The pressure valves are whistling in Europe… How Italy becomes the next Venezuela… And why it threatens your retirement… In the mailbag – “The War on Drugs is a joke at best”…
Our mission at The Daily Cut is to put you ahead of the profit trends shaping the markets.
Like the lookout on a ship, we also keep our eyes peeled for wealth-destroying crises on the horizon.
There’s no point in building wealth during good times… only to see it wiped out in a financial crash.
And as colleague Nick Giambruno has been telling readers of our Crisis Investing advisory, the next crisis won’t be U.S.-made.
Instead, it will detonate almost 5,000 miles away – in the European Union (EU).
As you’ll learn in today’s dispatch, the entire EU project could die in Italy… as soon as next year.
If that happens, it will be the most violent economic shock in history – dwarfing the collapse of Lehman Brothers… and even the 1929 Crash.
Like his mentor, Legacy Research co-founder Doug Casey, Nick is a professional crisis investor.
He spends much of his time flying around the world, studying the turmoil and the opportunities these crises often create.
He’s also an Italian citizen. He speaks the language. He knows the people and the politics.
And after putting his boots on the ground in Italy over the summer, he’s convinced the country poses a grave danger – not just to itself and the EU…
The 28-member EU is the second-largest economy in the world.
Last year, its economic output was $17.3 trillion versus $19.4 trillion for the U.S.
If the EU and its shared currency, the euro, collapse… another global financial panic won’t be far behind.
As you may recall, starting in 2010, we saw the threat of a Greek sovereign debt default nearly pull the EU apart.
We’re now seeing a graver threat emerge – this time from Italy.
Italy has the ninth-largest economy in the world. And it’s roughly 10 times the size of the Greek economy.
More important, Italy has outstanding debt worth more than $2.6 trillion – the fourth-largest national debt pile in the world.
That’s more than three times the $619 billion in debt that Lehman Brothers held on its books when it went to the wall in 2008. And it’s more than the $356 billion the Greek government owed in 2011, at the peak of the Greek sovereign debt crisis.
Without getting too far into the weeds, here’s why that matters…
The Italian government wants to expand its budget deficit beyond the EU limit.
This could mean losing the support of the European Central Bank (ECB), which has been backstopping Italian government bonds with “quantitative easing” – financial jargon for buying bonds with newly created cash.
But if the ECB refuses to bend… or finds itself unable to fudge the rules… a blowup of $2.6 trillion in Italian government bonds would hit banks across Europe that hold Italian sovereign bonds.
That could cause European banks to fail… lending to dry up… and economic growth to plummet – the so-called “banking doom loop.”
But the ECB may have no choice.
EU rules prevent it from helping a country unless it first agrees on a “rescue” program.
That’s technocrat-speak for a bailout in exchange for painful belt-tightening and economic reforms – something Italy’s government has flat out rejected.
Earlier this year, angry Italian voters swept aside the establishment parties.
Instead, they elected two populist parties that have campaigned on anti-EU and anti-euro platforms – the Five Star Movement and the Northern League.
The groundswell of anti-euro sentiment is no surprise. As Nick explains it…
According to Merriam-Webster’s dictionary, an economic depression is “a period of time in which there is little economic activity and many people do not have jobs.”
Italy has had virtually no productive growth since it joined the euro in 1999. Today, the Italian economy (real GDP per person) is smaller than it was at the turn of the century.
That’s almost two decades of economic stagnation. And it gets worse. Nick again…
The economy today is 5% smaller than it was in the second-quarter peak prior to the 2008 financial crisis. The overall jobless rate is about 11%. Youth unemployment is running at about 32%.
And these are only the official government statistics, which almost certainly understate the true numbers.
Establishment economists don’t want to call it a depression. But that’s what it is. And depressions have a habit of empowering combative hardliners.
When Italy issued its own currency, the lira, it could devalue it to regain competitiveness when the country went into a slump.
But the ECB issues the euro, not the Italian Central Bank.
So instead of devaluing its currency, the only choice Italy has to regain competitiveness is the hard way – allow its depression to continue to push its people out of work.
