Where to look for the beginning of the end….

Tuesday 20th June 2017

Where to look for the beginning of the end….

My money would be on Italy. I think Italy makes for a fair bet….

Not to be the winners of the 2018 FIFA World Cup….

But to be the country that provides the spark that lights the fuse on the bomb that will bring the global financial system to its knees….

I’ve been thinking about what Jim Rogers said in his recent interview on Business Insider. I referenced his comments in last week’s column….

Rogers was talking about the crash he and I (and others) believe is headed our way and where it might start.

He said this: ‘These things always start where you’re not looking.’

  • Nobody was looking at Reykjavik in 2008….

You might recall that the 2008 global financial collapse started where nobody was looking – in Iceland.

Three of the country’s biggest banks, Kaupthing, Landsbanki and Glitnir – all privately owned – defaulted after experiencing difficulties refinancing short-term debt.

The crisis in the Icelandic banking system came as a complete shock. Nobody was looking at Iceland.

Nobody expected the most sparsely populated country in Europe – located in the far North where the North Atlantic and Arctic oceans meet – to be the source of a calamity that would fan-out and work its destruction across the entire global financial system.

But, like Jim Rogers says: these things happen where you’re not looking. And that’s where the last global financial crisis began – in little old Iceland.

  • The train wreck nobody dare miss….

Right now, the TV cameras and the press men are obsessed with the runaway train-wreck that is Donald Trump’s presidency.

All eyes are fixed on the grotesque spectacle. It’s a bit like watching a snake consume a donkey. You don’t want to look – but how can you avert your eyes when something so peculiar and horrific unfolds in front of you?

After an initial honeymoon period when the markets thought Trump might be a new messiah, the spell is gradually wearing off.

A few months down the road and markets are not as confident as they were that Trump can or will do what he promised and make America great again. The Trump trade is running out of steam.

Rather than making America great, Trump is in severe danger of turning her into a basket-case – a circus of loony-tune proportions played out on evening news bulletins worldwide.

His unorthodox approach (to put it kindly) is causing him problems. The crown does not sit comfortably. The word impeachment hasn’t been so popular with editorial writers since the dog-days of the Bill Clinton presidency….

  • Problems at the top in Britain….

This side of the Atlantic, the lens is focused on Mrs. May’s various trials and tribulations – not least the thorny issue of Brexit.

Will it be soft? Will it be hard? Will it happen at all?

Will Mrs. May even be involved for the entirety of the Brexit negotiations?

Right now, she’s struggling to get the support she requires from her own cabinet and back-benchers. Merkel, Macron, Tusk, Juncker and the rest are the least of her problems….

As recently as mid-May, she was the PM the Daily Mail said was ‘not afraid to be honest with you.’ Now the same newspaper is calling her ‘the Maybot’ – the PM without feelings.

When the Daily Mail’s photo-editors quit whitening her teeth in their front-page photographs and let the public see her incisors as they really are, we will know her time in No.10 is ending.

Meanwhile, nobody is looking at Italy. Perhaps they should be….

  • A government in serious trouble….

The Italian government is in a lot of trouble….

Government debt as a proportion of GDP is running at a whopping 133%….

That means Italy is one of the most indebted nations on the planet. The government has borrowed somewhere close to $2.5 trillion. Italy is on the very bones of its backside – the next best thing to flat broke….

The table below puts things into perspective. It shows you how Italy’s government debt compares to a selection of other nations….

Country

%Debt

Greece

179

Italy

133

Portugal

130

United States

104

Spain

99

France

96

United Kingdom

89

Germany

68

Sweden

42

Switzerland

34

Luxembourg

28

Italy’s national debt hasn’t quite reached the same herculean proportions of the Greek equivalent – a situation that has been well-documented and has required an ongoing programme of repeated bailouts.

But Italy is a bigger potential problem than Greece. If we exclude Britain, Italy is the third biggest national economy in Europe (the world’s biggest economy) behind Germany and France.

Greece might be ablaze. But that relatively small fire is relatively easy to manage. If the Italian government goes broke, the ensuing inferno will not prove so easy to damp down. It will spread quickly – across Europe and the rest of the world.

The signs are that day is drawing closer….

  • Turning off the taps?

The European Central Bank has been the big buyer of Italian bonds – effectively keeping the country afloat.

Quantitative easing…. money printing…. call it what you will…. the ECB has been using plenty of those hot-off-the-press Euros to buy Italian government debt….

Now that the European inflation rate has reached the 2% target set by Mario Draghi (the commander in chief of the ECB), the Germans (in much better shape than the Italians) and other EU states want the money printing to stop – to take the heat out of rising prices.

That’s the last thing the Italians need. If the ECB finally turn off the spigots from which fresh money has been flowing like water, it won’t be buying any more Italian government bonds.

If or when that happens, how will the Italian government fund its ongoing commitments? There’s a high likelihood it won’t be able to.

Confidence in Italy will swiftly evaporate once the EBC largesse is removed from the equation. The consequence will be a price crash in the Italian bond market. Nobody will want to lend money to a government in such dire straits.

The bottom-line is that the Italian government will find it nigh on impossible to raise new finance. And it will become like a ship without power – stricken and at the mercy of the high-seas….

  • Don’t rely on the Italian banks either….

And Italian banks won’t be stepping in to fill the ECB’s big boots. They won’t be launching any lifeboats. You can be sure of that.

Italian banks are already insolvent and will be fighting like rats in a sack for their own survival….

They already have $230+ billion of Italian government debt on their books. A crash in the Italian bond market will have a huge negative impact on their bottom-line figures. It could wipe them out.

Make no mistake. If the Germans get their way – and they have a knack of doing so – the Italian government and Italian banks are smack-bang in the middle of an endgame scenario. They might not survive.

The Italian system could be the first of many dominoes to fall….

  • 2008? A mere warning tremor in comparison….

The last global financial crisis started in Iceland. This time it might well be the Italian system that is sitting on a huge time-bomb.

But the devastating consequences in the Italian system will be no more than the start of something bigger….

When this earthquake hits, the effects will be felt far and wide – decimating markets and confidence. First in Europe. And then further afield. One domino bringing down the next as it falls….

2008 will look like a mere warning tremor in comparison….

This time round the debt in the global system is so much bigger…. so much more dangerous…. and replete with so much more destructive power. The effects this time round will dwarf those of 2008.

If or when the ECB turn off the printing presses that have been running off new Euros day and night since 2009, keep a close eye on Italy.

You might just be looking in the right place when the beginning of the end comes to pass….

That’s how it looks from here….

All the best,

Dave Gibson

Dave Gibson

Money Truths