Friday, January 30, 2015

Greece’s Do-Or-Die Moment?

Shawn Tully of Fortune reports on Greece’s do-or-die moment:
If Greece’s newly elected government sticks to its sloganeering stance, it will probably exit the Euro. And that could snowball into an economic disaster.

It’s the showdown the world’s been dreading. On January 25, the ultra-leftist Syriza party won an overwhelming victory in the Greek parliamentary elections, defeating center-right New Democracy and ousting its leader, prime minister Antonis Samaras.

Syriza’s chief and Greece’s new prime minister, Alexis Tsipras, is brazenly defying the European nations and institutions that support its stricken economy. Tsipras lost no time declaring that his triumph marks the moment when Greece “leaves behind catastrophic austerity … and five years of humiliation and suffering.”

Tsipras blames Greece’s descent on the slate of tough, even brutal, reforms that its EU neighbors demanded in exchange for gigantic bailouts. He’s pledging two major shifts in policy that, if enacted, will infuriate his European neighbors. First, Tsipras denies that Greece has any obligation to enact the liberalization measures that its creditors—which include the International Monetary Fund, the European Commission, and the European Central Bank, known as the “Troika”—negotiated with two previous governments. “The Troika is dead!” Tsipras announced in his post-election address.

Second, Tsipras is demanding a substantial reduction in the roughly $270 billion in debt that Greece owes to the EU nations. Those funds are dispensed through the European Stabilization Mechanism, an EU organization that gets its money directly from Eurozone members such as France, Germany, and Spain. It’s designed to provide a firewall to protect the Euro. Tsipras contends that his Eurozone partners should suffer big losses, paid for by their taxpayers, for the benefit of Greece.

The Eurozone is witnessing an unprecedented display of hubris, the undoing of ancient Greek warriors. Rather than demanding debt relief the usual way, by promising deeper reforms, Tsipras has pledged to renege on Greece’s debts while scuttling all commitments to unshackle its economy.

“It’s a surreal situation,” marvels Yannis Ioannides, an economist at Tufts University. “The new government is promising to do things with no money to do them. What does it mean for a government to say we don’t recognize the agreements signed by the previous government?”

If the new government sticks to its sloganeering stance, Greece—probably through a stumbling accident—will exit the Euro. Given its policies, a “Grexit” would unleash a wave of hyperinflation unseen in Europe for decades. But it’s not at all certain that Tsipras will let ideology lead to disaster. Greece depends on the EU and European Central Bank for the funds it needs to keep running—and hopefully, that reality will temper Tsipras’ demands. The crux of Greece’s problem isn’t that it has embraced the reforms demanded by its creditors. In fact, the nation has skirted those reforms and, in the process, done far too little to modernize its markets.

To be sure, Greece has made progress on the fiscal side. It has substantially reduced government spending and lowered once-yawning budget deficits to the point where it now generates a “primary surplus,” meaning that its revenues exceed expenses before covering interest. That’s a big improvement, since the government is no longer forced to borrow heavily simply to make interest payments (which, as we’ll see, are manageable due to a 2012 restructuring deal with its EU creditors}.

Yet the shrinkage in Greece’s super-sized public sector did nothing to lessen the suffering of its citizens. In moving towards a balanced budget, the Greek government has substantially lowered wages and pensions, and companies followed suit. But shrinking pay failed to translate into a like decline in prices, as it would have in a competitive economy. Instead, the prices of groceries and drugs—and the overall cost of living—fell far less than the decline in incomes. That painful combination means that Greeks increasingly buy less and less of anything. To make matters worse, Greece imports an usually high proportion of the goods it consumes, from cars to PCs, and the prices of foreign products remained steady while Greek incomes shriveled.

Why did the cost of local goods stay so high during the downturn? It’s the legacy of over-regulation that’s governed Greek products and professions for decades, rules specifically designed to stifle competition. “Every aspect of economic life is highly regulated in Greece,” notes Costas Meghir, an economist at Yale University.

Greek law mandates that pharmacies generate minimum profits of 15% and grants them a monopoly on the sale of non-prescription drugs and even baby formula. That regime effectively prevents lower-cost retailers from giving consumers a better deal. Licenses for truck drivers cost over $600,000, and no new ones have been issued since the 1970s. A lawyer practicing in Athens lacks the authority to serve clients in Thessaloniki. Foreign cruise lines are effectively barred from starting and ending journeys in Greece. That’s driven the big operators to run their tours from Turkey and Israel instead. Companies are banned from laying off more than 4% of their workforces without receiving government permission that’s predictably hard to obtain.

For many years, those rules prevented Greece from emerging as a force in technology and manufacturing, despite its hard-working, well-educated workforce. Its output-per-worker is just 75% that of its European neighbors, the same meager level as at the start of the financial crisis. Under an agreement with its EU creditors, Greece is obligated to achieve a long list of market-opening reforms. That deal is known as the “Mnemonio,” the Greek word for memorandum. Even the previous center-right government did not do enough to comply with the Mnemonio. It masked the lack of progress with half-measures, laws that were passed but never implemented, and requests for more time.

“The crisis created chances for structural reforms, such as the opening of closed professions, tax reform, and privatizations to increase competition,” says Nicholas Economides, a professor of economics at NYU’s Stern School of Business. Even the previous government, he says, “tried not to change much.” Following a poor showing in the European parliamentary elections last year, it fired reformist ministers and retreated on plans to trim the government’s bloated workforce.

So what’s next for Greece? Here are two possible scenarios. The first is the “Greek tragedy” path, which could proceed from a number of causes—the many possibilities are in themselves a major cause for concern. The second is the pragmatic, compromise approach, which could allow Greece to remain in the Eurozone.

What could cause the Greek tragedy? If Tsipras continues to demand that Greece renege on its debts, dump the reform agenda, or both, Greece is headed for disaster. In the next several months, Greece will need to confirm past commitments or repay loans and retire bonds to secure continued funding from the EU and ECB, funding it can’t do without. Defying its creditors at any of these three junctures could seal its fate. The IMF was scheduled to give Greece $8 billion in fresh funding in September. But because Greece is lagging on its reform agenda, the IMF hasn’t agreed to make the payment. Yet the new government is counting on that money, and over $2.5 billion more from the IMF in 2015, to make its budget work. It’s also planning to spend an extra $22 billion or so to hire more government workers and raise their pensions and pay. But it’s highly unlikely that the IMF will provide that money if Greece ditches the reform agreement.

Greece faces a second, crucial showdown with the European Central Bank. The nation’s banks have suffered large withdrawals of cash in recent years, a trend that accelerated just before the recent elections. On January 22, the ECB advanced Greece’s central bank around $45 billion in emergency funding to supply liquidity to the banks it regulates—in addition to the more than $60 billion it had previously given to those banks. Greece agreed to repay about $8 billion to the ECB in July. Tsipras now claims Greece won’t make the payment. “The ECB operates under extremely strict rules,” says Economides. “It’s likely the ECB would withdraw all of its support for the banks if Greece refuses to pay.”

The third obstacle is Syriza’s demand that the EU nations forgive a big chunk of its debt. “That’s totally unfeasible, insane,” says Economides. “No politician will say to their taxpayers, ‘You need to pay for the Greeks!’”

If Greece defies the EU and ECB over any of these commitments, Tsipras will lack the funds to keep the government running, or, in the latter two cases, the EU will remove the essential support of the ECB, causing a credit crisis. In that case, Greece would need to flee the Euro and reinstate the Drachma. It would then be free to print new currency to pay its debts and fund its vision of a still-bigger government. That’s a recipe for rampant inflation.

None of this has to happen. The interest rate on Greek debt is just 1.82%, and it isn’t obligated to pay any interest for between 13 and 25 years on 80% of its borrowings. If its creditor nations agreed to extend the maturities to 75 years, Greece could easily handle its current debt load. It might be enough for Syriza to withdraw its pledge to roll back previous reforms and to honor its debts in exchange for those longer maturities. “I think they will make a u-turn,” says Economides. “The money they need is so gigantic. They will not have a choice.”

