This page has been archived and commenting is disabled.
Greece - A Line in the Sand?
On December 10th I raised the possibility of Greece breaking the connection with the Euro. On the likelyhood of this black swan type of event happening I said, “This is not a high probability outcome.” A week later the possibility of a realignment of some sort is still remote. But it is a tad closer.
On December 11th Steve Barrow
at the Standard Bank, London wrote a piece that raised the issue of
both Greece and Ireland doing something with currencies to assist their
domestic economies. Steve clearly has more visibility than I do. His
thoughts got to the Finance Ministry in Dublin who responded with, “Uniformed comment”. The Greek FM was very clear on the topic. “No chance Greece would leave”.
This is a risky development. The Central Banks have put a line in the sand on this. That is always a mistake. When a CB says, “Such and such will never happen” you are going to get people (like me) saying, “Oh, really?” The very fact that they are saying, “that is rubbish” just fans speculation.
Greek PM Papendreou proposed a cutback in 2010 expenditures to 8.5% of
GDP (down from 12.7%) as a way to instill confidence. For me that is, ‘rubbish’.
It will not work. If cuts like that are made there will be social
consequences. That instability will just fuel the sovereign ‘flight
risk’ issue. This problem will not go away with just that proposal on
the table.
The Central Banks have drawn a line in the sand for good reason. They
do not have a choice. The countries that are at risk have issued
mammoth amounts of debt in Euro’s. If some form of two-tiered Euro were
the result the cost of revaluing the debt for both the public and
private sector would be devastating.
The flip side is that the countries that are suffering have no policy
options available to them. They can’t provide a meaningful stimulus
because of the Euro link and limitations on budget deficits that the
link mandates. At some point this will become untenable. The argument
that a two tiered Euro would stimulate both the tourist and industrial
economies of Greece, Spain and Ireland (Italy too) becomes compelling.
I don’t see a soft landing. At an extreme where could this go? It leads
to global financial instability, it could be very deflationary.
Precisely what the global economy does not need. Greece is a bit like
Sub Prime. By itself, it truly was containable. But it exposed other
weaknesses. If one was looking for something to upset the applecart,
Greece could very well be it.
»
- advertisements -
In due course it is almost a certainty that Ireland and Greece will be bailed out by the IMF. They cannot afford to leave the Euro; their interest rates would shoot up to 10% and above.
Me thinks the lady doth protest too much.
Greece and Ireland are probably going to dump ya.
"The countries that are at risk have issued mammoth amounts of debt in Euro’s. If some form of two-tiered Euro were the result the cost of revaluing the debt for both the public and private sector would be devastating."
There is no risk of a two-tiered EUR. The risk is of some countries leaving the EMU and issuing their own currency again, which would soon devalue and create a currency crisis that may lead to contagion.
http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/680415...
so, in a thumbnail you are for some severe austerity.i doubt the congress combined could agree on a lunch hour.not to mention these citizens seem to be in a pretty sour mood of late.
i believe this catastrophy is on automatic pilot and inevitable. i believe bernanke & co.are just hoping and praying, they all look worried to me(the ones that have enough sense to be worried). there will also be some completely unforseen events that will crop up and can turn this situation into a semi -slow motion train wreck, and all of us paralyzed, pedestrian onlookers.
hope for the best and prepare for the worst.
I'm just saying that fiscal implosion is not a fait accompli. If we wanted to eliminate the possibility of devolving into a failed state, we could do it.
But I also believe and anticipate that we WON'T do it. We lack real leadership, and the distance between the have and have-nots is measured in light years. The "HAVES" are too incented to sustain the status quo, and the "HAVE NOTS" are too disengaged, distracted, unempowered, and myopic to make any self-directed change.
So my holiday shopping list comes down to liquor and ammunition. There is always a market for liquor and ammunition, and if the market becomes depressed, you can always enjoy the consumption thereof.
you may as well black market a little tobacco, for the trifecta.
Prepare for the end of nation-states, which are now to be liquidated in a wave of sovereign defaults.You just thought you owned America.The orientals will be picking our bones like so many vultures, according to the bible, "the rich ruleth over the poor, and the borrower is servant to the lender." Our so-called leaders will be all too willing to sell us out even further, to insure their parasite / host status over decent Americans. And these traitors will crouch down and lick the boots of America's new overlords.
