πŸ”΄ The Fate of Italy’s Future (w/ Steve Diggle and Grant Williams)

GRANT WILLIAMS: With a layer of mist rolling
in, Steve added to the mystery box introducing an unscheduled stop en route to our final
destination. STEVE DIGGLE: So, head to Cortona, before
we go there, I want to show you a pretty amazing place. GRANT WILLIAMS: If we’re going to see it with
how this fog’s come in. STEVE DIGGLE: Well, actually, the reason why
is the fog plays a big part in the story of this place. It’s quite a phenomenon in this part of the
world. It always has been. And very close to Cortona is one of the ancient
world’s greatest battlefields. It’s right by the lake. And I think it’s a story with a contemporary
message. So here we are at the site of the Battle of
Lake Trasimene. This is where the largest military ambush
in history happened. 21 of June, 217 BC. Hannibal, Carthaginian, he of the elephants,
invades, but doesn’t invade as of course, you’d expect, which is across the 8 miles
of water that separates North Africa from Southern Italy. He comes famously through Spain, Southern
France, over the Alps with his elephants, defeats the Romans at Trebbia to the north,
and then head south. The Romans, not used to defeat, not terribly
happy, they sack– they basically kick out their existing leadership and bring in some
new guys. Also something that happens in Italy more
than once. GRANT WILLIAMS: Yeah, right? STEVE DIGGLE: So the Proconsul Flaminius takes
his army, moves up to where Arezzo is, those days, Arretium, to try and intercept Hannibal. Hannibal goes around him, lays siege to Cortona,
which is just over the hills, just over there. Flaminius is waiting for reserves, but he’s
under political pressure to produce a result. So he does something hasty, which is he rushes
down with his army in pursuit of Hannibal to try and get a political and military victory. GRANT WILLIAMS: He sounds very familiar so
far. STEVE DIGGLE: Hannibal knows all this. He’s deliberately despoiling all the countryside
in order to provoke a response, which works. So Flaminius is rushing down from Arezzo with
about 30,000 men. What he doesn’t know is that in the last couple
of months, the Carthaginian army has swelled up to about 45,000, 50,000 men. Hannibal takes them over the hills and he
positions them all around this amphitheater, natural amphitheater. Hills on three sides, lake to the back. It’s the perfect position for an ambush. And there’s mist, as there is today, which
obscures the fact that in these hills, he’s got 50,000 men hidden. Flaminius rushes in here with his troops,
and the Carthaginians do something, Hannibal does something very clever, which is he pushes
a small body of men right down there. And they see the Roman army, and they turn
and they flee up the hill. The Romans, used to people running away, go,
all right, lads. Let’s go get them. And they rush in here, not even in full battle
armor, not even wearing full– you know, full form kit. They just rush in. And then, as soon as enough of the army are
in this natural amphitheater, the signal goes up. Carthaginian army descends en mass on Flaminius
and they massacre the entire Roman army, 30,000 men. The population of Rome at the time is maybe
300,000, 400,000. So it’s a huge percentage of their manpower. So in two hours, 15,000 are dead, 15,000 including
Flaminius, who dies just over there with his body guard, all of them hacked to pieces. And 15,000 surrender, mostly down by the lake
where they’re trapped. And that is Rome’s worst defeat in history
at the time. Even to this day, 22 centuries later, there’s
never been a larger more successful ambush than that. What did Flaminius do wrong? Well, he did three things. One is he acted hastily. His strength is– he wasn’t really under any
time pressure, but he was under political pressure, which is what he responded to. Militarily, the right thing to do, we wait
for reinforcements. So that’s one thing. Secondly, he rushed to battle. Never a good idea. Never rush to a defining conflict, right? Prepare. But thirdly, and most importantly, he underestimated
his opponent. Now, all of the greatest military and probably
investment disasters are always based upon a significant error of underestimating– GRANT
WILLIAMS: A combination of those three things a lot of times. STEVE DIGGLE: And I think that Brussels is
now in a position where it systematically underestimates its opponents. So convinced is it of its right and might
that’s what they consistently do. Mr. Nigel Farage was massively underestimated
by, by –they thought he was a clown. GRANT WILLIAMS: As was Grillo, right? Beppe Grillo was a clown and was underestimated. STEVE DIGGLE: And yet, Britain– the UKIP
movement succeeded in getting the referendum and succeeded in winning the referendum. Not UKIP alone, but they did it. Brussels almost provoked that. And now Brussels is provoking the Italians
