Blowing Up: The Italian Debt Crisis, The Experts That Missed It – And What’s Next

To summarize: with simply trying to raise revenue and pay off their debts by placing relatively small taxes on the colonies, the British Empire ended up triggering a revolution that left them embarrassed, weakened, and poorer. 

Today, the political risks in Italy have turned their financial world upside down.

And in the mind of herd investors and financial ‘experts’, owning Italian bonds were safe and low risk – that is, until it wasn’t.

Look at the spread between Italian 2-year bonds and their German counterparts – essentially overnight Italian bonds ‘blew up’...

(Click on image to enlarge)

From the perspective of the bond market – with how fast they re-priced everything, triggering massive losses – they clearly didn’t see any of the risks.

I can hear them now...

“No one could have seen this coming.”

“Look, it’s not like anyone else was expecting this – it was a fluke.”

“I’m sorry that we lost all your money, but everyone got burned from this – it wasn’t just our fund alone.”

But – were things really this unexpected? What about a week before Puerto Rico defaulted in 2016 or Greek in 2010? People were buying their bonds up until the final hours.

Studying the blow up in Italian bonds – I can’t help but rope in the ideas from another great thinker.

Nassim Taleb and his ‘Turkey on Thanksgiving‘ Paradox...

Imagine a nice plump turkey on a farm.

The turkey’s taken care of and is given food daily. It lives in a nice open-range pen and freely trots around.

As time goes on, the turkey becomes use to how things are – its daily routine – and It feels safe and secure eating its meals everyday at noon.

If you were to graph this, you would see an upwards sloping line. Investors and economic ‘experts’ can use fancy math and collect past data to make forecasts over the next five years – feeling confident things will continue.

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Disclaimer: The piece is from my original write-up @ - all ideas expressed and charts are my own. Sources and quotes are credited. 

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