Past: Scarily Prescient Analysis of @Grexit meets Present: Analysis of the Goldman Hedge meets Future: Goldman DisintermediationSubmitted by Reggie Middleton on 02/20/2015 15:12 -0500
A literal Tour de Force, likely the most indepth, practical analysis of the Grexit situation as you will ever read. This is why I like blogging... You can never find stuff like this in the mainstream media.
With reports of near mutiny in Syriza's ranks amid the back-bending they have done to try to meet Germany's demands - only to be abjectly denied by a non-ultimatum-setting Schaeuble - it is perhaps time to prepare (ahead of tomorrow's apparent "G" day) for the possibility that Greece creates a systemic event. As Goldman recently warned, there are aspects that leave us more worried than we have been since the start of the Euro area crisis with a tight schedule to avert a disorderly outcome. Risk markets so far have traded in a resilient (well managed) manner but risks of an accident remain and here is how Goldman suggests you hedge that exposure.
A couple of days ago a Café member sent me some of the latest commentary by Martin Armstrong of Armstrong Economics, formally of Princeton Economics International. As you will read, he continues his rant against "the gold promoters," a rant that seemed more than vaguely familiar.
What an understatement!
Feel like trading FX has become next to impossible, with massive, gaping bid-ask spreads, strange "tractor beams", completely unexpected stop loss runs, and - of course - central banks behind every corner? Don't worry you are not alone. According to Bloomberg, that's precisely the case as "it hasn’t been this difficult to trade currencies since the collapse of Lehman Brothers Holdings Inc. shook markets worldwide."As for the reason why, well: take a guess.
Since central banks are there 24/7 and on site to intervene and "eliminate" Greek leverage at any flashing red headline, it is up to Greece to create a narrative that the European leverage in turn is also weaker, which means to project, whether based on truth or otherwise, that Greek bank deposit outflows are slowing. That is precisely what Reuters reported moments ago when it reported, citing Greek bankers, that deposit outflows have slowed so far in February after a sharp increase estimated for a month earlier, but savers are still uneasy over the new leftist government's standoff with its official lenders.
- if rates go negative, the U.S. Treasury Department’s Bureau of Engraving and Printing will likely be called upon to print a lot more currency as individuals and small businesses substitute cash for at least some of their bank balances.
- As interest rates go more negative, market participants will have increasing incentives to make payments quickly and to receive payments in forms that can be collected slowly
- if interest rates go negative, the incentives reverse: people receiving payments will prefer checks (which can be held back from collection) to electronic transfers
- we may see an epochal outburst of socially unproductive—even if individually beneficial—financial innovation
With one of the world’s leading dry bulk shipping companies, Copenhagen-based D/S Norden, having made huge losses for the last 2 years and expected to report dramatic losses in 2014 also, it is hardly surprising that the smaller bulk shipping firms are struggling as The Baltic Dry Index collapses ever closer to record all-time lows. As Reuters reports, privately-owned shipping company Copenship has filed for bankruptcy in Copenhagen after losses in the dry bulk market, with the CEO exclaiming, "we have reached a point where there is not more to do." We suspect, given the crash in shipping fees, that this is the first of many...
Just what the market had hoped would not happen...
*ECB SAYS IT LIFTS WAIVER ON GREEK GOVERNMENT DEBT AS COLLATERAL
*ECB SAYS IT CAN'T ASSUME SUCCESSFUL CONCLUSION OF GREECE REVIEW
What this means simply is that since Greek banks are now unable to pledge Greek bonds as collateral and fund themselves, and liquidity is about to evaporate, the ECB has effectively just given a green light for Greek bank runs, as suddenly it has removed, both mathematically but worse politically, a key support pillar from underneath the already bailed out Greek banking system, (or merely a negotiating move to let Greece see just what kind of chaos this will create ahead of the big D-Day on Feb 25th when ELA could be withdrawn).
Even if you think you know how competitive devaluation works, this primer is worth it because parts 2-4 of this series will blow your socks off leaving you wondering, "Damn, why didn't I tink of that?"
Those curious to learn why Greece is the only country excluded form the ECB' QE (for now), will not find any additional information in the ECB's supplement on its asset purchase program. Neither will they learn why something that is in effect monetary financing, and is prohibited by Article 123, is not monetary financing. However, they will learn that the proceeds from the ECB's money printing can be used "to buy other assets and extend credit to the real economy." The ECB adds that "In both cases, this contributes to an easing of financial conditions." Actually the only thing it will contribute to is making the world's billionaires into the world's trillionaires.
It will be even more disruptive if some among them decide that the only reason for the failure of their collective delusion of grandeur is that they have not been deluded enough and that even more wild-eyed palliatives are therefore needed. Disruption on such a scale is not what the budding entrepreneur wants to contend with as he contemplates whether to risk both his capital and his reputation in launching or expanding a business, in ordering new equipment, or hiring new staff and so fostering a meaningful recovery. Disruption on such a scale is not something we should wish to inflict upon a system we have been both unable and unwilling to fully repair. Either way – damned if they do, damned if they don’t – disruption seems to be what we will get in the months ahead.
Every couple of years the same identical European drill repeats itself: 1) Greece makes loud noises as it approaches an election, 2) Europe says it couldn't care what the outcome is and that Greece should stay in the Euro but if it exits it won't be a disaster, 3) the ECB reminds everyone of the lie that it is not preparing for Plan B (it is) despite holding on to over €100 billion in "credibility-crushing" Greek bonds, 4) panicking Greek banks say the deposit outflow situation is completely under control (adding that "The Bank of Greece along with the European Central Bank are monitoring closely the developments and intervene whenever this is necessary," which is code word for far more familiar, five-letter word), and meanwhile 5) all non-Greek banks quietly start preparing for the worst case scenario. So far this time around, we had everything but step "5". We do now.
As investors and market participants become increasingly aware of the regulatory failures that allowed for manipulation of LIBOR, FOREX, municipal bond bidding and certain commodities markets, regulatory sources are increasingly expressing concern that they have paid too little attention to potential manipulations of an arguably larger, more systemically important and less regulated market – the CDS market as self-governed, through ‘regulatory license’, by the International Swaps and Derivatives Association (ISDA).
Despite the authorities' best efforts to keep everything orderly, we know how this global Game of Geopolitical Tetris ends: "Players lose a typical game of Tetris when they can no longer keep up with the increasing speed, and the Tetriminos stack up to the top of the playing field. This is commonly referred to as topping out."
"I’m tired of being outraged!"
While the adverse impact on the Russian banking system has been mostly confined to the upper class - since there is virtually no middle class in the country to speak of - the second cold war of words, which rapidly morphed into a very hot financial war, is about to hit the very ordinary Russian on the street, because as Russia's Vedomosti reports, citing vegetable producer Belaya Dacha, juice maker Sady Pridoniya and others, Russian suppliers are suspending food shipments to stores because of unpredictable FX movements. And it is about to get worse: very soon Russians may have to live without imported alcohol because at least on supplier of offshore booze, Simple, halted shipments in "a two-day pause” to see what happens with the ruble, Vedomosti reports.