The EU has long been girding for a Greek departure from the Euro. The new government will not succeed in blackmailing its neighbors into granting more bailouts just to keep Greece in the club. Europe’s mainstream governments dread making a special deal with Greece a lot more than a Grexit. If the Troika caves, they’ll hand a powerful weapon to radical, anti-bailout parties that rail against the cost and constraints of the Eurozone and EU.

In theory, pragmatism should prevail. Then again, just look at all the ways in which things could go horribly wrong. The sheer number of them is scary indeed.
I thank professor Nicholas Economides of NYU's Stern School of Business for sending me this excellent article which covers what's at stake following the political earthquake that just hit Greece and the eurozone.

But even this article made some huge errors, especially when referring to "the shrinkage in Greece’s super-sized public sector." Are you kidding me? Greeks working their butts off in the private sector would laugh out loud, or more likely cry, reading such utter nonsense and for good reason.

The sad reality is that over 50% of all jobs in Greece are still directly or indirectly related to its bloated public sector. The proportion of civil servants in the working population easily ranks among the highest in the world, if not the highest. I often joke that Greece has almost as many civil servants as China, and trust me, I'm not far off!

Yes, troika drastically cut pensions and wages in the public sector but they did the exact same thing in the private sector and that's where most of the savage job cuts took place. When you read about Greece's sky-high unemployment, keep in mind that it's almost all due to cuts in the private sector. Also, many pensions and wages in the public sector needed to be drastically cut because they were ridiculously lavish to begin with, a by-product of decades of profligacy from Greece's two main parties -- PASOK and New Democracy.

And now that Syriza is in power, what did it do? It hired a bunch of of public sector workers that were let go, proposed to raise the minimum wage to 751 euros a month, added a 13th month to pensions despite the system being at a breaking point, announced the cancellation of the privatization of Piraeus Port Authority (that didn't fly too well with the Chinese who let them have it), and that's not all.

Greece's new left-wing government will cancel plans to sell the state natural gas utility and is firmly opposed to a Canadian gold mine that is among the biggest foreign investment projects in the country, the energy minister told Reuters on Friday.

If I was André Bourbonnais, PSP Investments' new CEO, I'd be very concerned with these actions as they demonstrate a flagrant disregard for public-private partnership deals and could significantly jeopardize PSP's stake in Athens' airport.

I asked a friend of mine who is an expert in infrastructure to share his thoughts. I specifically asked him if Syriza can renege on deals struck by the previous government and jeopardize PSP's take in Athens airport. He replied:
"Sure it can. Syriza can pretty much do whatever it wants. But there will be consequences to all these actions and Greece will go the way of Pakistan which pissed off foreign investors a long time ago and hasn't been able to strike any major PPP deal in the last 15 years."
He added: "Varoufakis (Greece's new finance minister) is being used as a political pawn. He doesn't realize it yet but his head will be chopped and Syriza will use him as the fall guy when the shit hits the fan -- and the shit will hit the fan the way these guys are governing the country."

Other Greek friends of mine are convinced that Syriza is a party of left-wing lunatics that really want 'Grexit' so they can go back to the drachma and implement some kind of socialistic dream (while they enrich the capitalists outside of Greece funding their party).

No doubt about it, Syriza's leaders aren't bluffing, but I remain unconvinced of all the political theatrics and think there is a lot of smoke and mirrors being played out right now in Athens. Let me go over some important points:
  • First, as the Telegraph rightly noted, Yanis Varoufakis is no extremist and he understands what's at stake if Greece defaults and reneges on previous private-public partnerships. In a recent interview with the New York Times, the feisty finance minister spread a more moderate message. But he will negotiate hard, piss off plenty of his counterparts and he just announced he will not cooperate with troika or seek aid extension, but when the real high stakes game comes, I just don't see him risking 'Grexit'. This is a tactic he is using to negotiate hard with Germany and the IMF.
  • Second, Greece's pivot away from Europe (and the U.S.) toward Russia which Zero Hedge keeps harping on is more utter nonsense. Greeks support Russia and want Russian tourists but they know where the real money lies and it ain't Russia! If anything, I think Alexis Tsipras is another U.S. puppet who is being used to shake things up in Europe (more on that below).
  • Third, fears of Grexit are way overdone, which is one reason Greek banks rallied a lot on Thursday after selling off hard earlier this week. I wouldn't touch Greek bank shares now because of the political uncertainty but exaggerated fears offer hedge funds big opportunities (I prefer businesses that have little to do with the domestic economy, like Plastika Kritis, a company which my uncle founded with the help of my grandmother's brother, and has flourished as the euro keeps declining).
  • Fourth, the Telegraph covered three myths about Greece's enormous debt mountain, highlighting misconceptions on the Greek debt. The article rightly notes that "Greece has already been the beneficiary of a number of debt extensions, and in 2012, underwent the biggest private sector debt restructuring in history." 
Now, I don't pretend to have a monopoly of wisdom when it comes to Greece and Greek politics. I've traveled there all my life, love the country and its people, and have recounted some of my observations from my trip to the epicenter of the euro crisis back in September.

You have all sorts of economic experts telling you what they think on the Greek crisis. Paul Krugman has written a couple of great articles on Greece. He wrote about ending Greece's nightmare, raising excellent points which the Germans have to understand if they are serious about saving and maintaining the eurozone (read his latest, Europe's Greek test).

In his article, Is Democracy Dead In The West?, Paul Craig Roberts raises more excellent (and disturbing) points on the Greek crisis and ends by stating the following:
Accommodation is unlikely to occur, because a reasonable accommodation is not the desire of Washington, the EU, or of Greece’s creditors.

A purpose of the “Greek financial crisis” is to establish that EU members are not sovereign countries and that banks that lend to these non-sovereign entities are not responsible for any losses with regard to the loans. The population of the indebted countries are the responsible parties. And these populations must accept the reduction of their living standards in order to ensure that the banks do not lose any money.

This is the “New Democracy.” It is a resurrection of the old feudal order. A few super-rich aristocrats and everyone else serfs obliged to support the ruling order. The looting that began in Greece has spread into Ukraine, and who knows who is next?

With only 37% of the vote, does Syriza have the clout to stand up for Greece against the looters? Can Greece escape from a situation comparable to the European Dark Ages when populations were ravaged by marauding raiders? Perhaps if Greece realigns with Russia and gains financing from BRICS.
But as I stated above, the pivot away from Europe and the U.S. toward Russia is just smoke and mirrors. Andreas Koutras, who just wrote an excellent article on his blog on the deja vu of Mr. Tsipras (in Greek), shared these thoughts with me:
Basically, the story goes as follows. Tsipras and his team have bought the scenario that there is an austerity/ anti-austerity battle and Syriza needs to get on the bandwagon. This is why the Anglo-Saxon media refer to his party as anti-austerity and not radical left party.
Tsipras thinks that America will save the day and the anti-austerity camp is going to win. The truth is that he is probably right about this. Germany eventually will lose the battle. The question is at what price.
Tsipras is being used as a pawn in this high-level battle and he does not know it. He thinks that he is riding a "wave" of change. This is why he is moving on a collision course. The outcome would be known rather soon.......
Keep all this in mind as you read the garbage being fed to you in the Greek and Western media as well as blogs like Zero Hedge. America's new economic hitmen have been planning this 'Greek crisis' for a long time.

Finally, a friend of mine who tracks developments in Israel very closely, shared these thoughts with me:
I'm really curious to see what will happen next. This has been inevitable for a long time now. But it's one thing to criticize - its another thing to rule. Let's see what they do now.

