posted on 06 August 2015
Under siege, Jean-Claude Juncker maintains that there is a sinister Anglo Saxon plot [i] afoot to destroy the Eurozone Project. Events leading up to and immediately after the resounding No vote in Greece suggest that the plot is thickening. Post No vote, Juncker is trying to save his reputation and his job by opining that the whole situation has become a "circus"; and that he does not understand what the referendum question meant [ii]. He thus leaves a door open to a compromise that will save his career.
Both Juncker and Tsipras were at one time clowns in the "circus"; with each playing an exaggerated antipathy towards the other which disguised their cooperation. The objective was to give Tsipras the credibility with Greek voters that would allow him to do a deal. Both clowns miscalculated. Last week the Telegraph reported the extent of Tsipras's miscalculations when it was revealed that he had intended a Yes vote that would have allowed him to make a compromise deal and retain his image of being a credible anti-Austerity campaigner [iii].
The stress of failure to engineer a Yes vote was clearly evident in the appearance of Tsipras, when summoned by the EU after the No vote. To some of his European hosts, the bags under the bloodshot eyes and pustulating cold sore clearly evinced the symptoms of the kind of extreme stress that can destroy a man. To others, they were signs of the debauched bacchanalia during the after-party party that followed the No vote. The stress can only have been made worse, by the fact that he now intends to go along with his original expected course of action based on a Yes vote and capitulate to the Troika. Such a capitulation will see him thrown to the wolves who voted No; and still expect him to deliver on his promise of better debt terms. Tsipras has effectively caved in and agreed to meet all outstanding debt payments [iv].
Going into the Sunday deadline, he then offered to meet most of the demands made by creditors in return for a bailout of 53.5 billion euros ($59.4 billion) [v]. Immediately prior to the referendum, the IMF had eyeballed the size of the funding requirements of Greece at $40 billion over the next three years - [vi]; and opined that this was unsustainable without some form of haircut and debt relief. There seems to be trouble at mill in the IMF however. It then emerged that attempts had been made, by a European contingent within the IMF, to block the publication of this ballpark guestimate and suggested Saltwater School solution for Greece's problems [vii].
It then also emerged that Lagarde's future is now in doubt, due to her subjective decision to align herself with the Freshwater School that advocates strict German forms of austerity for Greece [viii]. It also emerged that there was indeed a Saltwater School within the IMF, connected to the $40 billion Greek bailout estimate, that had been suppressed; right up until the last minute when Lagarde realised that her career as a double-agent was over [ix].
Lagarde has overplayed her hand and finally shown that her sympathies lie more closely with Wolfgang Schaeuble than with the Anglo Saxon voting bloc within the IMF. It is now clear why Larry Summers [x] was seen to begin hurling abuse at the Troika the previous week in Epoch of Belief, Epoch of Incredulity (27) "Metanoia". The Anglo Saxon drive to clean up the global levers of economic power and replace them with more empathetic personnel is gaining momentum. As Lagarde's tenure became more tenuous, it was revealed that France and Italy had allied with the Anglo Saxon group in order to defeat Germany's application of its Freshwater economic hegemony to the Eurozone [xi]. The IMF then revised down its growth forecasts for the USA, UK, Canada and Japan; thus providing greater scope for these countries to put all notions of interest rate increases on hold [xii].
Perspicacious readers who closely read Epoch of Belief, Epoch of Incredulity (27) "Metanoia" would have seen the semiotics of Varoufakis threatening to quit but subtly indicating a right turn. He dutifully followed his little signal, by resigning in order to facilitate greater concord in the re-opening of dialogue with Greece's creditors [xiii]. The right turn now comes with his replacement, the eponymously named Euclid Tsakalatos; who will be expected to live up to his name by the Troika if a deal is to be made [xiv].
The "circus" continued with Tsakalotos however; when his hastily scribbled "state of play" negotiation points, on a hotel notepad in English, revealed that he was as unprepared for the No vote as his Prime Minister. When it became clear from both Tsipras and Tsakalotos that they were not in fact bearing gifts, the Eurogroup swiftly replied that Greece had until Sunday to provide credible proposals otherwise a vote to expel it from the Eurozone would follow [xv].
The No vote itself illustrated several things.
