Archive for January, 2015

Greece and the Cold War Reloaded

Posted: January 30, 2015 in Uncategorized

Russia Finance Minister Siluanov told CNBC that Russia would be ready to assist Greece, if Greece would ask for help.

That is an interesting geopolical (not market) development.

Also there is the new “BRIC” Bank (anti IMF) founded mainly by China, Brazil and Russia.

This could be a great help to Tsiparas and Greece.

A Greece in the Russian/Chinese sphere of influence would be terrible for NATO. Turkey is already a frenemy (friend and enemy) and losing Greece would compromise the American superiority in the East Mediterranean and block the Black Sea and isolate Ukraine.

Already Greece tried (unsuccesfully) to block NATO sanctions against Russia. And both Russia and China acquired land and harbour (plus there is the new pipeline from Turkey).

A very interesting February

All eyes are on Greece, but no one moves.

There are opening from the EU officials and moderation speeches from Syriza.

But eventually they will clash. When? Well the 28th February the Greek bailout will finish and there are several refinancing debt.

28 February, Greece should have access to Euro 7 Billion, in part to repay Euro 4.2 Billion in February/March.

Then the next big tranche (over Euro 9.8 Billion) will be between end of June and August 2015.

There will be fervid negotiation trying to reclassify the Greek as something different so not to entice Portugal, Spain, Italy to follow a similar path.

Watch this space…in a sense this pattern would follow the classic market pattern of the last few years…strength until February followed by a weakness.

Ukraine, Russia and US (updated)

Posted: January 28, 2015 in Uncategorized

Russia and USA are going steady towards the Cold WAR Reloaded.

The US has refreshed the old cold war strategy to store tanks and weapon in selected European locations.

Also two experimental blimps (high tech hot air balloons) with capacity to detect incoming cruise missiles have been launched over Washington

Meanwhile Russia is developing a new set of weapons to counter the US enemy – new nuclear power cruise launcher submarine, a new predator style drone and the PAF 50 a stealth fighter.

Meanwhile the war in Eastern Ukraine is going on. The battle for Mariupol is a kind of game of chess. The Russians needs a “bridge” to Crimea to ensure it does not get isolated before the US training and “secret” help to the Ukrainian Army changes the dynamic of the conflict. In a sense the Russians do not want a full attack of Mariupol, but need to gain a ground advantage.

Updated: The US is considering sending lethal weapon systems to the Ukrainian Army (NATO General Breedlove).

This is a clear red line for Vladimir Putin and could push Russia to a real invasion.

I often explained that for Russia Ukraine has to remain weak or destabilized as the Russian Army lost 1 million men to recapture it from the Nazis and they know that a car can take just 8 hours drive of flat territory without geographical obstacles to reach Moscow.

And if you say…NATO is not interested in conquering Russia, Vladimir will say in 1930 Germany did not even have an army. In 1942 the Nazi arrived at 200km from Moscow. He will not repeat the error.

Greece and the share markets

Posted: January 28, 2015 in Europe, greece

If the Greek left anti-euro party Syriza won an election 2 years ago, the market would have tanked.

Now nothing happened. Why?

There are three part to the issue.

-First now the Greek debt is spread over institutions that can easily sustain the hit of a default

-Second Syriza toned down its speeches

– Third everyone is waiting to see what really is going to happen –

Germany cannot care less if Greece leaves the Europe on a debt level, BUT Germany needs Europe as its economy is based on 60% exports.

If a Grexit results in a short pain and fast recovery…a lot of countries could follow destroying the German export market.

Everybody is watching this space.

In a sense, as last year the various Reserve Banks saved the market several time, there is a complacency in the markets that I do not like.

For the first time since 2007 the various Reserve Banks have different agendas (US and “anglo saxon Reserve Banks are in tightening mode, while Europe, China and Japan are in loosening mode).

It is a different market.

In the speech of Mario Draghi there is a subtle, but terrible message.

Since 1951, the year where the first embryo of the European Union, every political/economical decision was a sequence of small steps towards an European Integration.

The fact that QE will be principally enacted by the National Central Bank it is actually the first step in reverting the trend.