to possibly a definitive response, which could really be a defining moment in development
in the history of the European Union. So you come to places like this. OK, it’s a long time ago. It’s very peaceful now. But very real, very physical, very visceral
two hours, history changed here. GRANT WILLIAMS: But man doesn’t seem to learn
from a story like that. It’s remarkable to me. STEVE DIGGLE: Yes. Well, it’s a different– every time the narrative
changes, right? And the belief system alters. And people still– and people think, those
guys were fools, but we’re different. GRANT WILLIAMS: Yeah, we’re smarter. Yeah. STEVE DIGGLE: This time it’s different. GRANT WILLIAMS: Well, I don’t know. I mean, I do get the sense, not only that
underestimating your enemy, but it’s not just the two combatants here. For me, everyone has been lulled to sleep
like Brussels has been by the might of Brussels or the fact that these skirmishes have happened
over the last seven or eight years, and every time it’s kind of gone away. And people are now– that’s the base case
now. The base case is not what are the risks if
this blows up? The base case is they always figure out a
way to make this stuff go away, and they’ll do the same this time, so we can ignore it. And I just– I don’t know, I just get a feeling
that that’s not the case this time. STEVE DIGGLE: It’s something that Italians
who are almost always divided about everything are actually fairly united on this. GRANT WILLIAMS: Yeah. The lessons from history are always instructive. And hearing Steve talk about the Battle of
Trasimene rang so many bells in my head it was almost deafening. But time was moving on and our next stop was
the walled city of Cortona. But on the way, I suddenly realized that something
was missing. So you know what’s just struck me? I haven’t seen any– not really nice– I haven’t
seen Ferraris, or Porsches, or Maseratis. I just don’t see any nice cars on the road. That’s weird. STEVE DIGGLE: So you know why that is? GRANT WILLIAMS: No. STEVE DIGGLE: Because a few years ago, four,
five years ago, one of the ways that Italy, the Italian government wanted to stop focus
on raising its tax revenue was they sent out the traffic police to stop any really nice
cars on the roads and asking them how much tax they paid last year. GRANT WILLIAMS: You’re kidding me? STEVE DIGGLE: No, no, no. It was a real thing. It was a real thing. So if you were driving a nice car, you were
being stopped constantly and asking what your tax number was. GRANT WILLIAMS: Is that right? STEVE DIGGLE: Yeah, no. So the tax department were on the line cross
referencing people’s motor registration with their tax records. And the answer was, well, sir, if you’ve only
paid EUR 2,000 tax last year because you’re earning EUR 8,000 a year, why are you– GRANT
WILLIAMS: Why are you driving a Ferrari? STEVE DIGGLE: Why are you driving this Ferrari? No, it was a huge thing. It was a real thing. I mean, it wasn’t just a few odd incidents
that got picked up by the press. I mean, it was really widespread. So instantly, four or five years ago, you
could buy a secondhand Ferrari in this town in this country for like, nothing. Because people were desperate to get rid of
them. Yeah, they even drove up to Cortina on the
Italian lakes in the north and took all of the number plates at this very fancy hotel
where wealthy Italians used to spend the weekend, went into the lobby and said, we wish to speak
to the following people. GRANT WILLIAMS: Wow. OK. STEVE DIGGLE: No, it was a real thing. So all of a sudden, boom, just like that. GRANT WILLIAMS: That’s amazing. Because we’ve been driving all morning, and
I don’t think I’ve seen one super sports car. STEVE DIGGLE: No. No. Millionaire tax dodgers are these days driving
a Panda. Hopefully as beaten up as possible. GRANT WILLIAMS: That’s amazing. STEVE DIGGLE: It was a real thing. And of course, it caused enormous resentment. But I think to a certain extent, they had
to do it. Tax collection in Italy has been a huge problem. And then it comes down to this whole idea
of how do you solve a fiscal problem in a country that has deeply systematic tax avoidance? Used to be, you used to build say that Italian
habits of paying little tax meant that you could afford a really nice car, but the roads
were terrible. And now I remember once, I was actually literally
stuck behind a Maserati going down this terribly potholed road. It was a beautiful car. And I was like, this is the Italian dilemma
right here. You can have private wealth in public squalor,
or you can have it go the other way around. No one seems to have found the balance. The Italian roads really got really bad around
2012, ’13, ’14, and they were really a direct reflection of just how bad the economy was. No one was paying anyone, including the municipal
