According to new data from the European Central Bank, and contrary to popular belief, weaker currencies do not boost exports, as many firms cannot react in time to take advantage of currency fluctuations.
Fear and greed are both getting a serious workout lately, but Monday will be even more fun than usual because of two big stories that hit over the weekend. First, Greece decided to put the draconian demands of its European creditors to a popular vote, to which the creditors responded by cutting Greece off from new bailout money. Greek citizens, now staring down the barrel of capital controls and/or bank failures, are busily emptying their bank accounts:
Greeks Line Up at Banks and Drain ATMs as Tsipras Calls Vote Greece’s banks may need an injection of fresh emergency funds to operate Monday as people rushed to pull out money after Prime Minister Alexis Tsipras called a referendum that could decide his country’s fate in the euro.
Two senior Greek retail bank executives said as many as 500 of the country’s more than 7,000 ATMs had run out of cash as of Saturday morning, and that some lenders may not be able to open on Monday unless there was an emergency liquidity injection from the Bank of Greece. An official with Greece’s Capital Markets Commission, the markets’ regulator, also warned that the Athens Stock Exchange may be unable to operate on Monday without a cash injection into the banking system. A Greek central bank spokesman said it was making efforts to supply money.
The European Central Bank’s governing council was expected to hold a conference call on Sunday to review the banks’ liquidity condition, said a Greek official, who asked not to be named in line with policy. The Frankfurt-based central bank said in a twitter post that it’s closely monitoring developments and would review the situation “in due course.”
Some banks were placing limits in daily cash transactions. Yiota Kardogianni, a manager at a branch of Piraeus Bank SA, said cash withdrawals were limited at 3,000 euros ($3,350) daily and ATM withdrawals at 600 euros. Alpha Bank AE had set a daily limit of 5,000 euros for most of its branches since last week.
After withdrawing more than 30 billion euros as the anti-austerity Coalition of the Radical Left, or Syriza, took power, depositors are now reacting to the latest twist in the five-month standoff with European leaders and creditors. One banker said 110 million euros had been withdrawn from his institution as of 11:30 a.m. Athens time on Saturday.
“Greek legislation allows either the Bank of Greece governor or the finance ministry to impose capital restrictions,” George Saravelos, foreign exchange strategist at Deutsche Bank AG, wrote in a note to clients. “The extent to which this materializes will depend on the ECB decision over the next 48 hours as well as depositor behavior.”
Some branches of Alpha Bank in central Athens that normally open for business on Saturdays remained shut and one carried a sign that it wouldn’t open. Only a few banks near central shopping and tourist areas are usually open on Saturdays.
That’s the fear side of the story. China, meanwhile, has enjoyed an epic stock market bubble over the past few months which, inevitably, seems to be bursting. In response the government is cutting interest rates and lowering reserve requirements in an effort to support stock prices. Markets love easy money and usually respond to such policy changes with panic buying. This, then, is the greed:
China Cuts Interest Rates to a Record Low After Stocks Slump China’s central bank cut its benchmark lending rate to a record low and lowered reserve-requirement ratios for some lenders after stocks plunged and local government bond sales drained liquidity.
In the fourth reduction since November, the one-year lending rate will be reduced by 25 basis points to 4.85 percent effective June 28, the People’s Bank of China said on its website Saturday. The one-year deposit rate will fall by 25 basis points to 2 percent, while reserve ratios for some lenders including city commercial and rural commercial banks will be cut by 50 basis points, according to the statement.
The easing follows the biggest two-week plunge in the stock market since December 1996 and a four-week rise in money-market rates as lenders hoard cash. While industrial production and retail sales stabilized in May, investment slowed further — a sign of weakness in infrastructure spending that policy makers are keen to reverse.
“The central bank doesn’t want a panic caused by the stock rout to spread,” said Shen Jianguang, chief Asia economist at Mizuho Securities Asia Ltd. in Hong Kong. “That would lead to financial instability.”
These stories are related in a number of ways, the most important being that they’re examples of governments messing with markets that they don’t understand and therefore have no business trying to manipulate. Greece would be fine (or what passes for fine for a Mediterranean country) if it had kept its own currency and managed its own affairs. Instead it joined a currency union dominated by Germany (!) and now, surprise, can’t function in that environment. But rather than letting market forces sort out the value of various pieces of sovereign debt, a bunch of bureaucrats in Brussels are making things up as they go along, piling mistake onto mistake and bringing the global markets to the brink of crisis over a country that could literally be bought out with a couple of years of ECB quantitative easing funds.
China, meanwhile, has spent the past couple of decades directing an infrastructure build-out that in retrospect was maybe twice as big as it should have been. Now it’s fiddling with all kinds of imperfectly-understood fiscal and monetary levers, trying to maintain a 7% growth rate that is looking more and more fictitious. Here again, the best way to deal with a bubble is to not let it happen in the first place. The second best way is to let it pop and allow the market to clean up the mess. The absolute wrong way to manage a bubble is to intervene from the top to keep it going. Look where that has gotten Japan and the US.
Anyhow, Monday will be interesting because Greece is scary and China is exciting, and traders will have to decide which to fixate on. This has meaning beyond the market open because most news can be interpreted in various ways. So the real story is not the event but how the markets respond to it. When investors and traders are optimistic they interpret everything as a reason to buy, and when they’re worried everything is a sell signal. Monday’s open will therefore say more about market psychology (and the direction of asset prices in the next few years) than about whether Greece or China are doing well or badly.
Yes, the clock’s ticking louder, louder, warns the Economist, “only a matter of time before the next recession strikes.” Unfortunately, the “rich world is not ready.” America’s not prepared. You are not ready.
Get it? America’s 95 million investors are at huge risk. Remember the $10 trillion losses in the crash and recession of 2007-2009? The $8 trillion lost after the dot-com technology crash and recession of 2000-2003? This is the third big recession of the century. Yes, America will lose trillions again.
Especially with dead-ahead predictions like Mark Cook’s 4,000-point Dow correction. And Jeremy Grantham’s warning of a 50% crash around election time, with negative stock returns through the first term of the next president, beyond 2020. Starting soon.
Why is America so vulnerable when the next recession hits? Simple: The Fed’s cheap-money giveaway is killing America. When the downturn, correction, crash hits, it will compare to the 2008 crash. The Economist warns: “the world will be in a rotten position to do much about it. Rarely have so many large economies been so ill-equipped to manage a recession,” whatever the trigger.
With today’s near-zero interest rates, our Fed and central banks worldwide have little “wiggle room” to add more monetary stimulus. And even if Congress decided to act on the much needed, highly effective “growth boosting investment in infrastructure,” today’s zero interest makes it impossible “to launch a big fiscal stimulus.”
No wonder Grantham says the “next bust will be unlike any other.” The Fed and central banks worldwide have taken on all this leverage that was out there and put it on their balance sheets,” giving trillions to the top 1%, the world’s 1,826 billionaires, accelerating the inequality gap and fueling a new people’s revolution.
Investors unprepared for 50% stock market losses dead ahead
Meanwhile, distractions are everywhere: It’s not just happy talk about a roaring bull market in tech, a modest recovery, GDP growth topping 2%. Rather it’s the relentless buzz on America’s 24/7 media choking the American mind with trivia.
One: The bizarre presidential primaries featuring the carnival barker of the Trump Casinos gambling against the Koch Bros, the owner of the Vegas Sands and 15 other contestants in their wild-card game of “Political Jeopardy” being played for control of the GOP brand (but no regard for the will of the American people).
Two: Another soap opera is the historic morality war with Pope Francis and billions of revolutionaries pitted against the 19th century Grand Climate Science Denying Fossil Fuel Conspiracy of Big Oil and the GOP. And both these soaps are almost as much fun as “Jurassic World,” Nascar racing and the network daytime soaps combined.
