Shortly before Greek PM Tsipras spoke at today's huge "No" rally on Syntagma square, scuffles in the crowds of protesters broke out and police have resorted to stun grenades and tear gas.
As Reuters reported, "Greek police threw stun grenades and scuffled with protesters in central Athens on Friday, as a rally got under way in support of a 'No' vote in a Sunday referendum on whether to endorse an aid deal with creditors. The scuffles involved a few dozen people, many dressed in black and wearing helmets but quickly appeared to calm."
Luckily, the violence was scattered and promptly dissipated.
Instead it has been replaced with one of the biggest people gatherings on Syntagma square in history:
— Mark Lowen (@marklowen) July 3, 2015
Editor’s Note: The innocent days of protect and serve are long over, and some officers seem very far gone. But how could this incident even have happened? Is this really what some individuals in uniform are capable of? Is there any humanity left?
On June 19th, an accidental shooting involving a police officer was reported in Whitehall, Ohio. The officer was responding to an unrelated case, when a girl rushed over to him from a house down the street. Her sister Ava had been badly injured by a broken piece of glass, and was hoping the officer could help her. He decided to investigate the situation before calling an ambulance. Once inside, the family dog apparently charged at him, causing him to open fire on the dog. But instead of hitting the animal, he accidentally struck Ava in the leg (She’s currently in stable condition, and is recovering from her injuries).
As bad as that sounds, the family has revealed their side of the story, and it’s far worse than the one reported last month. They claim that the dog did not charge the officer at all, and that after shooting their daughter, he didn’t offer any kind of medical assistance. In fact, they claim he never said anything at all. He simply walked away from the scene.
Columbus police have since made a statement offering their condolences, and are currently investigating the matter. “The Division will take the steps necessary to appropriately address what happened, make any necessary changes to training or policy and take any corrective actions that are warranted to lessen the chance that a tragedy like this ever happens again.”
With just two days to go until Greeks decide their fate in the eurozone, the country is split down the middle, a new poll shows. The survey, commissioned by Bloomberg and conducted by the University of Macedonia Research Institute of Applied Social and Economic Studies, shows that “43 percent intend to vote ‘no’ to reject the austerity demanded by creditors in exchange for financial aid, while 42.5 percent back a ‘yes’ to accept the conditions.”
Bloomberg goes on to say that support for a ‘no’ vote has dwindled since Tsipras first announced the plebiscite last week, which seems to suggest that the bite of capital controls has quickly forced many Greeks to reconsider whether the benefits of standing firm in the face of overbearing creditors truly outweigh the economic costs of an EMU exit.
The narrowing lead for the “no” side comes as IMF research appears to support Tsipras and Varoufakis’ contention that any feasible Greek deal should include debt relief.
As we said on Thursday, the report (which was prepared prior to capital controls and the banking sector meltdown) shows that any deal which includes creditor concessions on fiscal reforms would mean Greece's debt load would have to be written down, as the country would need at least €60 billion in new financing. Subsequently, the media and sell side chimed in. Here’s Barclays for instance:
The IMF released yesterday a document with a revised debt sustainability analysis for Greece. The document basically argues that OSI is a necessary condition in order to secure sovereign solvency with a high probability. This means that before the IMF re-engages in any lending activities with Greece, OSI will be required in the form of NPV debt relief.
The timing of the publication of this report it is very important. Debt relief is something that the Greek authorities have repeatedly demanded; therefore, in a way this report can be interpreted as the IMF backing the Greek government's demands. By extension, it could also be interpreted as supportive of a 'No' vote, which is what the Greek government is campaigning for.
We’ll see over the weekend, if the “no” vote is bolstered by the IMF’s findings.
Meanwhile, Wall Street continues to speculate on what happens in the event of a “no” or worse, a tie. The following is excerpted from Credit Suisse "Greece: A Thread In The Labrynth."
* * *
The Result Of A "No": A Live Test
We believe that in the case of a ”No” vote in the referendum that the creditors will reject any further deal with near certainty and the only outcomes are either a systemic crisis or a contained idiosyncratic crisis.