The majority of Greeks still believe that they can still have their cake and eat it by welching on their debts and remaining in the Eurozone. The obfuscated referendum question only seemed to exaggerate this delusional belief. The No vote seemed to think that it was voting to give Tsipras a stronger negotiating hand, despite the warnings to the contrary from the Eurogroup. The response to the No vote, or rather lack thereof, also illustrated that the Eurozone had no Plan B ready to go in the event of such an outcome.
Tsipras's failure to deliver any concrete new proposals, when he was summoned to meet his EU counterparts after the No vote, confirms that he never expected a No outcome; and that he has no plans of how to deal with such an outcome [xvi].What will now ensue is more of the horse-trading that the Greeks excel at and the Europeans underachieve at until a point in time is reached when European taxpayers get bored and signal that life in the Eurozone without Greece would be much better.
Eurogroup head Dijsselbloem's reaction to the No vote, signals that the Northern Europeans are already there. He opined that the vote was "very regrettable for the future of Greece" [xvii]. Clearly he sees not only the Grexit, but also the complete collapse of the country in the near future. Before then, however, the various anti-Austerity groups in Southern Europe and France can run riot. In anticipation of this, Emmanuel Macron started making cryptic references to avoid another Versailles moment [xviii] with Greece; and Prime Minister Rajoy totally panicked and started offering tax cuts [xix].
Macron's instincts seem to be shared by the analysts at RBS; who equate the Greek situation with wartime experiences of other European nations. It would seem that German led Northern Europe has declared war on Greece. A Spanish Civil War as a precursor to a wider European conflict seems less likely at this stage however, if history is rhyming again, since Podemos is keen to distance itself from Syriza. The lumpen-Middle Class in Spain is a significant majority that Podemos cannot afford to alienate as Spanish elections loom. Pablo Iglesias was therefore at pains to differentiate Spain from Greece [xx], in order not to alienate these potential Podemos voters; after Rajoy had already tried to buy their votes with tax cutting legislation.
Angela Merkel is in an awkward position. As domestic attitudes harden against Greece, she is faced with another Balkan threat to combine with the emerging threat from Ukraine. Just as Greece blows up, Merkel faces a fact finding Balkan tour; during which she needs to assess the situation on the ground and plan strategically for German intervention if things deteriorate further [xxi]. Whatever the outcome of the Greek referendum, the German parliament had already taken the decision to end all constructive dialogue [xxii]. The No vote therefore changed nothing in Germany; it only served to galvanise German preparations for life with the Euro after Eurozone dissolution.
The problem for Merkel is that German opinion is now driving her actions; since she hopes to get re-elected as Chancellor in the near future. This German political directive therefore forces her to play hardball and refuse to countenance any concessions for the Greeks. One such concession is the rolling forward in time of Greek payments rather than writing them down. With IMF support, this solution could be achieved. Unfortunately for Merkel, German attitudes have become so ingrained that it will not fly in Germany [xxiii]. The European Project has now become the German Project and the Euro has therefore become the Deutschemark by default. Epoch of Belief, Epoch of Incredulity (27) "Metanoia" suggested that Germany was hardening the Euro in preparation for this eventuality. This hardening will be achieved by the Bundesbank increasing German equity and control of the ECB, as write-downs on Greek debt create capital losses for the ECB and its national central bank members.
Jens Weidmann lent support to this line of reasoning last week, when he signalled to the German government that a Grexit would cause a loss of government revenue from the Bundesbank associated with losses on Greek bonds [xxiv]. He then pushed for further Euro hardening by reiterating that ECB emergency loan extension to Greece should remain frozen [xxv]. He could therefore be seen to be deliberately creating the losses that he is warning of. The only rational motivation, for such perverse behaviour, could therefore possibly be the hardening of the Euro to become the new old Deutschemark.
His warning was heeded by the ECB, that of late is also trying to harden the Euro after Draghi torpedoed it with his front-loaded QE earlier in the year. The ECB turned down a Greek request for expanded emergency lending under the ELA programme [xxvi]. The ECB also raised collateral margin haircuts for ELA eligible collateral; which effectively raises the cost of credit in Greece [xxvii]. To cover itself whilst complying with the German directive to save and harden the Euro; the ECB opined that expanding the ELA programme would occasion "Moral Hazard" [xxviii]. The ECB's promise to do anything in relation to Greece, articulated by Ignazio Visco, was therefore lacking in any substance [xxix], as was Nowotny's claim that an emergency bridge loan for Greece could soon be made [xxx].
