany does nothing and another country is the first to leave the Euro currency instead. But I expect Thursdays decision to be pivotal
We’ll discuss the European Interest Rate decision in section 2, which I think is tangentially related to what’s going on in Italy. But first, let’s discuss the Italian government and the resignation that occurred on Thursday.
So first, to avoid mis-leading you, Draghi did not resign because the ECB raised interest rates. Draghi resigned because his coalition government in the Italian parliament fell apart, this is the 3rd or 4th time the coalition government from the 2018 elections has fallen apart and Draghi has only been PM since February 2021. Similar to German elections that I discussed at the beginning of the week, all of the parties run for seats in parliament, and then whichever parties can form a coalition to represent 50% or more of the seats becomes the majority government.
Problems arose in the 2018 election which resulted in a hung parliament. The Populist Party (5 star movement - yellow) won the popular vote with 32% of the vote and 36% of seats in parliament. This is the party that proposed leaving the EU despite the Euro being of significant benefit to Italian sovereign debt financing.
The other Italian political parties did not want to form a coalition with the 5 Star Movement and so created a center-right (blue) and center-left (red) coalition.
Unfortunately for the other political parties they still did not have enough of the vote through these coalitions to be able to form a coalition government just yet.
In 2018, the primary drive for Euro-skepticism was the migrant crisis. In Italy the population breaks down demographically North to South. Northern Italy is fairly similar to Germany, France and Switzerland in culture and ethnicity. While Southern Italy’s population is more mixed with Mediterranean and Arabic culture. During the expansion of the Arab caliphates that eventually lead to the crusades, Southern Italy was occupied for nearly 100 years by the Rashudun Caliphate. During this southern occupation, Muslim raids reached as far North as Italy’s current border with Switzerland and at one point even put Rome under siege. A result of that occupation is that a significant portion of Italy’s southern population has some genetic admixture of the native Apennines with the Arab and Mediterranean invaders of the 8th and 9th century, while the North are mixed with German, Swiss, and French.
To this day there are quite a few cultural divides between Northern and Southern Italy with the South often feeling as if they are being aggrieved upon by the more cosmopolitan and less Mediterranean North. The migrant crisis was an example of how policy led to votes being split upon these ancient cultural lines. The migrant crisis was an EU policy that the North supported, while Southern Italy were the ones who actually had to deal with the migrants landing in, and overwhelming some of their cities and the facilities they tried to process them in. So any politician promising some form of populism or to leave the EU garnered significant support in the South in the late 2010’s.
Now, if we refer back to the original 2018 election results after the failure of the center-right and center-left coalitions to surpass 50% of the seats and form a government, some sort of agreement had to be made to create a coalition government.
So, The League (green, a center right party) broke away from the center right coalition and entered negotiations with the 5 star movement (yellow) in order to form a coalition government with 55% of the seats in Italian parliament. However within a year the first Prime Minister resigned, and the League gained more seats in parliament while the 5 star movement lost seats. So the next coalition government was under more control of the League, while the 5 star movement’s influence over the coalition waned. Basically every year since then, the Prime Minister of Italy has stepped down and they have squabbled over the creation of a new coalition government. Draghi was just the last in a line of weak, ineffective governments since the 2018 election, and after the Italian Parliament gave a vote of “no confidence” in Mario Draghi’s leadership last week, he decided to resign yesterday. Parliament has been dissolved in its entirety now and a new Italian election will be held near the end of September 2022.
The most recent no-confidence vote was lead by the 5 star movement who refused to vote with their coalition anymore. Despite losing seats continually since the 2018 election they still held significant power among their coalition. The coming elections in 2022 will tell us whether an Italexit is a possibility or not. Despite Italy being an anchor on the Euro currency as a whole, if the markets deem Italexit as a real possibility, there will be further broad selling of the Euro to come.
Not to mention, this is happening at one of the worst times for the Euro. But then again, tragedy often strikes you when you are at your weakest. We’ve already previously discussed how the ECB is currently funding Italian sovereign debt and their move to stop printing Euro’s yesterday may put the Italian treasury under significant pressure through rising bond yields as we start to head into the elections. It wouldn’t be too much of a stretch for an Italian populist movement to blame shortages, inflation, and energy insecurity on the EU, and it’s not totally impossible for more Southern voters to show up and vote for this populist movement. I view a break-up of the Euro-zone as inevitable due to how divergent the member countries finances are. But no one can really say for certain just when or how the inevitable fire will start.
Now I could be wrong, the countries could gather together in solidarity, and accept austerity and shortages as the price to pay for 13 years of money printing and spending what they didn’t have. But I think it is dangerous to underestimate just how much the average person truly believes that they can get something for nothing. I have no faith in the Euro-zone to delay gratification for their own benefit, maybe Italexit is the inciting spark, maybe it isn’t, but you should be wary of this as a possibility and as a source of further global instability in what is already an unstable world. The election will be September 25th, 2022. Keep an eye out on it.
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