The situation in Greece has very little to do with politics or economics. Instead it is entirely focused on just one thing.
As so often, Mr. Tsipras makes a number of fair points. However, it seems to us that everybody is skirting the main issues. Greece cannot become a “socialist Utopia”, unless its citizens are happy with being condemned to a hand-to-mouth existence for a long, long time indeed. Whether or not Greece defaults, the one thing the government will be unable to fund is the very socialism that is its basic ideology.
A glance at a chart of 5Y Greek Govvies shows the last trade at a 16% yield, well below the worst 20% yields - suggesting yet another storm in a teacup as "markets know best." However, this is entirely wrong! Greek government bond trading has stopped... 5Y bonds have not traded since April 24th. In fact given current equity levels, 5Y yields would be closer to 22% - as bad they have been ever. The entire fixed income market in Greece has died with CDS liquidity having collapsed and only sporadic longer-dated bonds trading.
History tells us two related facts. Central banks are always defeated by markets in the end, and central bankers have a touching faith that next time they will retain control over markets. But if we accept the lessons of history, we must dismiss complacency over systemic risk to the financial system. We can go even further, and begin to expect that of all the risks that will eventually trigger a widely expected financial crisis, it will be an old-fashioned bear market in bonds.
There is hardly a better signal that inflection points in asset classes have been reached than major shifts in capital in/outflows. As a reminder, Bank of America has practically made a career of dragging out the old "great rotation" canard every time there has been a, well, great rotation, out of bonds and into stocks for the past 4 years... only to always top (and bottom) tick said capital flows. Overnight it did it again, when it reported that based on EPFR data, bond funds just suffered the biggest weekly outflow in 2 years of some $10.3 billion matched by a $10.8 billion inflow into stock funds: the largest since March.
European shares remain higher, close to intraday highs, with the autos and travel & leisure sectors outperforming and basic resources, utilities underperforming. Meeting of finance officials to reach a deal over Greek aid ended in frustration, forcing leaders to call for an emergency summit for Monday. ECB plans to hold an emergency session of its Governing Council on Friday to discuss a deterioration in liquidity at Greek banks, three people familiar said. German airwave auction raises $5.7b to top 2010 sale. Bank of Japan leaves monetary policy unchanged as forecast. Shanghai Composite Index capped its worst weekly decline in seven years.
For the 2nd time in a month, China's Shanghai Composite entered a correction, plunging 10% from local highs as headlines of delayed IPOs and large-scale steel 'dumping' at a loss combined with global monetary policy fireworks and European event risks. The rest of the more highly sensitive and manic Chinese equity markets are also plunging with CHINEXT and CSI-300 down over 7% in the last month (and 17% from the highs in the case of the former). Chinese stocks have gone nowhere in a month...and are now in fact notably lower in June.
"The time it takes for the global regulatory community and central banking world to find a solution this time may be longer than the time where one episode of big illiquidity happens. Then the question is what to do. In my view the only thing that can be done at that time is that central banks should become again market makers of last resort."
This is the REAL issue with interest rates, NOT the economy.
"Both the US and China have a vital interest in reaching an understanding because the alternative is so unpalatable," Soros wrote in an article for the New York Review of Books, with the danger imminent if Chinese economic reforms fail forcing President Xi Jinping to "foster some external conflicts to keep the country united and maintain himself in power." These "conflicts" would present themselves in the form of a Sino-Russo alliance which could draw the entire world into war.
All those saying the Fed will never be able to raise rate are looking particularly smug this morning, because if the market needed a green light that despite all the constant posturing, pomp and rhetoric, the US economy is simply (never) ready for a rate hike, it got it late last night when Goldman is pushing back its forecast for the first Fed rate hike from September to December 2015 saying that "in large part this reflects the fact that seven FOMC participants are now projecting zero or one rate hike this year, a group that we believe includes Fed Chair Janet Yellen. We had viewed a clear signal for a September hike at the June meeting as close to a necessary condition for the FOMC to actually hike in September, but the committee did not lay that groundwork today."
"The Fed is allowing the [market] tail to wag the [monetary policy] dog... The Fed's credibility itself is at stake... they have backed themselves into a very tight corner... the tightest ever... The hope today is that the current era of easy monetary policy will have no deep economic ramifications. Such thinking, though, may prove to be naive... All retirees’ security is thus at risk when the massive overvaluation in fixed income and equity markets eventually rights itself."
When and what will break the chains on gold by those seemingly omnipotent forces that so assuredly keep its price in check? In essence, the belief is (and I expect for most honest and impartial analysts this is true) that because there is potentially significant downside risk to a global monetary system built upon a currency to which gold represents the proverbial kryptonite (we’ll discuss why), there are checks in place within the system, to ensure that kryptonite doesn’t become too potent. The architects of the existing system would have been foolish not to implement checks on gold.
Every Fed watcher’s favorite word these days is “lift-off”. As if the Fed’s first rate increase, whenever that comes to pass, is the ignition of some giant Saturn V rocket that will inexorably carry interest rates up, up, and away. Please. This is Narrative creation … really, Narrative abuse … of the first order. The next time you read or hear someone use the word “lift-off”, I’m begging you to remember Jim Mora’s classic press conference when he was asked about the Colts’ chances of making the play-offs, because it’s a dead ringer for what Janet Yellen is saying in her heart of hearts.
A rumour has been making its way around the blogosphere suggesting that gold coins are not available for purchase from retail outlets across Europe. This information is misleading and incorrect.