Ardo Hansson put on a brave face by signalling that the ECB stands ready to apply more unconventional tools should Greece leave the Eurozone; but without a political backstop, in the event of this obviously political event, the ECB is way out of its depth [xxxi]. The ECB has reached the practical limits of its mandate, at which its future actions are circumscribed by the politicians and its charter [xxxii]. This position was underlined by Draghi himself, when he opined that the Greek situation is getting increasingly hard to fix [xxxiii].
The ECB is now facing the prospect of not being paid on the Greek securities it owns [xxxiv]. This has been used as a bargaining chip by the Greeks in the past, but now its effectiveness is waning as the move to save the Euro at the expense of Greece has become the priority in the Eurozone.
The latest initiative under consideration, to save the ECB's P&L and the Euro and Greece's Eurozone position, is for the EU to guarantee the ECB's loans to Greece [xxxv]. Germany as the uber-guarantor would necessarily need to approve this, which would then involve the time-consuming process of German court rulings and parliamentary votes. It will be interesting to see if Schaeuble waives the German democratic process and signs the country up for this ECB quick-fix; and also what his quid pro quo will be.
The Greek government also has about 2.5 Billion Euros of public sector salaries and pensions coming up on July 15th [xxxvi], creating a dilemma over which payments to prioritise. The muted reaction of the Euro, to the Greek No vote, illustrates clearly that a process of currency hardening is now under way [xxxvii]. It also signals that the speculative positioning is net short Euros; thus creating a technical bid for the currency in addition to the fundamental bid being created by the hardening process.
Japan's preparations to strengthen the Yen, in order to deliver a new round of QE, have been observed progressing nicely. Finance Minister Amari joined in the preparations recently; when he opined that, since inflation has been ostensibly achieved, the government has the room to raise sales taxes to balance its budget [xxxviii]. Amari was also careful to issue the large caveat, that all this is subject to the global economy continuing on its current growth trajectory. In the event of a growth shock, all bets will be off and the door will presumably be open for the BOJ to step in with more QE. Ideally, taxes can now be raised, which will strengthen the Yen and ultimately slow the economy enough for a new wave of QE and another leg down in the Yen.
If the global economy slows, then there will be no tax increases; and the BOJ will have the green light to start easing again. Amari however went further, to actually discount the expected tax hike altogether; when he said that the situation in Greece shows that austerity does not work where there is no economic growth [xxxix]. Following the Greek No vote, Governor Kuroda swiftly signalled that he is watching the headwinds blowing Japan's way [xl]. Etsuro Honda, a close friend and adviser to Abe, went the furthest of all by opining that a BOJ exit was off the cards in the face of fiscal tightening and global headwinds [xli].
Japan therefore looks set to immediately embark on another round of easing prematurely, as all global central banks use the problems in the Eurozone as the excuse for further easing. As short Yen positions got squeezed out by the events in Greece and China last week, the Japanese policy makers prepared to hit the easing button. The widely held consensus is now that Euro weakness will prompt a new race to the bottom by all central banks [xlii]. This consensus also assumes that the Fed will not hike rates this year [xliiii].This consensus ignores the evidence that the Northern Europeans and the ECB are now doing their best to strengthen the Euro. Consequently, speculation directly involving the Euro looks like an even bigger mugs' game than it was before the Greek referendum.
Readers of Age of Wisdom, Age of Foolishness (38) "Rosebud" [xliv] will remember that "Rupert's Bear Market" was seen as a precursor to the big risk-on event, when the Fed will abandon tightening and refocus on an accommodating economic stimulus. Under such circumstances, the Euro mugs' game becomes even more so.
China continues to try and defy gravity, by trying to keep its equity bubble inflated.
Perspicacious readers will also remember that in Age of Wisdom, Age of Foolishness (38) "Rosebud" [xlv] it was suggested that the Anglo Saxon media, epitomised by Rupert Murdoch, would have its day and bear market in relation to China. This day of reckoning seems to have occurred last week. The failure of the Government and the PBOC to save the equity market was reported with great enthusiasm in western media [xlvi]. The conclusion is that Xi Jinping is now trying to save face and political control of a situation that is out of his control. His survival is now inextricably linked to the value of the equity market, just like any leader of a liberal democracy.
