Conte’s inferno: political crisis in Italy

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Hello and welcome to the Intelligence on Economist Radio. I'm your host Jason Palmer. Every weekday we provide a fresh perspective on the events shaping your world. Most people haven't thought of the video game store Gamestop for years, if they ever did. Now it's all Wall street is talking about. We dive into an intriguing tale involving the social media site Reddit, some snarky day traders and serious stock moves. And ski resorts were the first known super spreader sites of the pandemic. All those crowded lifts and spirited apres ski sessions. In America, that danger has driven a spike in backcountry skiing. No lifts, no crowds. But the sport isn't without its risks. First up though, Today talks continue in Rome to try to form a new government, Italy's third in three years. Earlier this week, Prime Minister Giuseppe Conte resigned, predicting he would no longer have a majority in Parliament. As for what's next, it's unclear even by Italian standards. Mr. Conte might just return as Prime Minister of the same fractious coalition or a different one. Or there could be a snap election. The crisis comes at a crucial time, not just for Italy, but also for Europe as it plans for and piles money into a post pandemic future.

Giuseppe Conte, the Prime Minister, ran out of support, but he ran out of support within his own coalition.

John Hooper is the Economist's Italy correspondent.

He has been supported up until now by a four party coalition. But one of the smaller parties, Italia Viva, has been spoiling for a fight. It's led by Matteo Renzi, the former Prime Minister, who basically has accused the government of being just not up to scratch.

Not up to scratch in what way?

Well, he has particularly objected to the government's plans for spending the vast sums of money that are going to be coming to Italy from the EU's Post Pandemic Recovery funds. He says that they're just not adequate. This really pushes this crisis way beyond the boundaries of Italy. It's a European issue Because Italy is going to get by far the largest allocation of funds from the eu, and people want to know that that money is going to be well spent. The government, in fact, is expected to find a good use for more than 200 billion euros, and even proportionate to the size of the economy, that's more than Italy received after World War II from the Marshall Plan. So it's no question that Mr. Renzi has lit upon an important point. But there's also a suggestion, suspicion on the part of many people in Italy that Mr. Renzi is still sore about having been ousted from power. He wants to put himself at the center of the stage and ensure that his little party has a decisive influence on events.

And so will Mr. Conte end up out of power, do you think?

That really is the crucial question. Because what we don't know is whether Mr. Renzi intends to make up with Mr. Conte and give him the chance to form a new government, or whether he really wants Mr. Conte's head on a plate, in which case he can withhold his support and make impossible demands that will ensure that that will not happen. It really all depends on what President Sergio Mattarella is going to discover in the consultations which are going to continue to take place until tomorrow. He'll be talking to all the party representatives and he is going to be looking at various possible options. One of them is to try to ask Mr. Conte to rebuild the coalition. One possibility is that they will invite in another politician or maybe a technocrat, to try to pull together an acceptable coalition. The other possibility is that he will perhaps bring in somebody else to form a different kind of government. Silvio Berlusconi, and he is still an important power in Italian politics, has signaled that he would support a much broader coalition, a kind of government of national unity, to see Italy through this crucial period in its history. But there's very little sign that others on the right in Italian politics want to join in an adventure like that.

And if none of those options pans.

Out, well, if nothing else works, then the nuclear option is to call an early election. And that's going to be taking place in the midst of a pandemic. If that happened, well, the polls indicate that the right would do very well and might even be able to emerge with a workable majority. And in Italy, right means quite a long way to the right. We're talking about the nativist Northern League and the so called Brothers of Italy, who are the heirs to Italy's neo fascist movement. So that really would Also throw a big spanner into the European works because that's precisely the kind of government that people in Brussels don't want to have to work with.

Well, what is it that the Italian people want though, away from the halls of power?

Well, that's rather ironic because Mr. Conte is by far the most popular politician in the country country largely because of his comforting handling of the first wave of the pandemic. Mr. Renzi, on the other hand, normally comes bottom of the table when polls are taken of politicians approval ratings. The other thing that the polls suggest is that the public wants a stable government. But in Italy that is very often really wanting the impossible.

And stability it seems, is exactly what they don't have at this stage. I mean, what are the wider implications of all of these ructions going on at this point?

Well, speaking on television the other day, the President of the European Parliament, David Sassoli, an Italian himself, said there was real concern in the rest of Europe, Europe about whether Italy can get its act together in time to make good use of those funds. Part of the idea behind the EU's recovery is to use it in the jargon to level up. In other words, to try and spend more in the south of Europe so that the south of Europe, and the south of Italy in particular doesn't act as a drag on growth in the way that it has done now for years, for decades. Europe is really banking on this. And the doubts about Italy's ability to do its bit are bound to grow for as long as this political uncertainty continues.

John, thank you very much for joining us.

My pleasure.

