We were gripped just one week ago by a spike in Italian bond yields the likes of which few can recall. Overnight, 10-year Italian-government-bond yields shot up from 2.62% to 3.16% and we heard talk that Italy was headed for some sort of collapse.
Given that yields had soared from 1.76% to that all-out fearful 3.16% range in just one month, it stood to reason that the world had to watch with baited breath over what could happen in Italy. Would there be a strongman elected who would break with the euro? Would there be a lurch to anti-immigration policies given that hundreds of thousands of immigrants have landed on Italy's shores, struggling to integrate into a country with 11% unemployment (plus pockets of 50% joblessness in some southern areas)?
It stood to reason that the Dow would plummet from 24,753 to 24,361 last Tuesday, didn't it? What's 400 points when a Western colossus with the third-largest bond market is crumbling? It's the proverbial black swan that no one saw coming -- and it has to lead to chaos, despair and ruin, doesn't it?
Well, one week later, Italian bond yields are back to exactly where they were before the political crisis began. The Italians conducted what was by all measures a very successful bond auction -- don't ask me who's dumb enough to hold them, but you sure could flip 'em, right? And there's a new firebrand prime minister -- Giuseppe Conti -- a University of Florence Law School faculty member who studied at such houses of tumult and rebellion as Yale Law School and Duquesne University. He also spent some time at the radical hotbeds of Cambridge and the Sorbonne.
I think it's fair to ask (since no one else will): "What happened here?" How did we all become so gripped by Italy that our markets had one of their more vicious declines since President Trump's election?
First, I would say that there are always going to be investors who like the status quo no matter how horrendous the status quo may be. There are also other investors so timid that they can't handle any uncertainty anywhere (even if it has nothing to do with the United States) simply because they're trained, quite poorly, to react to any new input with fear.
Finally, there are no rules about how the media can report things. People, (including I) are always looking for something new to talk about, and this spike in yields was worth talking about in stentorian and pseudo-knowledgeable ways. Or to put it another way, only a handful of people were willing to castigate the former Italian government and say that the country was totally dysfunctional and might be less so under a new government, even if that pressured the euro.
What should have happened? First, I think it would have helped to have some perspective on Italy. The country's gotten pretty dysfunctional, with almost no growth whatsoever. There's also that aforementioned 11% unemployment rate, plus an immigrant population that all parties concede will cost more than the country can currently afford.
At the same time, Europe's recent history of chaos has provided multiple opportunities to invest here in America, because you can count on some people panicking over the "black-swan theory." Finally, you can be sure that what happens in Italy won't be related to any individual companies, as all anyone cares about now are the indices. Those trade both here or abroad as if they're their own beasts these days, unrelated to anything corporate at all like earnings, or dividends or prospects.
Now, I concede you can't not report these things in the media. But I also think that the Italian crisis should have been reported in the light of what it really was -- an oddity that produced a quick spike in Italian bonds as a product of a government changeover. Nothing more.
But on a slow news day with almost no earnings and the usual Trumpian trade tensions growing less and less newsworthy, it was something new and exciting to report. And it was easily framed as frightening and worrisome, because there are no consequences whatsoever for it not to be framed that way. If it turned out to be terrible for our markets, the dread would be warranted. But if it turned out to have a positive resolution (which was the case), well, nobody pays for the scare stories.
It's an asymmetrical standard at work, and the only two things you can do are: 1) expect it and 2) exploit it. Otherwise, shame on you for selling, given how often these European "woe-is-me" stories burst onto the scene, explode and then recede within a few weeks' time. Or even less in the case with this particular Italian job.