This will push down wages… make Italian exports cheaper abroad… and make visiting Italy cheaper for foreign tourists. But it’s deeply unpopular with Italians for obvious reasons.
It’s why, over the summer, Italy’s deputy prime minister, Matteo Salvini, declared…
I remain convinced… that the euro under these conditions was an error. Which we will put right.
We’ll leave the last word to Nick…
Italy’s new leaders don’t have the faintest clue about sound money. They want to leave the euro so they can print money and pay for giveaway social programs such as a “universal basic income” – free money for all, in other words.
These people are not Ludwig von Mises or Ron Paul. They want to go back to the lira, which was a very weak currency. That’s how they’re going to pay for their extravagant social welfare programs – not by hiking taxes or making cuts elsewhere, but by printing money. This is clear as day.
They want to leave the euro so they can turn Italy into Venezuela. And if they do, all hell will break loose – not just in Europe but around the world.
As we saw in the dark days of 2008, when a big enough crisis strikes, global stock markets tend to move in near lockstep.
That makes it even more important than ever to make sure you are not overexposed to the stock market.
That can be as simple as following (even very loosely) Bill Bonner’s three asset class solution.
It’s simple. You divide your wealth up into three simple asset classes – stocks, real estate, and cash (a mix of gold and U.S. dollars).
The exact mix – or total number – of asset classes isn’t important.
For example, you could substitute art or collectibles for real estate. You could sprinkle in some bitcoin along with your U.S. dollars. You could add some other precious metals in with your gold. You could add in bonds as a fourth asset class (dividing your wealth now into quarters).
What matters is that a single event – such as another global financial panic – can only do limited damage to your portfolio.
As Dan Denning, Bill’s coauthor at The Bill Bonner Letter, puts it…
No investment or allocation strategy can protect you from the worst type of financial calamity. However, maintaining a diversified asset portfolio is one good way of reducing how much damage you’d sustain when the next calamity occurs.
The debate of whether or not pot legalization is a good idea continues to rage in today’s mailbag.
Wednesday and Thursday’s mailbags were chock-full of arguments on both sides. And on Thursday, reader Greg G. said, “nobody has ever died of a marijuana overdose.”
Not everyone agrees with him…
“Nobody has ever died of a marijuana overdose.” I don’t know how true that is. But it is certainly an entrance drug and you might want to look into how many people have died as a result of a driver being high on marijuana.
– Dawna R.
Personally, I find it very difficult to invest in marijuana just for marijuana’s sake. Everything under heaven was created for our benefit. However, it requires a balance… and that is where we humans lose it. We don’t know how to live in balance.
– Delcia C.
Other readers say our personal freedoms are at stake…
I don’t understand the big stink over drugs. Aside from a puritanical, tyrannical government dictating every aspect of one’s life, why is it the government’s business what I do with my own body? If I want to drink alcohol, that’s my choice. If I want to eat only vegan foods, that’s my choice. Why did we cede personal, bodily sovereignty to the government in the first place?
The War on Drugs is a joke at best, and a financial and human nightmare at worst. If I want to smoke weed, or shoot up heroin, or overdose by huffing paint, that’s MY choice. Stop trying to save people from themselves. Stop trying to control everyone else and realize you have no control. Not over the markets. Not over nature. Not over others. And not even over yourself, to a very large degree.
Just let people do what they want. If that’s self-destruction, that’s THEIR CHOICE. Either you believe in personal freedom and personal responsibility, or you’re akin to the church controlling everyone in the Middle Ages. Pick one.
– Michael M.
To say, let alone believe, any one substance has never killed anyone is actually absurd. Liquor, marijuana, and other substances we ingest or introduce into our bodies change behavior and normal functions. Would you group these substances with inanimate instruments such as a fire arm, motorcycle, knife, or baseball bat? Substances alter how people behave. I could say a motorcycle sometimes alters how I behave. Same thing?
– Dave P.
Do you agree with Michael and Dave that we should have control over what we put into our bodies? Or do you think the feds should decide what’s good and bad for us? We read every single email you send us at feedback@legacyresearch.com.
Regards,
Chris Lowe
November 19, 2018
Lisbon, Portugal