Brace Yourselves

I feel bad for the Greek people, but I don’t understand what it has to do with broader markets (especially U.S. markets). The idea that this could lead to disintegration of the Euro seems rather extreme to me.

Is anyone actually worried about this? And if so, what are your concerns?

One theory is the ripple effect this could have for the financial systems. If Greece defaults on its debt, any bank (central or otherwise) that holds Greek debt will have to steeply discount it, even if it’s not the issue that is actually defaulting. A further discount may need to be applied to any other sovereign debt in Euro denomination if a Greek exit from the Euro could potentially lead to currency instability. And hey, if Greece defaults, maybe Portugal, Ireland, and Spain will as well. So possibly any sovereign debt issued from those countries will need to take a haircut as well.

Many banks (and countries) are still so heavily leveraged that the write down of even a small percentage of their assets could cause them to blow right through their capital reserves. And a bank that has to book write downs that drop its capital to below sufficient regulatory levels may well have to start taking some drastic steps of its own. Some level of instability in the larger financial system could result, and that will almost certainly impact financial markets.

Do I think any of this will actually happen? I have no idea. None. But I think a very interesting “domino” argument can be made that while Greece itself may not be singularly important, it could be the first domino to fall that leads to many more. It may not lead to the disintegration of the Euro, but it could lead to the disintegration of some very heavily leveraged balance sheets.

How is this actionable? I have no idea. Sorry Saul :slight_smile:

Fletch

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If I do any buying it will likely be on Thursday.

Chris,

Just a quick question. What’s the rationale behind buying on Thursday? I believe Greek vote results are out by Sunday. How about buying early next week?

Thanks,
Hex

If Greece defaults on its debt, any bank (central or otherwise) that holds Greek debt will have to steeply discount it, even if it’s not the issue that is actually defaulting.

I found this article informative.

http://www.nytimes.com/interactive/2015/business/internation…

How does the crisis affect the global financial system?

Since Greece’s debt crisis began in 2010, most international banks and foreign investors have sold their Greek bonds and other holdings, so they are no longer vulnerable to what happens in Greece. (Some private investors who subsequently plowed back into Greek bonds, betting on a comeback, regret that decision.)

And in the meantime, the other crisis countries in the eurozone, like Portugal, Ireland and Spain, have taken steps to overhaul their economies and are much less vulnerable to market contagion than they were a few years ago.

When “most international banks and foreign investors” sold their Greek bonds that was when they took their haircut, and that is already reflected on their books.

Nobody should have been caught by surprise at this point, and anyone who did not already prepare probably shouldn’t have access to anything more sophisticated than a piggy bank.

There is more to the article worth reading that my excerpt.

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Just a quick question. What’s the rationale behind buying on Thursday? I believe Greek vote results are out by Sunday. How about buying early next week?

On Friday the markets will be closed so Thursday is last train day this week. Greeks vote on Sunday. The could potentially drag out into next week or beyond but if stocks get pummeled really badly this week, I may not be able to resist buying some on Thursday.

BTW, I normally don’t sell into any crisis but I was 98% invested without considering my short put positions. I may need access to some cash in about 2-3 months for a large purchase so I wanted to raise some cash. I went from 2% cash to about 6% cash today.

Chris

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http://www.nytimes.com/interactive/2015/business/internation…

How does the crisis affect the global financial system?

Wow, what a great informative article from the Times. Thanks RHinCT.
Saul

I think the following falls into the “investment related” category. It is todays missive from Ben Hunt and he does point out the “I have no choice” stage is likely coming. He says that if either side caves in, a relief rally follows. If both go over-the-cliff, not too much happens either how much or how long. Longer term, not so good for anybody but it will evolve over 12 to 18 months. I think that is a good summary. Read for yourself.

"Nothing like a good Friday-after-the-close blockbuster to set the stage for an interesting week.

At 1am Saturday morning Athens time, the Greek government called for a nationwide referendum to vote the Eurogroup’s reform + bailout proposal up or down. The vote will happen on Sunday, July 5th, but Greece will default on its IMF debt this Wednesday, and as a result the slow motion run on Greek banks is about to get a lot more fast motion unless capital controls are imposed. If you want to get into the weeds, Deutsche Bank put out a note, available here, that I think is both a well-written and comprehensive take on the facts at hand. As for the big picture, I’ve attached last week’s Epsilon Theory note (“Inherent Vice”), as this referendum is EXACTLY the sort of self-binding, “rip your brakes and steering wheel out of the car” strategy I wrote about as a highly effective way to play the game of Chicken.

Look, I have no idea whether or not Tsipras will be successful with this gambit. But I admire it. It’s a really smart move. It’s a wonderful display of what de Tocqueville praised as the “condition of semi-madness” that was so politically effective in 1848, and I suspect will be today. Plus, you can’t deny the sheer entertainment value of hearing Dijsselbloem splutter about how he was open to a revised, revised, Plan X from Greece all along, if only Tsipras would continue with this interminable charade. “The door was still open, in my mind.” Priceless.