Then of course there’s all the Clash of the Titans between two political dynasties, the heir apparent of the Bush crown versus the Clintons for the right to take over as titular head of a tenuous global anarchy of 1,826 billionaires, 67 of whom own half the assets of the entire world, the one percent whom politicians bow to more than the other 99% of America’s citizens.
Yes, with 95 million average investors risking it all in the volatile Wall Street casino, it’s virtually impossible for any normal folks to concentrate on the ticking time bomb that’s warning of a recession dead ahead ... when the bubble pops and the bear takes over the economy ... because it really is “only a matter of time,” as the Economist keeps warning that the “rich world,” the Fed, Congress, all America really is not ready for a new recession ... and neither are you.
America is its own enemy, trapped in new irrational exuberance
What’s even more disturbing than the near certainty of Grantham, Cook and the Economist in the dark predictions is what’s driving them, America’s self-delusional narcissism, overoptimism and irrational exuberance from the happy-talking bulls, which sets us up for huge losses, as in the recessions of 2000-2003 and 2007-2009, with trillions in lost market cap.
Individually and collectively, whether Washington, Corporate America, Silicon Valley or Main Street, most Americans, secretly believe in the American Dream, at least for themselves, perpetual opportunity, perpetual growth, perpetual prosperity. When we surveyed Wall Street years ago we found a 93% bias toward positive thinking, and a tendency to ignore or substantially discount bearish signals, to “accentuate the positive, minimize the negative.”
This behavioral tendency puts individual investors, stock markets, even nations at great risk. Harvard financial historian Niall Ferguson, author of “Colossus: The Rise and Fall of the American Empire,” asked rhetorically in a Los Angeles Times column:
“America, a Fragile Empire: Here today, gone tomorrow ... could the United States fall that fast?” Yes. America could fall very, very fast, triggering an economic collapse with losses in trillions, the historic game-changer demanding a political course correction, like the 1908 antitrust laws, the 1932 banking and securities laws ... or today’s massive takeover of American government by an anarchistic oligarchy of superrich billionaires.
Next crash, an ‘accelerating sports car ... a thief in the night!’
The point, it’s sudden, fast, and you won’t see it coming. Nor will America’s leaders. Unprepared, says the Economist, unable to act in time to avoid the recession dead ahead.
Says Ferguson, “for centuries, historians, political theorists, anthropologists and the public have tended to think about the political process in seasonal, cyclical terms ... we discern a rhythm to history. Great powers, like great men, are born, rise, reign and then gradually wane.”
In that scenario, “whether civilizations decline culturally, economically or ecologically, their downfalls are protracted.” We believe “the challenges that face the United States are often represented as slow-burning ... threats seem very remote.”
“But what if history is not cyclical and slow-moving but arrhythmic?” What if history is “also capable of accelerating suddenly, like a sports car? What if collapse does not arrive over a number of centuries but comes suddenly, like a thief in the night?”
What if the collapse of our great capitalist world is dead ahead, in the next decade? What if we’re so deep in denial, we are totally unprepared, thanks to today’s zero-interest Fed policy? Yes, you’ve been forewarned: America, and you, are in a loud, rapid countdown to another crash and recession and negative returns till 2020 … tick … tick … tick …
Submitted by Northman Trader
The Greek Butterfly Effect
Many times nothing happens for a long time. Then all of a sudden everything happens at once. Like a dam break. It builds slowly and then it bursts. Example: Who would have ever thought the Confederate flag would be taken down across the South during the same week that a rainbow flag is symbolically hoisted across the entire country? Just because things seem unthinkable doesn’t mean they won’t happen.
Take the global debt construct as another example. For decades the world has immersed itself in ever higher debt. The general attitude has been one of indifference. Oh well, it just goes higher. Doesn’t really impact me or so the complacent rationalize.
When the financial crisis brought the world to the brink of financial collapse the solution was based on a single principle:
Make the math workable.
In the US the 4 principle “solutions” to make the math workable were to:
1. End mark to market which had the basic effect of allowing institutions to work with fictitious balance sheets and claim financial viability.
2. Engage in unprecedented fiscal deficits to grow the economy. To this day the US, and the world for that matter, runs deficits. Every single year. The result: Global GDP has been, and continues to be overstated as a certain percentage of growth remains debt financed and not purely organically driven.
3. QE, to flush the system with artificial liquidity, the classic printing press to create demand out of thin air.
4. ZIRP. Generally ZIRP has been sold to the public as an incentive program to stimulate lending and thereby generate wage growth & inflation. While it could be argued it had some success in certain areas such as housing, the larger evidence suggests that ZIRP is not about growth at all.
If ZIRP’s true goal were to stimulate growth the result of this:
…would not have produced this:
No, ZIRP’s true purpose is actually much more sinister:
To make global debt serviceable. To make the math work without a default.
Here’s the reality: If we had “normalized” rates tomorrow the entire financial system would collapse under the weight of the math. In short: Default.
Which brings us to Greece the butterfly, the truth and indeed the future:
Greece for all its structural faults is the most prominent victim of fictitious numbers. From the original Goldman Sachs deal to get them into the EU based on fantasy numbers and to numerous bail-outs, the simple truth has always been the same: The math doesn’t work.
It never has and it never will until there is a default on at least some of the debt.
And in this context the Greek government’s move to call for a public referendum on July 5 may be a very clever strategic move as it forces the issue of math.
Here’s the strategic frame-up:
Ultimately what Greece needs is debt relief. Big time debt relief to make the math work.
The global cabal of creditors, ECB, EU, and IMF do not want that.
Why not? Because the very second they do this the classroom will look like this:
Everybody would want a cut on their debt starting with Italy, Spain, Portugal etc. and the dominos would be rolling.
No, they do not want this as a default would require acknowledging that debt matters.
What are the alternatives?
Greece’s referendum move risks putting a debt deal up for a vote to citizens. When has that ever happened? Have Americans every voted on their government’s debt spree? Have citizens ever had a say on their central bank’s policies and balance sheet expansions? The answer is no. This so ever important element of our global economic system is completely removed from voters.
And so Yanis Varoufakis is very much correct in highlighting this open secret:
Democracy deserved a boost in euro-related matters. We just delivered it. Let the people decide. (Funny how radical this concept sounds!)
— Yanis Varoufakis (@yanisvaroufakis) June 26, 2015
No, voters are very much not permitted to participate in this decision making process. And hence the only reason a Greek referendum may actually proceed is this: To make an example of Greece. You want to default? Watch what we will do to Greece.
But that’s a big gamble for the EU, for the ECB, the IMF and everybody else including China and the US.
Why? Because all of them have carefully orchestrated a construct that they do no want to see disturbed. It’s not an accident that we have seen 46+ rate cuts this year. It’s not an accident that China announced another rate cut just a day after Chinese stocks plummeted 7% this past Friday. It was no accident that the Fed’s Bullard talked about QE4 in October the moment US stocks got close to a 10% correction.
No, you see their primary mission in their timed actions and their words: To make the math work. And to continue to make the math work.
And hence Janet Yellen is not delaying rate hikes because she is “data dependent”. She is dealing in reality: Over $18 trillion in US debt (and ever growing) a large portion of which needs to be refinanced over the next 5 years. And higher rates will become an ever larger burden on the discretionary budget of the US. And the world, heavily indebted that it is, has the same problem:
So this next week is not so much about Greece the butterfly, but it is about keeping the butterfly from becoming a hindrance to the math working globally. And the Greek government knows this. They are negotiating on the basis that a bad Greek deal from Europe’s point of view is better than a default. Angela Merkel wanted a concluded Greek deal before markets open on Monday. Now she has a mess.
And in the world of gamesmanship every percentage drop in the #DAX will enhance Greece’s negotiation stance.