As the debt is national, each country will have to deal with it and could cut (or be cut) ties with the European Union much more easily.

Germany showed that, when pressed, “Because the needs of the one… outweigh the needs of the many” (Star Trek quote, Search of Spock).

Due to political factors, this trend will be hard to reverse.

Please note – this is not a market forecast (equity markets probably will be very happy as in the US). It is a political forecast.

The European Quantitative Easing (QE) has been announced and the market cheered has it is Euro 60bn per monthtill 2016 (just over E1 trillion) versus the expected 50-60.

Markets cheered at the surprise (the real reaction will be in a few days, after digestion).

So let’s focus on some details.

It starts in March 15, some details still to be unveiled.

The ECB, to make the Germans agree, had to put some conditions.

In theory the purchase will be shared 20% by the ECB and 80% by the national Central Banks. But also there is a conditions that limits the amount that the ECB can hold of a single nation. As the ECB helped already a lot the likes of Greece, Italy, Spain, Portugal….it means that the risk sharing for these countries will be 8% ECB – 92% Single Country. Practically if ECB buys 70 the National Central Bank buys 730!

This goes against the idea and pattern of European integration.

Greece comes even worst. As the various bailouts have already filled the ECB quota of Greek debt….no purchases of Greek debt until the first tranche of the bailout expires (conveniently in July/August, when the outcome of the elections will be very clear).

So we will need to see how Syriza (probable winner in Greek elections) will behave – but they are already toning down their requests. Similar situation for Cyprus.

The ECB can buy a maximum of 25% of single issuance (and 30% top of issuernot to distort the price- it looks like a nice clause, but it is actually the market distortion that helped the US Fed to do what it did. Plus it is not clear if there are enough bonds to buy at 25% of single issuances  which sums makes Euro 60 bn per month.

Take out:

– It is consistent with the “disintegration” (not economical, but political) of Europe in the long term

-it could be positive for the market (some more details in March)

-it probably will not effect the real economy  – to 2016 the real effect will be 0.2/0.8% on the GDP. So to bring the GDP growth to 2-3% you will need European QE2 and European QE3 like the Americans.

If you have the questions…..since they could see the US, why the ECB did not do immediately a QE1,2,3 of Eu3 trillions. They are not stupid – they simply cannot do it as the Germans say NEIN NEIN NEIN!! In reality Europe is in a worst position than US, so it should do like the Bank of Japan that is now compelled to buy everything – including shares.

Oil and geopolitical risk

Posted: January 21, 2015 in Uncategorized

A funny consideration: oil at this price practically has an implicit zero geopolitical risk.

As you well know the world as we know is pretty far from a zero political risk.

Russia and Ukraine are still fighting.

Libya is practically in a state of anarchy.

Syria issue are not solved (and Israel seems to be more and more involved, behind the scenes)

Islamic State is still there (if it is contained or not, that depends on the media news)

North Africa has plenty of hot spots.

There are terror alerts everywhere.

The implication is that if a geopolitical stress event would happen, oil could sharply rise USD20.

Update 23 January.

King Abdullah of Saudi died and oil jumped 2% as now the policy of OPEC is not anymore clear (it is not really like this as the King was already sick and not really a policy maker…but it stands to show that even a predictable (the King was in the 90s and seriously ill)  event can cause serious jumps in the oil pricing

Yesterday the Swiss shocked the markets unpegging the Swiss Franc from the Euro.

The Swiss Central Bank was having great difficulties in defending the Swiss Franc and it is in constant talk with the European Central Bank. The move means that they are pretty sure that QE -Europe is coming and they could not defend the Swiss Franc any more.

What Europe – QE can we expect?

There are three theories circulating

The ECB buys bonds from all European countries proportionately in relation to economic size – the perfect choice, but opposed by Germany.

The ECB authorizes the State Central Banks of each country (EG Bank of Italy) – a positive choice, but it could be the start of the end of Europe….it makes it easier for an EU member to walk away or be sent off.

