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As a veteran investor and hedge fund manager, I've often pursued strategies that feed off volatility. So for me, the type of schizophrenic, up-and-down action that we saw last week was just what the doctor ordered. Unfortunately, for anyone banking on a positive long-term outcome for Greece and the EU, the doctor making orders may well be named Kervorkian.
The "Gridiots" in Europe spent the week torturing a world too fearful (or stupid) to just ignore their idiocy. The dysfunctional and bankrupt Hellenic State will continue to be funded for a couple of more years - after which they'll have to go through this moronic exercise all over again. Having allowed its populace to self-immolate and vote against accepting the demands of its creditors, the Syriza government caved to precisely those demands and now the world will wait to see if the rest of the European governments will be dumb enough to fall for this charade.
Nowhere in the proposed deal between Greece and its creditors is there any write-down in Greece's hundreds of millions of euros of debts or any recognition that the Greek people will continue to suffer inside the currency union. While this was going on, the Greek banking system and the Greek economy were coming apart at the seams. Greeks are known for their epics, but the only thing epic about this sorry episode was its pointlessness.
Greece's problems are unlikely to trigger a broader global sell-off although they may prompt the ECB to intensify its already doomed QE program. According to investment research firm Cornerstone Macro, and The Wall Street Journal, foreigners' holdings of Greek government debt have plunged from €247 billion ($275 billion) to just €34 billion -a decline of 86%. And losses that should be realized on Greece's debt are likely to be deferred in any case by the pending deal - allowing everyone to pretend that Greece is a functioning member of the European Union when it is nothing of the sort.
The "Idiot Contagion" Spreads
The two other global hot spots - China and Puerto Rico - also have yet to penetrate the thick skulls of most global investors. China's stock market has been effectively closed for business. It is for all intents and purposes illegal to sell a stock in China after a series of regulatory crack-downs over the last ten days.
Of course, the "Chidiots" are paraded on CNBC and Bloomberg breathing huge sighs of relief that the Chinese stock market had a huge rally over the last two days. Yet they don't breathe a single word about the fact that half the stocks didn't even trade and selling was outlawed. Instead, they are too invested in seeing the China bubble continue. Here is a news flash for them: the bubble is over.
Never in the history of markets have efforts to stop people from selling succeeded - all they do is intensify the desire to sell. If Chinese authorities allow markets to re-open or allow investors to sell without risking imprisonment or death, the sell-off will resume. The real question is why anybody with any common sense might have been the least bit surprised that markets that doubled and tripled in price over the last year could sell off by 25%. The only good news is that China's stock markets remain relatively isolated from the rest of global markets and are unlikely in themselves to trigger contagion.
The more realistic threat is that economic growth in China will continue to decline; the country would be lucky to eke out 3% growth this year (official figures showing 7-8% growth are nonsense). The Wall Street Journal reported last week that China's contribution to global output has increased from 5% a decade ago to 14% today, and J.P. Morgan estimates that, over the last year, China has been responsible for one-third of global growth.
The collapse in the prices of key commodities such as iron ore, copper and oil is strongly tied to the slowdown in China. A collapse in stock prices will only further dampen consumer demand in China and slow growth further, which will likely place further downward pressure on the global economy. Companies dependent on Chinese demand are likely to suffer over the rest of the year and into 2016.
As for Puerto Rico, the ramifications of the territory's admission that it can't repay its $72 billion of debt will be primarily limited to the municipal bond market. Puerto Rican bonds are widely held by municipal bond funds because of their triple tax free feature - they are free of federal, state and local taxes.
Unfortunately, anyone paying attention should have noticed that they are also free of any possibility of being repaid in full! The "pridiots" who decided to buy these securities should be fired as managers and replaced with people who understand credit risk before they inflict further damage on their clients.
The Real Danger is Nothing New
While none of these trouble spots may breed immediate contagion, they are all symptoms of a widespread problem that infects every part of the global economy: Greece, China and Puerto Rico each has too much debt that can never be paid back. The same is true of the United States, Japan, the emerging world, the rest of Europe and Japan.
Watching policymakers kick the proverbial can down the road again by agreeing to a deal that doesn't write down any of Greece's debt is a sad spectacle. It only shows once again how devoid the world remains of courageous political leaders.