A particularly bad scenario for Greece would be some sort of split vote, e.g., 51% voting “No”. We think Tsipras would likely claim to have won the backing of his policy by the electorate – assuming he campaigns for a “No” till the end – while nearly half the population would have voted in favor of the creditors’ deal. This could cause unrest domestically in Greece, while the creditors would probably be less inclined to acknowledge Tsipras’ “victory” under such circumstances. A relatively low participation rate would further reduce the credibility of a marginal “No” vote, in that regard.
We again want to be clear: “leaving EMU” is not a policy choice and, if enforced by referendum, materially reduces Greece’s freedom of action. Introducing a new currency is a pipe dream and the likely result is a broken financial system reliant on a neighbor’s currency (the euro) and banking system.
If the result of the Greek referendum is a “No” and the situation is not immediately remedied (which we would not expect), the Greek people will probably have taken the opportunity to illustrate how illusory the whole idea of “exit” actually is. How that unfolds determines whether the situation systematizes immediately. This is because the choice is not “do you accept the core’s terms your government has rejected?” Rather, it is “do you want Greek banks to function independently?” and, de facto, do you want to be able to use the cash machine tomorrow? This is the nature of “Grexit”; it is not a choice to circulate a shiny new devaluation mechanism, it is a decision to reject the (local, to begin with) financial system and start again.
We have always pointed out that the new “currency” mismatches involved in any attempt to exit the euro would be so "toxic" for the banking system as to make it not a practical alternative. It is certainly not a way to avoid default. Rather, an attempt to exit is a way to default, at the expense of making that default systemic and so more costly. We are seeing this right now, with anecdotes of large dislocations and the reality of a closed banking system.
This fact seems to get less than its fair share of attention. The Greek banking system is closed. How does it reopen given a “No”? So “No” should be a dominated policy option and a properly informed Greek public should rationally vote “Yes”. Yet we cannot confidently give it more than a 50:50. The closed banking system imposes real pressure and a deadline. The 20 July date we have always pointed to now has real teeth; three weeks is the absolute maximum we would expect Greece to be able to function in this state.
The “loss of sovereignty” resulting from this dilemma could be a dominant consideration leading to an irrational outcome (“better a day as a lion…”). As always, we have to be VERY careful with the “rational player hypothesis” in these situations. And the core pointing out that the question can be reframed as “do you want a banking system”? and “do you want to stay in the euro” could be criticized as "moral blackmail", but it is the reality of the implications of having joined a currency area. The time for these concerns was in the run-up to 2001. We are all learning about these realities and Greece could again be an illustrative test case. We stick to our view that “nobody leaves” and any new drachma (which we strongly doubt) would effectively be a transitory default mechanism on the way to an economy that was euro-ized without the votes on the ECB GC. We could call it the “Panamization” of Greece. But where is the 13%-capitalized banking system which is required going to come from? At a minimum we would see €40 billion of untainted capital being required. Some of it could come from the existing capital structure under resolution but we believe that the balance could not come from Greece itself (a state in a serious state of default) without triggering immediate collapse and returning to the path of the new arrangements being a default vehicle on the way to euro-ization only now without a domestic banking system at all).
The far more likely outcome, in our view, of an attempt to leave (i.e., of a “No”) is a banking system that can only open under foreign (nationalized) ownership. This seems to be a very likely step given the apparent intention of the core to honor guaranteed deposits. But all of this would of course be contingent on some form of cooperative outcome. In the absence of that—and relations are already manifestly more strained; a change of government may help—we would have to suspect that Greece’s EU membership would be under threat. And as this situation becomes ever more political, that would be a huge issue well beyond our scope but which highlights our view that the mechanism for systematizing this situation is political not financial. It seems unlikely that the 13% capitalization needed to rebuild a banking system could come from a non-Western power, but the concern obviously exists.
* * *
Summing up, Credit Suisse believes a "no" vote is effectively a vote for economic catastrophe. The banks would, for all intents and purposes, have to be nationalized by Germany (which, given the Greek banking sector's complete reliance on the Eurosystem for funding, and given Berlin's TARGET2 position relative to the rest of the EU, would simply be to make official what has already been going on for years), and the (re)introduction of the drachma would not only be a disaster, but is in fact an unworkable "pipe dream."