Also, I think the big threat to the Euro is not Greece leaving. The biggest threat is Greece leaving, suffering for two or three years - and then rebounding. The first two or three years after leaving would be a disaster. There would be inflation. There'd be a devaluation. But in the end, they have one of the biggest trading partners in the world on their border. And they'd be a cheap tourist destination and a cheap source for goods. Managed properly (eliminating corruption and bureaucracy) - they could recover in 18 to 36 months. And then, what do the Spanish and Italian people think, looking at a growing Greek economy?

That's the real threat.
He also sent me a Haaretz article on Panos Kammenos, a right-wing politician who said Jews don’t pay taxes, and was just appointed the new defense minister of Greece (he is part of this strange coalition government made up of radical left and right wing parties):
Kammenos, who heads the ultranationalist Independent Greeks, was appointed to the post in the new government on Tuesday after joining the coalition of the newly elected far-left Syriza party, which won handily in Sunday’s national elections.

While the parties are far apart on most issues, they are united by a common rejection of the harsh terms imposed on Greece in the financial bailout.

Kammenos drew condemnation from Greece’s Jewish community in December after he said on television that Greek Jews don’t pay taxes — a remark denied publicly by a government official, who called it “conspiracy theories, lies and slander” that had become a part of “the dark side of the Internet.”

As defense minister, Kammenos will oversee the military ties with Israel that have become much closer in recent years. Even considering the taxes statement, he is still likely to be more pro-Israel than the Syriza lawmakers, who have taken part in protests against Israel, with some even participating in the flotillas to Gaza.

Conspiracy theories are rife in Kammenos’ ultranationalist party, which frequently blames outsiders for the economic woes befalling Greece.

A recent Anti-Defamation League poll found that anti-Semitic stereotypes are widespread in Greece and that the country had the highest percentage of anti-Semitic views in Europe.

In the elections, the neo-Nazi Golden Dawn party retained its position as the third-largest party in Greece.
When I shared this article with my father, he replied: "Yes, it's true, many Greeks are anti-Semitic until their health is on the line at which point they run to the closest Jewish doctor which they love and admire."

In all seriousness, if this new Greek government had any brains at all, it would be building on the efforts of the previous government, forging much closer alliances with Israel, not Russia.

But I'm not a fan of Panos Kammenos, who many Greeks regard as an idiotic right-wing blowhard, and think he chose that particular ministry for the same reasons that a former Greek defense minister is now serving a 20-year jail sentence (basically, that's where the biggest bribes take place!).

As you can read, I'm very cynical on developments in Greece and the eurozone. I think too many people are being caught up in the theatrics of it all and a lot of investors are losing precious sleep over a lot of nonsense. More worrisome, they're not focusing on the bigger story, global deflation and the possibility of the Fed making a monumental mistake.

Below, Emmanuel Macron, economy minister of France discusses the potential bailout negotiations with Greece, saying it should respect its commitments as part of the European Union. Mr. Macron should worry about his country and its bloated public sector.

Second, Bill O'Neill, head of the UK investment office at UBS Wealth Management talks about Russia's sanctions and debated whether Greece is using the Russia sanctions as "leverage" in terms of debt negotiations. I laugh at the thought of using Russia as leverage as oil prices keep sliding to new lows.

Third, John Perkins, author of Confessions of an Economic Hitman and The Secret History of the American Empire, discusses how economic hitmen and jackals work to ensure the interests of America's 'corporatacracy'. The full "Zeitgeist: Addendum" extended interview is available here.

There is a lot of truth in what Perkins says but I'm not into these Zeitgeist conspiracy theories. The biggest social issues plaguing humanity today are rising inequality, the lack of jobs and the coming war on pensions which most people seem to ignore until pension poverty stares them right in the face.

Finally, Yanis Varoufakis, Greece's new finance minister, was interviewed on BBC Newsnight. On his blog, Varoufakis states the following regarding the interview: "As a fan of the BBC, I must say I was appalled by the depths of inaccuracy in the reporting underpinning this interview (not to mention the presenter’s considerable rudeness). Still, and despite the cold wind on that balcony, it was fun!".

Update: Nikos Chrysoloras of Bloomberg reports that Greek Prime Minister Alexis Tsipras sought to repair relations with creditors after a week-long selloff in bonds and stocks, triggered by his pledge to end the country’s bailout agreement.

Looks like Syriza did the math and decided it's better to negotiate and not piss off their creditors in the first week of office.

Also, read my follow-up comments on why the ongoing euro crisis likely spells checkmate for Greece and whether Germany will push Greece over the edge. Stay tuned, this isn't over, more Greek drama ahead as the world sinks into deflation.

Thursday, January 29, 2015

Will the Fed Make a Monumental Mistake?

Lisa Abramowicz of Bloomberg reports, Jeffrey Gundlach: Fed Is on the Brink of Making a Big Mistake:
Jeffrey Gundlach says the Federal Reserve is on the brink of making a big mistake.

U.S. central bankers have been talking about raising benchmark borrowing costs this year even though the outlook for global growth is worsening as oil prices tumble. If Fed Chair Janet Yellen goes ahead with this plan, she runs the risk of having to quickly reverse course and cut interest rates, according to Gundlach.

“There’s no fundamental reason to raise interest rates,” Gundlach, chief executive officer at DoubleLine Capital LP, said at a conference yesterday in Hollywood, Florida. “My idea is the Fed raises rates for philosophical reasons. That may be short-lived.”

Policy makers concluded a two-day meeting in Washington today. The Fed maintained its pledge to be “patient” on raising interest rates and boosted its assessment of the economy and labor market, even as it expects inflation to decline further.

Yellen said in December that being patient meant such a tightening wouldn’t happen “for at least the next couple of meetings,” or not before late April.

Bond traders would seem to share Gundlach’s concern that the Fed may be getting ahead of itself with its road-map for an exit from six years of near-zero interest rates.
Inflation Outlook

They are pricing in annual inflation of about 1.33 percent during the next five years, short of the Fed’s 2 percent goal, based on break-even rates for Treasury Inflation Protected Securities. Oil prices have fallen to $44.28 a barrel from $107.26 in June.

“I would bet a great deal of money that oil’s not going to go to $90 by year-end,” Gundlach said.

While things are generally looking up for the U.S. economy, it’s unclear how long that can continue in the face of tepid growth elsewhere. The strengthening dollar is another cause for concern, mainly because it makes it more expensive for countries with less valuable currencies (which is almost all of them) to import U.S. goods.

This already appears to be eating into the earnings of companies such as Procter & Gamble Co., Pfizer Inc. and DuPont Co.

Despite this backdrop, most analysts expect central bankers to go through with some sort of tightening this year. Money-market derivatives traders are pricing in a rate increase in the fourth quarter, too.

“This is the triumph of hope over experience,” Gundlach said.
Gundach joins Larry Summers in warning of an epochal deflationary crisis if the Fed tightens too soon. I've already covered his thoughts on oil prices and the U.S. dollar in my Outlook 2015.

In sharp contrast, there are others like T. Boone Pickens and more recently, Daniel Yergen, who think crude's discount days are numbered. But with oil prices now hovering at near six-year lows after the government reported record-high inventories in the United States, it's raising anxieties about the global oil glut that has pressured the market since last summer.

And it's not just an oversupply story. As Jim Keohane, CEO of HOOPP recently told me when we discussed whether pensions are systemically important, the plunge in oil is worrisome because the "drop in commodities is so severe that it implies demand factors are driving it."

Indeed, demand is falling fast as global economic weakness gains steam, which is surely one reason why Goldman now forecasts oil prices hitting $30 a barrel in an extended slump.

Of course, it's also worth noting Mark Wiseman, who runs Canada’s biggest pension fund, offered the Davos crowd last week a two-pronged argument on why he’s bullish on energy assets after the recent plunge in oil prices:
“Part one, the world is consuming about 90 million barrels a day,” said Wiseman, chief executive officer of the Canada Pension Plan Investment Board. “Part two, God isn’t making any more.”