Little note was made, in the broader media, of the fact that Chinese households in fact have less than 5% of their wealth in equities [xlvii]. The equity crash will hit the leveraged players and their financiers far harder than the majority of households. Leveraged long bets on Chinese stocks have increased to a record level, versus the size of the market, as stock prices fall faster than margin traders cut their positions [xlviii].
As the bubble burst, the securities regulator allowed the securitization of margin loans [xlix]. No doubt these securitised loans will ultimately get bought up by the PBOC; as it is forced into performing its lender of last resort mandate in the absence of other buyers of this toxic debt.
In the latest move, real estate can now be used as collateral for margin trading [l]. This move was intended to signal confidence in both the real estate and equity markets; and thus the economy in general. Confidence however only applies to assets that are moving up in price, so this step has fundamentally weakened the confidence in both asset classes.
It will be interesting to see, if and when a more traditional hard-line resistance to Xi's authority develops. It will also be interesting to see if he embarks on foreign conflict, to play the distracting patriotic card in order to save his political career. Such a move would probably be welcomed by the Republicans. The violent symbiosis of the two, suggests a clear logic behind assuming that political relations between America and China must now deteriorate going forward. Analysts at RBS will no doubt then be including analysis of Chinese GDP contractions during periods of conflict in their Tweets.
The scope for a more robust foreign policy reaction is neatly provided by the BRIC Summit in St Petersburg [li], at which plans for an alternative global financial system to the Anglo Saxon incumbent are eagerly anticipated. Clearly, Xi Jinping had hoped to use this event as a launch pad for the Chinese AIIB project; however the equity market collapse has changed his focus. Clearly also, those antipathetic towards this BRIC challenge have been able to exaggerate the apparent policy failure in China going into this event.
The response from China thus far, suggests that it is already in a state of high alert; and that asymmetrical economic warfare has already broken out. The terse yet cryptic official response, which promised a full investigation into the role played by "foreign meddlers" in the $3.7 trillion destruction of shareholder value, from agencies normally associated with national security confirms that war has been declared [lii]. The as yet unexplained shutdown of the NYSE trading platform and correlated grounding of all United Airlines flights [liii], on the same day that the Chinese equity market went into freefall, also suggests that the response from China has already been asymmetrical and proportionate.
Confluent with the rising militaristic undercurrents in foreign policy, Joint Chiefs of Staff nominee General Dunford explained that current Pentagon thinking actually places Russia back as the greatest threat to American national security [liv]. This view was reiterated by US Air Force Secretary Deborah Lee James [lv]. Earlier this year, Director of National Intelligence Clapper had placed Chinese cyber-terror as the greatest threat. Clearly the recent tit for tat cyber-terror on the Chinese and American stock exchanges is yesterday's threat that Clapper had already flagged; so that it is now time to move on to military hardware rather than clandestine economic software as the global conflict escalates.
Epoch of Belief, Epoch of Incredulity (27) "Metanoia" observed the colonial family of the former British Commonwealth falling into the thin red line behind the Anglo Saxon agenda. Australia was identified as a particular victim of its fascination with the China syndrome. Last week the spirit of 1986, when Paul Keating opined that the country had become a "banana republic" [lvi] by nature of its reliance on zero value-added commodity exports, was rekindled as the economy and the Aussie Dollar followed China down the tubes.
At the front of the thin red line, George Osborne charged into the heat of battle with a budget that affirms Britain's commitment to NATO defence spending [lvii]. As a future PM candidate, Osborne needs to establish his global warmongering credentials; at a time when the global economic headwinds are begetting unilateral militaristic policy responses. Having ring-fenced Britain's ability to wage war, Osborne has now waged guerrilla war (on the cannon fodder who traditionally end up dying in large numbers in official British wars) according to the IFS's budget analysis [lviii].
