Cinque Stelle Aren’t Jokers
By John R. Taylor, Jr.
Beppe Grillo and Gianroberto Casaleggio, one of
his senior financial advisors, have initiated the
long march to a non-constitutional referendum to
demand that Italy remove itself from the euro and
reinstate the lira as the currency of the land.
Although the M5S (Movimento 5 Stelle) Party has
been ignored in Brussels and (as much as
possible) in Rome too, the M5S actually polled
more votes, as just shy of 26%, than any other in
the last national poll as Renzi actually ran under
the banner of several associated party lines.
M5S had one line on the ballot not multiple ones.
One of the Eurozone’s major problems is that it is
closed to outside protest or change. Politics is
the art of the possible but the Eurozones’s leaders are not listening to what the people
are saying is possible and necessary. Communication is critical. With no communication,
politics veers towards confrontation and war. The Eurozone is far from a state of war but
the deterioration has become very serious and this M5S challenge ups the risks
significantly. M5S and the one out of every four Italians backing it have been wronged
and this won’t be forgotten – not if Grillo is any kind of a politician. As Casaleggio stated
concerning the response to the M5S’s minimum demands, sent to Brussels and
Frankfurt in May, “five months have gone by and we have had no reply. They have
totally ignored us.” Those are fighting words and the euro is headed into a new crisis,
this time a political one – one that can’t be solved by the ECB. A little recession next
year could tip the scales. Where this goes, no one can be sure, but we knew it had to
come down to this, and it has.
The EUR/CHF is vulnerable to the re-tooling of this euro crisis. Will the new purple box
become as debilitating for the euro as the last one was? At the least it is not something
that is likely to make the euro rally against the Swiss. On top of this political
development, the one other factor that is especially damaging to EUR/CHF is a major
equity market decline, the more globally inclusive, the worse it is. As our cyclical analysis
has identified a major reversal in the US equity markets in the last month, looking at the
past one must argue the pressure will be down. But in the four weeks since that peak,
the EUR/CHF has not shown any consistent movement, but volatility has increased
significantly. Our attitude a week ago was positive (see KOF to the Rescue on October
7), despite the fact that many of the big banks in this market have been negative.
We understand the political and economic reasons behind the SNB’s determination to
hold the euro above the magic 1.20 floor against the Swiss franc, and if there is deflation
in Switzerland plus very little growth there seems no reason to doubt the SNB’s desire.
However, with the M5S showing the fragility of the political peace in the Eurozone and
the equity markets turning down, we have to say that fear has shown its head and we
will just have to see how strong it will prove to be.
Dangerous Curves Ahead
By John R. Taylor, Jr.
With a quick touch of the 1.2003
level the game on the EUR/CHF
has jumped to another level. Ever
since our letter in mid-October, with
a similar but less focused chart than
we are showing to the right, some
of you have been wondering
whether the "Eurozone political
crisis" or the "equity market decline"
would actually take place. Well, if
they are not taking place now, then
they are certainly imminent. The
Greek situation is horrifying to us as
we find it unlikely that Samaras can
come up with the votes to elect a
very EU-friendly President, and
without that there will have to be a
'snap' election. That election, with the new electoral law originally written to create a
manageable majority in favor of austerity and the Troika solution, will probably result in a
SYRIZA victory and a strongly anti-Troika ruling coalition that will force a dramatic
change in direction that will upset the status quo within the Eurozone. This smacks of a
burgeoning political mess. 'Snap' elections are aptly named as they are out of the
normal order and can result in a 'chaotic' outcome - like the straw that broke the camel's
back, the ultimate of chaotic results. The Japanese election, happening just as you are
reading this letter, could do the same thing, throw all the political assumptions out the
window.
The second highly correlated factor with a weak euroSwiss is the equity market, which
has just finished a very disturbing week if you were a bull, like most of the world. A weak
stock market correlates with a weak euro and a very weak equity market plus euro
problems looks like a hellish combo for the EUR/CHF and the Swiss National Bank. The
equities broke down this week, but our analysis argues this is not a short-term
phenomenon but rather part of a very major reversal that would go down for years, if the
central banks can't come up with newer money and credit expanding strategies.
Even if we assume they will, there are 10 to 12 weeks of trouble ahead. And that will be
enough to aggressively challenge the 1.2000 level. We are sad to see it has already
begun. We are still hoping for a Christmas break.