The number of countries which are currently in jeopardy, due to their own bankruptcy is extensive. On Nov. 30 alone, the following nations were mentioned: Ireland, Greece, Hungary, the Baltic States, Ukraine, Pakistan, Romania, Bulgaria, Spain—and the United Kingdom and the United States. The least unto the greatest.
You might want to read what you can on Peter Bernholz, an economic academic,( book: Monetary Regimes And Inflation) who has spent all of his adult life researching the collapses of the 28 largest fiat money systems.The one salient point of his work might be distilled into this; all these fiat currencies had in common this tipping point into oblivion, WHEN THE DEFICIT EXCEEDS 40% OF EXPENDITURES .
example fed. budget 2009 3.1 trillion X .40 = 1.24 trillion we have already exceeded the tipping point. ratio of gdp is not relevant to this equation. broken down, 1,420 billion deficit requires begging, borrowing, stealing, or printing 3.94 billion every day of the year or 118.3 billion every month. that amounts to some serious khaki.
The U.S. of A BORROWING is now at this level, and the congress and senate are still digging in the hole, 2 trillion more for the cap just last week and more in the pipeline. When the other nations can't or will not buy any more of our debt, the curtain comes down on this pathetic America. The fat lady is tuning up in the wings, ready to sing.
God have mercy on u.s.
Bravo7,
The Federal government fiscal situation is still fixable, and it is not at all complicated to understand what needs to be done to fix it. These three things must be achieved:
1) Social security entitlements must be reduced by about 1/3, caps on contributions must be lifted completely, the eligible age for claiming benefits must be increased to age 78, or benefits must be means-tested. Or some combination of the above.
2) Defense spending must be reduced by about 50%.
3) Medicare entitlements must be reduced by 45%.
It would take ONE sesssion of CONgress to fix the public debt problem. But I share your fear that the market will fix it for us; probably harshly and at greater long-term cost; possibly violently.
Problem is, Greece is not capable of making the kinds of cuts necessary, not even those at the level of Ireland; hence, the risk is much greater than the authorities can acknowledge.
There will be resistance from the labor unions, when when push comes to shove, they will concede some cuts. Greeks aren't as stupid as you think they are. The country has faced MANY challenges in the past and come through. This is nothing compared to those historic challenges.
Greece is just a canary, the rot is everywhere, Euroland CDS exploding today...
http://www.zerohedge.com/article/greece-default-risk-surges#comment-167778
How deep the rot? Deep enough...
http://www.zerohedge.com/article/greece-default-risk-surges#comment-167789
Greece i.s. big in that it has all the ingredients for an impressive meltdown along the Meditteranean seaboard in it. Corruption, statism, massive bureaucracy, falsified data, the works. The P.I.I.G.S., nothing new here, but the scale of shittiness now coming out of Greece extrapolated to one or two big countries makes for one potential massive clusterfuck on everything. It is not the absolute number of the problem but the way it influences the margin. This is very heavy shit.
Good analogy with sub prime. Interesting that gold is falling in the midst of pressure. Liquifying for some deposits to the Greek bank maybe? Or Euro? And where do the 'folks' run, @ the $$. Vix up almost 9% for the day.
Greece and Ireland may be an outlier, stay tuned. The revolution will be televised.
I view the currency/gold situation as a continuum where, at least for the moment, the pivot point is the dollar.
Developing nation currencies -> First world currencies -> Dollar -> Gold
When developing nation currencies are weakening, capital flees to first world currencies. When first world currencies are weakening, capital flees to the dollar. When the dollar weakens, capital flees to gold. But if the dollar strengthens, capital moves back towards the dollar from gold. Further, the global financial system has functioned in this manner for so long that traders are conditioned to expect the above flows. This makes gold a lousy investment over the last 50 years generally but it makes gold the ultimate wealth preservation mechanism if the dollar sinks. The traditional places to make money in the FOREX realm has been in the leftmost two nodes of that continuum, not the rightmost two nodes. The fact that you can make money right now in those rightmost two nodes is a symptom of the level of stress in the global system.
Perhaps that's a bit too simplistic for some but the above gives me a general mental picture around which to organize information about foreign exchange dealings.