government wasn’t paying people. So they just stopped working on the roads. In some ways, although we’re in a sort of
pseudo crisis environment, the economy in many ways is much better now than it was three
or four years ago. Certainly you can actually get paid. People really just stopped paying each other. And that negative multiplier really was very
palpable here in Italy. I had a lot of reasonably wealthy people ask
me if I could lend their business money because it has run out of credit because none of it
was coming from the banks because the banks had blown their– blown their load, and they
no ability to credit, even to good businesses with good credit. So classic example of how a banking crisis
immediately filters through into the real economy. Although the politics feels worse, and the
share prices at the banks suggest that quite a few things are worse, in some ways, the
real economy is actually a bit better. GRANT WILLIAMS: There are so many forces pulling
at both the fabric of Italian society, and the European project as a whole. And as we made our way inside the ancient
walls of Cortona, it seemed like the perfect location to discuss perhaps the most polarizing
threat to the EU’s survival. And one that, given its geographic location,
resonates particularly strongly with Italians. So there’s one thing that we haven’t touched
on, which is kind of the elephant in the room for a lot of these problems. STEVE DIGGLE: Which has why you can’t get
a cappuccino in Italy after noon. GRANT WILLIAMS: Listen, I’m not happy about
this whole drinking tea in the afternoon. STEVE DIGGLE: I know. It’s come as a horrible shock to you. GRANT WILLIAMS: Cappuccinos should be universal. STEVE DIGGLE: I’m afraid in Italy, cappuccino
is only available in the morning. GRANT WILLIAMS: Well, I’m not happy about
that. But immigration. STEVE DIGGLE: Yes. GRANT WILLIAMS: This is something that is
a problem entity from a political standpoint. It’s also looking like a problem from a societal
standpoint. You’ve got experience with this in Germany
as well, I know. This is real. And it’s been kind of marginalized as a debate
that only racists and far right people have. But there’s more to it than that, it seems
to me. STEVE DIGGLE: Italy is at the pointy end of
this because of its geography. We’ve just come from Trasimene battle between
Romans, southern Italians, and North Africans. Carthage is part of North Africa. Why are they fighting? Because they’re so close there’s only one
power that can be dominant in the Western Mediterranean. And that’s what those Punic wars were about. That’s why Carthage is invading Italy. And it comes back now once again, this geography
is a very important part of the Italian destiny. It’s very close to Africa. It’s very easy to get to now. And the Italians are looking for a European
solution. Which doesn’t seem unreasonable given they’re
constantly being told they’re part of the European Union. But when it comes to allowing immigrants in,
everyone gets very nationalistic. Brussels doesn’t have much to say on the issue. In fact, it tries to keep it quiet. Now there is another part, which is that both
Germany and Italy do need immigration. There’s a shortage of– there’s going to be
a shortage of people in these countries. Italy and Germany both have quite poor demographics. In fact, the Italian family size is tiny now. I think the average Italian woman has 1.2,
1.3 children. So there isn’t– there’s a long-term issue
that you’re going to need some immigration. The problem is it’s not controlled. It’s very much not– and it’s very much the
wrong type of people. And unlike Germany, which currently has an
unemployment rate of 3.7% and 1.2 million job vacancies, Italy has an unemployment rate
of 9.6% and a youth unemployment rate of 31%, and really doesn’t need a lot of unskilled
labor coming into the country. It’s really had a very strong impact on Italian
attitudes to the support they’re getting. Because these what they see is– and I think
they have a point– is a European Union that is very demanding about certain things– this
current budget, for example– and really not very helpful when they have a problem. Why is it an Italian problem with their geography? Well, it’s supposed to be an open border. But the Italians are having to bear this burden
disproportionately. GRANT WILLIAMS: Well, the problem for the
EU, obviously, is that any problem is a 27 nation problem. That if you give a solution to that problem
to one nation, by their own rules, you have to kind of offer it to all. You can’t mix and match and say, here’s a
problem Italy has. We’ll fix it for Italy. But no, Greece, sorry, that does apply to
you. STEVE DIGGLE: Immigration is this problem
that has become very difficult to talk about. People can’t talk about it rationally. GRANT WILLIAMS: Exactly right. STEVE DIGGLE: No one wants– GRANT WILLIAMS:
