Wednesday, December 10, 2014

OPA! Another Greek Black Swan?

Sara Sjolin of MarketWatch reports, Greece’s stock market just suffered its worst collapse ever:
Greece’s Athex Composite tanked almost 13% Tuesday — the biggest drop for the index on record, according to FactSet. The renewed jitters came after the government, in a surprise move late Monday, said it would bring forward presidential elections to Dec. 17, potentially, setting the scene for snap elections in early 2015.

Here’s why that’s important: Far-left party Syriza currently is leading the early polls and it seems likely they would win a snap election. This is how to think about Syriza:
  • The party has been calling for an end to austerity in Greece
  • Has been campaigning for market-unfriendly measures
  • Is firmly against the international bailout program that helped the country avoid a default during the depths of its financial crisis.
How bad is Greece’s Tuesday collapse? It’s worse than the 9.7% drop the market saw Oct. 24, 2010, at the peak of Greek debt worries. The drop also eclipses the 10% fall Greek markets saw in 1989 during a bout of political turmoil (click on image).

“If there is uncertainty about Greece’s political commitment to the bailout program, it seems likely that the QE opposition within the ECB has some temporary tailwinds,” analysts at RBC Capital Markets said in a note. “If that is the case, the [ECB] January meeting (due on 22 January) could be a quite contentious one, and the ECB might choose to wait until after the elections in Greece to decide further measures.”

With Greece’s problems once again in the limelight, investors all across Europe. the Stoxx Europe 600 index slumped 2.3%, while Germany’s DAX 30 index fell 2.2% and France’s CAC 40 index gave up 2.5%.

Greek government bond yields jumped 75 basis point to 7.90%, according to electronic trading platform Tradeweb.
Reuters reports that Japanese stocks tumbled to a more than one-week low on Wednesday morning, as political uncertainty in Greece spooked world markets already under strain from a slide in crude oil prices and worries over global growth:
The resulting flight to safety drove the yen higher and took a toll on exporters.

The Nikkei benchmark dropped 1.5 percent to 17,542.67 in mid-morning trade after falling to as low as 17,518.05 earlier, the lowest since Dec. 2.

Traders said the benchmark should be supported by its 25-day moving average of 17,378 for now on hopes that the Bank Of Japan would buy exchange traded funds, or ETFs, when the market falls.

On Monday and Tuesday, the central bank bought a combined 74.8 billion yen worth of ETFs and 1.3 billion yen worth J-REITs.

Brent crude was down 1.6 percent to $65.78 during Asian trade after hitting a fresh five-year low of $65.29 the previous day. Oil prices have been under pressure amid a massive supply glut, after OPEC decided against an output cut.

European political woes added to the anxiety, after the government in Athens brought forward a presidential vote that heightened uncertainty over the country's transition out of its IMF/EU bailout.

"Market euphoria over the recent positive news is fading out for now as investors shift to risk-averse from risk-taking," said Hiroyuki Nakai, chief strategist at Tokai Tokyo Research Center.

The Nikkei has gained 12 percent since the BOJ's surprise easing on Oct. 31.

"People started to look at the negative effect that weak oil prices would have on developers in the world and how that would affect the global economy," Nakai said.

China's latest inflation report did little to help sentiment, with data showing its annual consumer inflation eased to a five-year low of 1.4 percent in November from 1.6 percent in October.
Indeed, China's inflation hit a five-year low in November, stoking expectations that Beijing will move more aggressively to head off the risk of deflation in a slowing economy, which put fresh life into soaring share markets after a reversal on Tuesday.

When I recently discussed the biggest risks for stocks in 2015, I didn't explicitly mention Greece but I should have as I warned my readers after visiting the epicenter of the euro crisis back in September, political uncertainty remains the darkest cloud hanging over Greece.

In that long comment, I painstakingly went over how deflation -- mainly in the form of much lower wages and pension benefits and lower rental rates -- is ravaging that country's economy. I also warned that the imbeciles that keep imposing austerity without committing to growth are fanning the flames of political extremism and this will lead to even more political uncertainty.

And it's not just Greece. The eurozone's deflation crisis is picking up steam and risks spreading throughout the world and might even eventually hit America. Most investors are either ignoring or completely underestimating the risks of deflation, and this will come back to haunt them.

As far as the plunge in oil prices, I am tired of listening to imbeciles on television who are saying it's only an "oversupply issue" and "unambiguously good" for the global economy. Really? Wake up, the plunge in oil prices is a harbinger of much worse to come which is why the deflationary boom everyone is salivating about can easily turn into a deflationary bust!