In short, the bank says that if Greeks were "properly informed", they would not, in their right mind, vote "no."
So perhaps we have a new way to characterize Sunday's vote: a sanity check for the Greek populace.
As systemic solutions fall short, we must grasp the nettle of making our own arrangements in a time characterized by burgeoning demands and diminishing resources, capital and security.
The idea that our large-scale problems could be fixed with systemic reforms is enticing: replace the thousands of pages of tax code with a simple flat tax without deductions, for example, or the replacement of too big to jail/fail banks with community-owned banks that served the public, not shareholders.
But the attraction of reforms is a siren song, because our system is run by vested interests for vested interests, period. Any real reform is Dead On Arrival (DOA) because any real reform threatens the swag and security of vested interests.
One person's livelihood is another person's vested interest.
Toss in The Enchanting Charms of Cheap, Easy Credit and Our Spoiled-Brat Economy and we have a toxic resistance to systemic reforms that require any degrowth, direct democracy, writedowns of debt, devolution of centalized power, i.e. any real reforms of the unsustainable status quo.
So where does that leave us? With no choice but to submit? No, it leaves us with private solutions, by which I mean arrangements made on the individual and household level that do not assume the unsustainable status quo will magically continue to issue us our "we wuz promised" share of the swag.
Private solutions subdivide into practicalities (securing multiple income streams, choosing where to live, arranging access to healthcare, food and energy, proximity to friends and family, like-minded colleagues, etc.) and what we might term self-fulfillment: aligning our internal goals, priorities, personality traits, values and skills with the practical externalities of daily life.
Longtime correspondent Bart D. recently responded to an email in which I expressed the all-too common sense of being overwhelmed--by work, duties, responsibilities. His response gives us a starting place for choosing our priorities and goals:
"At the suggestion of a 93-year old relative, I spent a bit of time thinking of myself as being on my death-bed and considering what I’d wished I’d spent more time doing in my life. Then I went out and did it (and still am). That way, hopefully, when I eventually get there, I won’t have any need to ask myself that question because I’ve already resolved it. (It’s a minor form of ‘time travel’ in my way of thinking.)
After that, I stopped worrying about lots of mundane life things and focused on the next really excellent thing I wanted to do. For me, that meant doing a great holiday with the kids, taking them (and myself) to an interesting and inspiring place, getting out into the wild. As a result of that first inspiration we travelled 3200km across the continent and spent days swimming and soaking in a thermal river in the top end of the Northern Territory. I ended up talking to heaps of people from all over the world as they drifted past ‘our spot’. Each had a little piece of wisdom to pass on.
During that time I completely forgot to think about any of my mundane life troubles and I remained changed after returning home.
Holidays are now my stepping stones through mundane existence. It’s the great luxury I wanted but never had as a child.
Where once I was an ardent ‘saver’ I’m now a moderate spender on things that provide a good life experience. I’ve also cut back on my sense of ‘duty’ to achieve certain things for others. My outlook now is that I’m a part of a greater social machine and there are others in that machine that can (or should) take a turn in bearing the load. I will now let others fail if they don’t want to share the load. We can’t keep everyone happy all of the time. Just some people happy some of the time. And that includes our own selves."
This reassessment of duty and what is possible is especially critical in times of decline/decay, as the process of decline is essentially one of burgeoning demands and diminishing resources: there simply won't be enough to meet everyone's demands.
This means we have to pick our priorities wisely, so we 1) don't get dragged into the abyss by over-committing our limited time and resources in a vain effort to meet the demands of everyone around us, and 2) by keeping our expectations realistic, i.e. within the boundaries of what is possible without extraordinary effort, wealth and luck.
