WEBVTT - Surveillance: Italy's Possible Eurozone Exit 0:00:00.320 --> 0:00:04.160 Who you put your trust in matters. Investors have put 0:00:04.200 --> 0:00:07.640 their trust in independent registered investment advisors to the tune 0:00:07.640 --> 0:00:12.240 of four trillion dollars. Why learn more and find your 0:00:12.240 --> 0:00:28.160 independent advisor dot com. Welcome to the Bloomberg Surveillance Podcast. 0:00:28.560 --> 0:00:32.239 I'm Tom Keene with David Gura. Daily we bring you 0:00:32.320 --> 0:00:37.320 insight from the best in economics, finance, investment, and international relations. 0:00:37.760 --> 0:00:42.320 Find Bloomberg Surveillance on iTunes, SoundCloud, Bloomberg dot com, and 0:00:42.400 --> 0:00:49.680 of course, on the Bloomberg. It is always a good 0:00:49.720 --> 0:00:52.720 time to speak with David blanche Flower of Dartmouth College. 0:00:53.320 --> 0:00:56.040 He is someone we can talk to our austerity on 0:00:56.120 --> 0:00:58.200 the FED. We can talk to him about the mysteries 0:00:58.480 --> 0:01:00.880 of economic growth. What we can really talk to him 0:01:00.920 --> 0:01:05.160 about is the labor economics of Italy is classic. The 0:01:05.200 --> 0:01:08.640 wage curve from a good twenty years ago was controversial 0:01:08.880 --> 0:01:12.120 with us Ian Shepherdson as well. This morning from Pantheon 0:01:12.520 --> 0:01:16.679 macro Economics, Professor Blanche Flower, I would suggest the wage 0:01:16.680 --> 0:01:19.880 curve for Italy is destroyed. Here's the chart we showed 0:01:19.920 --> 0:01:26.680 earlier under twenty five year old unemployment. His balloon from 0:01:26.720 --> 0:01:31.840 to thirty seven percent. Danny Blanche Flowers labor economics doesn't 0:01:31.840 --> 0:01:35.679 work in Italy, doesn't. No, not really in a sense 0:01:35.720 --> 0:01:39.479 that to put it technically, there are long flatbits. What 0:01:39.520 --> 0:01:43.039 we mean by that is when unemployments really high, labor 0:01:43.080 --> 0:01:45.760 markets kind of stopped working. So think about when the 0:01:45.840 --> 0:01:49.720 unemployment rates and it moves to a team doesn't change 0:01:49.720 --> 0:01:52.360 things very much. So so this is a labor market 0:01:52.440 --> 0:01:57.240 that hasn't been working, isn't working um and obviously that 0:01:57.320 --> 0:01:59.840 has implications. I mean the big thing you see actually 0:02:00.480 --> 0:02:02.360 if you look at in Britain as an awful lot 0:02:02.400 --> 0:02:05.640 of Italian academics, they come out of the Italian labor 0:02:05.680 --> 0:02:09.200 market moved to the UK. Young Italians do the same. 0:02:09.600 --> 0:02:13.480 But this is clearly a labor market in crisis. Well, 0:02:13.480 --> 0:02:17.200 it's a labor market in crisis. What are the incentives 0:02:17.240 --> 0:02:21.440 to the people that the Italian government must initiate. Not 0:02:21.720 --> 0:02:26.760 macroeconomic mumbo jumbo, but how do you incentivize these people 0:02:26.880 --> 0:02:33.919 under to go get a job? Well, obviously there's two 0:02:33.960 --> 0:02:36.240 parts to it. You obviously want to make sure on 0:02:36.280 --> 0:02:40.000 the supply side that they have the skills, but the 0:02:40.120 --> 0:02:43.280 reality is on the demand side, you've actually got to 0:02:43.400 --> 0:02:46.799 offer adequate numbers of jobs and you said, talked to 0:02:46.880 --> 0:02:51.080 Blanche Flower about wages and growth and austerity, and blanch 0:02:51.120 --> 0:02:55.000 Flower would obviously come back and say, fiscal policies overly 0:02:55.160 --> 0:02:58.840 tight as it's been throughout the European Union, um, and 0:02:58.919 --> 0:03:01.960 we have very little incentive on the part of Italian 0:03:02.040 --> 0:03:06.440 employers to hire young Italians. And so that's the problem. 0:03:06.480 --> 0:03:09.839 Firms are not moving to Italy. But that's exactly where 0:03:09.880 --> 0:03:12.000 I wanted to go. Tom bring up your chart right, 0:03:12.040 --> 0:03:14.799 when you look at youth unemployment in Italy, it's huge. 0:03:14.840 --> 0:03:18.000 When you look at Spain, look after that forty two percent. 