Wiseman said that simple supply and demand perspective all but guarantees oil prices will be higher 10 years down the road, offering investment opportunities now for the C$234 billion ($188 billion) fund.

“I’ll take that bet” on oil’s rebound, he said in an interview Tuesday at Bloomberg’s Toronto office.
I respectfully disagree with Mark Wiseman's simple supply/demand argument but I also understand why he's taking the long, long view on all of CPPIB's investments. And in the very long-run, he may turn out to be right, but over the next few years these investments in energy could suffer a lot more pain, especially if global deflation hits us.

You know my fears. I already think we're undergoing a transformational shift unlike anything we've ever experienced. This time is really different as Gundlach has warned us. But as he and other well known hedge fund managers warn us of a catastrophe in equities, I think they're running way ahead of themselves.

Importantly, there is still plenty of liquidity in the global financial system to drive risk assets much, much higher, but Gundlach raises an excellent point, if the Fed goes ahead and raises rates at this juncture, it will be the biggest policy mistake ever because it will all but ensure global deflation.

I personally think the Fed won't raise rates. Let's go over the latest FOMC statement released on Wednesday (emphasis is mine):
Information received since the Federal Open Market Committee met in December suggests that economic activity has been expanding at a solid pace. Labor market conditions have improved further, with strong job gains and a lower unemployment rate. On balance, a range of labor market indicators suggests that underutilization of labor resources continues to diminish. Household spending is rising moderately; recent declines in energy prices have boosted household purchasing power. Business fixed investment is advancing, while the recovery in the housing sector remains slow. Inflation has declined further below the Committee’s longer-run objective, largely reflecting declines in energy prices. Market-based measures of inflation compensation have declined substantially in recent months; survey-based measures of longer-term inflation expectations have remained stable.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects that, with appropriate policy accommodation, economic activity will expand at a moderate pace, with labor market indicators continuing to move toward levels the Committee judges consistent with its dual mandate. The Committee continues to see the risks to the outlook for economic activity and the labor market as nearly balanced. Inflation is anticipated to decline further in the near term, but the Committee expects inflation to rise gradually toward 2 percent over the medium term as the labor market improves further and the transitory effects of lower energy prices and other factors dissipate. The Committee continues to monitor inflation developments closely.

To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that the current 0 to 1/4 percent target range for the federal funds rate remains appropriate. In determining how long to maintain this target range, the Committee will assess progress--both realized and expected--toward its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. Based on its current assessment, the Committee judges that it can be patient in beginning to normalize the stance of monetary policy. However, if incoming information indicates faster progress toward the Committee’s employment and inflation objectives than the Committee now expects, then increases in the target range for the federal funds rate are likely to occur sooner than currently anticipated. Conversely, if progress proves slower than expected, then increases in the target range are likely to occur later than currently anticipated.

The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. This policy, by keeping the Committee’s holdings of longer-term securities at sizable levels, should help maintain accommodative financial conditions.

When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent. The Committee currently anticipates that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run.

Voting for the FOMC monetary policy action were: Janet L. Yellen, Chair; William C. Dudley, Vice Chairman; Lael Brainard; Charles L. Evans; Stanley Fischer; Jeffrey M. Lacker; Dennis P. Lockhart; Jerome H. Powell; Daniel K. Tarullo; and John C. Williams.
The big change from the December statement, where the FOMC used linguistic gymnastics to basically state more of the same, is the use of "readings on financial and international developments."

This pretty much confirms what Sober Look stated back in December, namely, the Fed's policy trajectory is increasingly tied to international developments.  And it's not just the Fed. The Bank of Canada's surprise rate cut caught many investors off-guard, but not me, I warned my readers to short Canada back in December 2013 and think Canada's crisis is just beginning.

Amazingly, Canadian banks are hesitating to follow the Bank of Canada's move but they're in for a rude awakening too. Have a look at at the sharp drop in the 30-year Canadian bond yield below, which Sober Look tweeted (click on image):

If you're wondering who is buying Canadian bonds at record low yields, I can guarantee you HOOPP, OTPP  and now OMERS are snapping up these bonds, as are some of the very best global macro funds and CTAs. But I can also guarantee you the majority of investors are getting creamed on bonds in Canada and the U.S. because they're all not prepared for global deflation.

Moreover, the ECB is a day late and a euro short, which is equally disturbing, especially now that Greece is experiencing a political earthquake.

The bond market is telling the Fed to take global deflation a lot more seriously, which is why U.S. bond yields are falling to record low levels and long bonds (TLT) continue to perform well and why the mighty greenback is surging higher.

Some aren't concerned by the surge in the mighty greenback. Below, Pimco's CIO, Scott Mather, tells CNBC why the strong U.S. dollar will not derail the Fed's decision to hike rates this summer.

And Bill Gross, Pimco's former CIO who now works for Janus, tells CNBC why the Federal Reserve will cautiously raise interest rates this year, but investors need not panic.

I beg to differ with Mather and Gross and agree with Gundlach. Moreover, I agree with those who say the Fed is cornered and won't raise rates, especially with all the political uncertainty in Europe. If it does raise rates, it will only exacerbate global deflationary headwinds and bring about an epochal deflationary crisis that Lawrence Summers warned of.

Unfortunately, no matter what the Fed and other central banks do, global deflation is coming, and it will pummel institutional and retail investors who are ill-prepared for the epochal storm ahead.

Wednesday, January 28, 2015

PSP Taps New CEO From Rival CPPIB

Euan Rocha of Reuters reports, Canada's PSP taps new CEO from rival pension fund manager CPPIB:
Public Sector Pension Investment Board (PSP), one of Canada's largest pension fund managers, announced on Tuesday it has chosen André Bourbonnais as its president and chief executive officer.

Bourbonnais joins PSP, which manages the pension funds of federal public-service workers, from rival pension fund manager the Canada Pension Plan Investment Board (CPPIB), where he was head of private investments. He replaces John Valentini, who was filling in as CEO after Gordon Fyfe left PSP last year to head the British Columbia Investment Management Corp (BCIMC).

PSP said Bourbonnais brings an extensive global network and proven portfolio management skills to his new job.

Separately, CPPIB announced that Mark Jenkins, who has been overseeing its direct private equity investments and its natural resources investment programs, will take on the role being vacated by Bourbonnais.

Jenkins, formerly a banker at Goldman Sachs and later Barclays, joined CPPIB in 2008.

CPPIB also named Pierre Lavallée to the new role of global head of investment partnerships. He will focus on broadening relationships with the fund's external managers in private and public funds, expanding direct private equity investments in Asia and building the fund's thematic investing capabilities.
Scott Deveau of Bloomberg also reports, Public Sector Pension Appoints Bourbonnais as CEO:
Public Sector Pension Investment Board has appointed Andre Bourbonnais president and chief executive officer, effective March 30.

Bourbonnais has more than 20 years of industry experience, most recently as senior managing director and global head of private investments at Canada Pension Plan Investment Board, PSP said in a statement.

He replaces interim CEO John Valentini at Ottawa-based PSP, which manages the retirement savings of Canada’s federal civil servants and security forces and had assets under management of C$99.5 billion ($80.4 billion) as of Sept. 30.

“We are confident he is the right person to lead PSP Investments into its next phase of evolution, which involves increasingly global activities and sustained growth,” ’ said Michael Mueller, PSP chairman.

Canada Pension said it had promoted Mark Jenkins to global head of private investment to replace Bourbonnais. 
PSP Investments put out a press release on this new appointment which you can read by clicking here. Before joining PSP Investments, Mr. Bourbonnais was Senior Managing Director & Global Head of Private Investments at Canada Pension Plan Investment Board for nine years. Prior to that, he oversaw the 2005 IPO of Addenda Capital Inc., a leading fixed income manager, and managed private equity portfolios for the Caisse de dépôt et placement du Québec from 2001 to 2004. A lawyer by training, Mr. Bourbonnais began his career in 1986 with Stikeman Elliott LLP and, after three years in Europe for a merger and acquisition consulting firm, he joined Teleglobe where he was Chief Legal Officer from 1995 to 2000.