So long as Tsipras can avoid market anarchy and TV coverage of violent ATM mobs this week, I think the NO vote is likely to win. The referendum is worded and timed in a way that allows very little room for Antonio Samaras and other Syriza opponents to turn the vote into a referendum on the Euro itself, which has proven to be a successful approach in the past. Particularly as the Eurogroup rather ham-handedly denied the request for a one-week extension in the default deadline, the referendum is being framed by Syriza as what Cormac McCarthy called a “condition of war”, an over-arching game where “that which is wagered swallows up game, player, all.” It may well be a close vote, but it’s hard to vote YES for a public humiliation of your own country under any circumstances, much less when that YES vote is being portrayed as giving aid and comfort to the enemy.

Here’s how I see the game playing out after the vote.

If Greece votes to accept the Eurogroup reform proposal after all, then the game of Chicken resolves itself within the stable Nash equilibrium of a shamed Greece and a triumphant Euro status quo. I would expect an enormous risk-on rally in equities and credit, particularly in Euro-area financials. Hard to say about rates … peripheral Euro debt (Italy, Spain) should rally, and German Bunds might, too, as the Narrative will be that Germany “won”. But reduction of systemic risk is a negative for any flight-to-safety trade, so this outcome is probably not good for Bunds in the long term, or US Treasuries over any term.

If Greece votes to reject the proposal, then either the game resolves itself within the stable Nash equilibrium of a shamed Euro status quo and a triumphant Greece (if the ECB and EU decide to cave to some form of the original Greek proposal), or we enter the death spiral phase of a game of Chicken, as all parties start to talk about how they “have no choice” but to crash their cars. That latter course is the far more likely path, I think, given how the various Euro Powers That Be are already positioning themselves. It’s all so very 1914-ish. Draghi’s cap on bank-supporting Emergency Liquidity Assistance (ELA) is the modern day equivalent of Czar Nicholas II’s troop mobilization. Good luck walking that back.

If we go down the death spiral path and some form of Greek exit from the Euro-system, I expect the dominant market Narrative to be that Greece committed economic suicide and that the rest of Europe will be just fine, thank you very much. That should prevent a big risk-off market move down, or at least keep it short-lived (although you should expect Bunds and USTs to do their risk-off thing here). Unless you’re a hedge fund trying to make a killing on those really cheap Greek bonds you bought two years ago, there’s no reason to panic even if we’re on the death spiral.

Over time, however, I expect that dominant Narrative to be flipped on its head. Greece will quickly do some sort of deal with Russia (hard currency for port access?), and then the IMF will strike a deal because that’s what the IMF does. More and more people will start to say, “Hey, this isn’t so bad”, which is actually the worst possible outcome for Draghi and Merkel. At that point, you’ll start to see the Narrative focus on the ECB balance sheet and credibility, and as Italian and Spanish rates start to creep up and as the spread to Bunds starts to widen, people will recall that ECB QE only has national banks buying their own debt … the Bundesbank ain’t propping up Italian sovereign debt. I suspect it will be a slow motion contagion, all taking place in the Narrative and expressed in Italian, Spanish, and French politics over the next 12 months or so. The Red King will start to wake.

One last point on how the market Narrative will shift if we go down the death spiral path, and that’s the dog that will stop barking. The incessant and often silly focus on Fed “lift-off” is about to go on summer hiatus, which can’t happen soon enough for me."

Again, this is from Hunt’s “Epsilon Theory”.

I did sell two positions, about 0.5% of portfolio. Not exactly a major move. Picked up $500-ish paper profits by end of session.

KC

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I don’t like trying to predict the future, preferring trying to react to the present, hopefully in a smart way.

OTOH. markets do not usually crash over events known to all,. Maybe not dissimilar to poison ivy, you don’t have to worry about the patches that are known to all, it’s the patch you didn’t know about that causes the problem. This is amplified if you have convinced yourself there is no poison ivy on your route so you aren’t paying attention.

Unless this is like the asasination of duke Ferdinand at Sarajevo - and even then I think that was an excuse not a real triggering event.

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Even with Eurozone stocks shedding nearly 4%, with the S&P 500 (^GSPC) suffering its biggest daily loss in 14 months, with all 10 S&P industry sectors down and with more than 93% of all trading volume in declining stocks – Monday’s market action did not qualify as a chaotic, indiscriminate selling purge.

The same guild of traders will tell you that after a nasty one-day drop, it’s preferable to see further weakness the next morning rather than the tentative bounce that greeted investors Tuesday morning.

http://finance.yahoo.com/news/now-things-get-interesting-for…

I expected this morning’s rally. But so far it isn’t very strong.

The market needed an excuse for a little overextended selling. Healthy.

For all you good folks who are a member of PRO, Jeff Fisher has a great article on the down day and the Greece hype. Included in his comments is a link to a Morgan Hosel piece which is a great read as well.
I do not know if one is allowed to quote from a Fool service but we shall see.

And I quote:
When it comes to Greece, the country has lived beyond its means and doesn’t have the resources to sustainably support its debt. This has seemed obvious for five years (see Morgan Housel’s explainer for more). Had we avoided stocks because of it, we would have missed years of gains. And why? Greece’s economy is small, and most of its debt is carried by other European countries (rather than public companies), so any default should do relatively little to no harm to the companies we own.

Personally, I am searching a good entry point on more stock. Added to some positions yesterday late.

No worries,
Mark

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