This past week saw a massive rally in the #DAX in the hopes that a deal would certainly be positively concluded. Now this weekend all this bullish sentiment may find itself tested come Sunday night and Monday morning unless Europe blinks quickly. China is doing its part to support the construct with this latest rate cut, but the ECB can’t be happy about its QE program challenged by the constant Greece distraction:
As we outlined in technical charts a default of Greece would risk a structural repeat of 2011:
And it couldn’t come at a worse time:
No, odds are they’re not going to let Greece default. They can’t afford to. The math has to work.
“They want to be on the top table in all areas of international trade and this is no different,” Sharps Pixley CEO told Bloomberg earlier this month, tying China’s move to participate in the twice-daily auction that determines London gold prices to Beijing’s efforts to embed the yuan more deeply in international investment and trade.
As a reminder, the auction has its roots in efforts to deter manipulation. Here’s what we said last month:
A long time ago, in a financial galaxy far, far away, a “fringe” blog raised the topic of gold market manipulation during the London AM fix. Several years later (which, incidentally, is about average in terms of the lag time between when something is actually going on and when the mainstream financial media finally figures it out and reports on it), it was revealed that in fact, shenanigans were likely afoot and indeed, regulators are still trying to sort out what happened. The ‘fix’ for the ‘fixed’ gold fix (only in the world of corrupt high finance is such a hilariously absurd passage possible) is supposedly a new system whereby the fixings are derived electronically.
On June 16, the LBMA announced that Bank of China would become the first Chinese bank to participate. Earlier this week, ICBC said it may also join the electronic auction process. From the press release introducing Bank of China's participation:
"We are proud to become the first Chinese and Asian bank to participate in the gold auction.” said Yu SUN, General Manager, Bank of China London Branch & CEO, Bank of China (UK) Limited. “Bank of China joined LBMA as an initial member in 1987, and has been actively participating in the gold trading business in London for over forty years. Although being the world’s largest gold producer and consumer, China has never played a major role in the global gold fixing. Bank of China’s direct participation in the IBA gold auction will reinforce the connection between the Chinese domestic market and overseas markets, make the international gold price better reflect the supply and demand in China, and help to promote the internationalization of the Chinese gold market.”
“We are delighted to welcome Bank of China to the gold auction,” said Finbarr Hutcheson, President, ICE Benchmark Administration. “The growth in daily volumes coupled with the increase in participation from around the globe, demonstrates strong market support for the independent governance and oversight we have implemented to bring transparency and trust to the gold auction.”
“Participation in the gold auction will increase the link between China and international markets, and make the gold price better reflect the nation’s supply and demand,” Bank of China said, while on Thursday, ICBC’s general manager of precious metals Zhou Ming told an audience in Shanghai that “Chinese banks want to expand [their] reputation and brand influence in the Western market.”
Indeed, China isn’t stopping with the LBMA when it comes to increasing its influence on gold pricing. As tipped here last month, the country is set to launch a yuan-denominated gold fix later this year. Now, we have the first public confirmation from the Shanghai Gold Exchange that the fix will be introduced by the end of 2015. Reuters has the story:
"We will be introducing a renminbi-denominated fix at the right moment, we are hoping to introduce by the end of the year," Shen Gang, SGE's vice president, said at the LBMA Bullion Market Forum in Shanghai on Thursday.
"We have policy support for development (of the gold market)," she added.
While Shen did not give more details, sources familiar with the matter have said that China is expected to receive central bank approval for the fix soon.
Pan Gongsheng, a deputy governor of the People's Bank of China (PBOC), said the central bank would continue to support "speedy and healthy growth of the China gold market" and its internationalization.
Given its leading role in gold, China feels it is entitled to be a price-setter for bullion and is asserting itself at a time when the global benchmark, the century-old London fix, is under scrutiny for alleged price-manipulation.
If the yuan fix takes off, China could compel local buyers and foreign suppliers to pay the domestic yuan price, making the dollar-denominated London fix less relevant in the world's biggest bullion market.
While details of the fix are yet to be revealed, sources say it would be derived from a contract traded on the bourse for a few minutes, with the SGE acting as the central counterparty. That could make the process transparent - addressing one of the big concerns about the London fix.
The yuan fix is the most recent effort by SGE to boost China's position in the global gold market. The exchange opened an international bourse in September 2014, allowing foreigners to trade yuan-denominated contracts for the first time.
Between Chinese banks' participation in the London auction and the advent of the yuan fix, China is now in a position not only to exert its influence on the dollar-denominated benchmark, but to establish its own price setting mechanism that may well serve to challenge and ultimately supplant the Western fix which the market will likely always view as subject to manipulation.
A correction is generally defined as any stock that is at least 10% off a recent high. If we look at a price performance over the past 200-days, 42% of all the stocks in the MSCI World Index are in a correction. Higher than you might have thought, right?
Regionally, MSCI Pacific has the greatest percentage of stocks in a correction at 46% and MSCI Europe has the fewest at 36%. For North America, 43% of stocks are in a correction but worryingly, this number has slowly been grinding high all year.
Lastly, the percentage of stocks that are fully in a bear market (down over 20%) is just 15% in the MSCI World Index.
Regionally, MSCI Europe have the fewest stocks in a bear market at just 11%. In MSCI Pacific, 14% of stocks are in a bear market and in MSCI North America, nearly one out of five stocks are in a bear market.
* * *
Just more noise to ignore when the "healthy correction" in US equities from Greek contagion happens...
Update: Parliament has voted in favor of Alexis Tsipras' call for a referendum.
* * *
Greece’s referendum question will would have read as follows (before the offer was rescinded):
"Greek people are hereby asked to decide whether they accept a draft agreement document submitted by the European Commission, the European Central Bank and the International Monetary Fund, at the Eurogroup meeting held on on June 25 and which consists of two documents:
"The first document is called Reforms for the Completion of the Current Program and Beyond and the second document is called Preliminary Debt Sustainability Analysis.
"- Those citizens who reject the institutions’ proposal vote Not Approved / NO."
"- Those citizens who accept the institutions’ proposal vote Approved / YES."
The two documents reflect the complexity of Greece’s financial predicament.
- The first includes sections on "parametric budgetary measures" and "unified wage grid reform."
- The second has a discussion of the methodological advantages of using ‘‘gross annual financing needs’’ to assess Greece’s debt burden, rather than the more traditional debt-to-GDP ratio.
* * *
We noted earlier:
The Greek parliament is in session on Saturday evening as lawmakers debate the country's EMU fate and vote on the referendum called by PM Alexis Tsipras just after midnight this morning.
- TSIPRAS SAYS REFERENDUM WILL BE MOMENT OF TRUTH FOR CREDITORS
- TSIPRAS: GREEK PROPOSAL FOR SUSTAINABLE DEAL STILL ON TABLE
- TSIPRAS SAYS REFERENDUM NOT MEANT AS RUPTURE WITH EUROPE
- TSIPRAS SAYS GAME OF BAILOUT HAS COME TO AN END
- GREEK PARLIAMENT TO RESUME IN 10 MIN AHEAD OF REFERENDUM VOTE
- SAMARAS SAYS REFERENDUM DRAGS COUNTRY OUT OF EUROPE
- SAMARAS SAYS CREDITORS DISCUSSING PLAN B FOR GREECE
- STATE MINISTER PAPPAS SAYS GOVT STILL AIMING FOR AGREEMENT
Parliament Speaker Zoe Konstantopoulou announces 10-min recess after opposition New Democracy lawmakers walk out of chamber in the middle of debate.
In the modern economy, we share everything: STDs, food stamps, transportation, and housing. It's all facilitated by mobile technology. First there was Rent A Gent. Now, the next part of the sharing economy is upon us: Rent A Tent.
Thanks to rampant NIMBY policies in the San Francisco Bay area, the housing market is rigged and stuck in a perpetual shortage. Hotel prices are higher than in New York and London. AirBnB rentals are hard to find, as the tech crowd is not keen on outsiders interfering with their NIMBY American dream.
One man decided he wanted to monetize a tent in his Mountain View backyard - for $900 per month. About 25 people have expressed interest, with some asking to stay a month or longer.