The scalpel, rather than the axe, was taken to Britain's welfare budget [lxix]; and a huge bandage named the Living Wage was applied to cover the gaping wound. The same bandage will presumably be applied to the eyes of the lumpen-Middle Class, in order to obscure the social consequences of Osborne's welfare cuts going forward. They will then feel more comfortable, in the assumption that those being cut from the welfare system will have a Living Wage in prospect to compensate them.
All sections of the polity will feel the loss of the fiscal stimulus in due course, which will shave a good chunk off GDP. To ease the pain, Mark Carney will keep interest rates on hold for longer; using the global headwinds rather than Osborne's budget as the excuse [lx]. Consequently the bid for Sterling, based on the prospect of rising interest rates vanished. The bid for Gilts however remains strong, against the backdrop of weaker economic growth and tighter fiscal policy.
Behind enemy lines, waiting to link up with British and Commonwealth forces, the US Treasury sowed havoc. Confirming that there is some substance, in the deranged ramblings of Juncker about the Anglo Saxon plot to derail the Eurozone Project, Treasury Secretary Lew opined that a deal which is sustainable along the lines suggested by the Saltwater cadre at the IMF should now be applied to Greece [lxi].
His verbal assault was returned with alacrity by Wolfgang Schaeuble, who made reference to defaulting Puerto Rico as evidence of America's own Greek default moment [lxii]. Secretary Lew then went on to report that China's headwind would not impact the US economy [lxiii]. All this was fighting talk indeed; and guaranteed to put a bid in for the Dollar, by implying that the Fed now has the green light to start hiking interest rates.
Luckily for US exports and the US economy in general, the FOMC took a more circumspect view of things. The latest FOMC minutes, as interpreted by "embedded" journalist Jon Hilsenrath, whilst confirming that the Fed was in hiking mode also suggested that there was enough geopolitical risk to allow them to hold off for now [lxiv]. Epoch of Belief, Epoch of Incredulity (27) "Metanoia" hinted that this risk would be used by the Fed to put rate hikes on hold and even to reverse them. The FOMC minutes confirmed that this card is on the table face down, but has not been played yet. Anxious to bluff the speculators and keep the markets in a volatile dynamic equilibrium, San Francisco Fed's John Williams commented that the US economy was still strong enough to allow a September rate hike [lxv].
Yellen's home town is playing a leading role in the deft art of guidance that many have assumed had been abandoned. Last week, the guidance extended in the form of a prosaic commentary from the San Francisco Fed entitled "Finding Normal: Natural Rates and Policy Prescriptions" [lxvi]. The gist of the article is the observation that the "FOMC Dot Plotters" at the Fed have consistently lowered their forecasts for both the Natural Rate of Unemployment and the Equilibrium Real Interest Rate over time. What this means is that the FOMC has imprisoned itself in the groupthink, which believes that low interest rates can still co-exist with the strengthening economy. Thus, even without the global headwinds, US interest rates are converging on an interest rate term structure that is itself falling over time. Factor in the current global headwinds; and this interest rate term structure projection then translates into interest rates remaining on hold and potentially being cut even further. No wonder Yellen is avoiding Jackson Hole this year.
If the global economy continues to blow up by then, she will be called upon to do the right thing and forget about raising interest rates. The theoretical basis has just been laid by the San Francisco Fed; and global developments will provide the trigger. Any strength in the US Dollar will have corporate America and the US Treasury crying out for this policy response. Outgoing Fed Governor Kocherlakota gave a glimpse of what the "Finding Normal" process will entail [lxvii]. In his latest speech, he opined that the falling Neutral Rate outlook gave the Treasury great scope to start issuing bonds again, in order to push yields out along the yield curve. Fiscal stimulus and a steeper yield-curve is on the way, to support the bid for a falling US Dollar. This Saltwater panacea will then be enforced with greater or lesser degrees of success as the Anglo Saxon crusade goes global.
- [xlvii] http://uk.businessinsider.com/chinese-households-invest-little-in-stocks-2015-7?nr_email_referer=1&utm_source=Sailthru&utm_medium=email&utm_term=Markets%20Chart%20Of%20The%20Day&utm_campaign=Post%20Blast%20%28moneygame%29%3A%20Chinese%20households%20don%27t%20have%20much%20invested%20in%20the%20wild%20Chinese%20stock%20market&utm_content=COTD?r=US#ixzz3fJ07jgru
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