Archive for June, 2015

What a day crash!

Good news, I checked the various markets and there is no sign of contagion “Lehman Brother” style.

This means that, at this stage, we are in for a serious bout of volatility, but not a 2008 style event.

Italian and Spanish market are off, but with no sign of crisis.

This is the hard part of the negotiations. PM Tsiparas knows that PM Merkel needs Greece in the Euro to keep the Euro weak (over 50% of German GDP is exports) and he is gambling the entire country on this.

What happens will depend a lot from Sunday referendum.

People say that Greece is little as Lehman Brothers was. A big difference is that Lehman Brothers debt was held by the private (whereas  now Greece debt is the EU or IMF) and Lehman Brothers was managing a great part of the world derivative market.

More to the point  in the US the Plunge Protection Team is at work, Draghi is thinking to increase the European QE (and more QE means devaluing the Euro – which would eliminate the problem of a stronger Euro provoked by a Greek exit….smart eh?).

Also China is now thinking QE.

At the end this could really the final bottom, for the mother of all rally, also for gold.

And on top of it….with this crisis the Fed first rate hike is likely to be pushed further out.

The jury is not yet out….but at this moment in time it seems we will have just a set back

China rally sputters

Posted: June 29, 2015 in Uncategorized

China rally sputters…from a recent top of 5,180 to a 4,035 in a month!

China is the best defined “momentum market” meaning that the crowd just go in one direction following each other…so massive gains and massive losses…are normal.

China still wants to preserve its target to have the Yuan included in the IMF monetary basket in October and have a major representation in the MSCI Emerging Markets Index.

I think the Chinese authority were pretty happy until last week as they needed to pop the bubble before bursting….but Greece got in their way.

Saturday they decreased the lending ratio…and today the market reacted well…..only to be overwhelmed by the international situation.

Now they will start scrambling their Plunge Protection team for real.

That has been an eventful weekend.

5 June Greek referendum on the austerity measures imposed by the EuroGroup. Today capital controls* in a European country (second time, Cyprus the first)!

The key issue is the pensions. They have been mismanaged and over-generous (2013: 31.7% of Greeks were in pension (and only 40% of over 55 works) while OECD average was 25%..This represented 13% of GDP in 2013 (today 16%) versus an OECD average 7.8% (2013). And until the 2010/2013 reforms pension were close to 97% of the last salary.

The issue is that now, with the crisis and lack of job, entire families are surviving on the parents pension.

Implication for Greece.

The referendum is like a “nuclear option” for Syriza. They been elected with the mandate of cut austerity and stay in the Eurozone. Mission Impossible.

To be fair it is a good democratic way, but it seems that this was what Syriza wanted all along. So again, in all fairness, Syriza has not be fair as a referendum should have been called in May.

Also to call for a referendum AFTER the expiry of the bailout agreement and in such a short term (imagine just to organize the ballots with all those islands, not easy!). They want to push on emotions – not on rationale thinking (and, by the way, I still have to hear what is the proposal of Greece after Europe).

So this is clearly part of the negotiation strategy. In fact the IMF payments are “in arrears”, so the IMF has 1 month to declare Greece bankruptcy. And the next ECB payment is the 20 July. So, technically, there is still time.

If the Greeks vote NO – the Grexit become a real scenario. PM Tsiparas will go to Brussels on Monday 6 with requests probably unacceptable. A Grexit would pose a series of questions which will be on the table as there is no clear exit mechanism in the European Union (does an exit from the Euro implies an exit from the European Union?)

If Greeks vote YES – the Greek Government will have to call an election and probably lose. An elected new Government will be more amenable to creditors and Greece will continue in its “lost generation” issue.

So solution is neither close nor clear.

Markets

The market will sell off – not a big news and I posted about this a few days before in my technical analysis post (which was a big news!).

Markets hate uncertainty and we have plenty of them. As games (negotiations) are still going on it is too risky to take positions.

Remember that markets hate uncertainty – even if there was a clear Grexit the market could rally as the issue is finalized.

There will be a panic that could provoke a loss of 10-20% on the US Indexes (problematic as the US till now barely lost anything while other markets have been bashed – thank to the good work of the Fed Plunge Protection Team) – but not a full on crisis. But the bond markets in Europe and US are the one to watch!

Geopolitics.

The consequences of a potential Grexit are even more acute in geopolitics…what is Greece exit Euro, European Union and NATO. And allies itself with Russia and China?

Or what about the other anti European parties. Already Podemos and New Left parties in Spain made demonstrations pro Syriza in Madrid (elections in November).

Volatile time ahead!

*Capital Controls are, example, limits on ATM withdrawals, limit in bank transfers and not availability of international money transfers. naturally these affects everything, also tourism!

Referendum on Europe! Contacts from Greece tells me of ATM cues in the middle of the night and a potential bank holiday on Monday.
Syriza did the right thing as it was out of the mandate…but now we are in really uncharted waters

The peace talks concluded with no solution (actually it finished with a fist fight).