As far as the Fed, Sober Look is absolutely right, its policy trajectory is tied to the global recovery:
The latest US payrolls report presents a challenge for the Fed. As discussed back in April (see post), US labor markets are continuing to heal, suggesting that the rate "normalization" should be a serious consideration for the central bank. However the recent deterioration in commodities, especially energy, is "importing" global disinflation to the US (see post). In particular, the Saudi commitment to retake lost market share has sent shock waves through the oil markets (see post). 
We live in interesting times. Just yesterday, I ran into Jonathan Nitzan at Sam Noumoff's funeral and we discussed his latest research with Shimson Bichler on why it's still about oil. We spoke of how quantitative easing has exacerbated income inequality and how there is a "systemic crisis" among capitalists that risks fueling political uncertainty everywhere, not just Greece and Europe.

At one point, I started discussing how CEO pay is spinning out of control and how companies are using share buybacks to enrich their overpaid senior executives. Jonathan reminded me that this is also enriching global capitalists and referred me to an excellent Financial Times article, Buybacks: Money Well Spent?

I leave you with some insights from friends of mine in Greece. First,  "Mr. Nick", a Greek Canadian lawyer who has been living off and on in Athens these last few years shared these thoughts with me on the political uncertainty:
Greece…Christmas coming up, Greeks aren’t really in a festive mood.

So the government decided to spice it up and have the hottest political turmoil in the last 2 years during this holiday period.

Τι μπουζουκια (bouzoulia) and other malakies (they can’t afford it anymore anyways), so its going to be all about politics.

What seems to be a big gamble from the PM, isn’t really one. He just fast forwarded the process of a scenario that was is the making for a long time now.

The issue in hand: get 180 MP's to vote for Stavros Dimas, the presidential candidate, from the center right, who recently completed a successful mild political career on the national and european level.
The candidate presented has nothing controversial in his background. The PM didn’t even try proposing someone from the left wing to ease Syriza's ear in the process.

No, Samaras gave Tsipras a great reason not to vote for the presidential candidate; he’s coming from the right. But the political game being played is a hole lot bigger.

Syriza is leading in polls for over 6 months now. The current President mandate is finishing in spring 2015. Syriza have been claiming for a long time they won’t back any candidate. They want elections.

Troika's bailout program was finishing at the end of the year and are in talks with government to assess how the next day will go.

With elections on the horizon, negotiations about how to send Greece to the markets in 2015 are withstanding, Troika is pulling on the breaks.

Greece’s program got a 2 months extension, so end of Feb. Samaras is hoping to gather 180 MP’s (difficult task, some will have to come from either Democratic left or Golden Dawn) to keep himself on power…Otherwise, elections will be called before New Year’s Eve. Χρονια πολλα!!

Even if Syriza is leading in the polls, they have been widely criticised for having an inconsistent message.

Samaras hopes to scare voters. Tsipras will criticise the government, blame them for the crisis, etc… and avoid as much as he can to talk about his plan for the next day.

New small parties will emerge. Old parties will die. Syriza or not, it will be a new day again in Greek politics the day after the election.

A new coalition will have to emerge, led by Tsipras or Samaras. Hopefully a new government will be in place by Februry, just in time to resume talks with Troika.

Fun times in Greek politics. One sure thing, Greeks love being the center of attention. Not for the right reasons you might say…But remember, even bad publicity is good publicity.
Another Greek Canadian friend of mine, who now lives in Greece, also shared his thoughts with me:
I don't agree with your friend Mr. Nick. Try getting a table Friday or Saturday night at the bouzoukia in Athens without reservations. Before the crisis, bouzoukia were open 5 or 6 days a week, now they are open 3 days (Thu., Friday and Saturday). No one in Patra was talking about the presidential election, they were talking about if Saki Rouva should be called an actor or not! Big problems, Greeks don't care anymore, government saved them by passing a law, that anyone who owes to the government can pay their debts in 100 monthly payments without interest.... Greeks have the attitude live now and who cares about later. That's the mentality that bankrupted this country and the mentality of not paying their debts (loans). Banks don't want to repossess cars, houses. They have no value in today's market.
I think Mr. Nick agrees with my other friend in Greece on the attitudes amongst many Greeks. Wish I was with him in Athens, enjoying dinner and drinks at Kolonaki. Instead, I'm freezing my butt off in Montreal!

Below, Marketfield Asset Management CEO Michael Shaoul and Bloomberg’s Hans Nichols discuss Greece Prime Minister Antonis Samaras calls for snap elections in December. They speak with Bloomberg’s Tom Keene, Scarlet Fu and Brendan Greeley on “Bloomberg Surveillance.”

Also, Bloomberg’s Joe Weisenthal explains how the Greek economy and politics have slowly crept back into play for Europe and why investors need to watch what’s happening in the country. He speaks on “In The Loop.”

Lastly, Francesco Filia, CEO and CIO of Fasanara Capital, says the euro currency is "unsustainable" and will be "dismantled" in two or three years.

I don't know if he's right about the dismantling of the euro but as I wrote in my comment on the mighty greenback, I remain short euro, short yen and short commodity currencies, especially the loonie now that Canada's crisis is just beginning.



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