Which is why we’ve left it to last. STEVE DIGGLE: No on wants to sound racist. That’s racism. GRANT WILLIAMS: It’s a powerful word. STEVE DIGGLE: And let’s face it, it’s still
a phenomena in most societies. And it does inform the debate. And it does motivate people to vote in a certain
way. Clearly, some of the Brexit debate was racist. Now, the Remainers tried to suggest that everyone
involved in it who was a leaver was somehow a racist, and they tried to tar them with
it’s just a group of small-minded racists. That’s clearly completely unfair and untrue. But you also have to be very naive to say
that racism didn’t play a part in that debate. Similarly, the rise of the Northern League
is partly about immigration, and it’s partly about race. It’s naive to pretend it isn’t. But how do you have a debate about this in
a rational way? It’s extremely hard because everyone rushes
to a position and then holds it. It’s a big problem everywhere. I mean, America, Britain, and in Italy, it’s
the same. Liberals just see a red flag, which is we
cannot allow racism to inform any of our debates or any of our actions. That’s clearly not working for Italy. GRANT WILLIAMS: But I think that for the liberal
side of the argument, it’s not so much racism, it’s exclusion of any kind. You cannot put up any barrier, any wall. The whole idea of Europe was to tear down
barriers, to tear down walls. And it’s naive to think that in no point in
the future, might you need to re-erect a fence instead of a wall, just to slow things down. But I think to your point, we’ve reached the
stage where if you even bring this subject up, it’s very easy to shout you down by labeling
you a racist. You don’t want immigration, therefore you’re
a racist. And as soon as you’re tarred with that brush,
it’s very difficult. There aren’t any right parties anymore. In the media, everything’s far right. The Northern League are far right. And Five Star are far right. There’s no right and left anymore. STEVE DIGGLE: I think the kaleidoscope of
political parties means this right and left axis has become very unhelpful. I mean, there are still some classically leftist
parties. But if you look at Italian politics, you can’t
really put any of them on that classic communist through to ultra conservative spectrum that
comes from France. These parties have a series of– it’s a sort
of– it’s a buffet sort of manifesto that they have. There’s no real– I’ve said it in the past. There doesn’t seem to be any real manifesto
here. There’s a series of grievances. And immigration is one, and it’s a bona fide
one. If you’ve got 10% unemployment, any sort of
immigration is a problem. Italians are leaving Italy to go find jobs
in Germany and other places because there’s not enough jobs here. So of course, if you are unemployed in Italy,
and a lot of young people especially are, and you see more people arriving in your town,
that’s not a welcome thing. GRANT WILLIAMS: We’ve come back to this all
throughout the day today. Everywhere we’ve been, we’re talked about
division. We’ve talked about separation. We’ve talked about this fracturing, not just
of Italy historically, but of society, and of the European Union. And it feels as though that is something which
just sits across not just Italy, not just southern Italy, not just Europe, but the world
at the moment. There is this– and that has to be telling
us something. The fact that everybody is excluding and is
withdrawing, that has to tell us something about a broader theme that is occurring naturally. It’s not just a coincidence. STEVE DIGGLE: No. No, it’s not. It’s an important part of what’s going on
in Italian politics. It’s an important part of their negotiation
with the European Union. And it’s the important part of a lot of peoples–
in Italy’s question of what is the European Union doing for us? GRANT WILLIAMS: Yes. STEVE DIGGLE: It has brought lower interest
rates to Italy, right? I mean, Italian rates were much higher last
century than they were this century. So it definitely has brought– GRANT WILLIAMS:
But as we’ve seen, the effect that that’s had on the banking system– STEVE DIGGLE:
Yes, it’s not an unmitigated advantage, is it? It has obviously caused some significant problems
too. And now, those problems do make Italy something
of a prisoner of the system. GRANT WILLIAMS: That’s exactly it. STEVE DIGGLE: The banking system is so weak
now that it cannot survive without external support. And that external support is probably coming
from Europe. GRANT WILLIAMS: You’ve mentioned a couple
of times today this inflexibility of the European Union. And this always interests me, because going
in, common currency, open borders, low interest rates, great. Achieved all three things. But there doesn’t seem to be any understanding
or an acknowledgment of the fact that if everything’s cyclical, which history tells us it is, and
