Six months ago the Italians held some bond auctions that brought the Italian benchmark to the 7% level. Leading in to it, we heard that if Italian bonds traded at 7%, the fate of the Western world would be in balance. When it finally happened we had one of our worst trading days of the year.
The whole thing was "inconceivable" -- accounts worldwide seemed to be in disbelief that Italy, the world's third-largest bond market, could unravel.
Now six months later the Italians held another bond auction, this time for money out until 2015, and it was a disappointment for certain, with rates spiking from 2.76% to 3.89% in one month.
Of course the stock market there and others on the periphery seemed to think that the auction wouldn't go badly and before the results these markets were trading flat vs. yesterday's close, to which I say, "Huh? What were you thinking? After all you've been reading, do you really think the market would not resume its decline that started earlier in the week?"
But that's exactly what happened. I guess you could therefore say the poor results were "surprising."
Here, however, is the key piece of information you need to be thinking about: Whereas in November people were in disbelief and the unraveling was "inconceivable," we all now know that a financial catastrophe could happen if the authorities do nothing. In other words all of the leading politicians and foreign ministers in Europe know it is conceivable. And that's what changes the equation.
Sure, we can fear Italy. We should. Without growth Italy won't be able to handle its finances itself. No kidding. That's what this whole exercise is about -- no single country outside of Germany being able to handle the problems itself.
But, again, I come back to what's conceivable. The drill from November did occur. This is not the first time. The authorities are prepared (as dysfunctional as they seem) and we learned in December that they would take any steps necessary to keep the center holding and stopping things from falling apart.
It is that, and that alone -- the will that was demonstrated, which then produced workable solutions -- that makes it so while we must address Italy in our thinking, it is not the only address.
So, keep in mind when you hear the yammerings today that it is "all" Italy, that such musings are no longer empirically correct. It is "some" Italy. That's a big difference, one that will be lost in all of the selling by people who seem to forget that November did occur and that the sheer act of its occurrence and the positive aftermath make the results different this time around.
So sell away. Sell in April and May if you want to. But you need more than just Italy and the fact that we rallied almost 1% yesterday to be the reasons for a wholesale "risk off" event (I'm putting the putatively moronic phrase "risk off" in here just to sound authoritatively obfuscating and, yes, annoying).
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