Sovereign Wealth Fund Institute published a great piece on André Bourbonnais discussing all his achievements. So what do I think of this new appointment? I'm a little bit surprised he left CPPIB where I thought he was next in line to take over after Mark Wiseman. But he's a Montreal native and Mark Wiseman is a young CEO so he would have had to wait a very long time before taking over the helm.

More importantly, this new appointment makes perfect sense for PSP. They tapped someone with extensive private market experience, contacts, industry experience and someone who can manage PSP during the next phase of its operations. It also helps that he's French Canadian and perfectly bilingual as PSP's head office is in Montreal and many employees are French natives (but perfectly bilingual too).

Mr. Bourbonnais is now running a major Canadian pension fund and has his work cut out for him. His experience at the Caisse and CPPIB will serve him well and now that he is a CEO, his role will change in a significant way.

My experience at PSP allowed me to gain insights on the job of being a CEO. I saw the good, bad and ugly from a CEO's vantage point. The toughest job of being a CEO is not only managing people, which is often cumbersome, but also managing the board of directors, which can drive you insane depending on how the board members are.

I don't know much about Bourbonnais's managerial skills but he will have his work cut out for him at PSP where he will lead a diverse group of people. Still, he'll be surrounded by very competent professionals and I'm sure he will bring in a few of his own people to help him in this new role.

For PSP's employees, at least now they finally have a CEO after Gordon Fyfe left to head bcIMC, and he's someone with a strong reputation in the pension fund industry and someone with extensive private market experience which is the direction that most of Canada's large public pension funds are heading.

On that note, let me wish André Bourbonnais congratulations and best of luck in this new and important role leading PSP Investments.

Below, a discussion with André Bourbonnais at a Thompson Reuters conference where he discussed CPPIB's approach to investing in private markets (October, 2014). Very interesting discussion, listen to his comments and answers to some excellent questions.

Tuesday, January 27, 2015

Soros Warns Pensions on Hedge Funds?

David Sirota of the International Business Times reports, Billionaire Currency Trader George Soros Warns Against Investing Public Pension Money In Hedge Funds:
Another towering figure in the financial industry is warning major pension systems to beware of investing retiree money in hedge funds. During a Thursday meeting at the World Economic Forum, billionaire investor George Soros cited management fees charged by hedge funds in arguing that steering billions of dollars of public employees‘ money into such products is imprudent.

“Current market conditions are difficult for hedge funds,” said Soros, who recently retired from his currency focused hedge fund business. “Their performance tends to be equal to the average plus or minus a 20 percent management fee.” (correction: 2% management fee and 20% performance fee). He said that while “you will always have some hedge funds that will provide outside performance ... to put a large portfolio into a hedge funds is not a winning strategy.”

Public pension systems currently have roughly $470 billion worth of investments in hedge funds, according to data compiled by Prequin, a financial research firm.

Soros made his comments only months after Warren Buffett issued a similar warning. A few months after Buffett’s comments, the United States’ largest pension system, the $296 billion CalPERS, or California Public Employees' Retirement System, made national headlines when in September it ended most of its hedge fund investments.

CalPERS’ move has been seen as a potential trend setter. In October, the $20 billion San Francisco pension system tabled a proposal to invest in hedge funds, and in December, New York Gov. Andrew Cuomo, a Democrat, vetoed legislation to increase the amount his state can invest in such high-risk vehicles.

The shift out of hedge funds has now moved to Europe. Earlier this month, the $184 billion Netherlands public pension system dumped its hedge fund investments. A top official told Reuters at the time: "With hedge funds, you're certain of the high costs, but uncertain about the return.”

In other remarks at the World Economic Forum, Soros urged world leaders to more forcefully intervene to challenge Vladimir Putin’s regime.

“Russia has become a mafia state in which the rulers use the resources of the country to enrich themselves and to maintain themselves in power,” he said. “They preserve the outward appearances of democracy such as holding elections, but there is no rule of law and no arrangements for a legitimate transfer of power.”

Of Russia’s standoff with Ukraine, he said: “Ukraine should be able to defend itself militarily as long as Putin maintains the pretense that the separatists are acting on their own, but it urgently needs financial assistance. I believe Europe will respond favorably... Much depends on the next few days. Not only the future of Ukraine but also the future of the European Union itself is at stake. I believe the loss of Ukraine would be an enormous loss for Europe. It would allow Russia to divide and dominate.”
When Soros talks about hedge funds, I listen, but when he rails against the "evil" Putin and Russia, I tune off because it's all U.S. propaganda that professor Stephen Cohen has thoroughly discredited.

Don't get me wrong, I know Putin is no angel and that Russia is a hopeless mafia state, but there are plenty of mafiosos in Washington with their own hidden agenda to destroy Russia and Putin's ambition to break the U.S. banking cartel. You should all read William Engdahl's latest on Russia and China and listen to Michael Hudson's discuss the Russian Pivot to gain a deeper understanding of the tensions between the U.S. and Russia.

Of course, Russia's fortunes are inexorably tied to the price of oil so when Gary Cohen, president of Goldman Sachs and a former oil trader, goes on CNBC to state that they believe oil prices will probably continue to decline and could reach as low as $30 a barrel in an extended slump, you know the banking cartel is winning the real (economic not political) war on Russia (but Russia is threatening to respond in kind).

Getting back to Soros's comments on hedge funds, he has nothing to lose because his money is being run by his family office. He pretty much states the obvious, namely, the bulk of hedge funds stink and are charging hefty alpha fees for sub-beta performance. 

Moreover, Soros is right, there will always be some hedge funds that deliver outsized performance, but current market conditions are very difficult for most hedge funds and picking winners is becoming increasingly more difficult. This is one reason why CalPERS dropped a bomb back in September and why the giant Dutch healthcare pension, Pensioenfonds Zorg en Welzijn (PFZW), dealt another blow to the industry recently and also exited hedge funds (CIO magazine reports that PFZW netted a $56 million profit in two months as it exited hedge funds last year).

How difficult are market conditions for hedge funds? Extremely difficult. Just look at how the Swiss currency tsunami hit macro funds hard, obliterating many of them. In fact, hedge fund manager Marko Dimitrijevic closed his largest hedge fund, Everest Capital's Global Fund, after losing almost all its money after the Swiss National Bank (SNB) scrapped its three-year-old cap on the franc against the euro.

Bloomberg reports that the franc fallout spread to other well-known macro hedge funds:
Billionaire Michael Platt’s BlueCrest Capital Management lost money in one of its funds and at least two employees departed as the fallout from last week’s sudden jump in the Swiss franc spread across the hedge-fund industry.

Platt lost 5.5 percent in his macroeconomic fund through Jan. 16, two people with knowledge of the matter said. Comac Capital, Fortress Investment Group LLC (FIG) and Everest Capital also reported declines.

Among managers avoiding losses are Leda Braga, a former BlueCrest executive who started her own computer-driven trading firm this month, and who gained 7 percent in January through last week. Billionaire Alan Howard posted gains in his main fund at Brevan Howard Asset Management.

The market turmoil caused by the Swiss National Bank’s surprise decision on Jan. 15 to remove a three-year-old cap on its currency pushed some currency-trading firms into insolvency and caused losses worth hundreds of millions of dollars at banks and hedge funds. The franc soared as much as 41 percent against the euro that day.

Speculators boosted wagers that the franc would weaken against the dollar to the highest in 1 1/2 years this month, Commodity Futures Trading Commission data show, only to be hurt by the currency’s jump.
Platt’s Woes

At BlueCrest, the declines are a further setback for former JPMorgan Chase & Co. trader Platt, 46, who started the firm in 2000. BlueCrest has faced underperformance, a decline in assets as clients pulled money and concern that an internal fund run for select employees may pose conflicts of interest between BlueCrest and its clients.