For more analysis like this from our international network of correspondence, take out a subscription to the Economist. Get a great introductory deal@exterator.com intelligenceoffer the link is in the show notes.

I bought 10 shares only at 35 and I still hold them. So they are at 250 now.

When we spoke to Kai, an amateur investor, before US Markets opened yesterday, shares in the video game retailer Gamestop had been on quite a tear, netting Kai a tidy profit.

My income is not that high. It's like four months salary for me.

As of today, Gamestop's shares are touching $350. In the four weeks of this year they've risen more than 1900%. That's an uncommon rise on Wall Street. And what's behind the rally is even more unusual.

Over the past few days in particular, the price of Gamestop has spiked dramatically.

Alice Fulwood is the Economist's Wall street correspondent.

This massive price increase seems to be down to a community of investors on a stock investing forum on Reddit who have sort of piled in to drive up the price, in part seemingly to spite big institutional short sellers.

Okay, so talk me through this a bit. There's a lot going on. There's people on Reddit, there's some spite. There's a video game store that if know it at all, they last thought of it perhaps a decade ago. Let's start with the short selling part. What's been going on with GameStop's share price?

Like many other physical retailers, Gamestop hadn't been doing very well. Revenues and profits had been falling consecutively and obviously had a difficult time during the pandemic. It has thousands of retail stores and in general, people increasingly are buying video games online. And its share price had reflected that. It's fallen pretty dramatically over the past few years and had been languishing in sort of low single digits at points in 2020. And then last year, one big investor called Ryan Cohen, who founded an online pet food company, took a big stake in the company, which he said wasn't adapting quickly enough to the digital revolution in gaming. Some investors took this as a sign that perhaps things could turn around for GameStop. But other institutional investors were much more skeptical. One, for example, called Citron Research, said the company was in a terminal decline and it recommended taking out a short position in this company. So that's when you bet that the share price is going to go down by borrowing the shares of a company from someone who holds them and then selling them. A lot of big institutional funds agreed, and in aggregate, there was so much interest in going short this company that the total value of shares that had been shorted was actually more than the market cap of the company.

Okay, and where do the people on Reddit come into all of this?

GameStop has become something of a fascination for members of a Reddit forum called WallStreetBets, which is a sort of online forum with a couple million users, mostly amateur day traders. And they seem to have taken a fancy to GameStop for a couple of reasons. One is for some of the fundamental points that I mentioned that institutional investors were excited about, but also almost in this David and Goliath style struggle against these big institutional short sellers. So if you go back through the post history, there was a post in September called Bankrupting Institutional Investors for Dummies featuring GameStop. If they got enough amateur investors on WallStreetBet sort of interested in buying up GameStop, they could potentially initiate a squeeze on all of these institutions that have gone short this company.

What do you mean when you say squeeze? How does that work?

A short squeeze can happen when there's a lot of short interest in a stock and the price of that company starts to rise because investors have borrowed shares, they eventually need to give them back and so they'll need to close out that position at some point. As the share price starts to rise, they can get either panicked or fret that they'll have to buy at a much, much higher price than where the market is currently trading. And that can force some of those shorts to close those positions. Positions. So as the share price starts to rise, that can put even more upward pressure on the share price and cause a spike in the value of that company.

And that's what's happened here in the.

First part of the week. It didn't seem that that was the main driver. It seemed like all of the short positions that were open were still open. So it wasn't that investors were having to close out their positions. That wasn't what was driving the price higher. Although that may have changed on Wednesday as price action got really out of control. Two of the most notorious or famous shorts, Citron Research and Melvin Capital, both said publicly that they had closed their positions. And year to date, it's not been a good trade for short investors at all. They've lost several billion dollars so far.

And meanwhile this has become something of a stock trade spectator sport.

Yes, there's been a huge reaction across Wall Street. There's been wall to wall coverage in the financial press, every investor going on cnbc. This is all people have been talking about. And it's even reached the upper echelons of politics. The White House press secretary was forced to take a question about GameStop team.

Including Secretary Yellen and others are monitoring the situation.

It's a good reminder though that the stock market isn't the only measure of the health of our economy. At the same time, the Federal Reserve Jerome Powell also asked questions about what was going on with GameStop. I was hoping that you would first react to the wild ride that GameStop stock has had this week. And he was sort of very quick to say there isn't a bubble. This isn't necessarily indicative of sort of wider systemic financial risk.

And I would say that financial stability vulnerabilities overall are moderate.

But there's been a lot of attention paid to what's going on in GameStop share prices by basically everyone inside and outside financial markets.

And is all this attention, all this frenzy limited to GameStop shares?

One of the dynamics that might be encouraging this is that there seems to be a secondary effect or a ripple effect going on in other stocks, in particular other heavily shorted stocks. So the least loved stocks by institutional investors. This includes amc, the big cinema chain that was also hit badly by the pandemic. But it also includes things like Nokia and BlackBerry. Those companies that have been unloved for a while and seem to be struggling have also seen dramatic price increases over the past day or so.