This process of reassessment implicitly holds the promise of a fulfilling life even in times of turmoil, instability and diminishing resources. As author Michael Grant noted in his history (referenced in Part 2 of my Collapse series last week) The Fall of the Roman Empire, many people opted-out of the decaying Imperial system by joining monasteries that were by design self-reliant and self-supporting. It was not an easy life, as the religious organizations operating the monasteries demanded piety and plenty of hard work. But the order provided security and purpose--precisely the qualities lost as the Empire frayed at the edges.
Some families of great wealth exited Rome and set up self-sustaining private fiefdoms in the countryside--manor houses supported by farms. Tradespeople and merchants impoverished by rising taxes found refuge as laborers on these sprawling estates. Once again, it was not the ideal setting, but it offered security, protection and purpose.
In our era, the questions that present themselves are: where shall we devote our limited resources of time, capital and effort? What is the payoff of our choices, and what are the opportunity costs, that is, what other choices must be abandoned to pursue this path? What trade-offs are we making, explicitly and implicitly? What must we forego to pursue our primary objectives? What is the balance between practicality, duty, risk, security and fulfillment?
Modern life in advanced economies implicitly promises order and security stretching on into the future. That order and security might fray is troubling, for it upsets the foundation of our decision-making and prioritizing.
This calls to mind the wry advice, "Don't let the dessert cart on the Titanic pass you by."
I place Bart's family vacations in this category. We cannot assume limitless growth, security, wealth, resources, etc. Rather, we should align life today with what we have concluded (after much consideration) to be our life's work, purpose, priorities, goals, limits and yes, pleasures, for the essential characteristic of fulfillment is a sense of doing what is most meaningful, what Ralph Waldo Emerson referenced in his famous phrase, “Trust thyself: every heart vibrates to that iron string."
Yes, we must make a living, or have the means of a living. Yes, we must care for others as well as for ourselves. But as systemic solutions fall short, we must grasp the nettle of making our own arrangements in a time characterized by burgeoning demands and diminishing resources, capital and security. Fulfillment is not precluded by decline; rather, it gains in importance with each passing day.
The Mobile Creative credo: trust your network, not the corporation or the state.
On what is obviously a quiet day, with US cash markets closed, US equity futures drifted quite notably weaker from overnight highs. Aside from total chaos in the last second of trading today, Nasdaq futures were down 0.3% (having been up over 0.2% at Europe opened) and The Dow dropped 80 from the highs. It appears the machines forgot it was a holiday as the standard US open to EU close trend reversal occuurred before dropping after Europe closed.
Notice the chaotic meltup into the close...
It all went a bit "Simple Jack" in the last few seconds...
On Thursday, we outlined how America’s heavily indebted E&P companies are about to be “zero hedged” when the downside protection that accounted for some 15% of Q1 revenue for nearly half of North American O&G operations rolls off.
In short, the hedges that had, until now anyway, helped to forestall a terminal cash crunch are set to expire, which will have the knock-on effect of making it more difficult for the companies to maintain crucial credit lines with banks.
As discussed yesterday, the payments from the hedges were the last line of defense for a sector that has been kept afloat in part by artificially suppressed borrowing costs and investors’ hunt for yield. These otherwise insolvent companies have tapped wide open equity and credit markets allowing them to keep producing, which in turn has contributed to the very same depressed prices and global deflationary supply glut that bankrupted the sector in the first place.
Now, even the regulators (who are, as a rule, always behind the curve when it comes to assessing risk) are “sounding the alarm bells”. WSJ has the story:
U.S. regulators are sounding the alarm about banks’ exposure to oil-and-gas producers, a move that could limit their ability to lend to companies battered by a yearlong slump in prices.
The Federal Reserve, Office of the Comptroller of the Currency and Federal Deposit Insurance Corp. are telling banks that a large number of loans they have issued to these companies are substandard, said people familiar with the matter, as they issue preliminary results of a joint national examination of major loan portfolios.
The substandard designation indicates regulators doubt a borrower’s ability to repay or question the value of the assets that back a loan. The designation typically limits banks’ ability to extend additional credit to the borrowers.
The move could add an extra obstacle to companies struggling with high debt loads amid lower prices for the oil and natural gas they produce. Banks have been flexible with troubled energy companies to avoid triggering a flood of defaults and bankruptcy filings, but regulatory pressure could force them to tighten the purse strings.
