Something interesting happened this weekend. It has taken me a few days to wrap my head around it but THE ERA OF EXTEND AND PRETEND is coming to an end. As I have said earlier, Yanis and Tsipras are not about business as usual and the EU, ECB and the IMF have finally figured out that their blackmail no longer works. The Greeks are unwilling to play this game any longer and want to restructure their debt which means banks and bond holders take a loss. I think it is inevitable that there will be some form of debt relief. I could be wrong but no one was expecting a referendum.
Yanis long ago realized that Greece is insolvent and that to continue with the extend and pretend bailout packages is insanity and also immoral. While many of us sit comfortably behind our Bloomberg and TradeStation terminals, the human cost to Greece has been immense and tragic. There are stories of children in the streets and mothers having to become prostitutes to put food on the table. In January I saw this interview with Yanis and I knew that he was not going to compromise on debt haircuts if he could help it.
The choice is between admitting the Truth of insolvency or continuing down the path of depression which inevitably leads to civil war or revolution. It looks like Yanis and company are trying to shine the light upon the Truth this week.
The new news is the the Governor of Puerto Rico Alejandro Padilla has decided that the debts of his territory are no longer payable and he wants to declare bankruptcy and restructure his debt. His timing was impeccable as he released this news upon the world Sunday night as Global markets were reeling from the Greek referendum news on Saturday. I think Padilla is basically using the Greek situation as cover to admit the Truth that his people can not possibly service the debt. We have arrived at the point in time of the credit cycle where the math no longer works. The effect of constant bailouts and extend and pretend has basically through the magic of compounding made the debt for these two regimes no longer tenable. The curious thing about Truth in the capital markets is that it is very contagious. The question is do the creditors see this Truth? Up until now the global credit markets have been lulled into a sense of complacency as the central banks have created the illusion of omnipotence. What many have failed to recognize is the human cost that has been imposed upon the people in these indebted regions. You can only push folks so far before they say No More! I suspect that the PR situation will quickly result in a widening of all muni spreads and begin the unpleasant process of putting pressure on essentially bankrupt states and municipalities in the US.
The Truth of the debt situation in Greece is what the Troika is trying to hide from the light of day. Most of the bail out funds that have been given to Greece have actually bailed out the banks and hedge fund creditors in the form of interest and capital gains and very little has actually gone into the Greek economy. In order to pay the creditors the people of Greece have had to become debt serfs under great austerity. If Troika gives in to Greece the Truth of the insolvency for Italy, Spain and Portugal will become readily apparent to the capital markets and to the citizens in these countries who will also demand a deal like Greece should it get one. So essentially when you hear Troika officials speaking of contagion they are really saying Truth. So the EU, ECB and the IMF really hope that they can contain the Truth about the situation.
Credit spreads have been widening slowly since July of last year and they are beginning to widen at an accelerating rate lately. If the Truth of Greece and PR begin to spread quickly in the minds of both debtors and creditors we could see a massive widening of credit spreads and a pause in the issuance of debt and a reflexive feedback loop that becomes vicious. The reason why this matters to the stock market is simple: credit is the life blood of the equity bull market. Without credit we will see corporate stock buy backs cease, company earnings collapse and system wide margin calls begin. The establishment knows this and this is why Jack Lew our Treasury Secretary and now Obama (clearly someone told him what to say) have both urged that Greece and the Creditors hammer out a deal. Jack Lew has even suggested that debt relief has to be part of the deal. The dirty little secret of the asset bubble blown by the Fed is that it relies on confidence of market participants and once lost it is essentially over and liquidations begin.
The question is can this Extend and Pretend continue or is it too late because the Truth Genie is out of the bottle? Will the Truth spread slowly or quickly like a fireball engulfing the Planet from an asteroid hit? In 1929 the Great Depression was really caused not by the stock market crash but by the Sovereign Debt defaults of Europe. I would contend that the math has stopped working and that the European power structure in place is desperately trying to hold on via propaganda and Police State brutality. Truth is their enemy. Unfortunately for them I think it is spreading quickly. We should know over the next couple of months either way.
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If you’re right in regards to the severity of the problem, I would imagine the resultant collapse would be more than ugly for most people. The Great Depression Part Deux, indeud, sir.
The truth is the greatest enemy of (fill in the blank)
many damn things in this world .. politics, religion, first and foremost
juice,
on this you and I agree.
Krugman been saying for a long time.You
cannot shrink your way to prosperity.
Greece needs real help and that means
haircuts to loans.GM was allowed to
go broke and they came out OK.
Every loan is a risk. Don’t lend
too much to any one entity and barring
a meltdown BoB’s your uncle.
Very nice/accurate write. The numbers stopped working Looooooooooong ago.
” I would contend that the math has stopped working and that the European power structure in place is desperately trying to hold on via propaganda and Police State brutality. Truth is their enemy. Unfortunately for them I think it is spreading quickly. We should know over the next couple of months either way.”……Ditto the US/City of London
ayetaye88,
Thanks. I agree on City of London and US. truth asteroid hits there last.