More than 50 other tents have appeared on AirBnB in California.
In the 1930s, this sort of activity also took place - except they didn't have exciting names for it like Rent A Tent or "the sharing economy." They called them Hoovervilles, named after President Herbert Hoover.
Actually, these Hooverville structures look much more solid than the Silicon Valley tent, and they didn't cost $900. Being homeless is getting expensive.
If there was any confusion if, as we warned first thing today was the biggest problem with the Greek referendum namely that next weekend there will no longer be a proposal to vote on, the IMF's Christine Lagarde just put it to rest. As she told the BBC moments ago, the Greek government's planned referendum on the terms of any new bailout plan will be invalid after Tuesday, when the current programme expires. As a result, the Greek people would be voting on proposals that were no longer in place.
But she said that if there was a resounding vote in favour of staying in the euro and restoring the economy then Greece's creditors would be willing to try.
Speaking to the BBC's Gavin Lee, she said there was still time for the Greek government to change its mind and accept the eurozone proposals.
Incidentally, in another interview with CNBC, Lagarde confirmed that hope is still an investment thesis: " I certainly hope that the bundled payment due to the IMF on Tuesday night, at the latest, will be paid."
Good luck, really. But assuming Greece, which hasn't had any cash in over a month and has zero intention of paying the IMF its €1.5 billion, whe then?
" If they were not paid on Tuesday night, then there is a series of procedures and notifications that I have to initiate. But technically, any country that does not pay on due date is in payment arrears vis-à-vis the Fund. And the consequences are that the Fund cannot disburse vis-à-vis that country until the arrears has been paid. Greece remains a member of the IMF. Greece benefits and alternate seat on the Board… and has access to technical assistance, receives surveyance and services but it cannot receive any payment until arrears has been paid.'"
So it's time to rephrase the referendum question which as was presented on the website of the Greek parliament is currently as follows:
Greek people are hereby asked to decide whether they accept a draft agreement document submitted by the European Commission, the European Central Bank and the International Monetary Fund, at the Eurogroup meeting held on June 25 and which consists of two documents:
The first document is called ‘‘Reforms for the Completion of the Current Program and Beyond’’ and the second document is called ‘‘Preliminary Debt Sustainability Analysis.’’
- Those citizens who reject the institutions’ proposal vote Not Approved / NO
- Those citizens who accept the institutions’ proposal vote Approved / YES.
We have no idea what a new referendum formulation may look like - most likely one on remaining in the Eurozone - but at that point the phrasing will likely be moot: by next Sunday, all else equal, the social situation in Greece is almost certain to devolve to the point where the government will hardly have much control left over key public works, especially if it has no money to pay wages and pensions, and the banking system implodes earlier in the week.
Ironically, the Greek PM, who clearly did not read the Goldman "conspiracy theory" article, which explained that Greece was set up as a fall guy, and a catalyst for the ECB to unleash even more "forceful" QE and thus to pad banker bonuses for 2015 with taxpayer moneyh, still is convinced that in the game theory between Greece and the Troika, rational minds are making the decisions:
— Alexis Tsipras (@tsipras_eu) June 27, 2015
Presented with no comment...
Tyranny Bonus Cartoon
Speaking at Russell Napier’s Library of Mistakes in Edinburgh earlier this month, Jim Grant of Grant’s Interest Rate Observer asked what financial mistakes we’re making today that future generations will regard as the most ridiculous.
If you’re familiar with Grant’s writing the short answer won’t surprise you...
“I am going to put discretionary monetary rule by former college professors at the head of the list of errors over which our descendants will roll their eyes. Deflation-phobia and inflation-philia come next, followed by a general willful ignorance of financial history,”
...though the speech itself delves into the debate surrounding the UK’s decision to resume the gold standard.
Keynes, Churchill debated the gold standard in the 1920s
While the UK didn’t officially leave the gold standard during WWI, it stopped exchanging pounds sterling for gold, which amounts to the same thing.
John Maynard Keynes opposed returning to the gold standard of course, while then-Chancellor of the Exchequer Winston Churchill argued in favor of returning to the pre-war exchange rate.
Jim Grant recounts one of Churchill’s retorts (new to me) to opponents who worried that the gold standard would shackle the pound to the US dollar: “I will tell you what it will shackle us to. It will shackle us to reality.” You can imagine Grant delivering a similar line when explaining his views on the price mechanism and money as a unit of measure.Failed 1925 policy discredited ‘true-blue gold standard’, says Jim Grant
But the pre-war rate was too high, and in 1931 the Bank of England refused to export gold. The difference is that while this is often seen as proof that the gold standard no longer works, Jim Grant argues that the problem lies not with the gold standard but with the details of its implementation.
“The failure of the half-baked gold exchange standard discredited the true-blue gold standard. The failure of the successor, the post-WWII monetary system known as Bretton Woods, discredited the very ideas that currency values should be fixed or anchored,” said Jim Grant.
* * *
So even though Keynes didn’t get his way in 1925, Jim Grant argues that mistakes in the gold exchange system allowed Keynes ideas to win the longer debate, leaving us with the monetary system that we currently have – and which Jim Grant quite vocally opposes.
He has no faith in what he often calls the ‘PhD standard’ and hopes that a revised study of financial history will convince people to go back to the gold standard.
Presented with little comment aside to ask if someone is off-script?
- *NOONAN: THE CRISIS HAS COMMENCED
- *SCHAEUBLE SAYS `HELLISH DIFFICULT TASK' ON GREECE
- *NOONAN: I HAVE SYMPATHY FOR THE GREEK PEOPLE
"Financial arrangement with Greece, without immediate prospects of a follow-up arrangement, will require measures by the Greek authorities, with the technical assistance of the institutions, to safeguard the stability of the Greek financial system,” ministers from 18 euro area member-states say today.
“The Eurogroup will monitor very closely the economic and financial situation in Greece and the Eurogroup stands ready to reconvene to take appropriate decisions where needed, in the interest of Greece as euro area member” ministers say in statement after informal meeting in Brussels
Translation: you are on your own, f##kers
* * *
But always remember, "Greece doesn't matter," which as Mohamed El-Erian explains, is somewhat true, since European leaders have two other existential issues to contend with also...
Dark clouds are lowering over Europe’s economic future, as three distinct tempests gather: the Greek crisis, Russia’s incursion in Ukraine, and the rise of populist political parties. Though each poses a considerable threat, Europe, aided by the recent cyclical pickup, is in a position to address them individually, without risking more than a temporary set of disruptions. Should they converge into a kind of “perfect storm,” however, a return to sunny days will become extremely difficult to foresee any time soon.
As it stands, the three storms are at different stages of formation.
The Greek crisis, having been building for years, is blowing the hardest. Beyond the potential for the first eurozone exit, Greece could be at risk of becoming a failed state – an outcome that would pose a multi-dimensional threat to the rest of Europe. Mitigating the adverse humanitarian consequences (associated with cross-border migration), and geopolitical impact of this storm would be no easy feat.
The second storm, rolling in from the EU’s east, is the costly military conflict in Ukraine’s Donbas region. The crisis in eastern Ukraine has been contained only partly by the Minsk II ceasefire agreement, and reflects the deepest rupture in the West’s relationship with Russia since the Soviet Union’s collapse.
Further Russian interference in Ukraine – directly and/or through separatist proxies in Donbas – would present the West with a stark choice. It would either have to tighten sanctions on Russia, potentially tipping Western Europe into recession as Russia responds with counter-sanctions, or accommodate the Kremlin’s expansionist ambitions and jeopardize other countries with Russian-speaking minorities (including the EU’s Baltic members).
The third storm – political tumult brought about by the rise of populist political movements – poses yet another serious threat. Energized by broad voter dissatisfaction, particularly in struggling economies, these political movements tend to focus on a small handful of issues, opposing, say, immigrants, austerity, or the European Union – essentially whomever they can scapegoat for their countries’ troubles.