Writing from Dublin here, Ireland will not pull out of the Euro. cold dead hands come to mind. The gov here although as bad as all the rest and maybe worse is forcing through pay cuts in the civil service and beyond. Also in Ireland's case Debt to GDP is still lower then the EU average so servicing the debt is not an issue for now. The risk to the Euro is Eastern Europe or repudiation by the Germans which seems unlikely
Agreed, Ireland is a much more conservative country then the sterotype suggests - sure we like to party but we have a collective memory of the bad times that seems to remain.
In short we will pay our debt even if its against our long term interest , my only reservation is that we will continue to pay bankbond holders 100c on the EURO - that is something we simply cannot do.
Riiiiight. Like the folks two years ago who said subprime was well contained. Keep believing that...
Sounds like Tiger Woods "first" mistress. "Did not happen." Or Bill Clinton: " I did not have...relations with that woman."
The stronger the denial; the more likely they are lying.
Leo,
have you heard of credit default swaps?
How many of those land mines would an error by officials set off?
leo, you see the fx mkt today? You see your global stock rally going up in smoke?
there is only one way out of this mess. It must come with a weak dollar. Things that get in the way of that (like Greece) are going to derail a global recovery.
A strong dollar is very deflationary. I know you like that, but you are ging to hate it when equities fall by 20%.
bk
A strong dollar in itself is not deflationary. Forced liquidations that drive down the price of assets and increase the importance of holding cash is deflationary. But this move in the dollar seems more like an oversold bounce than an indication that folks are being forced out of long positions.
And every bullish day that goes by increases the chances that the next bust will feature falling asset prices and a repudiation of the dollar.
Bruce,
See my serious and not-so serious comments here:
http://www.zerohedge.com/article/apocalypse-not-dollar
Only line in the sand being drawn is at the beaches of Greece. Dubai, Greece, whatever else comes our way, will do nothing to dent the bigger liquidity-driven rally. Yes, Greeks will have to get their fiscal house in order, and make tough choices along the way, but to claim that something much nastier will emanate fom Greece's woes is a stretch of the imagination.
Leo,
In the game of selling to the greater fool, one only reaps the gains if they actually sell. This is opposed to holding something for cash flow, which people have gotten away from in the past 30 years. The majority of middle class americans have most of their net worth in their house and retirement plans, and have to buy "stuff" from their discretionary cash flow. Of course, this cash flow has disappeared with lost jobs and stagnant wage inflation for those who have jobs. Not to mention higher energy and food costs. Therefore, "feeling better" about the SnP being up 10% this year doesn't mean that much as it doesn't produce day to day cash flow.
My point is that decreasing cash flows in the real world will soon suck the life out of everything, including 150 plus PE ratio common stocks. This is further enhanced by the increasing amount of debt expense, both sovereign and private. The debt market dwarfs the equity market and will crowd out equity. Eventually, a common stock that pays little or no dividend, and also trades at several hundred times operating earnings, doesn't make sense to own. The only way it serves a purpose is if you sell. Sure, it can increase one's collateral, but as I said, the amount of debt out there dwarfs the amount of equity.
In the end, its cash flow, cash flow, cash flow. And its disappearing.
I don't remember who said this but it's worth stealing:
"The supply of fools, while indeed vast, is not infinite."
Only fools are those that look at trailing P/E ratios to make investment decisions. Good luck with that.
not looking at trailing, looking at current and forward estimates versus predictions of Dow 12-14K. Let me know how buying in to the hype game works out for you.
Valuations do matter, and we are already in a valuations bubble.
Ok, if you believe that then you either a) go to cash or b) short this market. I wish you luck on both fronts. I am staying long, buying every single dip, especially in solars.
I am only scalping long very selectively at these levels with a small percentage of trading capital. Otherwise yes, I am short and in cash with some physical PM's.
Leo, your belief that Central Banks can keep this liquidity driven rally goin' while Europe's banking systems are beginning to show serous signs of imploding (see Moody's report) may also stretch the imagination. At some point, those Central Bank's Paper money are just that: Paper.
All fiat money systems fail. Will the central banks be able to trigger hyperinflation before hyperdeflation? My vote's for deflation first and in an effort to battle deflation Central Banks will go crazy and that will lead to hyperinflation.
Are we seeing the first dominos falling (Dubai, then Greece... then Ireland.. Uk)? Time will tell.
Books
Leo,
Here is the bullisht case from one of the masters ...
http://anonymousmonetarist.blogspot.com/2009/12/interview-with-james-grant.html