Here Comes "Prexit": Puerto Rico In "Death Spiral", Debts Are "Not Payable", Governor Refuses To "Kick The Can"Submitted by Tyler Durden on 06/28/2015 21:57 -0400
As we noted last night, for a whole lot of time nothing at all can happen under the guise of "containment"... and then everything happens all at once. Because not even two full days after Greece activated the "Grexit" emergency protocol, leading to capital controls, and a frozen banking system and stock market, moments ago the NYT reported that the default wave has jumped the Atlantic and has hit Puerto Rico whose governor Alejandro García Padilla, saying he needs to pull the island out of a “death spiral,” has concluded that the commonwealth cannot pay its roughly $72 billion in debts, an admission that will probably have wide-reaching financial repercussions.
As we previously noted, liquidity is there when you don't need it, and it promptly disappears once it is in demand. Consider it "cocktease capitalism." If liquidity lasts longer than 4 hours, call the CFTC because you may be experiencing a spoof. Right now, the ultimate spoof is setting up as the credit default swap market collapses, and a global bond market margin call is just around the corner.
"The growing size of the asset management industry may have increased the risk of liquidity illusion: market liquidity seems to be ample in normal times, but vanishes quickly during market stress. This liquidity may be artificial and less robust in the event of market turbulence." So what's the solution? Unfortunately there isn't one. Instead, fund managers are simply resorting to emergency liquidity lines with banks which is just another manifestation of using cheap cash to delay the Schumpeterian endgame scenario which, if ever allowed to play out, will finally purge capital markets, reset the system, and free the world from the nefarious clutches of central bankers gone mad with delusions of Keynesian grandeur.
As we await the final capitulation by the ECB, EU and IMF to provide Greece another bailout (or not), we have assembled a list of reading for you that has ABSOLUTELY NOTHING to do with Greece.
"You're cruisin' for a bruisin'." - Kenickie, Quote From "Grease"
Today will almost certainly be the busiest trading day of the year, as the Russell indexes go through their annual rebalancing/reconstitution. But, as ConvergEx's Nick Colas notes, Friday’s close will be the end of a trade that began almost 2 months ago, as traders began handicapping which equities would be included for the first time or swapped between various Russell indices. Since the beginning of May, for example, the stocks that will be added to the Russell 2000 are up 11%, and those being deleted from the same index are down 2% over the same time period. In short, for one day – and this is the day - every U.S. equity market participant, no matter what their investment mandate, needs to think like a trader. Throw in a little Greek drama going into the weekend, and it could be quite a day...
“Any of these events would likely trigger asset price volatility [and] attempts by institutional investors to redeem illiquid corporate bonds in crisis circumstances would amplify volatility.”
2/2 If more respected investors had warned about the market in ’07, we might have avoided the crisis in ’08.
— Carl Icahn (@Carl_C_Icahn) June 24, 2015
"We've won a few months' respite but the problem will come back," France's Marine Le Pen said of Greece... "Today we're talking about Grexit, tomorrow it will be Brexit, and the day after tomorrow it will be Frexit." We shouldn’t need Le Pen to voice the obvious. But that no other ‘leader’, save for Nigel Farage, puts it into these crystal clear terms, does tell us a lot about all other European leaders. And unfortunately that includes Alexis Tsipras. Though we hold out some hope for him yet. Here’s hoping he will not sign that deal, whichever it may be in the end, and thereby set in motion the disintegration of the unholy Union.
“The real problem is the following: we have paleolithic emotions; medieval institutions; and god-like technology. And it is terrifically dangerous, and it is now approaching a point of crisis overall.”
“We ran the model forward to the year 2040, along a business-as-usual trajectory based on ‘do-nothing’ trends - that is, without any feedback loops that would change the underlying trend. The results show that based on plausible climate trends, and a total failure to change course, the global food supply system would face catastrophic losses, and an unprecedented epidemic of food riots. In this scenario, global society essentially collapses as food production falls permanently short of consumption.”
A Greek exit from the euro would change everything. The greatest change being simply doubt and fear regarding the outlook for other vulnerable EU nations, EU banks and the EU banking and financial system. We discuss short and long term considerations, best and case outcomes, and wealth preservation strategies.
We decided to do a little research to find out the size of different investable asset classes globally, to try to get some color on the money flows in this extraordinary period. The data is from various dates from 2013 to 2014, but the differences don’t matter much.
The troika of Greek creditors has gone into full-frontal morals-be-damned attack mode. This has turned into the kind of economic warfare one would expect to see between sworn and lethal enemies, that the US would gladly use against Russia for instance, but not between partners in a union founded on principles based entirely and exclusively on being mutually beneficial to everyone involved. And all EU nations should understand by now that this is not about Greece anymore, it’s about all of them.
"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."
Is Goldman right that the Bundesbank really is sabotaging Draghi's QE effort by "under-extending" its bond purchases? Or...
Is this a warning From Draghi's mouthpiece to Weidmann to stop being stingy with the bond buying?