October 2, 5:00 pm EST

Italy’s face-off with the EU is ramping up, following their announcement last week of plans to increase their deficit spending.

Why does it matter?

This is another round of populist push-back against policies that have stifled economic recovery and threatened sovereignty over the past decade.  We’ve seen it play out in Greece, in the UK, and in the U.S. 2016 election.

With risk rising of a shakeout in Europe, you can see in the chart above, money is moving out of Italian government bonds and into German government bonds.  This sends Italian yields UP and German yields DOWN — on what is already a 300 basis points spread between the two 10 year borrowing rates.  A continuation of this puts pressure on Italian solvency.

But this will all likely end favorably for Italy and for the broader European economy.  Because as Italy pushes back on austerity, we’ll likely to see the EU make concessions on fiscal constraints, that will open the door for fiscal stimulus across Europe.

The policymakers know very well that the health of the “monetary union” is the lynchpin in Europe.  If it’s pulled (by an exit of a constituent member), the European Union will crash and fracture.  That’s why the ECB stepped in back in 2012 to prevent debt defaults in Italy and Spain.  And that’s why EU officials have made concessions throughout, on aid to keep Greece alive.

Italy’s resistance will come with a lot of draconian threats and warnings (from EU officials, as we’ve already seen), but in the end Italy may be the catalyst to unlock growth in Europe.

Trump has laid out the playbook for economic stagnation.  It’s aggressive fiscal stimulus.  Europe should follow that lead.

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September 28, 5:00 pm EST

 Back in May, the populist movement that gave us Grexit, Brexit and then the Trump election, gave us a new government in Italy with an “Italy first” agenda.

Italy first, means EU second.  And that puts the future of the European Union and the European Monetary Union in jeopardy.  Today, the new government made that clear by rejecting EU fiscal constraints, in favor of running a bigger deficit spending.

This puts the game of poker the European Union has been playing since the financial crisis erupted, front and center (again).

As we discussed back in May, this story is looking a lot like Greece, which used the threat of leaving the euro as leverage to negotiate some relief from austerity and reforms. It was messy, but it gave them a stick, in a world where the creditors (the ECB, Eurogroup and IMF) had been burying the weak economies in Europe in harsh austerity since the financial crisis.

As the third largest euro zone constituent, Italy brings a lot more leverage in negotiating, in this case, the EU rulebook. We may see this all result, finally, in a relaxing of the fiscal constraints that have suppressed the economic recovery in the euro zone in the post-Great Recession era. And Italy’s pushback may lead the way for a euro-wide fiscal stimulus campaign — following the lead of Trumponomics.

A better economy has a way of solving a lot of problems.  And Europe has a lot of problems.

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May 24, 5:00 pm EST

We have a lot of geopolitical noise surrounding markets.

Let’s step through them:

1) Yesterday, we discussed the Trump trade threats with China:

How is it playing out?

We have an economy that is leading the global economic recovery.  China wants and needs to be part of it.  Trump’s bark, with the credibility to bite, is creating movement. It’s creating compliance.  That’s becoming a very positive catalyst for global economy and for geopolitical stability (the exact opposite of what the experts have predicted these tactics would produce).

2) We’ve talked about the shock-risk developing in Europe.  A coalition government forming in Italy, with an “Italy first” approach to the social and economic agenda, has created some flight of Italian bond market capital toward safety. This has people skittish about another blowup threat of the euro zone.

How is it playing out?

The last time Italy was on default/blow up watch, the 10 year yields were 7% (unsustainable levels).  At those levels, the ECB had to intervene.

This recent move in the Italian bond markets leaves yields at just 2.4% …

This looks like Grexit, Brexit and the Trump election. It creates leverage for the third largest economy in the European Union (excluding Britain). In this case, we may see it result in a loosening of fiscal constraints in the European Union – and an EU wide fiscal stimulus plan to follow the lead of the U.S.

3)  The North Korean nuclear threat …

How is it playing out?

Eight months ago, North Korea launched a missile over Japan.  Markets barely budged, and the world continued to turn.  Now, we’ve quickly gone from an imminent threat to potential denuclearization. And now a meeting has been cancelled.  With that, on the continuum of this relationship, I’d say it’s closer to its best point, rather than its worst.

Bottom line, these risks should do little to stop the momentum of the economy and the stock market.  

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