0:03:18.080 --> 0:03:21.480 Let's just think about this. Forty people between twenty five 0:03:21.520 --> 0:03:25.320 and thirty five are unemployed in Spain. Danny, My question 0:03:25.360 --> 0:03:28.160 to you is, how do you do Do you do 0:03:28.320 --> 0:03:33.080 reforms that actually make employers want to hire but also 0:03:33.200 --> 0:03:35.240 fire a lot of the people in it They are 0:03:35.240 --> 0:03:37.320 holding back from hiring because then you're stuck with someone 0:03:37.360 --> 0:03:40.920 for twenty years. Right, So the obvious thing, you've got 0:03:40.920 --> 0:03:45.160 to raise the level of aggregate demand. Give firms incentives 0:03:45.200 --> 0:03:47.720 to hire young people. You can do it through the 0:03:47.760 --> 0:03:51.360 tax code. You give firms incentives. You say, if you 0:03:51.440 --> 0:03:54.640 hire a young person, will give you this this tax credit. 0:03:54.760 --> 0:03:58.280 We're not seeing any credible government in Italy focused on 0:03:58.320 --> 0:04:01.320 those kinds of issues. That one thing you would actually say, 0:04:01.320 --> 0:04:05.440 the surprise is actually these young people have been pretty compliant. 0:04:05.880 --> 0:04:07.880 You would have thought they'd have been on the streets. 0:04:08.080 --> 0:04:13.200 High levels of youth unemployment like that generally generates social disorder. 0:04:13.560 --> 0:04:16.479 They haven't, and so that's obviously a big puzzle. But 0:04:16.760 --> 0:04:20.200 you need to break this youth unemployment problem. What we 0:04:20.279 --> 0:04:24.320 know that the famous line is a youth unemployment actually 0:04:24.360 --> 0:04:28.560 generates a permanent scar rather than a temporary blemish on people. 0:04:28.720 --> 0:04:31.839 So it's not just an individual problem. It's down the road. 0:04:31.880 --> 0:04:34.360 The society is going to be heard by the fact 0:04:34.400 --> 0:04:36.680 that these people haven't got into the label. Fritz, you 0:04:36.720 --> 0:04:38.640 don't want to jump in. This is so critical. This 0:04:38.720 --> 0:04:42.440 is the history recess that Olivier Blanchard and wren Somers 0:04:42.440 --> 0:04:45.919 talks about. This is like, absolutely it is. But you 0:04:45.920 --> 0:04:49.159 know what, talking to your point, let's start talking mumbo jumbo, Danny, 0:04:49.200 --> 0:04:52.960 what needs to happen, because actually Materrancy was empowered. He's 0:04:53.040 --> 0:04:55.480 forty one years old and he's in and the focus 0:04:55.520 --> 0:04:57.800 was meant to get people back into jobs, and he's 0:04:57.839 --> 0:05:00.880 been unable to do that. Well, I don't know about 0:05:00.960 --> 0:05:03.640 mumbo jumbo. I mean there's a reality is that this 0:05:03.720 --> 0:05:06.880 labor market has been in trouble for two or three decades. 0:05:07.320 --> 0:05:09.880 The government doesn't seem to have any kind of ability 0:05:09.960 --> 0:05:12.839 to do that. The fiscal framework is too tight. You 0:05:12.880 --> 0:05:15.520 need to give firms incentives to hire, You need to 0:05:15.560 --> 0:05:18.919 give incentives for mobility. You need to get the labor 0:05:18.960 --> 0:05:22.279 market working, the capital market working, the housing market working, 0:05:22.560 --> 0:05:24.839 and you need to loosen the levels of aggregate demaut 0:05:25.000 --> 0:05:28.120 and give incentives for employers to hire the young. And 0:05:28.200 --> 0:05:30.880 that's not what's been happening. Okay, we got Ian Shepherdson 0:05:30.960 --> 0:05:33.520 and David Blanchelire where this this is what surveillance is 0:05:33.560 --> 0:05:36.479 all about. Bring up the chart. This is from fokars Landau, 0:05:36.920 --> 0:05:40.279 which is the idea here of they need a Lira. 0:05:40.800 --> 0:05:43.880 And I'm not speaking for David fokars land off Deutsche Bank, 0:05:44.080 --> 0:05:47.680 but Beppy Greenlow France been clearly says he wants an 0:05:47.680 --> 0:05:51.840 independent Lira. Ian Shepherdson, what would happen two days or 0:05:51.920 --> 0:05:56.040 two weeks after an independent Lira other than wealth destruction 0:05:56.120 --> 0:05:58.320 for the elites of Italy that there would be gigantic 0:05:58.320 --> 0:06:02.279 wealth destruction and extended period of total chaos at the breakup. 