On the ground there is actually no solution. After the second phase in which Saudi Arabia coalition seemed to win – now everything is “incremental”.

Actually the Houthi mounted quite a few cross border (into Saudi Arabia) attacks and even briefly seized a Saudi military base (it is not clear if they have been repelled).

Personally it was clear this “end” as the Houthis have 20 years (at least) of experience in fighting various enemy.

The ground invasion of Yemen would be a disaster. The Houthis are similar to the Taliban as fighters and terrain knowledge and the Saudis are not as well prepared as the US Army.

So another frozen conflict.

The big issue is that the Saudis were, for some reason unfathomable to me, convinced in a quick win campaign. The continuation of this war will put strain on the kingdom of Saud as they already have a few issue to contend to: the succession from old generation to the new generation, the lower oil revenues, the change of US strategies and the Islamic State infiltration attempts.

European markets have been cheering at the news of a deal.

As usual geopolitics saved Greece.

– the US (major stakeholder in the IMF) cannot allow for Greece to fall into a Sino-Russian sphere of influence

– Germany cannot risk an unknown scenario in Greece that could stimulate the breakdown of Europe (Spain has election by the year end and the Italian government starts to be wobbly)

-Greece cannot destroy the best economic season (holiday in Greece) by defaulting in July.

But is it all real?

It is not really clear at the stage.

There is general optimism, but also the Eurogroup President referred to “prior action” before the money disbursement.

Greece often offered good deals, but then could not implement  them (or they got blocked in Parliament by the left part of Syriza). The question here is “will the PM Tsirapas survive?”. The last two PM that signed bailout agreement did not (PM Papandreou and PM Samaras) and now they are completely forgotten. And PM Tsiparas knows it.

This could be the relief rally that I mentioned about in my technical analysis previous post.

Definitely Europe wants to keep on negotiating as the Emergency Lending Assistance (ELA) to the Greek banks has been again raised.

Notwithstanding this, Greek banks are more and more under stress as, in order to receive ELA, they need to provide collateral.

So the most likely scenario is a further extension of the bailout while details are negotiated.

A “natural” extension of the bailout is the 20 August when another big tranche of Greek debt.

So unfortunately the Greek saga will continue simply because this “Theory Game” scenario has no solution.

Europe (and US) cannot allow Greece to go to the Russian and Chinese and Greece cannot survive as a Euro currency country.

What they should do? Well, look at history under “Truman Doctrine”, 12 March 1947

From Wikipedia

He (President Truman) pledged to contain Soviet threats to Greece and Turkey. No American military force was involved; instead Congress appropriated a free gift of financial aid to support the economies and the militaries of Greece and Turkey. More generally, the Truman doctrine implied American support for other nations threatened by Soviet communism. The Truman Doctrine became the foundation of American foreign policy, and lead in 1949 to the formation of NATO, a full-fledged military alliance that is in effect this day. Historians often use Truman’s speech to date the start of the Cold War.

This was in the midst of the Greek Civil War (military backed by US and UK versus Democratic Army of Greece backed by Yugoslavia, Albania and Bulgaria – won by the Americans when Stalin (Soviet leader) stopped Tito (Yugoslav leader)

Don’t they say story repeats itself? Now it has to be more subtle as now everybody reads the news (which was kind of rare in 1947).

Update

The negotiation are still going on. Two main point sticks out

– PM Tsiparas is confronted with a serious backlash from its own party

– Wednesday (Europe) everybody is meeting again. There is progress but the main sticking point is that IMF wants to have pension cuts (as pensions represents 16% of GDP expenditures) and small tax increases…while the Greek Proposal is 92% tax increase and just 8% pension cuts).

The issue with the early pension is very contentious as in Greece you can retire just after 35 years of contributions (early 50s) – if you were working in a “strenuous occupation” (funny, the definition includes even hairdressing and represents 35% of all pensions) you could have worked strenuously just for 25 years and contributed for 35 to access pension. Another funny thing is that minimum pension at quite good salary substitution rate could be taken just after 15 years (so people dropped workforce and went to work into the black market world). Also before the reforms imposed (2010 -2013) the substitution rate salary/pension were 96%(!!)…now they are decreased  (54% of salary, 62% for strenuous occupation like hairdressing).

Now also you can see that why pensions are the main sticking point – and will always be the burden of the Greek society!

In April, we correctly saw the weakness of this two months (much more pronounced in non-USA)

As news are really confounding, let’s see what the old technical analysis.

The negative stance is starting dissipating, but it really looks like a short term bottom with a rally into early July (window dressing?) and then a real test of SP500  2,070/1,970 in August (almost a repeat of what happened in the first US Debt Ceiling Showdown a few years ago).

The market also gave two Hindenburg Signals that would confirm this pattern.

On the bond side, again there is a oversold bounce which would last some when in July – but it is actually a moment to sell.

Gold looks interesting…I think this summer we will see the final bottom

If this is real it means that at the 30 June Greece will make it…..probably just to arrive to the next issue 20 August.

Or there is something else in summer coming from the bond market (the panic moment is still missing)