This year’s Shared National Credit review process contrasts with those in prior years, when regulators didn’t broadly disagree with the banks’ own ratings of credit facilities known as reserve-based loans, the people said. But regulators are paying closer attention to these loans amid worries that a sustained slump in energy prices could lead to big losses for banks, they added.
Twice a year, banks themselves review the value of oil and gas deposits that companies have the right to extract and use as collateral for bank loans. Declines in commodity prices can prompt lenders to reduce their commitments to companies. The effects of such reductions can cascade through energy companies’ capital structures and require them to look elsewhere for funds.
Earlier this year, a number of energy producers sold bonds, took out term loans or sold new shares to replace shrinking reserve-based loans. While some of those moves were forced, others were pre-emptive.
Banks may turn to equity or bonds to supply additional financing to borrowers with the substandard designation, some of the people said, though both are costlier for companies than loans.
The analysts also said the prolonged period of lower revenue could push more companies closer to violating agreements with creditors to maintain certain profitability levels, and that they expect stock investors to be “more discerning” when offered new shares from heavily indebted companies.
In other words, if the BTFD-ers get wise to the fact that these companies are insolvent and that throwing money at equity and debt offerings only serves to allow them to lumber around, zombie-like in a desperate attempt to wait out what they hope is a temporary slump in crude prices rather than a fundamental commodity reset in the face of depressed global demand, the sucker bid will dry up just as HY spreads blow out and the hedges roll off, leaving Wall Street to clean up the mess.
And as for waiting out the crude price slump, well, things aren't moving in the right direction...
...which means that in the absence of the home gamer, E*Trade bid, a buyer of last resort may have to double down...
Submitted by Erico Matias Tavares of Sinclair & Co.
The Fourth Turning – An Interview With Neil Howe
Neil Howe is a historian, economist and demographer who writes and speaks frequently on generations, the economy and social change. He is America’s leading thinker on who today’s generations are, what motivates them and how they will shape the nation’s future.
He has authored nine books on American generations, many co-authored with William Strauss, including Generations (1991), The Fourth Turning (1997), Millennials Rising (2000) and, most recently, Millennials in the Workplace (2010). In relation to The Fourth Turning, the Boston Globe wrote “If Howe and Strauss are right, they will take their place among the great American prophets.” He has also authored numerous books and policy reports on demographics, most recently The Graying of the Great Powers (2008).
He is a senior associate at the Center for Strategic and International Studies, where he helps lead the Global Aging Initiative. He holds graduate degrees in history and economics from Yale University.
Erico Tavares: Neil, we are delighted to be speaking with you today. Your work has influenced many people over the years, including us. We read the “Fourth Turning” many years ago, and had almost forgotten about it. Then 2008 happened and we felt that this time was indeed different. Upon re-reading your book we were stunned by many of the things you had predicted over a decade ago. For the people less familiar with your work, could you briefly describe what a Fourth Turning is, which as we understand it results from a specific generational sequence that you have identified?
Neil Howe: A turning, as you define it, is a unit of history which is roughly the length of a social generation, about 20-23 years long. We identified these units looking deeply at the history of America and of other countries around the world, and originally discovered this idea of turnings by analyzing the generational history over many centuries. What we noticed is that not only social generations are very different, they also tend to arrive in a certain pattern, a certain order. Certain types of generations always follow other types. And this in turn is connected to a certain order and rhythm in history itself.
For example, America’s great crises – certainly our greatest total wars – have arrived in our history roughly at intervals of a long lifetime, including the War of the Spanish Succession, the American Revolution, the Civil War all the way to the Great Depression and World War II. That’s kind of the sequence.
These are the great Fourth Turnings of American history. And we call them so because of where they are in a cycle of different mood shifts that we observe. The Second Turnings by contrast happen almost in between these crises, and that’s when you get the great awakenings in American history. These are the great cultural upheavals.
