Archive - Jun 2015 - Story

Just as we warned earlier in the year, total uncertainty about the future of Greece has enabled a growing sense of moral hazard as "if the nation doesn't pay its debt, why should we" sweeps across the troubled nation. As Greeks' tax remittances to the government, which were almost non-existent to begin with, have ground to a halt, so The FT reports, so-called 'strategic defaults' have become a way of life among Greece's formerly affluent middle-class..."I still owe money on the car and motorboat I can’t afford to use. Even a holiday loan I’d forgotten about...I’m living with my mother looking for work and waiting for the bank to come up with another restructuring offer."

Time's running out...

With The IMF (and Germany to a less extent) apparently peeing in the Greek Deal pool, perhaps it is worth considering what happens next if this "Greece is rescued" deal is not done. Who can save Greece? Who will pay The IMF? Why, that's simple, the good ol' American taxpayer thanks to The Fed's lifeline...

Despite near-record high equity prices, it appears soaring gas prices, stagnant incomes, and unaffordable homes are weighing on the American consumer far more than talking-heads would have investors believe. Gallup's latest economic confidence index re-tumbled to -9, 2015 lows and the lowest since Nov 2014. What is worse is the spread between current conditions and the outlook is gapping with hope for the future at its lowest since the end of QE3 after peaking In Feb.

The Bank of Greece has been hard at work with securities services firm G4S over the past two weeks coordinating an unprecedented effort to keep the country's ATMs stocked amid billions in withdrawals. Although the situation has become "critical", G4S notes that it hasn't had to enlist military assistance -- yet.

Rome didn't fall so much as erode away. That's the template for collapse. While collapse may be sudden, the decay that generated the collapse had been rotting away the foundation for years or decades.

But it was all looking so great based on the market's all-knowing discounting mechanism of idiot algos. Despite Merkel's comments on "no discussion of restructuring" and Schaeuble's dysphoria over the proposals, a Greek Minister's overconfident "Greece is rescued" comment is about to be crushed by Lagarde's heavy hand:

IMF DISAGREES WITH GREECE ON CORPORATE TAX, VAT AND PENSIONS - EU SOURCES

Yeah - but as they say - apart from that The IMF loved the Greek Proposal!?

The problem for investors is that inorganic measures to boost profitability, like cost-cutting, wage suppression, layoffs, and stock buybacks, are finite in nature. Eventually, these options are exhausted. There are only so many employees that can be terminated, wages can only be suppressed for so long, and there is a finite number of shares that can ultimately be repurchased from shareholders. The question that investors need to be asking is what happens when companies inevitabilty reach "the end of road." Importantly, with the Fed determined to begin hiking interest rates, despite weak economic data, the end may be nearer than most are currently expecting.

Because hope is a strategy after all...

What is the reason for the non-existant rebound? Simple: the following chart comparing total new home sales and the median new home sales price explains it.

Greece, Europe and the world are being crucified on a cross of Keynesian central banking. The latter’s two-decade long deluge of money printing and ZIRP has generated a fantastic worldwide financial bubble, and one which has accrued to just a tiny slice of mankind. That much is blindingly evident, but there’s more and it’s worse. The present replay of high noon on Greece’s impossible mountain of debt clarifies an even greater evil. Namely, that the central bank printing presses have also utterly destroyed the fundamental requisite of fiscal democracy. To wit, in the modern world of massive, interventionist welfare states, fiscal governance desperately needs an honest bond market.

On the heels of yesterday's explosive (but not a bubble) Existing Home Sales, May New Home Sales printed 546k - up 2.2% MoM - (against expectation of 523k). This is the highest SAAR new home sales since Feb 2008. By region, the NorthEast soared 87.5% MoM (as historical outlier fabrications remain buried in the data) and The West rose but The Midwest and South dropped 5.7% and 4.3% respectively.

Having hovered at its lowest level since January 2014, Markit's US Manufacturing PMI slipped even further to 53.4 (against expectations of 54.1). This is the weakest since October 2013 and the biggest miss since August 2013. Stunned, Markit notes, "while the survey data points to the economy rebounding in the second quarter, the weak PMI number for June raises the possibility that we are seeing a loss of momentum heading into the third quarter;" which is odd because every talking head has been proclaiming everything is awesome, "while a September rise still looks likely, given the ongoing strength of the service sector, any further deterioration in the data are likely to push the first hike into next year."

While Greece is collectively scratching its head why Tsipras et al were at loggerheads with Europe for 4 months, during which time the Greek economy entered a recession and saw its banks not only depleted of all cash but become de facto wards of the ECB, just to reach an "agreement" that could have taken place back in February, and attention shifts to just how Tsipras will pass last night's impromptu capitulation through hard-line leftist parliamentarians, Greece now has another problem: how to unpivot the aggressive pivot toward Russia in the past few months, which culminated with the signing of an energy deal last week in St. Petersburg.

FOMC Voting member Jerome Powell has spooked markets this morning (though a glance at stocks impotence would not tell you that) with his comments that a "September rate hike is now 50-50," and that "The Fed would like to test a rate rise as soon as September." FX markets are turmoiling with the USD surging and bond markets are seeing Bunds/TSYs sold aggressively. Stocks shrugged in their "huh?" way initially but tumbled as Powell confirms 'mechanical'-sounding 1% rise per year in rates if the economy continues to grow as expected.