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Look at Europe go!
2.5% moves are HUGE for a single day on major indexes and we're already (7:30 EST) past that point for Germany (EWG), France (EWQ) and Spain (EWP) in anticipation of a last-second deal with Greece that will put off the next crisis for more than 30 days. Already this morning, the ECB has increased the amount of emergency loans available to Greek banks to offset the massive daily outflows of capital as depositors flee the banking system. See – all is well!
What they are really celebrating is that there is no problem the Central Banksters will not throw money at and that's very encouraging as everybody has problems to one degree or another in the Eurozone and, as long as no one wonders where all this free Central Bank money comes from, we can paper over these problems seemingly forever. That is the true glory of a monetary Union – you have a Central Bank that endlessly prints currency that is removed from your own country's bond market so, when you are Germany (for example) you get to act "holier than thou" even though you are just as irresponsible as everyone else.
Greece's markets (GREK) are up 10% this morning as Greece submitted a proposal that would increase pension contributions by wealthy employers (earning over 500,000 Euros) while phasing out some payments to it's poorest pensioners (the ones least likely to fight back) and eliminating early retirement options.
It's a good move by Socialist Tsipras, who is now forcing the ECB to be the bad guy if they turn down a plan that is solving their balance sheet problem by placing a burden on Greece's top 1% – the very people the ECB serves. This is a very dangerous precedent so the deal may still blow up (with other excuses, of course) before any other countries get an idea that this is a way to fix deficits.
Tsipars's move means that those other EU corporations who are licking their chops as the force Greece to privatize their vital services may be walking into a tax trap as they fall under the Greek Government's umbrella. It had been hoped, by the ECB and IMF (who trained journalists to promote their agenda at the expense of the Greek Government) that this crisis would undo Tsipars's left-wing coalition and allow them to get their own puppets back in control but, as can be seen from Friday's pro-Greece rally – they have grossly miscalculated how much the Greek people now hate the IMF and ECB.
Oh sorry, that's London! This is Greece. This is France. This is Spain. Portugal. Germany. That's right, while we're distracted by Greece, other nations in Europe are rebelling against austerity too (and, if you live in the US, you know nothing of this because our MSM pretends Everything is AWESOME) and that's why the EU/ECB/IMF can ill-afford to let Greece off the hook when other nations owe 10 times what Greece owes and, one day, they will have to be reckoned with as well…
Speaking of being distracted from catastrophes in the making — China!!!
Anyway, I know people hate these charts that compare a pattern we're seeing today to a pattern we saw just before the last time the markets collapsed because this time, of course, is different because of blah and blah, blah. While that kind of argument is eloquent as always, to me these are kind of a reminder to keep our eye on the ball – especially when US companies have 100% more debt now than they had in 2007 so "this time is different" may be WORSE!
We know yields are rising and that makes junk bonds, with their higher risk, less attractive as regular bond rates catch up and, to some extent, a little inflation is a positive thing but the only reason we're at these historic yield lows is because the Central Banksters have pumped in tens of Trillions in liquidity into the system while Corporations have issued Trillions in debts and Investors have borrowed Trillions in margin and then Corporations and Investors have been racing each other to buy stocks with all that borrowed money driving prices up to what some people say is now a bubble.
When you have a bubble based on false signals and false expectations, they can easily pop, like we did in 2007/8. Remember, no one attacked us, there was no famine, everyone had jobs at the time… All that happened is that it was discovered that homes weren't actually worth what people thought they were because banks had been disguising risky loans as prime loans which meant the banks balance sheets weren't what we thought and PRESTO!, the whole house of cards came tumbling down.
This time is different because TSLA, who make 60,000 cars a year, is priced at $33Bn on $300M in annual losses while Ford, who make 3M cars a year (50x) and $3Bn a year (100x, to be generous) are priced at $60Bn (2x). This time is different because NFLX, who makes TV shows and provides a monthly subscription services to 60M people is priced at $40Bn on $5.5Bn in annual revenues and $250M in income while TWX, who have 114M HBO subscribers and 30M cable subscribers generating $30Bn in annual revenues (5.5x) and $4Bn in profits (16x) is priced at $72Bn (1.8x).
THAT'S WHAT A BUBBLE IS PEOPLE – unrealistic valuations that can't be justified by anything other than unbridled (and often unrealistic) optimism about a future that may not actually come to pass. Any sign of things not working out so that NFLX, TSLA or hundreds of other momentum stocks won't be able to grow earnings 10x to catch up with valuations can lead to a very quick and VERY painful market correction.
Back in 2007/8 we had $100 oil and that fueled a bubble in the energy sector and we had a housing price bubble that fueled a bubble in mortgage companies, home builders and, of course, banks. What we have now is a high-expectations bubble for "disruptive" companies to create "new paradigms" but, more so than that, we have the liquidity bubble that has been brought on by endless money-printing by the Central Banks and that has flooded the World with money and artificially made it very cheap to borrow but who will be found to be swimming naked when the tide goes out?
Fidelity's Ian Spreadbury told the London Telegraph this morning that he is concerned that a “systemic event” could rock markets, possibly similar in magnitude to the financial crisis of 2008, which began in Britain with a run on Northern Rock. “Systemic risk is in the system and as an investor you have to be aware of that.” The best strategy to deal with this, he said, was for investors to spread their money widely into different assets, including gold and silver, as well as cash in savings accounts. But he went further, suggesting it was wise to hold some “physical cash”, an unusual suggestion from a mainstream fund manager.
Neither Spreadbury or I are looking for an immediate collapse. We were worried Greece would not be fixed and would be the immediate cause of a crisis and, hopefully today we can avoid that. Once Greece is out of the way, we'll see how China opens tomorrow (holiday today) and then we'll keep our eye on Japan (we're back to shorting /NKD at 20,600) and, if we can get past that, we'll only have to worry about the rest of Europe and, of course, Russia/Ukraine.
Other than that, everything is AWESOME!