0:06:02.600 --> 0:06:05.160 You couldn't have Italy leaving the Eurozone without the rest 0:06:05.200 --> 0:06:07.039 of the Eurozone falling apart. So it's kind of the 0:06:07.320 --> 0:06:10.200 end of the world event where things would lie six months, 0:06:10.200 --> 0:06:12.640 one to three years down the line. That's a different question, 0:06:12.960 --> 0:06:14.560 and it may well be that after a period of 0:06:14.560 --> 0:06:19.360 extraordinary extended pain that actually a much weaker sovereign Italian 0:06:19.400 --> 0:06:21.839 currency would would be would put it really into into 0:06:21.839 --> 0:06:23.880 a better position. But I've got to say the transition 0:06:23.920 --> 0:06:26.600 from where we are now to that would be horrendous 0:06:26.600 --> 0:06:28.320 and it would be short term things would be much 0:06:28.320 --> 0:06:31.160 worse without a doubt, right And Danny, so Tom keeps sudden, 0:06:31.240 --> 0:06:33.360 you know, talking about the switch to Lira. I mean 0:06:33.360 --> 0:06:36.159 this is extremely unlikely, right to Danny blanch when you 0:06:36.160 --> 0:06:37.680 when you look at even Beppy Grille, I mean he 0:06:37.680 --> 0:06:40.680 doesn't really have the best craft of economic so you 0:06:40.680 --> 0:06:43.240 don't see how this would work. Do we just need 0:06:43.320 --> 0:06:46.520 to have a prime minister with more power that has 0:06:46.520 --> 0:06:52.120 a much more aggressive mandating reforms? Well, what what you want? 0:06:52.160 --> 0:06:56.320 A credible market driven reforms where firms feel that there's 0:06:56.360 --> 0:07:00.520 some certainty going forward that they can invest and higher. 0:07:00.720 --> 0:07:02.640 I mean, what you and Tom have been talking about 0:07:03.040 --> 0:07:05.799 is a country in chaos. I mean, we've seen similar 0:07:05.839 --> 0:07:09.400 problems in the UK with Brexit. Has calm um. If 0:07:09.440 --> 0:07:11.679 you can't form a government, you can't get a policy. 0:07:11.760 --> 0:07:14.400 You you know, we don't know where this country is going. 0:07:14.760 --> 0:07:19.080 Why would firms go in and hire young Italians? So 0:07:19.160 --> 0:07:22.160 you've got to break that first. There's this great chicken 0:07:22.160 --> 0:07:24.440 an egg, and if you're an employer, you'd say, well, 0:07:24.480 --> 0:07:27.480 I think I'll go to Germany. Actually, but David, I 0:07:27.800 --> 0:07:30.560 want to get this on the record. Professor Blanche or Is, 0:07:30.600 --> 0:07:33.640 you're one of our true international authorities. What would be 0:07:33.680 --> 0:07:37.720 the pain of an individual separate Lira? I mean, bring 0:07:37.800 --> 0:07:40.840 up the chart here, Jose and the idea here. Ian 0:07:40.880 --> 0:07:45.520 Shepherdson says there would be massive instability. Is lira depreciated? 0:07:45.600 --> 0:07:51.320 Do you agree? Well, I mean he's completely right that 0:07:51.480 --> 0:07:54.280 if suddenly you say we're going to go to the lira, 0:07:54.400 --> 0:07:57.000 that would cause the collapse of the euro Zone. That 0:07:57.040 --> 0:08:01.680 would have huge cataclysts, make effects for for quite some time. 0:08:02.080 --> 0:08:04.679 But he's also right in that what you have here 0:08:05.160 --> 0:08:08.960 is a currency that is overvalued for the Italian The 0:08:09.040 --> 0:08:11.440 point of saying you would go to a lira would 0:08:11.440 --> 0:08:15.080 be at least that would make the country competitive, and 0:08:15.160 --> 0:08:18.120 so that is that is in some way attractive. So 0:08:18.240 --> 0:08:23.240 it is completely right, um that a lower valued currency 0:08:24.000 --> 0:08:26.640 could help. It's hard to see how you get to 0:08:26.720 --> 0:08:29.920 the benefits of that lower currency without the cut this 0:08:30.800 --> 0:08:34.520 terrible collapse that he's talked about. It's hard to know 0:08:34.559 --> 0:08:36.920 where you go from here. But this does threaten us 0:08:37.120 --> 0:08:40.400 the whole being of the euro Zone, right and tom 0:08:40.440 --> 0:08:42.320 there are people out there saying that the market is 0:08:42.320 --> 0:08:44.720 just a