Market Noise

The Renzi Referendum: Italian surrealism in a post-truth world

It seems apposite that Matteo Renzi’s term as Italian Prime minister should end in this way. For investors, this referendum was a surreal distraction. The population were voting on the nuance of domestic decision making, but Eurozone membership means that there is limited scope for those decisions to impact the Italian economy. The result has been presented as an act of public rejection of the establishment, but it is ultimately an endorsement of the status quo.

For some, the vote is a further manifestation of the “post truth” world. “Post-truth” refers to a politics where appeals to emotion are more powerful than facts, but more broadly it has come capture a sense that presentations of reality are becoming distorted and confusing. There is no longer one simple story to explain what is going on.

As we wrote in October, attempts to fit the Italian referendum into broader pre-existing “post truth” narratives such as the “rise of populism” and the rejection of globalisation seem to have been overplayed. Rather, it seems that the focus of the vote was primarily domestic and specific in nature.

There are also important differences between this referendum and both the Brexit vote and Trump’s US victory. Unlike those events, the Italian result was in line with expectations. Price moves already partly reflected the outcome.

Italian equity market has lagged


The relative lack of importance to economic policy, and the fact that the result was widely expected seem to explain the muted reaction of markets so far. At the time of writing Italian government bonds have seen the most notable weakness, but this comes against a background of the broader bond sell off of the last couple of months.

Referendum result already price in


The future

Beyond the short term price response, it seems clear that Italy has two interconnected problems that will not be resolved by this vote. It is cyclically extremely weak, having been needlessly devastated by the eurocrisis, and it needs banking consolidation.

Italian “misery index”


In the days when Italian governments, not the EBA or the European Commission, made the important macroeconomic decisions, Italy would have devalued, and the government would have printed money and bought up the non-performing loans.

But Italy is part of the Eurozone. The reality of the Eurozone is that there are no effective, urgent counter-cyclical policies available, nor is there a coherent way to deal with a banking crisis. Renzi is a reminder that a nation has very limited sovereignty if it cannot print currency or set interest rates. It should not be surprising that ambitious, young, national politicians get distracted by surreal referenda – where the population feel empowered by leaving everything unchanged.

“Post-truth”: Politics and economics

Seeking to interpret global developments through the “post truth” lens may be interesting, but it is of little use to investors.

Reality has always been far more chaotic and complex than the received narratives of media sources and historians have tended to suggest. The current environment seems “surreal” or “post truth” because many of us are used to a relatively simplistic presentation of how the world works but are now bombarded by countless different viewpoints and interpretations. The shock of “post truth” in the current era is not just about lying, but the uncertainty that comes with realising that there is not one “truth” but many.

Financial markets have always been “post truth.” Because economics is complex and constantly evolving it is far harder to construct stories than it is from politics, which has clear protagonists and set piece events. At the same time, asset prices are an amalgam of a multitude of divergent and ever-shifting beliefs. The best investors seem to be those who accept this fact.

The value of investments will fluctuate, which will cause prices to fall as well as rise and you may not get back the original amount you invested. Past performance is not a guide to future performance.