So in a Fourth Turning we remake the outer world: the economy, politics, empire, technology, infrastructure… In Second Turnings we remake the inner world: religion, values, art… This basic yin and yang of looking at a multiplicity of social trends is something you don’t notice unless you are looking at all of it. And once you do, you can see how these intergenerational patterns move to the same beat.
I should also add that within this cycle there is an interaction between how different generations are shaped in childhood, coming of age when they are young. They then become parents and leaders as they reach mid-life and then go on to shape history, which in turns shapes the youth of a younger generation. You can see how that works. It’s a fully integrated and complete cycle.
And it's one of the few cycles – whether you are talking about war, realigning elections, cycles in family life or the long cycle in the economy – whose periodicity is strictly determined by the phases of life of a human being. One of the problems that long cycle theorists have had, be it 60-year or 100-year cycles or whatever, is that they often wonder what governs these cycles. Why isn’t it 2 years or 5 years?
So our research shows a connection with the biology of human life.
ET: Yes, many historians, economists and even politicians have studied the cycles of history, and you are correct, they tend to link these cycles with nature and in some cases more obscure things like planetary movements. What your work has revealed in some fascinating detail is that they are in many cases driven by the different generations as they come and go. Each generation tends to be different from the one that preceded it. We tend to think of society as a continuation but this is generally not the case, as you point out...
NH: Yes, each generation tends to be different not only because they are so encouraged by their parents but also as a reaction against the world created by the mid-life generation in charge. And that leads to a constant turning in the direction of each new generation. We actually identified four different kinds of generations, each coming of age in one of these different turnings we talked about. The ageing of each generation into a new phase of life is what gives each of these turnings its distinct mood and emotional feel.
ET: In fact you were the first to coin the term “Millennials”, which groups that generation of people born from the 1980s onward...
NH: Yes, that’s correct. That was in our 1991 book “Generations”. The oldest millennial alive then was only about 8 years old. It is interesting to remember that at that point Gen X-ers did not even have a name. The book that named that generation, Doug Coupland’s “Generation X”, was still a year away from being published.
And so, if Gen X-ers already don’t feel bad enough about their lives, they can reflect on the fact that the generation that came after them was named before theirs was!
ET: That’s right! As Gen X-ers ourselves we had never thought about that…
NH: Well, they did a study a few months ago on which generation was referred to the most in corporate earnings calls over a certain recent time period. The #1 was Boomers, right behind them were the Millennials – in fact only just behind them, and #3 were Gen X-ers – way, way behind.
I get this complaint a lot from Gen X-ers and I think it is legitimate. People have never quite paid attention to their generation coming in between.
ET: Do Fourth Turnings always occur after Third Turnings, or are we merely speculating about a potential generational outcome?
NH: Historically the answer is “yes”, it always comes in that order. In fact, the regular nature of the order is really striking. I’m not an historical determinist, in the sense that certain events or catastrophes have greatly shaped turnings in the past – for instance, in the 19th century we had a very quick turning during the Civil War, and we see similar patterns in other countries as well – so we are not saying that the length and the order of the turnings is exact. But the overall pattern is overwhelming.
I think that today most Americans are aware that we are in a social mood much more similar to the 1930s – and we can go through many other parallels – than the 1950s, the 1960s or even the 1970s.
ET: And typically how long can such a turning last? You mentioned about 20-23 years.
NH: Well, that has the same variability as the generations themselves. They can vary from 18 years to maybe about 23 years. It can be longer or shorter depending on the accidents of history, but overall it is aligned with the basic cycle of life of most people. It keeps coming back to that governor of time. So it can vary, kind of like the seasons. Spring can come a little earlier one year, Winter late in another.
When we talk about periodicity, this is not a simple physical system like a planet orbiting around the Sun, which is very exact. This is more like a complex system which has different factors at play, regressing or being attracted to a certain kind of periodicity. This is typical of such complex systems. And obviously human society is a complex system.
ET: Within the limitations that you just described, we can reasonably predict when those “turnings” are likely to occur, but not the magnitude of the turning in terms of socioeconomic changes. When we look back at history some turnings were very profound, others less so. Is this correct?
