'Italexit 2016-7': Next Sunday's Critical Vote Is Likely To Lead To A Sharp Correction In Global Stock Markets

From the United Kingdom’s BREXIT vote in June to US President-elect Trump’s upset victory on November 8th, the rising global tide of anti-establishment, protectionist populism now moves back to the European continent. Front and center and in big way.

Italy is the European Union’s 4th largest economy and a participatory member of the Eurocurrency system. Italy also holds the second highest debt-to-GDP within the EU (second only to nearly insolvent Greece) at 135% and an official unemployment rate near 12% and youth unemployment rate approaching 40%. With a long running sluggish economic backdrop and an immigration crisis continuing to unfold, it is no surprise that social unrest and discontent with the status quo is on the rise in Italy.

What is also not surprising is that the likelihood of the December 4th Italian Referendum vote continues to increasingly lean heavily towards a ‘NO’ vote verdict. Italy’s current establishment Prime Minister, Matteo Renzi, has repeated said that he would step down immediately if a NO vote is the outcome, most likely leading to a whole new leadership government and BREXIT-like vote within the country in the months ahead.

An ‘Italexit’ or an ‘ItaLeave’ as it is being called is not the only lethal threat ahead for the fragile European Union and shared Eurocurrency. 2017 has the potential to be a year of European political hell. (See below)

What IS surprising however is that the majority of US investors are still complacently focused on the post-Election Donald Trump ‘honeymoon’ and melt-up in the US stock market. As Bloomberg and ZeroHedge reported, the Credit Suisse Fear Barometer has tumbled 25% since the day before the presidential election, while the S&P 500 Index, along with the Dow and NASDAQ, have all reached all-time highs. (See below)

The CS Fear Barometer compares bearish options prices on the Chicago Board Options Exchange (CBOE) with bullish ones three months from now. The indicator has dropped to its lowest level since February of 2016, a level that corresponded to a sharp 12% correction in US stocks.

Despite the market’s euphoria over a relatively peaceful Presidential transition to the new Trump Administration and Republican control of the US Congress, US stock market history does not bode well for the crowded bull market enthusiasts when two-term presidential handovers to a new administration occur in Washington DC. (See below)

h/t @ConvertBond

Although market corrections can be volatile and sharp, like the 5% overnight sell-off in S&P500 futures we witnessed on the November 8th Election Night, investors should buckle up in the short term.

An overbought, over-extended US stock market as well as an under-the-radar, systemic risk event in the upcoming December 4th Italian Referendum is likely to put an abrupt ending to our new President-elect’s stock market honeymoon.

Kirk D. Bostrom, Founder and Managing Partner

Strategic Preservation Partners LP ( http://sppfund.com ) is a private investment firm managing the Strategic Preservation Fund LP (The Fund), a US domiciled global special situations investment fund. The Fund offers qualified investors the opportunity to build and protect real wealth by exploiting a volatile conclusion to the Global Central Banking Bubble and credit market super cycle.

Disclaimer: The views expressed are the views of Kirk Bostrom and are subject to change at any time based on market and other conditions. This material is for informational purposes only, and is not an offer or solicitation for the purchase or sale of any security and should not be construed as such. References to specific securities and issuers are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendations to purchase or sell such securities. The opinions expressed herein represent the current, good faith views of the author at the time of publication and are provided for limited purposes, are not definitive investment advice, and should not be relied on as such. The information presented in this article has been developed internally and/or obtained from sources believed to be reliable; however, the author does not guarantee the accuracy, adequacy or completeness of such information.

DECEMBER 4, 2016: Italy’s Referendum (‘ItaLeave’) Is Bigger Than Brexit And Is A Systemic Threat To Europe’s SurvivalGOLDMAN SACHS 2017: ‘Heads We Win, Tails We Win’