By Alec Hogg
Our Stone Age minds are hard wired to overestimate the short-term effect of major transitions – but underestimate their long-term impact. It’s a result of mankind’s 70 000 years of hunter-gathering; then 10 000 of agriculture; and only 200 years in modernity.
Homo sapiens are conditioned to become overexcited by change, but to quickly settle into old routines once danger has passed. That condemns us to being poorly prepared for when hit by seismic shifts that we can see coming.
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Witness Amazon.com’s stock performance before and after the Dot.Com crash. In the “before” period, when markets were excited by the Internet, in four years Amazon shares went from under $2 a share to $106. In 2001, a year after the peak, they traded under $10. With the Internet revolution now hitting everything, you’ll have to pay $750 to acquire that same Amazon share.
The market reaction to yesterday’s results of the Italian Referendum have not deviated from that broad script. Initial panic on the “No” result drove the Euro to a 21-month low. But as we saw immediately after the US Presidential election, Mr Market soon relaxed – setting the stage for a belated future re-awakening.
As outlined in some detail last week, Italy’s populist Five Star Movement was tailored to benefit from an anti-establishment wave sweeping the world. In professional comedian Grillo they had their own jocular outsider – as per Brexit’s Johnson and America’s Trump. Little wonder “No” scored a 60-40 victory.
What happens next appears pretty obvious. Italy is like someone who for years has been borrowing to close the gap after spending more than they earn. At $2.1-trillion, Italy’s national debt is 1.3 times the size of its economy, having risen in each of the last eight years. Economists say once it goes over 1:1, borrowers enter a debt trap where it is impossible to repay the debt.
Countries with too much debt could previously address it by “reflating” – driving up inflation by printing money. But that option – likely to be employed by Trump’s America and May’s UK – is not available to Euro-based Italy. No surprise that Grillo’s anti-Referendum campaign was built on abandoning the EU’s currency and then “renegotiating” Italy’s debt.
He wants to wipe the slate clean, start again debt free. And isn’t concerned with risks. Grillo isn’t bothered by unintended consequences. Populists never are.
Long-term investors able to retain perspective will see the current populist wave as extremely positive for gold and very negative for the Euro and sovereign bonds. Also, not great for banks while also an inhibitor for global growth, open economies, China and commodities. But to take advantage we must overcome hard wiring which makes us under-estimate the obvious long-term impact.