NH: Yes, and I also think that the sense of urgency of a Fourth Turning and how the outer world and the world of institutions is reconstructed, can differ from one turning to another.
Now, it is true that all the major wars in American history have always arrived in a Fourth Turning, but I don’t see it as necessary that a Fourth Turning requires a total war. It could be some other sense of urgency pushed by, for instance, economic necessity.
The sense of collective urgency to solve a dire problem which is perceived to threaten the very future existence of this society is something that Fourth Turnings do have in common. That is not necessarily a war, but I think it will be something with a strong collective incentive for society to act in a way that it wouldn’t otherwise have in other turnings.
ET: What type of economic conditions are typically associated with Fourth Turnings? You established a parallel with the 1930s which was a very challenging time with the Great Depression and the like. In addition to that societal objective, that urgency, are there any economic factors that tend to occur in a Fourth Turning?
NH: We looked very broadly at this. The 1930s was a decade of deflation, competitive trade wars, chronic underemployment of workers and capital, all of which are being experienced today. Alvin Hansen, who was the great popularizer of John Maynard Keynes in America, in 1937 coined the term “secular stagnation”, which has been recently revived by Larry Summers today.
And you look too at some of the demographic phenomena going on: declining migration rates – we’re certainly seeing declining immigration in the US over the last few years, declining fertility rates, declining mobility (people moving around)...
And some of them are not negative at all. Some of them are positive in fact. One of the things we’ve noticed is that from the early 1930s into the 1940s there was a pretty dramatic decline in crime. That is something that we have experienced over the last 15 or 20 years, in fact a very substantial decline in youth violence, which is one of the hallmarks of the Millennial generation – how risk averse they are and how little violence we see from this generation.
You can go across a long list. Another interesting parallel is really an incredible shift that we see in America over the last 20 years towards the great strengthening of the extended family. Back in 1980 only 11% of 25-34 year-olds lived with their parents or other older family members. Today it is 23%. We have tens of millions of young people living in extended families. This is something that we also saw in the 1930s. In both cases it is partially motivated by the economy, but also because the generations personally got along very well.
It is a complete closing of the generation gap on values. This is something we have always seen in Fourth Turnings.
ET: That is fascinating! So based on everything that you are describing, are we already in a Fourth Turning? And when did it start?
NH: 2008 is when it started. We had many readers and people who came up to us and said, “Well, it actually started in 2001” and we’ve always said “No!”
Part of the reason is that we can time turnings by looking at generational ageing, and typically a turning begins just after each generation reaches a certain age because they enter a new phase of life. In 2001 that’s too early because Millennials weren’t really coming of age into their adulthood, Boomers weren’t fully retiring and Gen X-ers weren’t entering mid-life. So we thought the timing was off.
We believe 2008 is a much better political and economic divide and will eventually be perceived as such. We perceive these turning points in history better in retrospect than we do up close.
ET: We understand why many people think that 2001 is the critical turning point because after 9/11 America was never the same again, both domestically and abroad…
NH: I think that mainly abroad. But in terms of the differences since 2001, we still had a bubble psychology in the economy very much alive and it did not take much to come back to that by 2003-04-05-06... And we also had almost like a celebrity circus, kind of a roaring 1990s tone in our household finances and how people were looking to the future.
I think all of that has really shifted. It’s only after 2008 that issues like standard of living growth, income inequality and fundamental doubts about the ability of America’s economy to recover, came to the forefront, as well as much longer term questions about geopolitical anarchy.
By the way, here’s another interesting parallel with the 1930s: a world that no longer has any great power or congress of powers ruling over it anymore. Back then this happened after the collapse of the League of Nations. We see that today nobody is running the world any more. We see authoritarian regimes doing what they want in their own neighborhoods.
This has come back to cast a great shadow of doubt to both political leaders and investors.
ET: The commonalities are indeed striking when we look at history from your vantage point. Today we benefit from insightful research that people like yourself have conducted over many years, so we can get a sense of what’s potentially ahead; perhaps people back then were much less aware. And yet we still seem incapable of changing course. There is just too much momentum, too much political bickering and too many opposing forces preventing us from reaching a consensus, or so it seems. This may make all the ramifications of a Fourth Turning even more likely. Do you agree with this?
