Global Economy

• Greece Bailout Referendum: They Voted ‘No’. Now What? (BBG)
• Varoufakis Quits as Greece Enters New Showdown With Europe (BBG)
• Merkel to Meet Hollande as Greece Told to Make Next Move (BBG)
• German line hardens after Greek referendum 'No' (Reuters)
• BOJ keeps rosy view of regional Japan, watching markets after Greek upset (Reuters)
• Oil falls on Greece vote, China stock market turmoil (Reuters)
• China Urges U.S.-Iran Compromise 36 Hours to Nuclear Deadline (BBG)
• U.S. and Iran: the unbearable awkwardness of defending your enemy (Reuters)

More than even the unfolding "chaos theory" pandemonium in Greece, market watchers were even more focused on whether or not China and the PBOC will succeed in rescuing its market from what is now a crash that threatens social stability in the world's most populous nation. And, at the open it did. The problem is that as the trading session progressed, the initial 8% surge in stocks faded as every bout of buying was roundly sold into until every other index but the benchmark Shanghai Composite turned sharply red.

Most leading indicators are warning; more trouble could be ahead...

Global central banks are afraid. Before Greece tried to stand up to the Troika, they were merely worried. Now it’s clear that no matter what they tell themselves and the world about the necessity or even righteousness of their monetary policies, liquidity can still disappear in an instant. Or at least, that’s what they should be thinking. The problem is that central banks have no plan B in the event of a massive liquidity event. In this cauldron of instability and lack of leadership, cash is the one remaining financial possession that Main Street can translate into goods, services and security. That’s why private banks want more control over it.

Notwithstanding everything that has been done since the Great Financial Crisis, it is not at all safe to go back in the water. Indeed danger of financial fragility is greater now than a year ago. The danger this time comes, interestingly, not so much from the banks as from the policymakers, who persist in using empirically discredited pre-crisis thinking as a guide to macroeconomic policy. The problem, in a nutshell, is that “a monetary policy focused on managing near-term inflation and output may do so at the cost of higher fluctuations in credit and asset prices than in the past.”

Assuming "growth" will fund all promised pensions and entitlements is magical thinking. We're going to have to do better than indulge our Spoiled Brat Economy mindset because "we wuz promised." What we were promised based on faulty assumptions, faulty projections and wishful thinking no longer matters.

America’s grand strategy, its long-term blueprint for advancing national interests and countering major adversaries, is in total disarray. Top officials lurch from crisis to crisis, improvising strategies as they go, but rarely pursuing a consistent set of policies. Some blame this indecisiveness on a lack of resolve at the White House, but the real reason lies deeper. It lurks in a disagreement among foreign policy elites over whether Russia or China constitutes America’s principal great-power adversary.

When it comes to Europe, Greece lost the blame game, and just like the Ukraine civil war last year, became an unwitting catalyst greenlighting Germany's concession to ECB QE, this time it may be Greece that launches the next step in the ECB's master plan: not just QE but more QE. This is precisely what Goldman's Franceso Garzarelli, co-head of macro and markets research, admitted earlier today in an interview on Bloomberg TV, when he said that the ECB "will have to go big" if the situation in Greece worsens and leads to wider peripheral bond yield spreads.

The oil price collapse of 2014-2015 began one year ago this month (Figure 1).  The world crossed a boundary in which prices are not only lower now but will probably remain lower for some time. It represents a phase change like when water turns into ice: the composition is the same as before but the physical state and governing laws are different. The market must balance before things get better and prices improve. That can only happen if production falls and demand increases. That will take time. The most likely case is that oil prices will decrease in the second half of 2015 and that financial distress to all oil producers will increase. The hope and expectation that the worst is over will fade as the new reality of prolonged low oil prices is reluctantly accepted.

Investors are losing money, which strikes us as largely inevitable with asset prices where they are and economic growth and profits on a downward trajectory. Losing the least amount of money may be the best source of success this year.

Cheap, easy credit has created moral hazard and nurtured magical thinking throughout the global economy.

Risk-taking in financial markets has gone on for too long. And the illusion that markets will remain liquid under stress has been too pervasive. But the likelihood of turbulence will increase further if current extraordinary conditions are spun out. The more one stretches an elastic band, the more violently it snaps back. Restoring more normal conditions will also be essential for facing the next recession, which will no doubt materialise at some point. Of what use is a gun with no bullets left?

The next round of the great crisis is here. 2008 was just A Crisis… we've just begun THE Crisis.

All banks and the Greek stock exchange are closed today. Greek citizens cued in long lines at ATMs or cash machines over the weekend and a run on the banks left most ATMs empty. There is a €60 limit on withdrawals from cash machines under strict capital controls.