we see a lot of history today that’s all been cyclical, there will be a time when those
three things reach the other end of the cycle where the common currency is not a good idea,
open borders are a bad idea, and low interest rates are if not unnecessary, possibly deleterious
to the future. And it feels that we’ve reached that point. All three of those right now are at the root
of the problem. But there is no flexibility around it. STEVE DIGGLE: Well, cheap money has clearly
caused a lot of problems in a lot of places in the world. Interestingly, we haven’t seen a lot of inflation
in Europe. Not even in Germany, which ought to be overheating
now. And we keep looking for signs of it, because
we have a decentsized business in Germany. It’s really not there. It should be there. You’ve got full employment. You’ve got shortage of labor. You’ve got incredibly low interest rates. Still low inflation. So I’m not really sure that Europe is ready
for higher rates. Certainly, Italy, given its problems in the
banking system, given its relatively weak economy, probably would not really cope very
well with significantly higher interest rates. It’s another reason why leaving the euro is
just a pipe dream right now. I mean, they could do it, but it would be
a terrible idea for the banking system. It would be a terrible idea for the Italian
economy, because interest rates would go very high. Well, one of the things we’ve spoken about
a long time in the past is if you’re investing in European countries, you have to look at
the underlying currency. And the underlying currency is not necessarily
the euro. Because as we’ve seen from the UK, things
do change and can change. There’s no reason why Italy cannot go back
to having a lira. If you’re invested here, you’ve got to take
that into consideration. GRANT WILLIAMS: Sure. Sure. It’s an area of risk. STEVE DIGGLE: If you’re buying something with
euros, and overnight, it changes to lira, that could be a very significant position. Now, that’s one of the reasons why what we
do in the investment business we’ve got in Italy is very modest. That and many of these other problems. I mean, I still think it’s a marvelous place
to have a home and a marvelous place to have a base and to spend some time. But would I want to have a very significant
part of my wealth tied up in Italian assets at a time when the political– the political
landscape is changing very fast, because I might end up with a lot of Italian lira. GRANT WILLIAMS: Yeah. Exactly right. STEVE DIGGLE: Just when I wouldn’t want them. GRANT WILLIAMS: And potentially, euro denominated
debt, right? Which any leverage you’ve employed is– that’s
a major problem. STEVE DIGGLE: Whereas if the euro were to
break up where we do own a lot of assets, as Germany, we’d end up with a Deutschmark
asset and European debt, which would be an extremely good position to be in. So Italy’s in something of a conundrum. GRANT WILLIAMS: Well, I mean, look, there’s
a bunch of conclusions for us to talk about and talk through the implications of all this. But I reckon we should do that over some good
Italian food. Because there’s no where better time to sit
and do that. So why don’t we go get some food and mull
this over on the drive back and then sit and chew it over with a nice bottle of red and
some good food. STEVE DIGGLE: Sounds good. I’ve been driving all day. GRANT WILLIAMS: All right, fair enough. Our day in the Italian countryside had been
both fascinating and educational. But as Steve and I chatted by the pool over
a glass of Chianti, my thoughts turned to the investment implications of everything
we’d seen and talked about. And so with a bowl of pasta waiting for us,
it was time to head inside and try to make sense of it all. We need to think about what this means from
an investment standpoint. Because when I look at it, I can’t help but
think this is bearish for the euro because I think this pressure is going to build on
Italy. And the more people understand the chance
of this accident happening is increasing, I suspect they’re going to have to– they’re
going to have to start thinking about whether that’s going to be a fatal blow to the euro. I can’t help but think that Italian banking
system is going to struggle. You look at UniCredit, you look at obviously,
NPS, you look at all the Italian banks, and for that matter, things like the Spanish banks,
they’re on their knees. I mean, they really are in all sorts of trouble
and have been. There’s been no bounce. We haven’t seen– STEVE DIGGLE: The share
prices reflect that. I mean, there was a bounce. GRANT WILLIAMS: Absolutely. STEVE DIGGLE: There was a bounce, but it’s
given it all up. GRANT WILLIAMS: Given it all up. And very easily. They kind of rolled over went straight back
down again. STEVE DIGGLE: I mean, whether or not you want
