be_ixf;ym_201909 d_20; ct_50

Select Page

Italy Pushes Europe to the Brink of Another Financial Crisis

Italy Pushes Europe to the Brink of Another Financial Crisis

It’s a familiar story…

A financial firm fails and threatens an important economic sector. The government steps in. Instead of directly bailing out shareholders, regulators sell assets with value to a competitor, and taxpayers cover losses on bad assets.

It’s the story of Bear Stearns and other major financial firms around the world in 2008. It’s also the story that’s unfolding in Italy right now.

Italian regulators bailed out Veneto Banca and Banca Popolare di Vicenza to avoid a crisis in its industrial heartland in the northeast region of the country.

This is Italy’s second major bailout within six months. At the end of last year, the country announced a rescue of the world’s oldest bank, Monte dei Paschi di Siena. That deal was completed last week, days before the second bailout was announced.

You might think stocks would drop on all the bad news. But that’s not what happened. Investors like to pretend problems don’t exist until they become too large to ignore. This was true in 2008 when multiple financial firms failed before the market crashed. It’s true now in Italy.

Europe’s Bubble Trouble

Investors are ignoring the risks, which has pushed the country’s benchmark stock market index into bubble territory. This is shown in the chart below.

It is possible there are no problems below the surface of the European banking system. But the large bank failures are warning that all is not well.

Of course, we can’t tell for sure that we’re in a bubble until after it pops. But from studying past bubbles, I found that when the annualized rate of change exceeds 30%, it’s time to expect a sell-off. Well, as the chart shows, it’s time to look for a sell-off in Italy.

But there are problems beyond the borders of Italy.

Greece avoided defaulting on its debt next month because the euro zone agreed to give the country enough money to meet its obligations. That’s like taking a cash advance on one credit card to make the minimum payment on another.

At the beginning of June, Spain’s fifth-largest bank failed. Spain’s largest bank, Santander, bought Banco Popular for €1. Banco Popular, with $100 billion in loans, never fully recovered from the subprime mortgage crisis of 2008.

Benchmark stock market indexes in Greece and Spain are also in bubble territory, with their annualized rate of change now topping 30%. The FTSE Eurotop 100 Index, a benchmark for the continent, is also flashing that same warning sign.

It is possible there are no problems below the surface of the European banking system. But those large bank failures are warning that all is not well. We know that it’s likely there are problems. The question is whether the stock market can shrug them off and continue higher.

The market has shrugged and rallied quite a few times in the past few years. But there will come a day when the stock market falls and a bear market begins. A crumbling financial system tells us the next global bear market could start in Europe.


Michael Carr, CMT
Editor, Peak Velocity Trader

About The Author

Michael Carr, CMT, CFTe

Michael Carr is an American investor, a Chartered Market Technician (CMT) and a contributing editor for Sovereign Investor Daily. He is a longtime member of the Market Technicians Association (MTA), where he serves as the editor of its newsletter, “Technically Speaking.” He is also a contributor to various publications related to trading, including the Journal of Technical Analysis, MoneyShow, SFO Magazine and Futures Magazine. Michael is the author of two books, Smarter Investing in Any Economy: The Definitive Guide to Relative Strength Investing (2008) and Conquering the Divide: How to Use Economic Indicators to Catch Stock Market Trends (2010).



I am up $20,070 in closed positions from Feb. 18 through March 7.

- Bob Rowe

I started your system in December … I am ahead $29,000 … I put total faith in you and your system and it has worked for me very nicely. Thanks again I sure like your humble approach about this whole thing

- Dale Leiffer

I have made a little over $4,000 while being cautious.

- Chuck Goss

Share This