Uncle Ricky, could you read us a bedtime story? Please?
Courtesy of Joshua M Brown
[Yesterday] morning, the US stock market reacted to PM Renzi’s lost Italian referendum with a gigantic IDGAF, the Dow printing a new all-time high within minutes of the open. Hell, even the euro gained on the news – which is hilarious if you’re in the camp that says the odds of a Euro Zone break-up increase with every populist victory at the polls.
I call this phenomenon “crisis fatigue”. If everything is a crisis, then nothing is. BTW, Italy has now had 63 “new governments” since WWII so IDGAF is perhaps the most appropriate of responses, historically speaking.
Here’s a highly prescient tweet from Barbarian Capital I want to share with you:
Market reactions>
Brexit: sharp dip, few days to recover
Trump: sharp dip, few hours to recover
Italy: probably just straight up— Barbarian Capital (@BarbarianCap) November 28, 2016
Some smart people are telling the story that the market reacted positively to the news because “a euro without Italy and its debt burdens is actually a stronger currency / economic union.” Perhaps they’ll feel the same when Le Pen sweeps through France like a hurricane. Is a euro without France stronger? How about without the Netherlands? Should Germany leave to really make it rock-solid?
Another story being told is that the Italian referendum’s ‘no’ vote was extremely well-telegraphed and that, on its own, it doesn’t mean an exit from Europe – all it means is a caretaker government through 2018 where very little gets done or changed.
One more story – US stocks are now the safety trade again for global fund flows, so that chaotic happenings elsewhere serve to make the S&P 500 more desirable for those pulling money out of geopolitcal harm’s way. This is probably the most absurd one.
I would just say to be careful with narratives. Like sentiment – or Greek mythology for that matter – they are always ad hoc, and designed to explain the inexplicable.
Besides, a price reversal later this week (or later today!) will invalidate any of the stories above immediately. Best not to get emotionally invested in any of them.
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You kids get to bed, I’ll get the story book…
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