Tuesday, 17 July 2018

On Italian bonds: Why positions on Rome weren't built (or lost) in a day

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What’s the definition of not caring? How about 10 year BTPs dropping no more than one point when former Prime Minister Silvio Berlusconi announces that he will no longer support the Monti government and attempts to force early elections in which he, aged 76, is looking to make a grand political comeback.

Anthony Peters, SwissInvest Strategist

Forget the “Bunga Bunga”, the inappropriate jokes, the prostitutes, the improprieties and the populist TV stations. Our man Berlusconi is taking a run at the government for having failed to generate the growth it had promised. This is the right beating up on the left.

Here in the UK, it is the left beating up on the right. I am reminded of the stressed young mother hitting a crying child and urging it to shut up.

The simple fact is that the growth potential simply isn’t there. After the seven fat years should come the seven lean years but as European governments failed to follow Joseph’s biblical advice to the Pharaoh and make provisions during the good times, the tough times which followed have been converted into a full blown famine.

In the fullness of time, it will be the right trade but how to overcome the mark to market risk while getting there is one of the key conundrums of modern investing.

Italy has a long history of short lived governments which must, at some point, beg the question as to whether the country’s economic success – and the huge leap forwards in the past fifty years should not be underestimated – is because of despite the shenanigans of Rome politicians?

Orson Welles gave Harry Lime in “The Third Man” the immortal words that: “In Italy for 30 years under the Borgias they had warfare, terror, murder and bloodshed, but they produced Michelangelo, Leonardo da Vinci and the Renaissance. In Switzerland they had brotherly love – they had 500 years of democracy and peace, and what did that produce? The cuckoo clock.” (I’m sure I don’t have to add that the cuckoo clock is in fact German, but I don’t think that such a detail blunts the point).

Italy v Spain

Joking aside, the Italy/Spain 10yr yield spread has contracted back into the 90bp area as investors continue to toss the two masters of the garlic belt into the same pot. More wrong they could not be. In November last year Italy in fact traded north of Spain. Then too I warned of misunderstanding the core difference between the two. Spain has a responsible government fighting to manage a country with no meaningful industrial economy. Italy has irresponsible government ably succeeding in mismanaging a more than just reasonably competent industrial economy. If I was in the business of trading Italy against Spain, I’d be long the former all day long and yet I’d have had my glutes handed to me on a plate several times in that past year or so. In the fullness of time, it will be the right trade but how to overcome the mark to market risk while getting there is one of the key conundrums of modern investing.

I had to laugh this morning at the headline “JPMorgan Investment Bank Bonus Pool Said to Fall as Much as 2%.” As “much” as 2% – they’re having a laugh! The CIO Office CDS losses were supposed to amount to over US$6bn when the bank’s net for the year will hit something in the area of US$20bn – after the write down – and the bonus pool is only down by 2%?

The argument is supposed to be that the losses were not taken in CIB but in the CIO in London and that therefore the performance related pool is protected. You might get it and I might get it but whether lawmakers and shareholders get it (other than right between the eyes) is another matter entirely.  


Alas, it’s that time of the week again. All that remains is for me to wish you and yours a very happy and peaceful week-end. As England battles with India in the third test match – that’s in cricket for the unfortunate foreigners who still think that a cricket is the thing you light your cigarettes with – may you forget the OMT and focus with joy on the LBW while appreciating that although too many cooks may spoil the broth, it only takes one Cook to finish the curry.

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