Amid last week’s losses, Luke Halestrap and Peter McGarry left the $15 billion Jersey-based firm, said the people, who asked not to be named because the information is private. BlueCrest shut a portfolio run by currency money manager, Peter Von Maydell, a person with knowledge of the decision, said yesterday.

Halestrap and McGarry didn’t reply to e-mails and telephone messages seeking comment. Before BlueCrest, Halestrap was at Merrill Lynch & Co., where he oversaw European trading in basic interest-rate related products. McGarry had previously worked at 5:15 Capital Management and BNP Paribas SA.
Braga’s Gain

Braga, the 48-year-old Brazilian who ran quantitative trading at BlueCrest, said in September that she was planning to start her own firm, Systematica. She planned to take almost a third of BlueCrest’s assets, with Platt’s firm taking a minority stake.

Her $5.6 billion BlueTrend fund posted a 3 percent gain last week, according to an investor update from her Geneva-based firm. Systematica oversees $7.7 billion in total in the strategy, which uses computer models to decide when to buy or sell stocks, bonds, currencies and commodities.

Another Geneva-based hedge fund manager, billionaire Howard, 51, avoided losses in his largest hedge fund, according to a person familiar with the matter. Howard’s Brevan Howard Master Fund gained 1.9 percent in the month through Jan. 16, compared with 1.1 percent as of Jan. 9, the person said.

Chris Rokos, who co-founded Brevan Howard with Howard and three other traders in 2002, said today that he will start his own hedge fund with the backing of his former employer after settling a lawsuit against the firm. Rokos had generated more than $4 billion when he worked at Brevan Howard.
Fortress’s Loss

In New York, Todd Edgar’s Atreaus Capital rose 10 percent last week as the $800 million currency and commodities hedge fund speculated that the euro would tumble, said another person. Atreaus, backed with $150 million from Goldman Sachs Group Inc.’s asset management arm in 2012, rose 9 percent last year, helped by wagers that the dollar would rise.

Other firms were less prescient. Fortress’s macro fund lost 7.9 percent this month through Jan. 16, according to an investor. The shares of the New York-based firm fell 4.4 percent today on the news, the biggest decline in four months.

Comac Capital, the $1.2 billion firm run by Colm O’Shea in London, is returning money to clients after losses. Everest Capital, run by Marko Dimitrijevic in Miami, saw all the money in its $830 million Everest Capital Global fund wiped out, leaving the firm with $2.2 billion in its other funds.

Officials for the hedge funds declined to comment.
I've already discussed Leda Braga, the most powerful women in hedge funds, when I went over PFZW's decision to exit hedge funds.

Zero Hedge, in its infinite wisdom, questioned how Soros and Alan Howard managed to avoid getting crushed by the surprise move from the Swiss National Bank but the truth is they were among a few savvy investors who were able to avoid steep losses.

This brings me to a very important point and I want all of you to pay attention here. I've invested with the very best global macro funds in the world, went head to head with the great Ray Dalio and others on why deflation is the ultimate endgame and I've never heard so many pathetic excuses by macro fund managers explaining their terrible calls on rates and currencies.

And it's not just macro funds. I'm amazed at the lame and ridiculous excuses coming out of many hedge fund managers for their poor performance. They blame the Fed and other central banks for 'juicing up' markets and removing volatility and when volatility comes roaring back, they are confounded, like deers caught in headlights.

In fact, part of me really misses grilling the hell out of these overpaid gurus but to be honest, I've danced enough with hedge fund prima donnas and would rather write my own views. A bright up-and-coming hedge fund manager told me yesterday how I got the call on deflation and rates right and I stick with my Outlook 2015 even with all the nonsense and fear following the Greek political earthquake.

Also, while the mighty greenback will hit earnings of many large corporations and exacerbate global deflation which most investors are not prepared for, I'm still betting on a melt-up in stocks led by technology (XLK) and especially biotech (XBI). My personal account was up huge last year and even though it was insanely volatile, I got my positions right because I got the macro calls right.

On that note, I ask all of you benefiting directly or indirectly from my insights to please show your appreciation and donate or subscribe to my blog via PayPal on the top right-hand side under my bio and contact info. I appreciate your words of encouragement but prefer your financial support (I'd be embarrassed if you haven't contributed, especially those of you who put me in this situation).

Below, Agecroft Partners' Don Steinbrugge and Bloomberg View columnist Barry Ritholtz discuss whether market volatility is good for hedge funds with Bloomberg's Trish Regan on "Street Smart."

Please keep in mind my comments and Soros's warning when investing in hedge funds. I honestly believe most pensions are better off following CalPERS and PFZW, exiting from hedge funds altogether.

Update: Soros is taking his own advice, firing his outside managers amid poor returns, which goes to show you even the king of hedge funds has difficulty picking winners in this environment.

Monday, January 26, 2015

A Political Earthquake in Greece?

Nick Squires of the Telegraph report, Greeks hand stunning victory to anti-austerity Syriza:
Greece set itself on a collision course with the rest of Europe on Sunday night after handing a stunning general election victory to a far-Left party that has pledged to reject austerity and cancel the country’s billions of pounds in debt.

In a resounding response to the country’s loss of financial sovereignty, Greeks gave Syriza 36.5 percent of the vote, according to the first official projections.

It will be able to send between 149 and 151 MPs to the 300-seat parliament, tantalisingly close to a majority.

The final result was too close to call but if the party wins 150 seats or fewer, it will have to form a coalition-- possibly with the Independent Greeks, a Right-wing party that also opposes the international bailout. (note: they did forma coalition, see below).

New Democracy, the conservative party which had governed since 2012, won just 27.7 per cent of the vote.

Led by the charismatic former communist Alexis Tsipras, 40, Syriza is now likely to form Europe's first anti-austerity government. The party, a motley collection of communists, Maoists and socialists, wants to cancel a large part of Greece's 320 billion euros of debt, which at more than 175 percent of GDP is proportionally the world's second-highest after Japan.

The debt is equivalent to nearly 30,000 euros for each Greek citizen.

Antonis Samaras, the outgoing prime minister, gave a brief statement in which he accepted the result and claimed he had put Greece back on the road to recovery.

"The Greek people have spoken and we all respect that decision," he said.

"I took charge of the country when it was on the edge of a cliff. I was asked to take burning coals into my hands and I did it. We avoided the worst, we re-established the credibility and prestige of our country."

He said: "We made some mistakes, but we averted the worst. I have a clear conscience because I told the truth to the Greek people right to the end."

The election victory threatens renewed turmoil in global markets and throws Greece's continued membership of the euro zone into question.

All eyes will be on the opening of world financial markets, although fears of a "Grexit" - Greece having to leave the euro - and a potential collapse of the currency have been less fraught than during Greece's last general election in 2012.

Mr Tsipras, an admirer of Che Guevara, has toned down the anti-euro rhetoric he used then and now insists he wants Greece to stay in the euro zone.

Austerity policies imposed by the EU and International Monetary Fund have produced deep suffering, with the economy contracting by a quarter, youth unemployment rising to 50 per cent and 200,000 Greeks leaving the country.

Mr Tsipras has pledged to reverse many of the reforms that the hated “troika” of the EU, IMF and European Central Bank have imposed, including privatisations of state assets, cuts to pensions and a reduction of the minimum wage.

But the creditors have insisted they will hold Greece to account and expect it to stick to its austerity programmes, heralding a potentially explosive showdown.

Greece has enough money to meet its immediate funding needs for the next couple of months but it faces around 10 billion euros of debt repayments over the summer.

Without fresh cash, it will be unable to meet the payments, raising the spectre of an exit from the euro.

The election result will reverberate in countries such as Italy, Spain and Portugal, where the rejection of German-inspired austerity is also growing.