Already, Greek voters handed the far-left anti-austerity Syriza party a sweeping victory in January. France’s far-right National Front is currently second in opinion polls. The anti-immigration Danish People’s Party finished second in the country’s just-concluded general election, with 22% of the vote. And, in Spain, the leftist anti-austerity Podemos commands double-digit support.
These parties’ extremist tendencies and narrow platforms are limiting governments’ policy flexibility by driving relatively moderate parties and politicians to adopt more radical positions. It was concern about the United Kingdom Independence Party’s capacity to erode the Conservatives’ political base that pushed Prime Minister David Cameron to commit to a referendum on the country’s continued EU membership.
With three storms looming, Europe’s leaders must act fast to ensure that they can dissipate each before it merges with the others, and cope effectively with whatever disruptions they cause. The good news is that regional crisis-management tools have lately been strengthened considerably, especially since the summer of 2012, when the euro came very close to collapsing.
Indeed, not only are new institutional circuit breakers, such as the European Financial Stability Facility, in place; existing bodies have also been made more flexible and thus more effective. Moreover, the European Central Bank is engaged in a large-scale asset-purchasing initiative that could be easily and rapidly expanded. And countries like Ireland, Portugal, and Spain have, through hard and painful work, reduced their vulnerability to contagion from nearby crises.
But these buffers would be severely strained if the gathering storms converged into a single devastating gale. Given the EU’s fundamental interconnectedness – in economic, financial, geopolitical, and social terms – the disruptive impact of each shock would amplify the others, overwhelming the region’s circuit breakers, leading to recession, reviving financial instability, and creating pockets of social tension. This would increase already-high unemployment, expose excessive financial risk-taking, embolden Russia, and strengthen populist movements further, thereby impeding comprehensive policy responses.
Fortunately, the possibility of such a perfect storm is more a risk than a baseline at this point. Nonetheless, given the extent of its destructive potential, it warrants serious attention by policymakers.
Securing Europe’s economic future in this context will require, first and foremost, a renewed commitment to regional integration efforts – completing the banking union, advancing fiscal union, and moving forward on political union – that have been crowded out by a never-ending series of meetings and summits on Greece. Likewise, on the national level, pro-growth economic-reform initiatives – which seem to have lost some urgency in the face of overly complacent and excessively accommodating financial markets – need to be revitalized. This would ease the policy burden on the ECB, which is currently being forced to pursue multiple ambitious objectives that far exceed its capacity to deliver sustainably good outcomes regarding growth, employment, inflation, and financial stability.
The current focus on the downpour in Greece is understandable. But policymakers should not be so distracted by it that they fail to prepare for the other two possible storms – and, much more worrisome, the possibility that they merge into a single more devastating one. Europe’s leaders must act now to minimize the risks, lest they find their shelters inadequate to the extreme weather that could lie ahead.
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It seems Goldman's "conspiracy theory" was right all along as the 'excuse' for Draghi to unleash the biggest bazooka the world has ever seen is looming... whether or not the 'market' can withstand it... and remember, what Goldman wants, its former employee at the ECB tends to deliver.
The Confederate Flag flying over South Carolina's Capitol building has been removed (temporarily)... not by congressional decree, but by the hands of spider-man-like Bree Newsome who scaled the 30-foot flagpole. However, shortly after her arrest by State Capitol police, the flag was raised again...
What comes down, must go back up...
One of America's most notorious bank robbers, Willie Sutton (1901-80), is said to have remarked that he robbed banks "because that's where the money is." In a strange twist, the banks themselves are now beginning literally to rob their own customers.
The theft occurs via the innovative practice of "paying" (i.e. "charging") negative interest rates on savings and checking account balances combined with account maintenance fees. Cash strapped Greece is looking to go even further – charging customers for daring to withdraw cash! So what gives here?Banking Policies Are Becoming Injurious to Your Financial Well-being
Since the global financial near-collapse of 2008, Central Banks, led by the U.S. Federal Reserve, have tried to solve the problem of faltering economies, excessive debt creation, government deficit spending and a deflationary landscape by flooding the system with fiat money, literally created out of thin air.
Their reasoning is that the problem of excessive, unpayable debt can be solved by creating still more debt!
If you had trouble paying off a $300,000 dollar home mortgage, would borrowing another $200,000 to continue making payments help you solve your dilemma? Of course not. You would simply owe a total of $500,000! Yet this is exactly what many of the world's leading financial wizards have been doing to keep government budgets afloat for the last 7 years.
In an effort to stimulate the economy and encourage consumption, the Federal Reserve has lowered interest rates well below where they would be if allowed to fluctuate based on free-market forces like business and consumer demand.
This has taken us to a Zero Interest Rate Policy (ZIRP), which by definition is theoretically the lowest rate that a central bank can impose as part of its strategic agenda. The closer rates get to zero, the fewer options monetary planners have at their disposal to attempt to stimulate economic demand.Altering Your Behavior
The effect of excessive money creation has been compared to the liquid sloshing around in a giant punch bowl.
And since interest rates are so low, investors must take on more risk in the search get greater returns. Across the globe, this new money – in an uncontrolled manner – seeks out profitable venues for growth.
A great deal of the central bank-created paper/digital money thus ends up chasing finite amounts of art, real estate, collectibles, or financial assets like stocks or bonds. This has sparked the latest stock market bull runs in one country or another, leading to new and unsustainable bubbles.
Afterwards, the supposedly most-connected person on the planet – the U.S. Federal Reserve Chairman – always seems to be surprised.The War against Cash
While investors are chased into higher risk assets in search of yield, we are witness to a simultaneous "war on cash."
Governments around the globe have lowered the amount of cash a person can withdraw without attracting the attention of authorities, who snoop on you to make extra sure you aren’t dealing drugs or selling weapons to terrorists. France, Sweden, Denmark, Israel are just the most recent to have announced this change.
With the formation of groups like the Orwellian “Better Than Cash Alliance,” plans are underway to eliminate cash altogether and leave the public with little choice but to keep all their money in a digital account. While using only electronic money may seem to be more "efficient," it makes it possible for authorities to track all of your financial dealings AND even allow banks to impose a Negative Interest Rate Policy (NIRP) upon you.
Without measures to prevent block them, account holders with cash balances might choose to withdraw and hoard paper currency. That would be the simplest way to escape negative interest rates.
But with funds trapped inside of bank accounts, bankers could simply deduct the negative rate charge from each customer’s balance. (Question: Would not such "digital cash balance robbery" be just a modernized version of what Willie Sutton was doing back in the day?)Targeting You for Outright Theft through NIRP or Asset Forfeiture
And then there are the rising abuses of Civil Asset Forfeiture. If you're stopped on the road and have a few thousand dollars on you – no matter that you might be going to buy a used car or plan to make some purchases during an extended vacation… the police can easily deprive you of the cash, without even charging you with a crime.
In recent years, Civil Asset Forfeitures have reached the scale of billions of dollars. And police departments come to depend on this tempting "revenue stream," creating the perverse incentive to seize even more.
Following a lengthy investigation last year, The Washington Post reported,
“There have been 61,998 cash seizures made on highways and elsewhere since 9/11 without search warrants or indictments through the Equitable Sharing Program, totaling more than $2.5 billion. State and local authorities kept more than $1.7 billion of that while Justice, Homeland Security and other federal agencies received $800 million. Half of the seizures were below $8,800.”
"Monetary thinkers" feel things would be so much more efficient -- for the government -- if we all went totally to digital accounts. No need to carry cash around or pay bills by mail. The authorities will know exactly how much money you have and what you spend it on, placing your balance under their control at the press of a button.
Coming Soon to a location near you?
The legend of the Greek craftsman Daedalus is relevant today. He learned how to fly and taught his son Icarus – cautioning him not to get too close to the sun at the risk of melting the wax on his wings.