to short something that’s as beaten up as the Italian banks now, I don’t know. GRANT WILLIAMS: No, you probably don’t. STEVE DIGGLE: Certainly not as a long-term
short. I think– GRANT WILLIAMS: I don’t think you
want to buy them because you think that this is going to be– I think that’s a big gamble,
to buy things like that and think, you know what? They might just pull this off. STEVE DIGGLE: There’s a chance of recapitalization
and there which could be heavily dilutive. GRANT WILLIAMS: Yeah. STEVE DIGGLE: I mean, it’s obviously especially
in the ones that are just wards of state. I don’t really know enough about it to have
a strong opinion. I haven’t felt tempted enough to do the work
to really understand the balance sheets. I suspect that would be really hard to understand
the Italian balance sheet in its current condition because I’m sure the disclosure is terrible. GRANT WILLIAMS: Yeah, but what about BTPs? Because I know that’s something you’ve played
in the past successfully. When you look at the spreads to places like
Germany, do they offer value, or again, I can’t help but think that this is a creeping
crisis. It’s a creeping realization. And with the ECB ready to pull back on their
bargain bonds, that’s going to be detrimental to Italy. Everywhere I look, I see things stacking up
horribly in the short to medium term for Italy. I really do. STEVE DIGGLE: There’s clearly a level of justified
fear already in the price. GRANT WILLIAMS: Yes. STEVE DIGGLE: So you’re clearly not getting
in the trade when everyone’s thinking the opposite. I don’t think anyone’s thinking things are
just going swimmingly here in Italy, and the spreads reflect that. So the $64 dollar question for any trader
is, is the spread wide enough? Well, the spreads been a lot, a lot worse,
a lot worse. That turned out to be a great trade going
on Italy. Clearly, we’re not at the bottom. Clearly, things could get a lot worse. And we haven’t got all the bad news priced
in the Italian spread. And of course, because the Italian debt is
so big and it’s so much bigger than anyone else’s, the debt matters doubly. Because Italy can’t afford expensive debt. The Italian government can’t afford it because
it starts eating up all of the budget, which is already under strain. So there is a risk if this fight with the
European Union and Brussels– let’s call it Brussels, because it’s not really with the
European Union- – gets worse, the ECB refuses to help, Italy could find itself in a very difficult position. So there is clearly a trade either way. It doesn’t feel to me like the risk reward
in any of those trades is exceptionally good. On the euro, I think that lower for longer
on interest rates seems a reasonable bet. A lot of people were moving towards a position
where clearly, the ECB was going to reduce its [INAUDIBLE] or stop its QE, and they were
figuring this was another step towards being part of a global tightening following the
US. I’d be surprised if that happened. Because although German conditions remain
strong at the margin, they’re weakening. GRANT WILLIAMS: Yes, I agree. STEVE DIGGLE: The PMIs are all heading lower. They’re heading lower in Asia as well. And that’s something we watch really closely. You’re going to get no help from Asia anytime
soon. So that’s going to be a drag. At the margin, German conditions, which lead
Europe, are slightly weakening. We haven’t seen any inflation yet. The need for the European Union to have a
anti-inflation reinterest rate rise doesn’t seem to me to be a call at all clear. US, on the hand, will continue to raise rates. So the interest differential is likely to
widen. That’s not unexpected. But the euro at its current level, fundamentally,
it feels cheap now. Not nearly as cheap as it could be if we saw
a situation of strain to a situation of crisis. What would cause that? Italy. GRANT WILLIAMS: Exactly right. I think the euro is probably due for a bounce
against the dollar. But that’s more going to be the dollar taking
a pause or perhaps weakening, is the euro. But when I look at likely scenarios, everywhere
you look, economies are slowing undoubtedly. And that’s something that has kind of sneaked
up on people. And I suspect you’re going to see sovereign
yields heading lower again. People are going to be looking to buy sovereign
bonds. And I would imagine that if that comes against
the backdrop of this Italy problem intensifying, it’s just a great opportunity to see those
spreads widen out. That to me looks like the obvious trade is
for a widening of Italy’s spreads against the likes of Germany. And I think that you’ll get a kicker to that. Not just because that’s the way it’s going
to happen, but you’re going to see a lot of people looking to add sovereign bonds to their
portfolios in the light of slowing economies, and they’re going to be herding into Germany. Even if they’re just uncertain about Italy,