Greece needs at least a 50% haircut. Having said that they kind of fucked themselves.
They where profligate borrowers during the drachma era which over time became more and more expensive for them to go to the markets as the drachma was devaluing. Once they joined the euro their borrowing costs became similar to Germany. This meant they became kids in the candy store and enabled them to take on more and more unmanageable debt why all the time running an inefficient, unproductive enterprise. Greece primary has three things it offers the world. Tourism, Marble and Olive oil. The bottom fell out of the market for oil once china started exporting its own marble (inferior to that of Greeces, only good for smaller surface application.) The olive oil market basically died when i believe Spain and Italy entered it in a big way. Greece has always been poor and now suffers from a terrible brain drain. They need a 50% haircut on their debt, probably need their own currency and they need to make deep reforms.
CORRECTION:
Bottom fell out of its marble market once china began exporting its own.
Superpositron,
The fact that the debt of the euro is country specific has always been its undoing.
Indeed.
Germany’s exposure for the two bailouts totals 57.23 billion euros,France’s is 42.98 billion, Italy’s is 37.76 billion and Spain’s 25.1 billion. The loans are of course unsecured. Were these counties OBLIGATED to make these loans? No. Now they are pissed that they can’t get their principal back???!! There’s some smart folks in Europe and they should have known Greece would never have the ability to service the debt. There were no preference payments, no fraudelant conveyence, nothing. It’s not like they can make everything whole but are not willing to. They simply do not have the capacity… they are insolvent many times over. IMHO, I do not have any simpathy for the lenders in this case. Time to eat your peas Germany.
Politically the eurozone countries had to step in once Greece couldnt raise funds through the markets around 2010 (?). It was a tough choice. Greece has been too slow to make the structural reforms needed.
http://investmentresearchdynamics.com/will-puerto-rico-cause-an-inadvertent-black-swan-derivatives-melt-down/
“I believe it is highly probable that the crashing stocks of MBIA, AMBAC and AGO are the alarm bells of a black swan landing. And, of course, no one has been talking about them until today. Although these firms are somewhat obscure and small compared to the size of the majority of financial companies, they are highly leveraged with massive off-balance-sheet liabilities for which they have zero hope of covering in the event of even relatively small bond defaults. In other words, these firms are the ones most likely to set off the next financial collapse triggered by their counterparty defaults.”
Who’s to blame?
At this point, it really doesn’t matter.
The debt cannot ever be paid back no matter how much austerity.
Little Johnny is 100 lbs overweight. His parents say he will only eat ice cream or cookies.
Unhappy days lie ahead for Johnny (Greece) and his parents (Germany)
and for their cousins, Japan, Spain, Italy, US…
When not if.
Bluestar: I am curious as to how you are positioned going into this weekend. If it is not a secret, please reiterate.
I think there is no “good” outcome to the Greek vote. Anybody long stocks going into this is unwise. A derivatives problem is not far off.
I reckon if we rip monday thats a good opportunity to short.
Im thinking whatever the outcome of the Greek referendum the market extends its drop. Thats just a guess. Greece is a side show.
Blue- Have you seen Felder’s blog. You guys have similar styles- thoughtful maybe. Some of the financial blogs these days look and feel like driving through the wrong part of town at night. Makes you want to lock the doors and watch your 6’s.
http://thefelderreport.com/blog/
PB,
I am massively short QQQ, SPY and some stocks. I use short term option to trade the ranges. I got good prices on my shorts and I am close to the ATH on most of my positions. I have no options right now. On POPs I buy puts and when they go green I monetize. I am becoming more convinced the top is in and I am playing for a big correction. If you look at other major indexes they all topped and appear to be in down trends.
I think greek news either way is bad for bulls. Bad news lower right away. Good news and we pop but then fade which will give the bulls an oh shit moment. The credit cycle is peaking and maybe we get one more high but the momentum of this market is over and gravity is slowly taking over despite the best efforts of the central banks. Technical damage is occurring.
The China implosion is destroying the myth of Central bank omnipotence. They are now saying you can margin your house for stocks. Clearly they have reached their Duke and Duke moment “Turn those machines back on!!!!!”
Superpostron,
I concur. On any pop I reload puts.
T.C.
I will check it out.
The IMF is now saying Greece needs a debt restructure. I think even if there is a yes vote there will be debt restructuring.
Which in a way calls into question the need of a referendum.
Superpositron: Yes, Greece is a sideshow but it is also “forward guidance” on much bigger problems in the EUR zone.
Bluestar: Thanks, I am neutral at the moment as the cyclical bull has fried the bears multiple times. But deflationary pressures are gathering steam. Just today I found out that the local ‘Only Store In Town’ canceled their traditional fireworks display…because sales have fallen off a cliff. A long-time tradition, gone kaput, just like that.