little bit too complacent ahead of that referendum 0:08:44.800 --> 0:08:47.360 to do the leap from the referendum to actually getting 0:08:47.360 --> 0:08:50.920 the lira bag is you know, it's humongous a lot. 0:08:51.120 --> 0:08:53.000 You know, very few people are doing that leap at 0:08:53.000 --> 0:08:56.920 the moment. Also, compared to Brexit, you can't constitution that 0:08:56.960 --> 0:08:58.920 you can't put a referendum on whether to leave the 0:08:58.920 --> 0:09:14.120 Eurozone or not to the at in So absolutely, December 0:09:14.240 --> 0:09:16.600 four is a referendum in Italy, one that will be 0:09:16.600 --> 0:09:19.679 closely watched in Italy, in Europe, indeed around the world. 0:09:19.720 --> 0:09:22.040 Swatter Thing is a senior economist at T. S. Lombard, 0:09:22.160 --> 0:09:25.240 a research and she joins us now by phone. We've 0:09:25.280 --> 0:09:28.560 been told here that there's a continuum between the Brexit referendum, 0:09:28.720 --> 0:09:30.800 the presidential election here in the US, and now this 0:09:30.880 --> 0:09:33.760 referendum in Italy. And what you urge some caution there? 0:09:33.760 --> 0:09:38.480 You say this is likely just to be a side show. Um. Yes, absolutely, Hi, 0:09:38.600 --> 0:09:41.960 good morning there. So we think the you know, investors 0:09:41.960 --> 0:09:47.480 are excessively focused on the referendum of thember of the vote. UM. 0:09:47.480 --> 0:09:49.240 But I guess it's just it will just be a 0:09:49.280 --> 0:09:52.320 side show in the largest game of things. Things will 0:09:52.360 --> 0:09:56.200 not dramatically change after the referendum. In fact, they will 0:09:56.760 --> 0:10:01.640 the trigger points for this sort of political days in in, in, in, 0:10:01.640 --> 0:10:06.400 in Europe, last summer else. UM. Italy nonetheless remains a 0:10:06.480 --> 0:10:09.560 key threat to a key medium term threat to UH 0:10:09.960 --> 0:10:13.439 your area stability. But a no vote in the referendum, 0:10:13.960 --> 0:10:17.640 while it will intensify near term volatility, it does not 0:10:17.840 --> 0:10:20.680 spell doom. UM. And in the same way, yes vote 0:10:20.760 --> 0:10:25.679 does not guarantee a recovery or reforms or recapitalization. UM. 0:10:25.720 --> 0:10:27.280 I guess what I'm trying to say is that the 0:10:27.280 --> 0:10:32.000 Italian problems are are very much supply side related, UH, 0:10:32.000 --> 0:10:36.439 and they're deeply ingrained. UM. Vote on the referendum does 0:10:36.480 --> 0:10:39.440 not change the story. Um. In fact, where the twelve 0:10:39.440 --> 0:10:43.120 month horizon ECB policies and trumponomics, so to speak, a 0:10:43.160 --> 0:10:47.880 strong dollar truth trumponomics I will actually provide a temporary 0:10:48.040 --> 0:10:52.720 tailwind to two Italians. For me? Is it is Italy 0:10:52.760 --> 0:10:58.880 an emerging market? Um? Well, if you look at the 0:10:59.160 --> 0:11:02.000 performance of the the spreads every time there was a 0:11:02.000 --> 0:11:05.240 political tremor, you might be tempted to believe it. I 0:11:05.360 --> 0:11:07.760 believe so, UM, But I guess it depends how you 0:11:07.840 --> 0:11:12.120 define emoting market. Um. The one of the ways I 0:11:12.520 --> 0:11:14.520 try to define the MS is the the you know, 0:11:14.559 --> 0:11:19.080 the correlation between stocks and heels that does not hold 0:11:19.160 --> 0:11:21.960 so well in Italian In Italian case, well, you may 0:11:22.040 --> 0:11:25.160 argue it's because of e c D policies. Um. But 0:11:25.679 --> 0:11:29.439 it shows a lot of characteristics. But well, not not 0:11:29.640 --> 0:11:33.760 yet animoting market. Not yet anyway, you know. I We've 0:11:33.800 --> 0:11:36.079 talked an awful lot here about the banking sector, and 0:11:36.120 --> 0:11:38.120 I wonder what you see is the path forward there 0:11:38.120 --> 0:11:41.439 through in a sixty billion euros in non performing loans 0:11:41.440 --> 0:11:46.040 there on the books, tremendously over banked country exclusive of 0:11:46.080 --> 0:11:50.000 this referendum, how does that begin to get fixed? Right? 