Some alternative BREXIT thoughts and why Italy could be next.

The last couple of weeks entertainment have taught me that there are decades when nothing  happens in the world and weeks where decades happen. I have bounced from anger to frustration and back again. and am still trying to understand the logic for the BREXIT vote. I am slowly getting to that place and thought I might share some alternative, and thought provoking views.

I also want to write about why Italy could be next in line.  (Any ideas on what to call it, Exaly, ItIt?)

One thing appears to be much clearer to me now and that is that the vote on June 23rd was basically the ordinary people of the UK telling the 'establishment' that they have had enough of austerity and want change.

This shouldn't come as a surprise after 8 years of government and central banks  supporting bailed  out banks (TARP, LTRO, LTRO2, QE, ZIRP, NIRP to name a few of the easing programmes that have been employed!) allowing huge corporate bonuses to continue, destroying income from savings with low interest rate policies and more austerity/taxes for you and I. Conversely the uber rich and corporates have seen asset price rises, an increase in offshoring and consistent tax breaks. Warren Buffet is quoted as saying that he would be happy to pay higher taxes and cannot understand why he pays a lesser percentage of personal tax than a nurse. It seems that since the financial crisis of 2008 there has been one objective: to save the financial industry at all costs.

With all this in mind is it any wonder that the average working man in Northern England is 'not' concerned about the consequences of BREXIT; a possible fall in house prices, a loss of jobs in the City, a 10% fall in share prices. These people are immune to this kind of pain. For this person BREXIT probably seems like a bonus. An opportunity to put a finger up to the establishment and David Cameron who have not protected their interests as they should have.

The working class man from Northern England may be immune to the pain of people who have assets, but financial markets are not, and they have reacted as you would expect. (Admittedly they have rebounded in the last few days). This affects the middle class, who also have assets. Expect more volatility to come.

This could all signify an end to economic policy being controlled by academics and economists.

I am now in two minds. Continue with the status quo; economic tranquility and pushing the economic pain further down the road, in reality to the next generation or, should I be a supporter of BREXIT's 'economic' possibilities and what it could ultimately deliver: higher interest rates, debt defaults, inflation, possible asset price falls (no one really knows what will happen here), higher taxes in the short term, vast privatisation of public assets and reduced benefits, with the aim of normalising world economic affairs through short term pain, long term gain.  My problem with BREXIT is that I don't think that the average man in Northern England who voted out actually understands that this is what it actually signifies and if they did then would they really have voted out? 

In the end that decision will be made by the people, but let's not think it is only isolated to the UK. Donald Trump is making similar inroads into the old industrial heartlands of America.  Don't be surprised to see him as President of the USA later in the year.  Marine Le Pen in France and Movimento 5 Stelle in Italy (although they have now come out in support of the EU, but with radically changed policies).

Which brings me nicely onto Italy. I have had the BREXIT conversation with many people since then and I have been surprised to hear the reactions from Italians. I can give 5 cases when  each person considered their future better outside the EU. A fascist man running a stabilimento (no surprise there then!); a right leaning hairdresser from Naples, devout catholic and openly critical of the influx of immigrants (in my opinion you could call him racist with some of the views on non Italians); a centre right voting physiotherapist with 3 children and self employed; a self confessed communist psychiatrist (with 3 houses and a house in the centre of Rome paid for by her father); and a cartoon animator, living hand to mouth, who is an open supporter of M5S and a vote to exit from the euro and the EU. 

All have their own reasons but essentially the same rationale. When the euro was introduced everything doubled in price and wages halved. They seem to think a vote to leave is a way to turn back the clock. That nostalgic feeling...'taking back control'.  We have heard that somewhere before!

The reality is likely to be quite different and would reflect the UK's immediate future if they do exit from EU (I am still not convinced they will). However, the point is that they all feel let down by the EU and would be better off without it.

So, where does this lead us to. A huge inflection point for Italy will come in October. Renzi has proposed a Constitutional change which will essentially liberate the Government from the current two chamber system and allow one party rule for a 5 year period, in much the same way as the UK and the USA. 

If this Referendum should fail to be approved by the people then Renzi has stated that he will step down as Prime Minister.  

The problem for Italy is that:

1.  It will likely return to less than 1% economic growth, and for a country that has hardly grown since the introduction of the Euro in 1999, that would not be good.

2.  Italian banks do not have enough capital to weather a storm of that nature. They are sat on €360 billion of non performing loans (a third of the size of the Italian economy).  If Italy voted out of the EU, Banca Italia would have to print that money to re-liquidate the Italians banks and that would lead to some pretty spectacular inflation.

3.  And lastly, Renzi leaving his post would  would leave a big void and allow parties with an anti European sentiment to fill the space.

This is going to be a trying time for Italy, the EU and the UK. I would suggest that this IS the EU's 'moment'.  If it can survive this then it will pull through, if not then it will fall apart.

So in all this mess and future potential mess what should we be doing with our money. GOLD and the US Dollar. These are things that will weather the storm. How and in what to invest to get best access to these assets is a subject for another time.

If you have any concerns about how BREXIT and other events may affect you and your money then please get in contact on +39 333 649 2356 or on email gareth.horsfall@spectrum-ifa.com