Immensely powerful central bankers believe that they can safely "fly high" with their monetary policies. But like Icarus, who flew too close to the sun and plunged from the sky when his contraption fell apart, so too do our monetary authorities run the risk of similar demise – and taking the rest of us down with them.Financial Repression Has One Logical Outcome...
In a recent article at mining.com, David Levenstein really nails it, saying:
"Financial repression has long been a driver of demand for physical precious metals. This demand will accelerate as measures become more draconian. Some bank customers… will decide that bullion is a better option than sitting on piles of depreciating paper currency or paying banks to hold deposits... Historically, only gold and silver have been trusted private stores of value as well as a hedge against political, financial, and economic turmoil. In such an insane environment, gold and silver will become the only real trusted alternative to fiat currencies. And, as more new capital flows into physical bullion, its price will soar."
Got gold? Got silver? Got common sense?
Back in April we asked if the student loan bubble was about to witness its 2007 moment.
The reference, of course, was to a wave of MBS downgrades in July of 2007 which sent a series of tremors through global financial markets and triggered an asset backed commercial paper crisis in Canada which, although no one knew it at the time, presaged the crisis that would wreak havoc in the US a year later. As a reminder, on July 10, 2007 Moody’s downgraded 399 bonds backed by subprime mortgages which together totaled some $5.2 billion. Meanwhile, S&P suggested it was close to cutting ratings on more than $12 billion in mortgage-backed securities due to declining home prices and rising default rates. On July 12, Fitch Ratings placed 19 structured collateralized debt obligations on Ratings Watch Negative due to a significant deterioration in the underlying portfolios of residential mortgage-backed securities. That same day, S&P cut its ratings on 498 subprime mortgage related bonds worth some $6.39 billion.
We’re starting to see a similar situation unfolding in the market for student loan backed paper. In April, Moody’s put some $3 billion in student loan backed ABS on review for downgrade citing an increased likelihood of default. Now, Moody’s has placed more than 100 tranches across 57 student loan-backed deals totaling some $34 billion on review. The rationale? “Low” payment rates, deferment, forebearance, and IBR. From Moody’s:
Moody's Investors Service has placed on review for downgrade the ratings of 106 tranches in 57 securitizations backed by student loans originated under the Federal Family Education Loan Program (FFELP). The loans are guaranteed by the US government for a minimum of 97% of defaulted principal and accrued interest.
The reviews for downgrade are a result of the increased risk that the tranches will not fully pay down by their respective final maturity dates. Failure to repay a note on the final maturity date represents an event of default under the trust documents.
The elevated risk is a result of low payment rates on the underlying securitized pools of student loans, driven by a combination of low rates of voluntary prepayments, persistently high volumes of loans in deferment and forbearance, and the growing popularity of the Income-Based Repayment (IBR) and extended repayment programs.
And BofAML has more color:
Moody's announced that it has placed on review for downgrade the ratings of 106 tranches in 57 securitizations backed by FFELP loans. This announcement follows a similar announcement made on April 8, 2015, which stated 14 tranches in 14 securitizations backed by FFELP loans were placed on review for downgrade.
The data shows deferment and forbearance levels for FFELP Stafford/PLUS and Consolidation Loan ABS have recently trended down, although 30+ days have increased. The increase could lead to higher involuntary prepayments (i.e., defaults). A portion of the increased use in IBR plans noted by Moody’s could be a substitution effect, as certain borrowers may have reached the time limits on economic deferment and forbearance.
As we indicated in an earlier report, the use of income based repayment (IBR) plans has increased for FDLP loans. A similar upward trend is likely occurring for FFELP loans but the magnitude is likely less, especially for Consolidation loans.
To be fair, numerous payment options under the Federal student loan programs make the cash flow analysis for FFELP loan ABS relatively complex for rating agencies, issuers, investors, and other market participants. Market participants must consider payment options that are influenced by economic and legislative/regulatory factors (e.g., PAYE and REPAYE) and generally, not available in other retail loan products (e.g., auto loans), along with delinquencies, defaults, claim rejections, interest rates and payment delays, among others.
In other words, there are all kinds of reasons to expect this paper not to perform well that do not apply to ABS backed by other types of credits.
Meanwhile, as discussed at length in these pages, the Education Department is aggressively promoting the IBR program, which is bad news for taxpayers. These plans allow borrowers whose incomes are not deemed sufficient to service their debt to make monthly ‘payments’ of zero. After 300 months, the loans are forgiven. In other words, it’s theoretically possible to remain ‘current’ on a student loan and have that loan legally discharged after 25 years without ever making a single payment. It’s easy to see how this type of arrangement might negatively affect the cash flows in a student loan backed securitization and hence it comes as no surprise that the proliferation of IBR is cited by Moody’s as a contributing factor to its review.
Lending some credence to our 2007 MBS comparison, Fitch has also moved to place 57 tranches of FFELP-backed paper on Ratings Watch Negative.
The fact that Moody's and Fitch are beginning to reevaluate student loan ABS is indicative of an underlying shift in the market. Between the proliferation of IBR and the Department of Education's recent move to open the door for debt forgiveness in the wake of the Corinthian collapse, financial markets are beginning to see the writing on the wall. Perhaps Bill Ackman said it best: "there's no way students are going to pay it all back."
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Full Moody's statement:
Approximately $34 billion of asset-backed securities affected.
New York, June 22, 2015 -- Moody's Investors Service has placed on review for downgrade the ratings of 106 tranches in 57 securitizations backed by student loans originated under the Federal Family Education Loan Program (FFELP). The loans are guaranteed by the US government for a minimum of 97% of defaulted principal and accrued interest.
The reviews for downgrade are a result of the increased risk that the tranches will not fully pay down by their respective final maturity dates. Failure to repay a note on the final maturity date represents an event of default under the trust documents. Because of the government guarantee and the available credit enhancement, recoveries upon default would be very high, although the timing of such recoveries would depend on the transaction structures and voting rights upon default for each transaction.
The elevated risk is a result of low payment rates on the underlying securitized pools of student loans, driven by a combination of low rates of voluntary prepayments, persistently high volumes of loans in deferment and forbearance, and the growing popularity of the Income-Based Repayment (IBR) and extended repayment programs.
During the financial crisis, prepayment rates dropped to historically low levels. Although prepayments have risen in the last few years, partly as a result of borrowers refinancing their FFELP student loans through federal Direct consolidation loans, prepayment rates of near zero in 2008-09 slowed pool amortization rates and resulted in pool balances exceeding the original projections.
The percentage of FFELP loans in various payment plans, including deferment, forbearance, IBR or extended repayment, has remained between 20% and 30% for consolidation loan pools and between 40% and 50% for non-consolidation loan pools. Borrowers in these plans either suspend repayment of their student loans or make reduced payments of principal and interest. Although the level of loans in deferment has declined over the last two years by approximately 7%, the level of loans to borrowers in IBR has increased by approximately the same amounts and offset this recent decline in deferments. IBR and extended repayment option plans that can extend loan repayment periods up to 25 years, from the standard 10-year term for non-consolidation loans, are significantly lengthening the weighted-average life of FFELP loan collateral pools. In some FFELP securitizations, loans to borrowers in either IBR or extended repayment represent approximately 10%-15% of the balance of loans in repayment
I think it does. Well, I think, you know what I think, the usual speculative nightmarish scenarios, the usual apocalyptic distractions on the internet.
But this one is novel, because it's based on an analysis of the 1987 (the year, not an S&P 500 level) crash. Well, what happened in 1987?
We had a decline off a significant high, followed by a bear-bull battle off that initial low. The low held a second time, with a deeper retrace back up, before we got our famous crash, a true waterfall.
It's a clear A-B-C move in my book.
Chart1: 1987 S&P 500
I was 16 and a Senior in high school when this went down.
