Greece threatens a complacent market.

May 23, 2011

Global Macro

The markets were under pressure Friday night from the troubles of the European periphery, specifically Greece again with Fitch this time highlighting that a default is a default after some European politicians and bankers were trying to sugar coat this idea that an extension of the debt repayment was only technical in nature, as if it doesn’t matter.

Indeed we now have a new term for this extension (or re-profiling) of the debt with Bundesbank President Jen Weidman calling it a “prolongation”. But adding fuel to the fire he did say that Greek debt is no longer acceptable under ECB rules as collateral for repo transactions. That implies a lot of money needing to be repaid to the ECB by banks all over Europe. Italy also got put on negative ratings watch and apparently, we saw this second hand, Norway refused to pay greece a small amount of $42 million saying that Greece had not done what was required to recieve the money.

Some readrers will be new to our blog but those who have been reading us in other places know that we are worried about the fingers of instability that are growing in the economies and markets at the moment and even though we don’t know when the likelihood of a default happening if seems to grow more likely by the week.

Indeed there was an article in the UK Telegraph over the weekend that paints a somewhat apocolyptic picture of the outlook for Europe should greece default but one that we have some sympathy with because of the fingers of instability. Fortress Europe is not likely to topple over, but it is teetering.

We worry about the impact not just in Europe but also in other markets because we strongly believe that free love and easy money have been distorting global trade in markets for at least the past 9 months since QE2 was announced and the short term capital gain chase that has been on every since smacks of Mynskian Ponzimania.

To wit, this week’s Barrons magazine in the US has an interesting article on the situation at the moment. It says (my bolding),

 The U.S. stock market fell for a third straight week, but is down just 2.2% from its late-April peak. That’s too shallow to even be called a correction. So why do things feel so much worse than they are?

Maybe it’s because the easy, dominant trade of the past eight months—selling low-yielding dollars to buy rallying commodities—has vanished now that the dollar has strengthened, and commodity exchanges are raising margin requirements to cool speculation. Sectors that have led the market—like energy and industrials—are faltering, and the lack of leadership adds to the creeping bewilderment and stocks’ desultory flip-flopping.

Nearly everyone has grown more circumspect. The pace of economic growth seems to be slowing. Energy and raw-material costs have risen. Our central bank’s heroic scheme to buy Treasuries to prop up the markets will end in June. Greece may not be able to pay its loans and may need to restructure its government debt, while China is tightening credit to fight inflation and cool its economy. Perhaps fatigued by such familiar fears, investors seemed more willing to fling themselves at fresher risks they don’t yet know, and the newly public shares of the social-networking site LinkedIn (LNKD) jumped 109% on its debut (See “Echoes of the Dot-com Boom.”)…

…The troubling thing about such an apprehensive crowd, and stocks still perched near the highest levels in years, is how the slightest excuse could trigger a further flight from risk.

This is what we were alluding to last week when we wrote about LinkedIn. But for us the key is that markets feel a little weird at the moment and much less stable than a few months ago. In truth we are fatigued with our constant warnings of storm clouds on the horizon, as we are guessing readers are, but the reality is that as uncomfortable as this constant harping on the risks is the reality seems to be that a Greek default is coming and the likely impact remains uncertain. As Keynes taught us that is never good.

But lets end on a bright note. the aforementioned Barrons article also said,

…eventually, and this could take a while, lower expectations will make it easier for even our sluggish economy to surprise and appease investors.

If only politicians and central bankers could understand that is the uncertainty that is the killer we could get this Greek, and whoever else, ddefault out of the way and give the global economy a chance to heal properly. Until then we’ll always keep coming back to this sickness at the core of Sovereign finances.

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  1. Is risk going OFF? | Lighthouse Securities - May 23, 2011

    […] rally, for the sake of not even half the worlds first trading day of the week. It’s like we wrote this morning, the greek situation really threatens a complacent, although worried, market but it doesn’t […]

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