0:11:50.240 --> 0:11:55.160 Um Um. Now, the Italian banking problem, UH, it's it's 0:11:55.240 --> 0:11:58.240 it's it's a lot more difficult to rectify it because 0:11:58.240 --> 0:12:02.559 of three important critiquy reasons. The first is the the 0:12:02.880 --> 0:12:06.760 dominant share of these bad loans or sorry, the dominant 0:12:06.760 --> 0:12:10.960 share of bank debt is held by retail investors um 0:12:11.040 --> 0:12:14.080 as compared to in in other in other countries, So 0:12:14.200 --> 0:12:18.600 one third of senior debt is held by retail investors, 0:12:18.640 --> 0:12:22.840 while half of the junior debt is held by uh 0:12:22.840 --> 0:12:25.720 A retail investors. And it's junior debt that will be 0:12:26.040 --> 0:12:28.640 used if the banks have if if banks have to 0:12:28.679 --> 0:12:32.679 be recapitalized. The second important reason is that the the 0:12:32.840 --> 0:12:37.000 government itself, policymakers themselves have been have played a role 0:12:37.080 --> 0:12:41.600 in in sort of selling this these bad potentially bad 0:12:41.640 --> 0:12:44.720 assets to to the household sector. And third, it's the 0:12:44.920 --> 0:12:48.439 the timing of the the eu Blian rules which came 0:12:48.440 --> 0:12:52.440 in affect earlier this year, which prohibit or make it 0:12:52.520 --> 0:12:56.760 very punitive to to for state aid uh to recap 0:12:56.800 --> 0:12:58.840 the banking sector. So it's the culmination of these three 0:12:58.880 --> 0:13:02.280 problems that's really making matters worse. Um. There was a 0:13:02.280 --> 0:13:06.960 way out the advance uptil Solvent. Well, if you exclude 0:13:07.080 --> 0:13:10.200 monted Departe, that is, there was a way out. They 0:13:10.240 --> 0:13:14.360 can they can use the precautionary clause. They can uh 0:13:14.800 --> 0:13:19.480 compensate the retail investors for miss selling. Um. Well, but 0:13:19.480 --> 0:13:22.480 but but you have to you need political will to 0:13:22.600 --> 0:13:26.280 go through that. That's lacking in Italy's case, and there's 0:13:26.280 --> 0:13:29.280 always a reason before their friends they did not want 0:13:29.360 --> 0:13:33.839 to disappoint policymakers or a retail investors. After the referendum, 0:13:34.000 --> 0:13:38.439 attention will shift to the elections. Sing with us with 0:13:38.760 --> 0:13:43.160 the definitive report and Italy from her Lombard Street Research. 0:13:43.600 --> 0:13:46.800 Your report Shadow which I need to recover the cover 0:13:46.880 --> 0:13:52.000 all twenty eight pages, shows that incentives are critical to Italy. 0:13:52.559 --> 0:13:54.720 When you and Charles Duma sit around a cup of 0:13:54.760 --> 0:13:59.800 coffee with Jonathan Fenby, what's the key incentive that big 0:14:00.040 --> 0:14:06.880 ins to nudge Italy towards a modern economy? Um, the 0:14:07.000 --> 0:14:10.760 key incenter would probably have to be, you know, um, 0:14:10.920 --> 0:14:15.080 directing capital uh and and and labor, all the productive 0:14:15.080 --> 0:14:20.040 resources towards the right area. We've seen as a massive 0:14:20.160 --> 0:14:22.920 increase in this allocation in the manufacturing sector and it 0:14:23.000 --> 0:14:27.160 has continued to increase, of course dramatically since the you're 0:14:27.320 --> 0:14:31.800 since that joined the Euro and after the global financial crisis. UM. 0:14:31.840 --> 0:14:34.240 I guess there are a lot of rigidities within the 0:14:34.280 --> 0:14:37.080 economy itself, whether you look at the product market, whether 0:14:37.120 --> 0:14:39.960 you look at the the label sector, labor segments, the 0:14:40.040 --> 0:14:43.440 the capital segments. And I guess one of the key problems, 0:14:43.640 --> 0:14:47.800 UH is is the there's a dominance of state of 0:14:48.160 --> 0:14:52.280 small and medium enterprises. In Italy. Almost eighty five percent 0:14:52.840 --> 0:14:56.320 of employment comes from the small and medium medium uh 0:14:56.920 --> 0:15:01.000 small industries, and that sort of restricts the gains you 0:15:01.320 --> 0:15:04.720 could enjoy from economy of scale. UH. You know, when 0:15:04.720 --> 0:15:07.840 you speak to a various small businesses, they say they 0:15:07.880 --> 0:15:10.920 did they preferred