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.