Greece, Greece, and More Grease
Sunday afternoon I began receiving text after text and tweet after tweet regarding the Dow market futures reflecting a 450 point drop behind the news that Greek banks would close today and capital controls would be implemented as the country awaits a “referendum” on whether or not to default. Greek officials found out about this bizarre move from the Marxist leadership of Greece via twitter while they were in the middle of negotiating with Eurozone officials. By the time markets opened this morning the Dow was only down 150, it ended up moving 50 points higher from there (to a 100 point decline), and the sold off more throughout the day en route to a 350 point drop on the day.
But here’s the thing: China entered bear market territory last night as another big leg down helped their decline reach a 20% level ( in just a couple of weeks), and Puerto Rico announced (at long last) that their heavy municipal debt levels were simply “unpayable.” If there was no such thing as Greece – it simply didn’t exist, or at least this whole Greek financial mess didn’t exist – and you told me, “China’s stock market will be down 20% and Puerto Rico will announce intention to default on municipal bonds”, I would have told you that the Dow would be down a minimum of 300 points. So alas, the sell-off is more nuanced than one may think.
It surely is a significant event (reverting to the Greece discussion now) and I do not mean to make light of the human element of the story. The citizens of Greece face a lose-lose situation, there has been pain and suffering, and there is going to be more pain and suffering. But I write as an analyst of the markets and the macroeconomic events affecting investors. Several considerations are in order …
1) This Greek leadership is dysfunctional. Should their decision to seek a referendum from voters fail like I suspect it will, it is entirely possible that the voters will demand change, now. To subject their economy to a bank freeze and a week of utter panic all for a conclusion they were elected to handle is malfeasance of the worst kind. Tsipras was elected with less than a single percentage point’s margin of victory, and I suspect a significant percentage has swung the other way now. 36% of the popular vote does not a mandate make, and I think his days in office are numbered. Ultimately, the idea that there would be a pain-free resolution to this mess was a lie, and now the poor citizens of Greece are going to have some tough decisions to make. Because the European authorities will NOT extend more lifeline to Greece while they go through this process, and because banks actually were forced into closure, I believe Greece (meaning, the citizens) may just yet come around and realize the medicine they are going to have to take. As my friend, Brian Wesbury, said today: “Don’t let anyone tell you Greece is sticking up for its ‘dignity’ by fighting ‘austerity.’ The current Greek government is sticking up for socialism by fighting reality.”
2) But let’s just say I am being too nice, and default is not only right around the corner, but also a full Greek exit from the Euro. This is where I believe the risk to Greece is huge and the risk to Europe is minimal. Draghi has gone down a “whatever it takes” path, and for the ECB to enter the bond market to protect European yields is not only possible, but virtually assured. Analysis I read today estimates the total Greek debt to be 3% of European GDP (for one year), and that within that European bank exposure is minimal. I do not know how the vote will go, but I am in the camp that says Europe will absorb it. What I do not believe Europe can absorb is capitulating to Greece, where surely the domino effect would be better deals for Italy, Spain, Portugal, and eventually, France. THAT is what Europe cannot afford.
3) I do expect this to be a source of volatility for U.S. investors and I believe that volatility to be opportunistic. Bank runs are clearly not taking place outside of Greece. It is unrealistic to expect U.S. P/E ratios to expand with macro events like this lingering, and therefore a cap on stock prices gets set in the short-term, but when volatility comes as a result of a non-fundamental and short-lived catalyst, that is the kind of volatility we want to buy.
The story behind all of this is politics. Tsipras believes that by getting the Greeks to say “no” to the referendum he can blame them with the negotiators of Europe and have a stronger hand. I believe the political calculus is wrong, and worse, I believe the leverage is far more with the European Troika than with the Greeks. I expect more twists and turns politically before this ends, and ultimately, a reversion rally when markets grow comfortable with this harsh reality: The Greeks need the world more than the world needs the Greeks (economically, that is what I am referring to – economically).