turban small because the the tax code 0:15:10.920 --> 0:15:14.200 and it's so intense. UM. And then you you have 0:15:14.560 --> 0:15:17.280 various restrictions in terms of how many farms we can 0:15:17.320 --> 0:15:20.320 have within a certain area. And it also extends to 0:15:20.560 --> 0:15:24.080 various other retail segments. Did the mark up on the 0:15:24.080 --> 0:15:27.440 the on the retail prices is significantly higher in Italy 0:15:27.800 --> 0:15:31.640 than in any any European economy. As you were saying earlier, 0:15:31.640 --> 0:15:34.400 it's it's an overbanked country. And I guess The reflection 0:15:34.480 --> 0:15:37.680 of all these weaknesses is the fact that the activity 0:15:37.760 --> 0:15:41.400 growth has been stagnant for almost a decade. And how 0:15:42.440 --> 0:15:45.320 sure you you in that very lucid report right about 0:15:45.520 --> 0:15:48.520 the small window of opportunity Italy has here to to 0:15:48.640 --> 0:15:52.000 write its economic and financial malaise. How small a window 0:15:52.000 --> 0:15:54.120 were we talking about here? And I wonder if that 0:15:54.280 --> 0:15:58.880 is going to happen under Matteo Rensey's leadership. The window 0:15:58.920 --> 0:16:02.480 of opportunity is is getting smaller because uh, you know 0:16:02.520 --> 0:16:05.480 as all because at least for the next twelve months 0:16:05.480 --> 0:16:09.800 you have support from ECB, Dewy and UH and a 0:16:09.880 --> 0:16:13.760 strong dollar thanks to h tromponomics so to speak. Um. 0:16:14.040 --> 0:16:16.960 But you know, very gradually we will see uh, well 0:16:17.000 --> 0:16:21.040 will see strengthening in the euro Uh. The ECB will 0:16:21.120 --> 0:16:24.520 have to start tapering its asset purchases and that means 0:16:24.520 --> 0:16:27.240 we will be even more exposed to a higher global 0:16:27.280 --> 0:16:31.240 youth and there will be increase in political uncertainty across Europe. 0:16:31.560 --> 0:16:34.320 We have elections in the Netherlands, um in in in 0:16:34.400 --> 0:16:37.480 France and in Germany. So it's it's a combination of 0:16:37.680 --> 0:16:41.000 all these factors. Not to forget it really might be 0:16:41.080 --> 0:16:45.440 heading towards another towards its own general elections. So I 0:16:45.480 --> 0:16:48.360 guess the visitor really is narrowing, especially if you look 0:16:48.360 --> 0:16:52.360 at the banking sector. Um. Uh So at this point 0:16:52.400 --> 0:16:55.600 in time, what is helping the sector survive is whatever 0:16:55.680 --> 0:16:59.400 literally nominal GDP broad that they have and and and 0:16:59.560 --> 0:17:03.040 a chief actor driving back to the weaker Euro. So 0:17:03.160 --> 0:17:06.480 once these things take to roy it will it will 0:17:06.560 --> 0:17:11.359 be quite a nasty scenario. Okay, you just hit on 0:17:11.480 --> 0:17:16.879 the discussion point. They've got to get away from the 0:17:17.000 --> 0:17:21.280 over value euro. Do they do that within the euro 0:17:21.440 --> 0:17:26.560 model or do you just presume some form of depreciation 0:17:27.200 --> 0:17:35.760 towards a renewed Italian lira. Um. I guess, but I 0:17:35.960 --> 0:17:39.120 think stands it will have to you know, the the 0:17:39.280 --> 0:17:42.440 need to suppose at this at least at this point 0:17:42.480 --> 0:17:45.240 in time, it's coming from the c D two. But 0:17:45.440 --> 0:17:48.159 gradually want the your stars to strength, and thanks to 0:17:48.320 --> 0:17:52.480 strength in the German economy for example, uh, improving corny 0:17:52.520 --> 0:17:56.119 concerts in your in your area, I guess the the 0:17:56.160 --> 0:17:59.200 burden of balancing will will fall back on on Themandi 0:17:59.280 --> 0:18:02.560 station Uh. And that's really quite a punitive way to 0:18:02.600 --> 0:18:08.320 address the problem. Uh. Notwithstanding the very very high non 0:18:08.359 --> 0:18:11.639 performing loan version of the banking sector. I would struck 0:18:11.840 --> 0:18:15.200 in your report. Uh, the degree to which so much 0:18:15.280 --> 0:18:18.359 of of the Italian economy's troubles right now you attribute 0:18:18.359 --> 0:18:20.600 to what happened with the w t O and China 0:18:20.640 --> 0:18:22.680 signed onto the w t O. Why would that happen? 