Welcome we will be reviewing macro events from this past week from The Post I made at the beginning of this week on 8/30/22.
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
Italian Election Watch
US Employment
G7 Meeting
EU Inflation
Crypto Macro
Conclusion
1. Italian Election Watch
Please read this section from a post in July as a primer to this section. As you know from July, Italy has been struggling to form a coherent coalition government because voters and politicians are fractured. The centrist parties cannot win enough of the electorate to form a center right or center left coalition government, and so have had to form coalitions with far right, populist and far left parties. Since the 2018 elections each coalition government has lasted about 1 year before falling apart and trying to reform. After the last coalition failed in July, Italy has scheduled a new election for September 25th. My thesis for Europe is that the problems borne of money printing and otherwise weak economies that are poor in natural resources or in the production of present natural resources would lead to shortages and inflation which would then lead to political instability. This will eventually lead to another member country within the EU leaving.
It’s possible that Italy may be that member country, and we will be watching the coming election to see if that possibility becomes more or less likely. Such a move would further depress the value of the Euro due to speculator fears, despite Italian government bonds being one of those toxic assets that was dependent on money printing to survive. I’m not sure how Italy would manage to leave as the details for the roll-off of Italian assets from the ECB’s balance sheet would be murky at best and could cause a sovereign default of the Italian government if not handled with care, but sometimes politicians leave the details for the next prime minister to solve.
In the 2018 election we had this distribution of votes.
Certain players from the 2018 election need to be monitored if you have a financial position in the EU, or will be trading such outcomes. In yellow is the 5 star movement, a populist party that is Euroskeptic. In Green is The League, which is a center right party. And in dark blue is Fratelli d’Italia (Brothers of Italy, we’ll call them FdI), which are considered a far right party.
Due to how much of a mess the 2018 election was, and how rough of a go Italy is currently having in terms of inflation and production cuts due to energy prices, the previous winning parties have lost credibility among voters. Not to mention as further restrictions of the natural gas supply occur, Italy has one of the highest percentage uses of natural gas in western Europe and would be most affected by such supply shocks.
The above facets (and probably other italian intricacies and cultural nuances that go over my head) have FdI currently leading the polls according to Politico and others, you’ll note that back in 2018 they barely managed to get 4% of the vote but now they are polling at 24%.
The other bad news for people wanting to avoid a potential Italexit is the rest of the poll. The only Left or Center-Left party anywhere near the top is PD at 23%, and none of their natural coalition partners have more than 5%. So if polling were to conclude today, FdI could reach 46% of the vote with a coalition with the 5stars, Forza Italia, and the Italexit party, all of which are Euroskeptic parties. And then they have the ability to ignore the center right League entirely when forming their coalition and could potentially make some concessions to the far left and form a coalition government focused on making Italy more independent from the EU. But it’s still early days in the Italian election cycle, and many things can change as this will likely be another contentious election, just as 2018’s was.
It’s quite likely that this Italian election will have even more conflict surrounding it because of how contentious the potential outcomes could be. The FdI is lead by
Giorgia Meloni, and if they won, she would be Italy’s first female prime minister.
She was one of the few right wing holdouts from the previous coalition governments, and holding out has been to her benefit, as the previous coalition partners are all broadly collapsing or viewed as no longer viable, and their base is shifting to FdI. Depending on who you talk to, you will be told she is a fascist, Euroskeptic, populist, nationalist, etc. A quote from the linked Guardian article depicts the cosmopolitan viewpoint that an academic might hold of Meloni.
Meloni and Salvini have no answers to Italy’s never-ending economic crisis, apart from scapegoating Europe, migrants, “bankers” and “Soros”. Their strange “flat tax” proposals will almost certainly make matters worse.
She has a fairly coherent campaign at the moment, although, like all politicians she seems to remain blithely unaware of how much Italian sovereign finances are dangling over the edge of disaster. She wants tax cuts, stricter immigration controls, Naval blockades to stop migrant ships from reaching Italian shores after the US turned Libya into an endless civil war over who control the slave markets. She wants to end extended welfare for the unemployed, restart Italian nuclear plants and expand drilling for gas in the Adriatic sea.
Currently Italy does not permit same-sex marriage, and Meloni’s stance is against the LGBTQ lobby, and it is expected that she would not allow for any change to Italy’s current stance on marriage if she won. I think we can also expect that while she wouldn’t directly push for an exit from the EU, I suspect that she would seek to distance Italy from the EU, and depending on whether or not she forms a coalition that includes the League will determine how high the Italexit rhetoric gets pumped, as the League are more centrists who would not encourage Italexit. But the other thing to consider is what such a government would do if she forms a successful coalition and then inflation within the Eurozone continues to get worse while simultaneously rates on Italian government bonds are driven up at the same time. In such a scenario, that government may ask what their EU membership is getting them and may decide to allow for an exit referendum. Of course, that possibility is probably a year or two away, and that’s if they even win the election first.
But you should be aware that this is going on, and the change it will have to the EU if Italy suddenly switches from having a leader similar to Macron to instead having one who more resembles Hungary’s Viktor Orban. A longer drawn out Ukraine conflict and a harsh winter could put the Eurozone in such a position as to lose a (an admittedly bad) financial partner from their currency at a time when they can probably not afford to depict disunity on the global stage. We’ll revisit this at the end of the month after the election to discuss the results and potential implications, and then we’ll revisit again once a coalition is formed (if necessary).
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