How can the West ever hope to face up to Putin, the mullahs in Iran or ISIS if they can be so easily cowed by a tin-shack Marxist clown like Syriza? Markets were already celebrating a new Greece deal on Friday and will likely continue to celebrate next week, but they should be ashamed of themselves for celebrating failure in order to bail themselves out of their own bad investments, and their inability to make money from anything other than bad policy decisions. These same investors will be crying like little babies when markets finally wake up and realize that the entire global economy has become a house of cards built on a phony foundation of debt, political weakness and delusion.
After the Greeks and Germans were finished shooting arrows at each other all week, the Dow Jones Industrial Average finished the week up 30 points or 0.2% to 17,760 after being down significantly early in the week. The S&P 500 closed in negative territory for the first time this year before closing the week at 2077 - flat on the week. The Nasdaq Composite Index, home to so many cult stocks, slipped by 12 points to 4998.
The NYSE also saw its worst failure since 9-11 after it was closed for several hours on Wednesday after a computer glitch that coincided with similar problems at United Airlines, The Wall Street Journal and most alarming for people like me, Zerohedge.
While even paranoids can have real enemies, it appears that these outages were unrelated. Nonetheless, they speak to our dependence on technology and the risks posed by threats to the systems that run the world. Markets are not the only things that can wreak havoc in an interconnected and over-leveraged world.
About the Author
Prominent money manager. Has built top-ranked credit and hedge funds, managed billions for institutional and high-net-worth clients. 29-year career.
I agree with your article 100%.
What are you thinking about the Sept surprise?
Already get the Money Morning newsletter.
Hard-hitting, clear-eyed analysis and commentary. I can't get enough. Thanks.
Hi I read your comments on Greece, China and Puerto Rica it is amassing how stupid investors are 95% are using inherited wealth and have a golden spoon shoved you know
where and of course greed masks the risks. I have had a taste of bankruptcy you are not
going to change human nature.
Thank You Robert Butt
Excellent article in a world of stupid.
Schizophrenic, really?, that is a mental disorder, did you hear voices and see things too? How dare you use a mental disorder to describe your chaotic portfolio!
Almost all the nations of the world have national debt being subject to compound interest, we will all face the idiot situation of bankruptcy sooner or later. Waking up and putting an end to this immoral banking system is the only way out.
Paying off creditors in German and France (primarily) first by using funds (more debt) that were earmarked for Greece. Michael Lewitt correctly identifies the crisis as continuing and his statement that the global economy is built on a house of cards that will fall is correct. What's also correct is that American investors will continue to ignore these warnings.
The question that most ordinary people want answered is:: Is there any kind of fix for the financial mess that the world appears to be in? Specifically; Can the USA dodge this bullet coming our way that will take down our fiscal house of cards? The USA has led the rest of the world into the idea of financing everything through massive debt. The problems we face are just to large to have any hope of solving this debt problem. Greece, Puerto Rico, and even China are just symptoms of the world-wide failure of most countries to limit their spending to what they can actually afford. Short-term band-aids will not prevent the long-term failure that is coming at us. What's your "Credit Score?" = madness!
As the 20th century philosopher George Santayana said those who fail to learn the lessons of history are doomed to repeat them. China now the second largest economy will be and is a force to be reckoned with. The Greek situation involves too much money being lent which can never be repaid. Puerto Rico the same thing. Looks like a whiff of deflation so no fed rate hike yet. Very complicated and confusing for the average investor.
There is no shortage of this type of journalism, just a real shortage of what to do.
After reading your article I only have one questions. I am a 69 year old man who has all of his money in the Stock Market in order to get a monthly return to live on. Based upon all that is said in your article. What should I do, to stay invested or to put the money under the pillow.
Right on Michael. I could not agree with you more. The only reason Greece is still in the Euro is that Germany does not want it to fall into Mr. Putin's pocket. But the Euro is doomed anyway. In my view it is not possible to have monetary union without political union. That would be like Texas using the Peso but still being part of the USA. Impractical and unworkable. From a business perspective Greece reamining in Europe is just plain stupid for the Greek people. The should go back the the Drachma. The tourists, their money and international investors will pour back in. It is after all a very very beautiful country with some wonderful assets that could make investors alot of money as well as the Greek people. I do not for one moment believe the Greek people are lazy or not capable of innovation. The Euro has made them lazy and here they go again thinking more of the same medicine that did not work before is going to fix their economy. As Einstein once said doing the same thing over and over again and expecting a different result is the definition of stupidity. Sure once Greece goes back to the Drachma everything will be at a huge discount but only that will end the unemployment and get the Greek people back to doing the work necessary to reconstruct their Euro destroyed economy. Giving the people more of other peoples money rather than encouraging the Greek people to work to produce the wealth necessary to repay it is just plain idiotic. As you say they will be right back here in two years time….except with even higher unemployment.