0:18:22.760 --> 0:18:27.800 Was Italy hit so profoundly hard? Um? Yeah, So we 0:18:27.880 --> 0:18:31.040 call it three strikes and you're out. So the first 0:18:31.040 --> 0:18:35.720 strike was the information and communications technology, which Italian of 0:18:35.800 --> 0:18:38.680 businesses quite well, we're quite a lagged in terms of 0:18:38.720 --> 0:18:42.560 adopting those technologies. And again the reasons are, you know, 0:18:42.600 --> 0:18:48.840 this this sort of relationship based U based businesses where 0:18:48.840 --> 0:18:51.960 where people are not really and managerial incentives are not 0:18:52.080 --> 0:18:56.679 really inclined towards profit for example. The second time was 0:18:56.680 --> 0:19:00.480 was Italy joining the euro and that meant that ment 0:19:00.600 --> 0:19:04.200 the the policy tool that was that it's Italian authority 0:19:04.320 --> 0:19:07.160 is so frequently used that the devaluation was no longer 0:19:07.240 --> 0:19:10.919 an option to them. And the third strike was was 0:19:11.160 --> 0:19:14.879 Italy joining sorry, was China joining the w and and 0:19:14.920 --> 0:19:18.280 the reason why this this hurt Italian economy a lot 0:19:18.320 --> 0:19:21.479 more than it did the other European economies is that 0:19:21.600 --> 0:19:25.800 Italian exports are very similar to Chinese exports. They're concentrated 0:19:25.840 --> 0:19:29.480 at the lower value added seconds um and and the 0:19:29.640 --> 0:19:34.840 d the rigidity on the product product labor, and there 0:19:35.000 --> 0:19:39.720 is other institutional weaknesses. Thanked that really was more exposed 0:19:39.840 --> 0:19:44.000 to these three forces external forces than many other economy 0:19:44.119 --> 0:19:48.480 within the area. We continue to see that. Try to 0:19:48.520 --> 0:19:51.880 thank you so much, saying with Lombard Street Research this 0:19:51.960 --> 0:19:59.720 morning and Italy, who you put your trust in matters. 0:20:00.400 --> 0:20:04.240 Investors have put their trust in independent registered investment advisors 0:20:04.280 --> 0:20:08.640 to the tune of four trillion dollars. Why they see 0:20:08.640 --> 0:20:12.359 their role is to serve, not sell. That's why Charles 0:20:12.400 --> 0:20:15.120 Schwab is committed to the success of over seven thousand 0:20:15.200 --> 0:20:20.320 independent financial advisors who passionately dedicate themselves to helping people 0:20:20.320 --> 0:20:24.520 achieve their financial goals. Learn more and find your independent 0:20:24.560 --> 0:20:35.240 advisor dot com we go now at. Stephen Shork, editor 0:20:35.240 --> 0:20:38.680 of the eponymous Short Report out of Philadelphia, spoke with 0:20:38.760 --> 0:20:41.640 him yesterday. He expressed some skepticism that OPEC delegates would 0:20:41.640 --> 0:20:43.919 be able to come to an agreement on a production freeze. Indeed, 0:20:44.359 --> 0:20:47.080 Bloomberg News reporting this morning according to two delegates they 0:20:47.119 --> 0:20:50.400 have agreed to a freeze here on this the first 0:20:50.480 --> 0:20:52.840 day of that OPEC meeting in Vienna at Stephen Shork. 0:20:53.400 --> 0:20:55.280 Great to have you with us here is that it 0:20:55.440 --> 0:20:58.960 all said and done. We haven't a great It's really 0:20:59.000 --> 0:21:02.040 this simple, right. So I was on bloomberg yest today 0:21:02.560 --> 0:21:08.719 expressed my skepticism that we would get it. I'm on 0:21:08.760 --> 0:21:13.399 today and the premise of that my skepticism still holds 0:21:13.560 --> 0:21:17.359 that I based it on the fact that without a 0:21:17.400 --> 0:21:21.680 material concession by Iran, I couldn't see how Saudi Arabia 0:21:21.680 --> 0:21:23.680 could ever sign off on this deal, and hence why 0:21:23.720 --> 0:21:25.920 they've been at loggerheads now for the past two years. 