Moral Hazard

Losing Control

Markets are beginning to signal that policy makers are losing control.  Many second-order-effects of the unprecedented and experimental global actions taken since the 2008 crisis are beginning to manifest.  There are always causes and effects that develop; but they do so at different speeds. Many actions in recent years have prioritized 'benefits today' over 'consequences tomorrow'.  'Tomorrow' is approaching ever more quickly. There is no 'free lunch'.

US Stock Futures Rebound On "Hope" Although China Has Big Trouble As Market Begins To Freeze

When it comes to Greece, and Europe in general, "hope" continues to remain the driving strategy. As Bloomberg's Richard Breslow summarizes this morning, "if you were looking for a word to describe the general feeling of equity markets today, you might well pick hopeful. U.S. equity futures opened higher and have been up all day. European bourses opened cautiously     higher as they await word, any word, from the European finance ministers or more importantly, Chancellor Merkel. Equity markets will continue to be very reactive to European headlines, but so far, no news has been taken as a reason for hope." Which incidentally, has been the general investment case for the past 6 years: "hope" that central banks know what they are doing.

Tumbling Futures Rebound After Varoufakis Resignation; Most China Stocks Drop Despite Massive Intervention

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.

A "No" Victory Appears Probable: What Happens Next According To Deutsche Bank

  • N1 – Soft deal: The most unlikely scenario is that the euro-area partners offer a much softer programme to Greece.
  • N2 – Default-and-stay: Moderately less unlikely is a scenario where Greece defaults but stays in the euro thanks to a direct recapitalisation of Greek banks by the euro-area partners, with the Greek government using only domestic resources for the country’s fiscal needs.
  • N3 – New deal: The third scenario is one in which the rising economic and political cost of a closed banking system results in the Syriza government being replaced by a new government of national unity and a new deal with creditors being reached.
  • N4 – Grexit: In our view, Grexit and Scenario N3 are the most likely – with about equal probabilities.

Good On You, Alexis Tsipras (Part 1)

Late Friday night a solid blow was struck for sound money, free markets and limited government by a most unlikely force. Namely, the hard core statist and crypto-Marxist prime minister of Greece, Alexis Tsipras. He has now set in motion a cascade of disruption that will shake the corrupt status quo to its very foundations.

The Ultimate Moral Hazard: 70% of Greek Mortgages Are In Default

Just as we warned earlier in the year, total uncertainty about the future of Greece has enabled a growing sense of moral hazard as "if the nation doesn't pay its debt, why should we" sweeps across the troubled nation. As Greeks' tax remittances to the government, which were almost non-existent to begin with, have ground to a halt, so The FT reports, so-called 'strategic defaults' have become a way of life among Greece's formerly affluent middle-class..."I still owe money on the car and motorboat I can’t afford to use. Even a holiday loan I’d forgotten about...I’m living with my mother looking for work and waiting for the bank to come up with another restructuring offer."

Should Students Voluntarily Default On $1.3 Trillion In Debt?

"Over the last couple of decades, we have been engaged in an enormous national experiment, taking impressionable and often ignorant teenagers and young adults and seeing just how much student loan debt they can handle.There is a practical question at hand for people who feel as if they are in over their heads: Is it ever a good idea to try to beat the system by openly defying it and refusing to repay the debt that you willingly took on?"

IMF Says It Will Continue Lending To Ukraine Even After A Default, And Why This Is Bad News For Greek Gold

As we enter Sunday and what may well be the last possibility to get deal done before the "accidental" Grexit scenario is put in play, we thought our Greek readers would be interested to learn that while Lagarde's "apolitical" IMF is digging in tooth and nail against giving Greece even the smallest amount of breathing room, the equivalent of half an our of a typical daily Fed POMO notional amount, yesterday the same Lagarde said that the IMF "could lend to Ukraine even if Ukraine determines it cannot service its debt."

The Definition Of An Unfree Market

"Only if the economy is powered by the marginal borrower who will no longer borrow after a 0.25% hike, does it make sense to believe a hike will derail the economy.  Comparisons to 1937, where a hike pushed the US into recession, are incomparable and groundless.  On the other hand, maybe the FOMC is worried that the ‘no free lunch’ concept makes them suspicious of the possibility of a meaningfully deleterious market reaction which could have a negative impact on the broader economy.  However, under this logic, delaying a hike would only exacerbate such a response."

Portugal's "Left-Wing" Forces Threaten Troika Revolt

"Europe faces the risk of a second revolt by Left-wing forces in the South after Portugal’s Socialist Party vowed to defy austerity demands from the country’s creditors and block any further sackings of public officials", The Telegraph reports. In sum, the reason why concessions (any concessions) to the Greeks are a non-starter in Athens' negotiations with creditors is that the IMF, the European Commission, and most especially Germany, want to send a clear message to any other 'leftist radicals' who may be thinking about using the "one move and the idea of EMU indissolubility gets it" routine as a way to negotiate for breathing room on austerity pledges, will get exactly nowhere and will have a very unpleasant time on the way.