After Trump …

Who’s next?

Mussolini before crowd. Public Domain. Source: Quarterly Review

Donald Trump’s election is just the latest development in a global trend towards nationalistic populism. It’s not that atypical. When an economy struggles to recover following a downturn, the political system is volatile as people search for solutions. This is what happened in Japan in the ‘90s. After their economy crashed, the Liberal Democratic Party was voted out of power for the first time in 38 years. A series of new governments were formed and then dissolved in quick succession.

On December 4th Italy will hold a referendum on a set of constitutional overhauls designed to make it easier for the government to pass laws. These reforms are also designed to slim down Italy’s cumbersome bureaucracy. Prime Minister Matteo Renzi has pledged to resign if the country votes “no.” Polls currently show the “no” vote is narrowly ahead, with about a quarter of voters yet to make up their minds.

The referendum gives voters another chance to kick the establishment in the teeth. Italy may muddle through after a “no” vote, but the government will be weakened until the general election in 2018. Italy’s “Five-Star” movement, led by Beppe Grillo – a former comedian – will gain influence.

Spread between Italian and German 10 yr govt bonds. Source: Bloomberg

Markets are nervous. Spreads on Italian government bonds have widened. If Italy can’t pass the reforms it needs to grow its way out of its debt burden of 135% of GDP. Italy then becomes the biggest risk to the financial stability of the Eurozone – something markets haven’t worried about for a while.

It’s never dull, is it? Of course, with volatility comes opportunity – sometimes. But often, volatility can also lead to just more volatility.

Douglas R. Tengdin, CFA

Chief Investment Officer

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