I mean, this is a tremendous amount of turmoil here. What about regulators? Have they weighed in at all on all this?

The big financial market regulator, the Security and Exchange Commission, has said that it is monitoring what's going on in these forums and is on the lookout for anything that might be nefarious. The most obvious channel through which things might be suspicious is if the SEC potentially thinks that this is tantamount to market manipulation. Now, the rules on that are quite vague, but in general it involves a group of people contriving together to push an asset pricing around in a way that's totally devoid from fundamentals. There are elements of what's happened on WallStreetBets that seem to fit into that category, but it is very different to any of the cases that the SEC has litigated with respect to market manipulation before. So it's possible that the SEC will look at this and say, well, it's sort of slightly mad, but it doesn't quite meet that standard and we'll leave it alone.

So in the final accounting here, what do you reckon? Have the Redditors triumphed over Goliath in the way that they set out to do so?

This story has been covered as though it's this great uprising of the, this Reddit mob that have stuck it to Wall street and a bunch of hedge funds.

I'm not going to lie. First reasoning for me was definitely to make some money, but it's a nice side effect to stick it to the big boys and show them that we can make money off of them.

It is true that many hedge funds have lost money. It's not been a great trade for them. But this idea that this torrent of retail trading is bad or damaging for Wall street is really quite misguided. For example, one of the hedge funds, Citadel, that helped bail out one of the short investors, Melbourne Capital, the owner of that hedge fund, Ken Griffin, also owns Citadel securities, which is a big high frequency market maker. And the way that that firm makes money for Ken Griffin is off of retail order flow. The more retail investors trade, the more money a firm like Citadel securities makes. And so the idea that this great surge in retail trading is going to trouble most of Wall street is potentially misplaced. And the way that you probably stick it to Wall street is by buying an index fund and leaving, because then they can't really make any money off of you. But that does require you to step above the fray and pay less attention to markets, and that is difficult when they are generating so much attention.

Thanks very much for your time, Alice.

Thank you, Jason.

The thing I love about backcountry skiing the most is that feeling of being small in the wild.

Fritz Sperry writes guidebooks for backcountry skiers in Colorado.

It's just so amazingly beautiful. And when you get to the top of that mountain, you feel like this tiny little speck, and the mountains are folded out away from you like a rippled sheet. You just see what's possible.

More and more people are coming to a similar appreciation of the sport.

Backcountry skiing is similar to traditional alpine skiing, except for you don't have any lifts. It's human powered up and down.

Lee Moore writes about America for the Economist.

The sport has been much more popular in Europe for much longer, but in the US in the past couple of decades, it's become increasingly popular.

Why has it taken Americans longer to come to it?

Backcountry skiing is always inherently dangerous. When you go out into the backcountry, it's not like a ski resort. You have to go back there and know what you're doing, and you have to know how avalanches are triggered. So because of the difference in safety culture in the U.S. i think there are a lot of liability issues. Resorts particularly have been wary of allowing people to use their areas to do backcountry skiing.

But you say that's been changing.

Yes. You had gear sales increasing over the past decade. What you saw with March 2020, you had lots of people come into ski shops and buy all of the backcountry gear that they could get their hands on because they knew that the resorts were shutting down. Backcountry became a way for them to continue skiing for that season. In terms of COVID it's fairly safe because you're never really that close to anyone.

And you mentioned the risks. Surely there's a concern about a whole bunch of novice backcountry skiers up there on the mountains alone.

That's correct. And this was a real concern that I heard from both people who are backcountry skiers themselves and those who are selling them gear. Last March, when things were just crazy, a lot of stores saw people buying $2,000 worth of backcountry ski gear, but then they didn't spend the extra $300 for the safety equipment. The concern was that you get out into the backcountry, you can trigger an avalanche. In the Alps, about a hundred people die every year from avalanches. Last year, six people died in Colorado over the entire season. This year, in December alone, four skiers have already died. So there is this real concern that novice skiers are getting into the sport without knowing the risk and that people who do know the risk, because you have a lot of beginners in their old haunts, they are going into more dangerous areas. And that's something that everybody in the industry is kind of nervously watching right now to see the numbers.

But putting those concerns to one side, surely all this extra effort is worth it for backcountry skiers. Any memorable experiences you've got?

The best backcountry skiing experience I had was in eastern Oregon. You get to the top of the mountain and you're tired, you're sweaty, it's cold. That's the moment when you really wonder, like, why am I doing this? Then you go down the mountain, and it's the best skiing you've ever done, hands down. And at the bottom, you realize there's no way you're ever going to be able to go back to skiing a resort without thinking about this.

Lee, thanks very much again for your time, and have fun out there.

Thanks, J.

That's all for this episode of the Intelligence. If you like us, give us a rating on Apple Podcasts and see you back here tomorrow.