So let's apply the 1987 idea to today, see if it suggests anything interesting. We are currently in the process of finishing up a very long-in-tooth ending-diagonal 5th wave rally off the October 2014 lows at 1820 SPX.
When an ending-diagonal finally breaks down, we get a rapid sell-off straight back to the point of origin, 1820 SPX. For a 1987 scenario, the speed and slope of this decline is our first critical piece of information, as it gives us the final target for the catastrophic "C" wave collapse.
The second critical bit of information is then how long the fight off the initial low -- 1820 SPX -- lasts before a final crisis. Why is this important? The fight over support and resistance levels creates a delay ... which only makes the ultimate target for "C" go lower and lower, into the depths.
So, you want a crash, one for the history books, one that removes all doubts about the future we have already consumed? Look to October.
Chart 2: The 1987 Crash applied to today
The vertical lines on the chart mark various cycle turn dates of interest to me along the way.
I'll propose a sequence of events for how this plays out.
- The Greece problem gets resolved in the short-to-medium term. We are not talking about huge sums of money needed, as well as just enough "austerity" to dissuade the other worthless grifter Mediterranean EU states from asking for their gibs and gravy, to kick this can.
- The market tops in two weeks, on the release of the June FOMC Minutes, at 2150 SPX. Fed members feel cheap and used and are generally pissed-off at this point, so they are screaming for hikes and "normalizing" rates.
- The market breaks wedge support and sells off to 1820 SPX. This is the long-awaited "correction", and it is bought.
- We rally halfway-back to 1985 SPX into late August.
- The 2nd estimate of Q2 GDP is released, and it is negative, meaning an official recession.
- The market returns to 1820 SPX on this grim news, and the knowledge that the used-and-abused Fed is really, seriously-this-time-guys going to hike rates at the September meeting.
- We sit right on critical support, 1820 SPX, into the September FOMC. The market calls their bluff in the most sick and insidious way.
- The Fed blinks, cites the recessionary GDP, and does not deliver the hike they had promised.
- The market rallies hard, Shemitah shorts are eaten alive, to a higher level than late-August.
- The S&P 500 gets back above the 2000 level, but fails to retake the old rally channel.
- October. Something breaks (bonds? yes, probably) and the Fed can do nothing but watch. We are still at ZIRP and they have no ammo, nothing. Fear and loathing grip the land!
- If the 1987 model holds, now we seek out the target defined by (1) the slope of (A) down, and (2) the delay produced by the fight during (B).
- Yes, it could go truly vertical, return us all the way back to the trendline between the 2002 and 2009 lows. This would be an epic finish to Dr. Bob McHugh's "Jaws of Death" pattern.
An objection would be that 1987 only took 36% off the indexes, while what I am proposing here is a 74% crash, pretty much all at once. It would blow through any support levels that seem reasonable -- 1500, 1100, 1040, etc. -- in a violent orgy of panic selling -- day after day after day.
I only want to suggest that something like this is possible, based on the geometry and logic of the 1987 episode, a true vertical collapse.
I mean, this is just foolishness, right? We have recovery, and the markets are real, and the Baby Boomers are going to get paid. Sure they are.
Chart 3: The Un-Possible True Crash For The Ages
No one gets out of this alive.
It is clear from the EU Finance Ministers' template-like comments to the press what the real worry is in Europe (and the world). It's not The Greeks (Schaeuble: "No other decision was possible, no problem with Greek referendum... need to see what happens next"), it's something else:
- *SCHAEUBLE SAYS DOING EVERYTHING POSSIBLE TO AVERT MARKET UNEASE
- *PADOAN: INSTRUMENTS IN PLACE TO COUNTER POSSIBLE CONTAGION
- *DIJSSELBLOEM: OUR INSTITUTIONS ARE PREPARED TO TAKE ANY ACTION
- *STUBB: "I DO NOT SEE A RISK OF CONTAGION"
- *SCHAEUBLE SAYS WE'LL DO EVERYTHING TO FIGHT CONTAGION THREAT
- *PADOAN: IF INSTABILITY, ECB HAS INSTRUMENTS TO INTERVENE
And then there's this utter rubbish:
- ITALY'S PADOAN: "EURO AREA IS VERY STRONG."
- SCHAEUBLE SAYS EURO ZONE IS STABLE, REMAINS STABLE
But then they spew this...
- *PADOAN: "AT THIS POINT WE HAVE A CRISIS SITUATION''
- *SCHAEUBLE SAYS GREEK DECISION WILL RESULT IN DAYS OF UNQUIET
What a farce!
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Save The Markets, screw The Greeks; save The Bankers, screw Democracy.
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Over to you Draghi...
Unleash the bond-buying... let's just hope that Buba plays along.
Back on May 11, we took a close look at what a Greek default to the IMF would mean in terms of the country’s obligations to its other creditors.
At the time, it appeared as though Greece was set to default on a €750 million payment to the Fund, so naturally, we were curious to know what the ramifications of a default might be. A day later, we discovered that Varoufakis had in fact orchestrated a deal whereby Greece was allowed to use its SDR reserves to make the payment, a move which amounted to the IMF literally paying itself.
That bought Greece around three weeks and the decision to bundle June’s payments bought three more, but now, with PM Alexis Tsipras having called for a referendum, with EU officials and finance ministers having finally thrown in the towel, and with Greek depositors draining the ATMs at a frantic pace, default is now all but certain on Tuesday and so the focus has suddenly shifted back towards what happens if Tsipras doesn’t cut Christine Lagarde a check by 11:59 on June 30.
As we’ve discussed at length, Lagarde can, if she chooses, delay a technical default by 30 days by not sending a formal notice of default to the IMF board. Regular readers have been well aware of this for some time now as we discussed it exactly one month ago today. Unfortunately for the Greeks, Lagarde recently indicated she isn’t likely to go that route and will “notify the board promptly” if payment isn’t made. Here's Bloomberg on the consequences:
A possible Greek default on debt due to the International Monetary Fund next week would trigger cross- default clauses on 130.9 billion euros that Greece owes the euro area’s temporary rescue facility, a European Union official says.
Should IMF Managing Director Christine Lagarde tell her board that Greece defaulted on a 1.5 billion-euro payment due on June 30, the European Financial Stability Facility would have to decide among three options: to claim the funds that Greece owes the EFSF; to waive the EFSF’s right to the money; or to invoke a “reservation of rights” that would avoid an immediate claim while maintaining the EFSF’s option to take such a step, the official tells reporters in Brussels on the condition of anonymity
EFSF Chief Executive Officer Klaus Regling would have to make a recommendation to the rescue fund’s board of directors, who are deputy finance ministers from the euro area: official
And here, as a reminder, is how Deutsche Bank explained the situation last month:
IMF loans do not include any formally defined grace period, with fund staff required to send an urgent cable demanding payment to the Greek authorities immediately. This is then followed by a formal notification by the IMF Managing Director to the Executive Board of the failure to pay. It is this notification that is defined as an event of default in Greece's EFSF and other official-sector loans, triggering cross-default. If this materializes, European creditors then have the right (but not the obligation), to accelerate EFSF loans, causing them to be immediately payable. In turn such an acceleration event would trigger cross-default and potential acceleration in the post-PSI Greek government bonds. The timing of the IMF notification letter is itself a political decision, however, as is the decision to accelerate EFSF loans. IMF guidelines suggest the notification to the board happens in a month. Our understanding is that the notification period may be flexible, with some reports last week suggesting that the Executive Board has requested that this notification happens sooner in the event of a failure to pay from Greece.
For those who demand still more granular details about which defaults trigger accelerated payment rights for whom and when, here is the complete visual breakdown courtesy of Barclays:
So as you can see, not only would a publicly acknowledged default to the IMF trigger accelerated payment rights on EFSF loans, but would "very likely" tip over the EU loan domino and after that, it's on to the ECB's SMP holdings (note that the profits from these bonds were included in Friday's memorandum outlining possible sources of funding for Greece) and then to what would likely be a very messy discussion about whether a CDS-triggering 'credit event' has occurred.
