Europe, or, You're Up

Back in the USA!  And for our first meal in Atlanta after two months, we had...Chinese.  Which was delicious, but our fortune cookie said - no joke - “Don’t invest in the stock market.  Invest in family instead.” Well played, China. Apparently we have progressed to the psyops portion of the trade war.

But let’s leave China to the side for the time being (until we get into what it means to have the world’s reserve currency) and stick with Europe for another month.  Europe is a hot mess.

​Let’s start with Brexit.  Boris Johnson is brilliant.  Well, perhaps not. I mean, he kind of looks like he never outgrew his second year of boarding school where experimentation with sloppy hair and dress was all the rage, which admittedly taints our opinion.  But he and/or his advisors (rumor has it Dominic Cummings is largely the brains behind the Brexit tactics) have played this beautifully.

This is not an endorsement of Brexit, merely an appreciation of political tactics.  Though to be honest, from our desk an ocean away, Brexit doesn’t seem to be the terrible tragedy the Remain side claims.  And given that the Conservative party (Boris Johnson) has gone from down 2 points in the polls to the Labour party to up 10 since he got selected prime minister (a time span of about two months), it seems the populace seems to agree.  A populace that, remember, did vote to leave. Without even a faithless electoral college to muck things up!

(Sidebar:  Good on the appeals court.  America is not and never has been a populist democracy, it’s a representative democracy.  Yes, the electoral college is super outdated and needs a change, and yes, finding out that your vote doesn’t really count for anything other than which political party gets to put up their slate of favorite contributors, oops, sorry, we mean electors, hurts, but just consider it another lesson in the State not actually caring about you.

What we’d like to see is to do away with the electors completely - keep the electoral “votes” as they are, just don’t have actual people casting them.  California still gets 55, Georgia still gets 16, New Hampshire still gets 4, etc., but they get allocated via proportional representation based on the popular vote in that state.  If California votes 61.7% for Clinton (which they did in 2016), then she gets 34 electoral votes and Trump gets 21.  This has the benefit of using the existing electoral college system (which is still useful for protecting the smaller, less populated states as well as being easier from an overcoming-inertia standpoint) and the added benefit of making individual votes more meaningful - the Republicans in California or the Democrats in Texas/Georgia suddenly have something to actually contribute on a national level.  Sidebar over.)

Back to Brexit.  So Johnson goes to the Queen and gets her to agree to prorogue (suspend) parliament for a month, from September 14 - October 14.  Kind of like how our Congress disappears for 6 weeks every summer (and 14 weeks from end July to middle October), regardless of any pressing issues or, you know, entitlement reform legislation that might be good to work on at some point.
Johnson has promised a no-deal Brexit on October 30th (a date that came about as a result of many earlier negotiations between Britain and the EU), and now the opposition in Parliament has 30 fewer days to do anything about it.  They have two weeks right now and then they’ll have just two weeks when Parliament starts up again. The thing is though, it doesn’t look like there’s a lot they can do. There are some legal attempts going on at the moment to try and stop Johnson, but proroguing is constitutionally legal.  There’s talk of a no-confidence vote, but that would require a coalition government to form within the opposition (very unlikely, given the lack of leadership evident in the last 3 years of the Brexit mess) or result in a new election. But - twist! - the current government (Johnson) would be responsible for choosing the timing of the election, and he has already said it would be early November...after a no-deal Brexit.

Does Johnson actually want a no-deal Brexit?  My guess would be no, which is part of the reason that he’s kept rebuffing Nigel Farage, but committing to one and putting it almost irrevocably in motion is the only thing that seems to give Britain any leverage for continued talks with the EU.  So you’ll probably see a flurry of last-minute negotiations at the end of October and then a vote in Parliament on whatever gets cobbled together, with the specter of a no-deal Brexit on Halloween in the background. Trick or treat, indeed but it should be great watching from this side of the Atlantic.  If you’ve never watched a Prime Minister’s question hour, do yourself a favor. They’re streamed live.

Also contributing to the dumpster fire that is Europe this summer, Italy’s government just collapsed.  Not anarchy-and-street-protests collapse, but still. Here’s the Cliffs Notes version:

Italy was governed by a coalition between the Five Star Movement (M5S - a populist anti-establishment party started by former comedian Beppe Grillo) and the League (far-right party led by Matteo Salvini).  The League is super popular right now, so Salvini withdrew his party from the coalition in the hopes of necessitating new elections and thereby winning a majority outright and becoming prime minister himself.  So he went off to the beach to celebrate.

But, while Salvini was at the beach, M5S got together with the third largest party in government, the Democratic Party (PD) to try and form a new coalition government, avoid elections, and leave the League on the outside looking in.  Except - twist! - you might remember the PD from Italian politics as one of the two main parties (the other being Berlusconi’s Forza Italia) for...pretty much forever, and in fact being the party in power when the M5S got started. As an anti-establishment group, remember.

So now you have basically antithetical political parties trying to make a coalition government.  And when it falls apart (when, not if - this is Italy we’re talking about), you’ve got the far-right League waiting to come back into power.
Which is important if you look down the road because Italy has the same problems Greece did.  Bloated budgets, excess debt, and spending that exceeds EU mandates. Except Italy is a much bigger part of the EU.  On economic terms, Greece is just under 2% of the Eurozone. Italy is 17%, and the third-largest of the 19 countries.  So whereas Greece was forced to take the bitter pill of Austerity, Italy (especially a far-right-led Italy), will tell the EU to shove that pill like a suppository.  So imagine what might happen in the markets, given that Greece managed to roil European markets for several years.

That graph is the last 10 years, 9/2009 to 9/2019.  The orange line is the S&P 500, represented by SPY. It’s up 177% in 10 years.  The blue line is the Eurozone, represented by EZU. It’s flat. Most of that flatness in the early years was because of the European Debt Crisis (ie, Greece).  Italy will be a whole other can of worms.

Which brings up an interesting question vis-a-vis diversification: in the immortal words of Edwin Starr, “huh, what is it good for?”  Stay tuned, because that’s where we’re headed with next month’s newsletter.