“What’s clear is we have a historic victory that sends a message that does not only concern the Greek people, but all European peoples,” said Panos Skourletis, Syriza’s spokesman. “There is great relief among all Europeans.”

He said the election result was a rejection of “wild austerity” and would herald “a return of social dignity and social justice”.

The Syriza victory was quickly seized on by the European Left as a sign of hope.

Gianni Pittella, an Italian MEP and the head of the Social Democrats in the European Parliament, said: “The Greek people have clearly chosen to break with the austerity imposed on them by the troika’s diktats and to ask the new government to bring in fair policies with more social justice.

“The renegotiation of the Greek debt, and in particular the extension of the terms of its bailout, should no more be considered as a taboo.”

The head of Spain’s similar anti-austerity party, Podemos, also hailed Syriza’s victory.

“Hope is coming, fear is fleeing. Syriza, Podemos, we will win,” said Pablo Iglesias, who last Thursday joined Mr Tsipras at Syriza’s final election rally in Athens.

“In Greece tonight, we are already hearing that. We are hoping we will hear the same thing in Spain soon,” he told a gathering of about 8,000 party faithful in Valencia.

“Syriza winning an outright majority is huge for Europe, an earthquake,” Costas Douzinas, a political commentator and a professor of law at the University of London, told The Telegraph in Athens.

“If a tiny country like Greece can stand up to the lenders and achieve even a small haircut of the debt, the message to the Spanish, Portuguese and Italians will be that they too can stand up at some point.”

“The theory of austerity was a kind of black magic. It was the idea that if you bleed a person, like they did with leeches in the Middle Ages, then they will get better. But the patient is bleeding to death.

“Paying back debt that is 180 per cent of GDP is just not viable. Ninety per cent of the bailout money is paid back to the lenders. It’s like borrowing on Visa to pay Mastercard. The debt just keeps increasing. The situation is absurd.” The election result will only cement the growing rift between Europe’s north and south over austerity and growth.

Before the official results were even announced, there were stern warnings from Berlin that a rejection of fiscal austerity would not be tolerated by Europe’s economic powerhouse.

“I hope the new government won’t call into question what is expected and what has already been achieved,” said Jens Weidmann, the president of the Bundesbank.

Greece would only continue to get loans if it stayed the course on austerity and the new government should not make promises it could not fulfil, he said.

Many Greeks remained unconvinced that Syriza would be able to renege on Greece’s debts or reverse austerity programmes.

“Tsipras promises a lot but I don’t think he will be able to deliver. How can he do all the things he has promised? We don’t have the money,” said Kostas Maganias, 65, the owner of a bar in Athens.
Nikos Chrysoloras and Marcus Bensasson of Bloomberg also report, Tsipras Wins and Sets Greece on Collision Course With Euro Partners:
Greek Prime Minister-elect Alexis Tsipras set up a confrontation with his European peers as he prepared to form a coalition dedicated to ending austerity, saying the era of bowing to international demands for budget cuts is over.

Tsipras issued the challenge to Greece’s euro-area partners after his Syriza party won a historic victory in Sunday’s elections by harnessing a public backlash against years of belt-tightening, job losses and hardship. Tsipras, who is two seats shy of an absolute majority in Greece’s 300-seat chamber according to the latest results from the Interior Ministry, said his priority “will be for Greece and its people to regain their lost dignity.”

Even in a fragile coalition, the result hands Tsipras a mandate to confront Greece’s austerity program, imposed in return for pledges of 240 billion euros ($269 billion) in aid since May 2010. The challenge now for him is to make good on election pledges including a writedown of Greek debt, while persuading creditors in Berlin and Brussels to keep aid flowing.

“There will neither be a catastrophic clash nor will continued kowtowing be accepted,” Tsipras, 40, told crowds of cheering supporters in central Athens late Sunday. “We are fully aware that the Greek people haven’t given us carte blanche but a mandate for national revival.”

The euro rose 0.1% to 1.1214 as of 8:49 a.m. in Athens today after dipping to a fresh 11-year low after Syriza’s win.
Coalition Building

With investors bracing for a drop in Greek government bonds on Monday, Greek voters awakened to find their new government taking shape. Tsipras plans to meet Monday morning with Panos Kammenos, the leader of the Independent Greeks party, to tie up an agreement already sketched out to form an anti-bailout coalition. He’ll also meet with Stavros Theodorakis, the leader of To Potami, a Syriza official said.

“Political stability will be difficult to find,” Vincenzo Scarpetta, a political analyst at the London-based Open Europe research group, said by e-mail. Syriza’s potential coalition partners “only agree in parts” with its platform, he said. “The medium-term outlook is far from clear.”

While Syriza’s victory was more decisive than polls had predicted, the results after 99.8 percent of the vote was counted left the party just short of a majority, with 149 seats in the 300-seat Parliament. Outgoing Prime Minister Antonis Samaras’s New Democracy, which took 27.8 percent to Syriza’s 36.3 percent, won 76 seats. The far-right Golden Dawn placed third with 6.3 percent, followed by To Potami with 6.1 percent.
Samaras Achievements

“I’m handing over a country that’s a part of the EU and the euro,” Samaras said in televised remarks, as he conceded defeat. “For the good of this land, I hope that the next government will respect these achievements.”

Syriza’s victory sends a signal to parties such as Spain’s Podemos that are challenging economic and political conventions across Europe from a country whose output has shrunk by about a quarter and where one in two young people is jobless.

Investors must now wait for Tsipras to spell out how he plans to negotiate Greece’s future financing needs. An extension of the current euro area-backed bailout program expires at the end of February, with Greece projected to run out of money by July at the latest.
Euro-Area Talks

European policy makers including German Finance Minister Wolfgang Schaeuble warned Greece before the vote against diverting from its agreed bailout program. Euro-country finance chiefs are due to discuss Greece when they meet in Brussels on Monday. Germany’s Finance Ministry said in a statement that Schaeuble’s position was unchanged after the election result and “the agreements reached with Greece remain valid.”

Tsipras, while saying that his incoming government is ready to negotiate and cooperate with the EU over debt, declared the era of the troika of the European Commission, the ECB and the International Monetary Fund to be at an end.

“Syriza’s convincing victory in Greece’s election ushers in a new and even more divisive phase in Europe’s fractious politics,” Nicholas Spiro, the managing director of Spiro Sovereign Strategy, said in an e-mailed note. “A dangerous Rubicon has been crossed.”

The election also ends more than four decades of rule by New Democracy and Pasok, the two parties that have alternated in power since the reintroduction of democracy in 1974 following a seven-year period of military dictatorship. Pasok, which won Greece’s 2009 election before requesting an international rescue the following year, took just 4.7 percent.

“The Greek people punished New Democracy for governing in the petty manner of the old regime’s political parties,” Aristides Hatzis, an associate professor of law and economics at the University of Athens, said by phone. “Most Greeks voting Syriza don’t expect a spectacular change but a marginal one. A marginal one would be significant for them.”
Indeed, a marginal change will be significant for Greeks, but I'm highly skeptical of the wild claims Syriza made during the election campaign. Following my trip to the epicenter of the euro crisis back in September, I continue to think Greece is on the wrong course.

Importantly, even if creditors forgave the entire debt of Greece (they've already forgiven a good chunk), the country will never grow and flourish as long as politicians from all parties keep expanding the Greek public sector beast.

Even after years of austerity, there are more direct and indirect jobs related to the Greek public sector than at any time in the past. It's actually a running gag inside of Greece where the private sector has born the major brunt of all these austerity measures. Despite sky high unemployment, hardly any job was cut in the Greek public sector (in fact, New Democracy hired more workers right before the election campaign).

This was Troika's biggest mistake when negotiating with Greece, and now Germany and the IMF are going to deal with growing anti-austerity movements throughout Europe. Greece is nothing, wait till Italy and Spain sock it to the Germans who have myopically focused on austerity and garnered the disproportionate benefits of the euro union.