As for China, I have not and never will invest in a controlled and contrived economy. The US economy is contrived enough with the limitless printing of funny money but at least there still remains some semblance of a properly functioning economy…but for how long I am not sure of that even.
We live in a massively over leveraged world where the real economy cannot ever catch up with the printed money economy the Federal Reserve has created. There is only one way this is going to end and it is not a pretty sight.
Malcolm
With the exception of a handful of countries, population growth is at or headed to 0. Beginning in the early 90's, the rise of the Information Age and it's labor reducing technology flattened income growth for 70% of the population. Flat economic growth is following. The old order is in crisis. The US has more debt per capita than Greece, and we are adding a 1/2 trillion a year, a number that can only rise as an aging population puts increased pressure on social services. They have cut a deal with the devil and have no solutions and no courage to implement them if they did.
The idea that Greece can function as a normal economy outside of the Euro is a fallacy IMO. That it failed to function inside of the Euro was a given from the start; Greece == Germany? The Greek state and economy are not fit for modern purpose as they are subjugated to family ties with endemic nepotism and cronyism and the prevasive corruption with which this is associated. The Greek view of the world is also Helleno-centric and it blinds them to the realities. The current denoument is a clash of orthogonal cultures and the Greeks have scripted their own tragedy. It is entirely logical that 'rich' Europe cannot bear Greeks when they bring no gifts. The former are now aiming to 'reform' Greece as a quid pro quo of funding them yet again.
A little known fact illustrates the Greek's manifold problems…. Are readers aware that EVERY decision of government can be challenged in the 'Council of State' ( aka 'Supreme Court' ) with virtually no procedural or cost implications to the plaintiff? By 'every decision' it should be noted that that de-facto in Greece this means 'everything involving anything' because normal procedure is lacking. You may imagine the impact on business in terms of the unfactored and additional time and cost in getting entrapped in what is a spider's web. And… then factor in the opportunities for corruption in initiating and maintaining such cases in a lash-up of a rule-based legal system. The direct foreign investment in Greece is negligible for this reason alone.
Your comments about "The Greek Tragedy" and the state of the world economy are bang on. One of fine these days the whole house of paper cards is going to collapse and wipe out all of this international debt that can never be repaid! Then gold will re-emerge as the one and only true money!
Excellent article. It's hard to disagree with the obvious. It is more surprising how many people try.
As for solving the world's problems, that's easy. I'm not even an economist and I know how to do it.
A man which produces more than he consumes will be fine.
A family which produces more than it consumes will be fine.
A neighborhood which produces more than it consumes will be fine.
A city, state, nation which produces more than it consumes will be fine.
If you would like to survive the upcoming financial catastrophes, all you have to do is always live within your means and save for a rainy day. If you want to excel, continually educate yourself and increase your capability to contribute. Enshrine the principles of hard work, personal economy and thrift in your own life and you'll be able to weather the storms. Any country that wants to rise to economic dominance won't need to do much more than that.
Sadly, American culture, which we are very successfully exporting to the world, is to get as much as you can for as little effort as possible. The world would be much better off to follow the basic principle of a fair wage for a hard day's work, for everyone.
EXUBERANCE AT THE CASINO ROYAL
These people are always in the wings at home and abroad. They go by different names in different times ( Liberals, then "Progressives") but its all the same nevertheless. Its just as true we all have our biases, including denial. Greece and Puerto Rico are two close and recent examples.
Other biases are cart blanche China Story, or Technology. Stocks like Facebook ( PE of 87 !!) sport ridiculously high P/E's for growth, as the entire Chinese market did up until July. Facebook has earnings of about $1.03 share yet is still being bid up.
We have a global state of extreme speculation and exuberance which looks like it has no end. It makes value investors like me feel and look like fools. I think that is the intention of central bankers: to amply reward imprudence at the casino. As far as the "Gridiots", well, the idiot class has always been among us both at home and abroad.
FALSENESS
The recent temporary NYSE shut-down is another example where a plausible explanation suffices in a roaring bull market, but the truth does not. When values realign, so will the markets. Until then, its casino time.