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Bonus: Deutsche Bank from early this morning (prior to Eurogroup) on the "big uncertainty":
We would consider the recent turn of events as a particularly negative market outcome.
First, the Greek Prime Minister took a significantly critical tone of the proposed creditor agreement, signaling he would campaign for a "no" vote. Tsipras said that the aim of some of Greece's partners is to "humiliate" the Greek people, and rejected the creditor's proposal as an "ultimatum" that is against European principles and will "undermine social and economic cohesion." The subsequent message was confirmed by numerous government ministers who all said the government would openly campaign for a "no" and were highly critical of the European position.
Second, the referendum will take place after program expiry and the IMF 1.6bn EUR payment on June 30th. Given that Greece likely does not have the funds to repay the IMF on Tuesday, the decision is likely to lead to a non-payment event on the day. Assuming the loan program is not extended, this materially increases the probability that the ECB does not approve an increase in Greek bank's ELA provision as soon as Monday, in turn leading to effective capital controls.
There will be three things to watch over the next forty-eight hours.
First, the European political response. A Euro leaders’ summit may be called at short notice. Similar to the Papandreou referendum proposal in 2012, we expect that Europeans will make it clear that the government's referendum will be equivalent to a question on euro membership. The Europeans will also need to decide on whether to grant a short-term legal extension to the loan agreement. Though we are still waiting for the European reaction, we consider a more likely outcome that the program is allowed to expire: extension requires multiple parliamentary approval processes, and given the tone of the Greek PM's speech it is unlikely that the political appetite exists to grant such an extension. The IMF response will also be important: when and if Lagarde notifies the IMF board of a non-payment event, this will trigger cross-default on Greece's EFSF loans and the EFSF board of directors (the finance ministers) will have the option, but not the obligation, to call these loans immediately due and payable.
Second, the ECB response. The central bank has been holding daily reviews of Greek bank ELA provision this week, and officials have in multiple statements last week made it clear that ongoing liquidity provision is based on a "credible perspective" of an agreement being reached. Decisions are likely to be taken in conjunction with the European political response and program extension this weekend. The situation remains very fluid, but as things stand we consider the most likely outcome being an ECB decision not to raise ELA funding beyond existing levels as of this past Friday, or alternatively an aggressive adjustment in collateral haircuts resulting in an implicit cap at some point next week. The Greek deputy PM has said he will seek a meeting with ECB's Draghi on Saturday.
The third factor to watch will be public opinion polls on the referendum question. So far, these have shown that support for euro membership when an "unconditional" ("simple") question is asked stands at around 70%. However, when this question is made conditional on more austerity, support drops to 55- -65% depending on how the question is phrased. We expect the Greek PM's position and the phrasing of the question itself to likely lead to additional swing towards a "no" vote. This is particularly so as Greek government officials have stated that the referendum will not be on euro membership, but rather the agreement. The extent to which European pressure and the situation of the banking system next week swings the vote the other way remains an open question.
Overall, we expect the outcome to be very close and uncertain. The closer opinion polls are to a “no” vote, the greater probability is the market likely to price to a Greek Eurozone exit.
In terms of timelines, parliament is expected to be called tomorrow where the exact question will be made public. A simple MP majority is needed. It is likely that a referendum is posed as a "matter of national importance" under the relevant legislation, which requires a 40% participation by voters and a 50% +1 majority for a "yes". The PM has stated that the referendum will be on the creditor's proposal, but this has not been made public and does not exist in an official manner. It is likely that this is done so in the context of tomorrow's scheduled Eurogroup, or it may be that the Greek PM publishes an outline. This notwithstanding, pressure from the European side is likely to be intense so that the referendum will be effectively on Euro membership.
In the meantime, the ECB is likely to hold an emergency meeting this weekend to decide on ELA policy. In the event of an effective cap being set, Greek banks' access to liquidity would be restricted and cash withdrawals or deposit transfers above would not be able to continue. Greek legislation allows either the Bank of Greece governor or the finance ministry to impose capital restrictions. The extent to which this materializes will depend on the ECB decision over the next forty-eight hours as well as depositor behaviour. Outflows had slowed down towards the latter part of the week but are reported to have accelerated again on Friday. Deposit behaviour and usage of ATMs this weekend will provide an indication of likely depositor behaviour into Monday.
In sum, a very significant period of uncertainty has now been initiated. The question of Greece's Eurozone membership has been officially opened.
Despite all the talk of "containment" and "Greece doesn't matter," not only are we told by anonymous EU officials that some banks may not open Monday but now, a Greek SEC Official has warned...
- *GREEK BOURSE MAY NOT TRADE MON IF NO ELA EXTENDED: SEC OFFICIAL
Greeks just got CYNK'd (or Hanergy'd).
As a reminder, here is the exuberance in Greek stocks from last week...
- Greek Stocks best week since post-Lehman dead-cat bounce (fell 37% after that)
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On a side note, for those looking for market reaction, Bitcoin is up 4% since Tsipras announced the referendum as the exodus from fiat currency begins to gather pace.
Bad breadth is everywhere in US equity markets...
As Bespoke Investment group wrote recently, while the percentage of stocks above their 50-days hasn’t gotten above the 80% mark all year, it also hasn’t been below the 30% mark either. That’s a very tight range for a six-month period. Below is a chart of this breadth reading going back to 2006, with the S&P 500′s price level included as well. Normally you’ll see this reading swing much higher and lower, but not this year. This is just another example of the completely sideways action that we’ve seen recently.
Going back to 1990, below is a chart showing streaks of trading days where the reading remained between 30% and 80%. As shown, the current streak of 122 trading days is the highest seen in 15 years, but it’s certainly not without precedent. In fact, back in 2000 we saw a streak that was double the current one, and in 1993/94, there was a streak that reached 300+ trading days.
The one concern here is that the 2000 streak came at a time when the market was trending completely sideways right near all-time highs as it is now. When the 122 trading day mark was hit during that streak, the index was still holding on at new-highs. As the streak got longer and longer, though, the index began to fade, and it eventually turned into a massive bear market that coincided with the Tech bust.
And as Dana Lyons notes, the weakening market breadth recently, especially as it pertains to New Highs vs. New Lows, is even more concerning.
Again, our contention is that the more stocks participating in a rally, the healthier the rally is. The most recent example of this weak breadth was Wednesday’s post on the fact that Nasdaq New Highs-New Lows have not hit a 52-week high in over 400 days. Today brings another example from the NYSE. Despite the NYSE Composite being within 2% of its 52-week high, the number of New Highs on the exchange versus New Lows actually hit a 6-month low today (*based on preliminary readings.) This is just the 8th such occurrence in the past 20 years.
Such breakdowns in breadth in the past 20 years with the NYSE Composite in close proximity to its 52-week high have not worked out well. As the chart indicates, this development has led to intermediate-term weakness, without fail. The prior occurrences in April 2004, May 2006, July 2007, May-June 2013 and September 2014 led to negative returns out 3 weeks and 1 month every time, with median returns of -5.0% and -4.1%, respectively.
Here are the numbers:
The good news is that after 2 months, returns gradually came back in line with historical norms. The other good news is that prior to 1996, returns after such developments were not unanimously negative. October 1995 occurrences led to essentially no drawdowns afterward. The only other occurrences since 1970 came in 1971, 1983, 1985, 1991 and 1993. While the returns were mixed in the intermediate-term, they were not as bad as those in the past 20 years.
What’s our ultimate takeaway from this development? We like to weight recent occurrences of these types of studies more heavily. Therefore, we’d consider it a negative factor for this market. That said, weakness has only been manifested over the intermediate-term. Therefore, the negative expectations, at least based on this study, probably expire after a month or two.
Generally speaking, it’s more evidence of the thinning out of this rally that has been accumulating lately.