From that vantage point, Syriza's victory does offer hope against mindless austerity, but the tenor of Syriza’s coalition partner, Independent Greeks led by Panos Kammenos, suggests compromise may be hard to achieve:
Kammenos said as recently as last week that Greek debt should be audited and its “odious” part written down, whether creditors like it or not. Europe, he said, is being governed by “German neo- Nazis.”

“What we will come to Frankfurt and Berlin and Brussels with is a plan to minimise the cost of that Greek debacle to the average German,” Yanis Varoufakis, an economist and Syriza lawmaker who is tipped as a potential Greek finance minister, said in an interview on BBC Radio 4. “We must be very careful not to toy with fast or loose talk of Grexit,” he said, referring to the prospect of Greece’s exit from the euro area. “Grexit is not on the cards.”
Clearly, there will have to be some form of debt restructuring taking place. Distressed debt investor, Wlbur Ross, appeared on CNBC earlier this morning stating he expects interest rate relief is coming, shaving 4 billion euros a year off debt financing costs. He also said they will renegotiate maturities on this debt (see below).

On his blog, Yanis Varoufakis, hailed Syriza victory as a win for democracy, but as I explained in my comment on the myth of Greek democracy, there is no democracy in Greece. "To really understand Greece, you have to understand that Greek politicians are blatant liars and corrupt to the bone. It's not just Tsipras. Successive governments from the Left and Right kept increasing the public sector to cement their political base and now that the country is bankrupt, they still can't cut the public sector beast because they fear political repercussions."

Moreover, Greece is a pathetic oligarchy run by a handful of ultra wealthy families which basically control everything in the country. This is why I laugh when I see Syriza, "a collection of  Maoists, socialists and communists," being funded by ultra capitalists outside of Greece looking to gain more economic control of Greek assets (The only ultra wealthy Greek businessman I truly respect is Vardis Vardinogiannis who lives in Greece, pays all his taxes in Greece, and flies Greek flags on his ships. Of course, he's Cretan so I'm heavily biased).

Now, what does a coalition government led by Syriza mean for global markets? In his Bloomberg comment, Mohamed El-Erian shared these insights:
The Coalition of the Radical Left, known as Syriza, placed first in the Greek elections today, with at least 36 percent of the vote, according to exit polls. The result could even give Syriza an absolute majority and, if it wishes, allow it to govern without a coalition partner. With these outcomes going beyond what markets expected and priced in, here is a Q&A before trading resumes Monday.

QUESTION: What happened and why will it matter for markets?:

ANSWER: The early parliamentary elections have given Syriza a significant and historic victory that surpasses the market consensus.

This is the first time Syriza is in a position to form and lead a government. Its popularity reflects intensifying economic and social frustrations among Greek citizens, including the perception that their long sacrifice hasn't yielded any meaningful gains, let alone any hint of an end to what they see as years of austerity and deprivation.

An alternative economic approach was the core of Syriza's electoral campaign. Its program, which rejects austerity and seeks debt reduction, was pursued with vigor by the party's leader, Alexis Tspiras, who frequently took swipes at Germany, including personal attacks on Chancellor Angela Merkel. He argued that the most influential power in the euro zone was too austerity-obsessed in its approach to Greece.

This has led to concerns that Greece could exit the euro zone. A so-called Grexit would entail the return of a national currency to replace the euro, losing access to European Central Bank financing windows and, most probably, less financial support from the European Union and the International Monetary Fund. It would also raise doubts about some other countries in the region, leading to a repricing of individual and collective risk factors.

An exit from the euro would require the Greek government to counter the immediate threat of significant disruptions, come up with a new medium-term economic vision, strengthen its domestic institutions and pursue a different relationship with European partners that would preserve the country’s access to free trade and certain financing arrangements.

Grexit concerns have been amplified by indications that, particularly compared with 2010-2012, Germany appears less concerned about the negative spillovers for the euro zone -- and for good reason, given the (albeit still incomplete) efforts to strengthen the region’s institutional structures. For example, regional financing mechanisms have been strengthened, banks have been subjected to more rigorous stress testing and a significant portion of national debt has been refinanced with longer maturities and lower interest rates.

Q: How are markets likely to react when trading resumes Monday?

A: If the larger-than-expected Syriza win is confirmed, and especially if it results in an absolute majority, expect a sell-off in European risk assets, including equities. High-quality bonds would be supported by flight-to-quality flows, resulting in lower yields (particularly on German bonds). And look for prices to fall and risk spreads to widen on bonds issued by European peripheral nations such as Italy, Portugal and Spain.

On the currency front, the euro will probably come under pressure, too, exacerbating the recent weakening to levels not seen in 11 years.

Greek markets are likely to be subjected to the greatest pressures, including a notable widening in risk spreads on sovereign and bank bonds. The question is whether this also translates into a significant pick-up in withdrawals by residents of bank deposits as well as capital flight. If it does, Greek politicians would need to quickly take major steps to counter the threat of cascading market dislocations.

Q: Is a Grexit inevitable?

A: No. To reduce the risk, Tsipras would need to embark quickly on a "Lula pivot." That is, he will need to assure markets that the relaxation of austerity would be accompanied by a big push on structural reforms, that the alleviation of the debt burden would be pursued in an orderly and negotiated manner, and that he is willing to engage in constructive discussions with Germany and other European partners.

Q: Are there broader implications?

A: Yes. The outcome of the Greek elections is indicative of a broader political phenomenon in Europe that involves the growth of non-traditional parties. Fueled by concerns about disappointing growth, unemployment and social issues, it is powered by large-scale dissatisfaction with the established political order. And it isn't limited to the peripheral economies.
Let me state once again, I don't think Syriza's victory will bring another euro crisis. There will a lot of huffing and puffing in Athens but when Tsipras and Varoufakis visit Berlin, they'll quickly realize that Greece has very limited options in terms of what it can and can't negotiate. Varoufakis will argue for his Modest Proposal but I doubt it will gain any support.

But Germany will have to negotiate or risk Grexit, which means risking the end of the eurozone and a hit to its banks, something it can ill-afford. Tsipras and Varoufakis know this, which they will use as political leverage to achieve some concessions on debt forgiveness. Either way, there will be very tough negotiations and there will be political repercussions throughout all of  Europe as some will support these negotiations while others will adamantly oppose them.

The bottom line: Alexis Tsipras won, Greeks voted for him because they're tired of austerity but they aren't holding their breath for an economic miracle. Instead, they're hoping the country will reverse course and start growing its way out of this economic morass.

I remain very skeptical. I don't think Greece will ever grow properly until it deals with its public sector beast, which won't happen under a Syriza-led coalition government which will use debt negotiations to further expand the public sector, much to the detriment of the private sector.

Having said this, I don't think economic catastrophe is coming, just more of the same nonsense that Greece has experienced over the last six years. At the end of the day, Tsipras' thirst for power will govern his decisions and he will bow down to creditors and accept some form of structural reform in return for much needed loans. It's pretty much what most cynical Greeks expect.

The bigger fear for me remains the advent of global deflation. That's a huge problem which policymakers keep ignoring or worse still, keep feeding with mindless austerity measures that exacerbate deflation throughout the developed world. When it comes to austerity, implementation has been completely bungled up in Greece and elsewhere.

Below, CNBC's Michelle Caruso-Cabrera reports on Greece's anti-austerity party's general election win and the possible bailout battle ahead.

And Wilbur Ross, WL Ross & Company chairman & CEO, shares his thoughts on the outcome of the Greek elections and the future of Greece and the European Union.

Finally, take the time to listen to a BBC interview with Syriza's Yanis Varoufakis, tipped to be the next finance minister. "We will take to the eurozone a plan for minimising this Greek debacle, we are going to put three or four things on the table: genuine reforms and creating a rational plan for debt restructure.. we want to bind our repayments to our growth," he said. I wish them luck, they'll need it.