0:21:26.400 --> 0:21:29.920 So with the preliminary data coming out, what I'm reading 0:21:29.960 --> 0:21:32.880 off of my Bloomberg here is that OPEC has agreed 0:21:33.320 --> 0:21:35.920 and let's let's let's mind you this isn't official. It 0:21:36.000 --> 0:21:39.639 is coming from an anonymous source, but OPEC has agreed 0:21:39.680 --> 0:21:43.400 to cut production by one point two million barrels a day. Now. 0:21:43.440 --> 0:21:47.720 Interestingly enough, Iran is going to be able to up 0:21:47.760 --> 0:21:50.280 its production to three point nine million barrels a day, 0:21:50.400 --> 0:21:53.320 So at three point seven currently with Iran, that means 0:21:53.320 --> 0:21:55.800 i Ran adds two hundred thousand barrels to the market, 0:21:55.960 --> 0:21:58.840 which means now other OPEC members have to cut one 0:21:58.880 --> 0:22:02.480 point four million arles a day. So of course that's 0:22:02.480 --> 0:22:06.760 going to be meaning that Saudi Arabia and Iraq are 0:22:06.800 --> 0:22:08.880 going to have to bury the brunt of this. And 0:22:08.880 --> 0:22:13.119 and once again, guys, I'm extremely skeptical of this report. 0:22:13.160 --> 0:22:15.239 I don't see how Saudi Arabia signs off on it. 0:22:15.840 --> 0:22:18.160 But in the here and the now, that's the headline 0:22:18.280 --> 0:22:21.000 and the markets rage respect. I don't know if you've 0:22:21.000 --> 0:22:23.240 seen it. I put it on Twitter, Stephen Short because 0:22:23.320 --> 0:22:27.320 my good morning. There is a spectacular Bloomberg gad Fly 0:22:27.640 --> 0:22:32.280 article for Liam Dunning and right co writing and it 0:22:32.440 --> 0:22:38.679 focuses on demand. Gus what you see for oil demand? 0:22:38.840 --> 0:22:42.760 Gad Fly says it's gonna vapor away. China is at 0:22:42.800 --> 0:22:46.560 the margin. But what is oil demand in the United States? 0:22:46.560 --> 0:22:49.440 Steve that you own, I mean, what what does demand 0:22:49.560 --> 0:22:54.359 like in Kansas or Florida or Washington State? Well, in 0:22:54.400 --> 0:22:56.520 the here, in the miror And this is the premise 0:22:56.560 --> 0:22:59.040 why I think OPEC should and would want to keep 0:22:59.119 --> 0:23:02.720 oil prices as low as possible because demand here in 0:23:02.760 --> 0:23:04.959 the United States, we just came out of last summer 0:23:05.359 --> 0:23:08.040 with the greatest demand for gasoline that we've ever seen. 0:23:08.200 --> 0:23:11.199 And why was that. It's because of a losticity of demand. 0:23:11.320 --> 0:23:13.679 Two dollars a gallon, you get a lot more people 0:23:13.760 --> 0:23:17.600 on the road, driving bigger, larger, longer distances. Uh. And 0:23:17.640 --> 0:23:20.880 so demand was very strong. And this is what OPEC 0:23:21.440 --> 0:23:25.040 essentially needs to have to happen, because what I also 0:23:25.080 --> 0:23:28.159 spoke about on Bloomer yesterday is the Tesla effect. You 0:23:28.160 --> 0:23:30.879 remember ten years ago we're all talking about. Well, I 0:23:30.920 --> 0:23:32.840 wasn't because I always thought it was a fallacy. But 0:23:32.960 --> 0:23:37.080 peak oil supply today, because of alternative fuels, we are 0:23:37.119 --> 0:23:41.480 talking about peak oil demand. And so each dollar you 0:23:41.600 --> 0:23:45.320 raised the barrel of oil is a marginal decrease in 0:23:45.600 --> 0:23:49.600 the entry barrier for alternative fuels. So even driving into 0:23:49.640 --> 0:23:52.359 the studio yesterday into Philadelphia on the school goal, I 0:23:52.400 --> 0:23:55.840 saw four teslas. This is Philadelphia, for crying out live 0:23:56.200 --> 0:24:00.040 driving Tesla's in Philadelphia. That means this is really a 0:24:00.119 --> 0:24:02.920 harding to take off. And so we're looking into we're 0:24:02.960 --> 0:24:06.960 talking about the long term relevancy of OPEC and if 0:24:06.960 --> 0:24:10.000 they succeed in driving oil prices to a level where 0:24:10.119 --> 0:24:13.399 we start to see gasoline prices well above three dollars. Well, 0:24:13.600 --> 0:24:17.040 that is only going to eat into demand longer term out. 0:24:17.080 --> 0:24:18.720 So this is a long this is a long term 0:24:18.760 --> 0:24:22.480 existential threat to back in all oil producers in here 0:24:22.480 --> 0:24:26.040 and they now, uh right now because me in the future. 0:24:26.480 --> 0:24:28.920 Right now, what we have is this is great news 0:24:28.960 --> 0:24:33.040