David Levine of Odin River joins Real Vision to discuss the emergence of political risk and how it will contribute to the next systemic crisis. Specifically, he provides his thoughts regarding Italy and how its crisis will unfold. Even though David is a short-term bear, he explains why he’s optimistic in the long run, and why themes such as transparency will continue to gain traction.
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Transcript: there was no way, ever, that the euro was going to fail based on Greece. And so at that time I was thinking about it, and I would look at all the charts. The charts were always like, opinions of Europe. The lowest was Greece, and then Italy was the same. And it was like, economic performance, Greece was lowest, and Italy was the same. And so it was just obvious. You started thinking about it, and you're like, wait, OK, so Italy actually is in a very similar position to Greece. They have a very similar set of fiscal constraints that have been placed on them. Their economy has suffered. The people really don't like being part of the Euro. So if you look at popularity of the euro, Italy has always polled similarly to Greece. 50% plus of people have never liked the euro for many reasons. They don't like it, and they have a playbook of what to do, which is what Greece just did, which is negotiate. So it was like, OK, this is probably what is going to happen. You're going to get a populist movement in Italy. And they're going to say to Germany, hey you, Germany, you need to give me something. Give me some fiscal stimulus. I made up a number in 2015. I guessed it would be EUR 500 billion fiscal stimulus. And they're going to say, Germany, give us EUR 500 billion fiscal stimulus. And Germany is going to say no. That moment, the fight, the argument, that's the systemic risk moment. And the reason is because, unlike Greece, Italy's bonds have been trading in an obscene way. Actually, two-year Italian debt was negative as of two weeks ago. The 10-year in Italy was at 2%. The US is at 3%. So you had the Italian 10-year government debt trading inside, 100 basis points, inside the US. I went to Harvard Business School. At Harvard Business School, they taught you that risk-free rate was a 10-year treasury. So you have the Italian government debt trading at a discount, so at the risk-free rate, which is truly insane. And the duration of these instruments, meaning the sensitivity of the interest rates, are very, very high, because there's been a chase for yield because of central banks. I'll bring it back to central banks. Because of the chase for yield, the duration of the instruments is very, very long. And so the interest rate sensitivity is very, very high, meaning the Italian government debt, a very small move in interest rates, would cause a very big drawdown on the holders, who are the balance sheets of that debt. And so I was like, oh, man, this is going to be, it is, very, very bad. You're going to have a fight. The populists are going to come to power. And they're going to do like Greece did because why wouldn't they? Because they are going to get stuff because they should. Germany is going to argue because the Germans are not just going to give EUR 500 billion. And at that moment, the credit markets will correct. So I've thought that for a number of years. I thought, and I still believe, that Draghi will lose control. So the main systemic risk, that kind of moment, causes attention. And then you start to get rates to rise. And then the systemic moment is when Draghi loses control. Because that's when the myth of the infallible central bank is revealed to be a lie. So how do you have a systemic collapse? You have a big mistake that everybody, collectively, is making that's actually obvious in retrospect that then becomes unveiled. And then people are like, oh, wait, housing prices can decline all at the same time. Oh, wait, central banks are fallible.
Filmed on May 29, 2018 in Greenwich, Connecticut.