it won’t be buy one, buy all like it was last time. STEVE DIGGLE: Yeah. I think you’re probably right. But these are all relatively short-term trades. They’re all trades where the risk reward is
possibly fair, but it’s not overwhelming. There are also plenty of possibilities for
things to calm down. There’s plenty that the European Union, if
it wanted to, could do to help the situation in Italy. GRANT WILLIAMS: That would be interesting. If they did, if they buckled, that would completely
shock me. Honestly, that would shock me. STEVE DIGGLE: The term buckle– STEVE DIGGLE:
–for them, buckle is the problem. GRANT WILLIAMS: But for them, a slight capitulation
or a slight– STEVE DIGGLE: No, not a capitulation. Just about a negotiation to accept the fact
that conditions in Italy are moving against the population, and that the need for some
form of extra stimulus is clear. GRANT WILLIAMS: Because they’re not Italians. They’re Europeans. And because the Brussels’ powers that be cannot
say, well, we’ll negotiate with Italy on their special terms, that’s been the problem all
along. I think you and I– STEVE DIGGLE: What does
that make you feel about the future of the European Union? GRANT WILLIAMS: Well, exactly right. I think you and I have chatted a lot about
this today and over the years about this inflexibility is going to be their downfall. I just keep coming back to the fact that despite
everything we’ve seen and everything we’ve talked about, there’s no real way of knowing
what’s going to happen here. Because it’s such a complex country, it’s
such a complex people, it’s such a complex situation within an intractable position on
both sides that I don’t think there is going to be a designed solution for. I think an accident of some sort almost has
to happen. STEVE DIGGLE: I think what’s clear is that
Italy is currently in a very poor position to weather a cyclical downturn. GRANT WILLIAMS: Yes. STEVE DIGGLE: A lot of people are watching
almost all data, but corporate data especially like hawks looking for peak of cycle. What comes after peak of cycle? Trough. Italy has not recovered from the 2008 crisis. Its economy is small. Unemployment still very high. Level of distress is still very high. If we are at peak cycle, and that we are heading
into a global downturn, several countries in Europe, Italy being the most important,
are in a very poor position. And if you are I think of a view that we are
headed into a downturn, then it’s quite easy to draw for some pretty negative conclusions
about the weakest economies in Europe, which have not recovered from the last cycle. That looks like structural decline. Structural decline rather than cyclical decline. A technical analysis would see it as lower
lows and lower highs. GRANT WILLIAMS: Sure. Sure. STEVE DIGGLE: So I think that much is clear. I don’t see an overwhelming trade here. That’s partly because I’m not looking for
it. I don’t also– nor do I see any overwhelming
business opportunity as a way of playing it. What I do see is a place I love going through
a fairly traumatic period in its political life. Things changing rapidly. And rapid change creates a level of unpredictability. And I think your point is exactly right, which
is that back in the status quo, and that Europe always winning, and everything holding together
has been a reasonably good trade, Brexit excepted. I think that level of complacency is very
dangerous now. And if there is a trade, it’s don’t assume
that the next three years in the European Union are going to be all Mr. Draghi has to
do is make a bullish statement of intent, and all the bears are going to run away, and
everything’s going to be fine. That much I’d agree with. But one of the lessons of history is that
people muddle through. The sun will rise tomorrow. In Italy, actually, we’ll see it. GRANT WILLIAMS: Yes, right. STEVE DIGGLE: Italy will continue to be a
fine place to live for most Italians. The food is great and cheap. The wine is great and cheap. The weather is excellent. We’re not going to see peasants with pitchforks. People aren’t going to run around in the streets
stabbing each other. That’s London, isn’t it? No. I mean, yes, problems. But the one thing you see from looking at
century after century Italy is that the good things in this country persist. GRANT WILLIAMS: Well, look, it’s been a fantastic
day. And thank you for the tour, and the conversation,
and the food, and the wine. And we’ll see what happens. But one thing we know is Italy is not going
away, and it really is a fantastic place to be. So cheers. STEVE DIGGLE: My pleasure. GRANT WILLIAMS: Whatever lies in Italy’s future
is pivotal. Not just to the country’s citizens, but to
Europe as a whole. And as the skies grew darker over the Niccone
Valley, I couldn’t help but think about what a perfect metaphor that was for everybody

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