The ECB buys only AAA rated bond – it would send the European periphery bonds yields sky-rocketing and de facto create a dual zone Europe – maybe precursor of a Euro 1 (stronger, Germany and Co) and Euro 2 (weaker, Spain and Co)

Still it will not improve the European economy as the issues are not just monetary.

But the markets and Gold could appreciate

 

 

A Greece European exit

Posted: January 14, 2015 in Uncategorized

The 25th January there are the Greek elections and there is the strong possibility that Syriza will win and push for a Greek exit from Europe.

The markets are reacting calmly  to the idea….a very different position from the last time a “Grexit” was on the card in 2012.

The difference is that now most of the Greek sovereign debt is on the hands of the IMF and other institutions that can easily handle a Greek mass default. So there is little risk of contagion.

What the market does not seem to perceive it is the political implication of a “Grexit”.

Even if Greece  does not exit, Syriza (the Greek party bound to take power) will ask special conditions, which, if granted, will be asked also by Italy, Spain and Portugal at least.

But let’s stay with the “Grexit” scenario.

A few issues there:

– there is currently no system devised to exit the EU

-if a system is created it must be such that scares other EU member from adopting it themselves.

And what about if a “Grexit” is actually a positive for Greece? Soon other nations would follow.

If you look at history, Italy used quite a few time what is called a “competitive devaluation” of their old currency, the lira.

Usually after one year of turmoil the competitive devaluation of lira was positive for Italy as tourism flourished and Italian goods got so cheap that everyone (specially the Germans) would buy it in drove (well imagine Prada, Maserati, Ferrari and the likes with a 30% discount).

Together with the Islamic immigration issue and the rise of European nationalism a Grexit could be well the seed that terminates the European Union.

In 2013 I wrote an article Europe: Dead on Arrival in which I was forecasting that Europe would not collapse economically as institutions would save the Euro – but the European dream was going to fail anyway. It will happen between 2015 and 2018.

The market repercussions could be not so bad as expected – but the rise of nationalism in Europe brought so much devastations to the world in the past, that the markets are not an issue.

And the enemy has been already identified, Islam.

Note:

Please I do not agree on the fact that Islam is the enemy “per se”, but you can clearly see where “future history” is heading. It is nothing new, the battle between Europe and Middle East started before Christians and Muslims – funny enough it started with Greece and the Persian Empire.

As the old father in ” My big Greek fat wedding” says – it all starts with Greece. And it could well end with it.

The biggest issue with Quantitative Easing (QE) in Europe is that in reality this is a political decision and not a monetary decision like in the USA.

Let me explain.

The decision of enact QE in the USA was taken by Federal Reserve, which is technically independent from the political establishment.

The decision to enact QE in Europe by the European Central Bank and its Chairman Mario Draghi depends instead by the agreement of different political states.

Specially the Germans are opposed to a broad based QE, as it would unravel the fiscal discipline imposed on Southern and Eastern Europe. Moreover also between the proponents there are different position as France and Italy are advocating more a fiscal stimulus than a monetary stimulus which, as in the US, would benefit more the share market than the real economy.

Mario Draghi has been a master in being able to talk to the market without actually doing anything.

In 2012 he calmed the markets just saying that the ECB would do whatever it takes to save the Euro. Now everybody expects the 22 January speech in which probably he will hint to a full blown QE in 2015 (and that is why the Euro dropped and the bond yield in the European periphery are so low) – again he will say the right words to sooth the market.

The issue is that internal cables show Mario Draghi’s frustration with the Germans (I read one and it say “they just know how to say NEIN”). So the issue is what happens when the markets will understand that Mario Draghi is bluffing – not because he won’t…but because he can’t do QE.

Even if it is complicated, you can see that the enactment of a European QE is a much more difficult proposition than in the US, even without going into the details of which bond to buy (and that is another, more technical, issue).

This situation is actually a win-win as a lower euro is a positive ( the US imports just 13% of the GDP so it is not an issue , while for example Germany imports almost 50% -most of which is energy which fell more than the Euro) and low bond yield allows the Southern Europe States to refinance their debt easily.

Until the market believes the European QE is going to happen, all shall be good.