Greece is back in the spotlight.
Talks broke down this morning and the Euro fell all the way to $1.088, a new low for the decade. The Dollar jumped to 97.235, up 4.5% in two weeks and back in the middle of its 6-month range. That, of course, is putting a bit of pressure on equities and commodities which are priced in Dollars and losing value relative to the currency they are priced in. In a low-volume, post-holiday week (London is still closed), we're not going to have much to go on, so this is more of a watch and wait kind of day.
Getting back to Greece, which is a very big deal that people have simply gotten tired of talking about. According to Greek Finance Minister, Varoufakis, there is a common fallacy pervades coverage by the world’s media of the negotiations between the Greek government and its creditors. The fallacy, exemplified in a recent commentary by Philip Stephens of the Financial Times, is that, “Athens is unable or unwilling – or both – to implement an economic reform program.” Once this fallacy is presented as fact, it is only natural that coverage highlights how our government is, in Stephens’s words, “squandering the trust and goodwill of its eurozone partners.”
The view that Greece has not achieved sufficient fiscal consolidation is not just false; it is patently absurd. The accompanying graph not only illustrates this; it also succinctly addresses the question of why Greece has not done as well as, say, Spain, Portugal, Ireland, or Cyprus in the years since the 2008 financial crisis. Relative to the rest of the countries on the eurozone periphery, Greece was subjected to at least twice the austerity. There is nothing more to it than that.
The problem, according to Varaufakis, is simple: Greece’s creditors insist on even greater austerity for this year and beyond – an approach that would impede recovery, obstruct growth, worsen the debt-deflationary cycle, and, in the end, erode Greeks’ willingness and ability to see through the reform agenda that the country so desperately needs. Our government cannot – and will not – accept a cure that has proven itself over five long years to be worse than the disease.
We'll see how this plays out over the next few weeks but clearly we're facing a serious impasse after 4 months of negotiations (in this round) with the potential fate of the entire European Union hanging in the balance. If the EU goes too easy on Greece, then Spain, Cyprus, Ireland and Portugal will want similar relief. If the EU goes too hard on Greece, then the four next worst performers may be next to defect from a Union that is clearly only united in debt collection. And, of course, there is now talk of the UK severing ties as well.
Meanwhile, there's been no improvement in the rest of the World over the weekend. Despite promising to buy more bonds last week and sparking a rally to record highs in the markets, the ECB actually bought LESS bonds, the least since March, when QE began, in fact. Facts, of course, don't matter to the markets, which are likely to bubble away regardless.
In Japan, the BOJ is buying record amounts of debt from the Japanese Treasury to prop up their joke of an economy but it still isn't enough to prop up liquidity anymore, as the 10-year note sale had the least interest since 2009 with overall demand now at the lowest levels since the 2007 liquidy crisis began. This is DESPITE the BOJ buying 12 TRILLION Yen ($99Bn) per month worth of bonds in a (so far) failed attempt to boost Japan's economy.
“The inflation rate will be higher in the second half of the year globally and in Japan,” Hiroki Shimazu, SMBC Nikko Securities Inc.’s Tokyo-based senior market economist, said in a telephone interview Monday. “There will be a shock in the global market in the second half of this year, including JGBs.” Ten-year yields may be as high as 0.8 percent in 12 months, Shimazu said, versus 0.425 percent as of 1:16 p.m. Tuesday in Tokyo.
As we expected on Friday, Zhuhai Zhongfu did indeed become the latest Chinese company to default on bond payments by missing a $96M installment this morning. The company did say it expects to pay the interest – just not the principal. “Chinese companies’ credit profiles are worsening because the economy hasn’t stabilized,” said Liu Dongliang, a senior analyst at China Merchants Bank Co. in Shanghai. “We may see more defaults in the coming months. The worst is yet to come.”
The ongoing problems in China have led GS to reiterate their bearish call on commodities for the 2nd half of 2015. According to Goldman, oil in New York will fall to $45 a barrel by October while the dollar continues its rise, pushing commodities prices lower as production costs slide. “We see downside pressures on commodity prices re-emerging,” the analysts wrote in the report dated May 22. “The recent rise in commodity prices is clearly at odds with our lower-for-longer bearish view across the complex.”
Very interesting this weekend was Fox, of all things, interviewing David Stockman who said:
The huge wealth disparity is "not because of some flaw in capitalism, or Reagan tax cuts, or even the greed of Wall Street; the problem is central banks that are out of control."
Simply put, they have "siphoned financial resources into pure gambling" and the people that own the stocks and bonds get the huge financial windfall. "The 10% at the top own 85% of the financial assets," and thus, thanks to the unleashing of almost limitless money-printing, which has created a massive worldwide financial inflation, "the central banks have created and exaggerated the wealth gap." Stockman concludes, rather ominously, "it's a coup d'etat, the central banks have taken over – unconstitutional domination of the entire economy."
Stockman has been saying this stuff for a while but to have his "radical" condemnation of Capitalism given 15 fair minutes on Fox is a real shift in the media landscape. As I've been saying for years, the disparity between the haves and the have-nots in this country can no longer be swept under the rug. Even GOP hopefuls in the coming election have been forced to discuss the problem and clearly the actions of the Central Banks his only exacerbating the issue – perhaps the tide is finally turning?