NH: Yes, in fact one of the aspects of a Third Turning is that nothing much really happens in public life. You look back at the 1990s, certainly after the end of the Cold War, what happened politically and legislatively that was really important? Even up until the Great Recession, what happened?
But after 2008 we saw last minute measures being implemented with desperate expedience, to keep the economy afloat. It’s amazing if you look back at the prior 20 years how little we have done in any way to legislate and form a collective public policy to change even the basic direction, or just adjust the direction, of our country.
This is typical. We have seen eras like that before in American history and what happens – and what people forget – is that public history does not always move in the same way. Decades go by and then suddenly certain events hit, and everything changes on a dime. Huge changes occur! And it’s almost like a seismic event, you know, suddenly the tectonic plates collide…
ET: A tipping point is reached…
NH: Right. And suddenly too. You often find that one generation’s power – its senior leaders – ebbs and another generation takes over the day after. What we will see now is a time when Boomers ebb and Millennials suddenly discover that they are actually running things, setting agendas and the like. And I really think that is the next major change for the country we are going to see.
Millennials are much more collective in their orientation and they are much more optimistic about the future. We do a lot of surveys on political attitudes by age and Boomers are by far the most pessimistic of all generations and the most apocalyptical in their values and orientation. Whereas Millennials are much more practical, collectivist and much more optimistic about how things are going to turn out.
This is the kind of generation that typically rises right around the time a Fourth Turning occurs. And again the last time this happened was in the 1930s. What was the new generation that everyone saw coming of age? It was the G.I. generation which was chronically optimistic. As kids they went to see Mickey Rooney in Hollywood movies; they accentuated the qualities of their own generation.
After World War II ended, their Boomer kids eventually began to hate the positivism of their fathers, the G.I.s... But we forget that during the 1930s it was that generation that added hope for the future and held the nation together through that period of crisis.
ET: It seems that Millennials will have a very busy schedule indeed, given our current predicaments... We talked a lot about the US, but you have also looked at other countries around the world. Is Europe in a cycle consistent with that of the US from a generational standpoint?
NH: Yes, we see Europe reaching as far as Russia, the English-speaking world and East Asia all having strong generational parallels.
They all had their World War II generation – probably because that and the Great Depression were global events. And they all had their silent generation, the little kids of World War II, which gave birth to leaders like Jacques Delors in Europe who constructed the European Union as a way to contain war. That was something which that generation never wanted to see again.
We have Boomers in America, who were certainly huge in Europe – the 68-ers in France and Germany and the euro communism youths – which embodied the clashes and terrific problems with their parents. In China this is the Red Guard generation…
ET: So even China is following the same cycle?
NH: Yes, think about it. Our G.I.s were their Long March generation which was a huge civic generation, our Boomers were their Red Guards, which basically tried to destroy 2000 years of culture and replace it with something new. It is very similar.
Today, we talk about our Millennials, China talks about their Little Emperors, you know, the generation which never tasted bitterness, who are incredibly positive about the future and who trust their parents to educate them and wanting to join something big – the China Dream.
We’re seeing this play out in the Far East in ways that are both fascinating and at times a little disquieting. Every major Asian power is now governed by a leader who has no memory of World War II. That’s true for Modi in India, Shinzo Abe in Japan, Xi Jinping in China and Park Geun-hye in South Korea.
And this is the old lesson of Arnold Toynbee, of what he calls the great war cycle that arose every 80 years or so: it’s when the generation who doesn’t remember the last great catastrophe finally become the senior leaders.
You look at what is going on in Asia and you sense a lack of that collective risk aversion that you saw with older leaders who did remember some of the terrible things that happened earlier in the 20th century.
ET: That’s an incredible insight. Is there any country or region right now that is in more optimistic turnings at this point?
NH: I don’t see it as more or less optimistic. You know, a Fourth Turning is necessary, it’s both good and bad. I like to emphasize that to people. In some ways it is like a forest fire: it burns away the brush and allows new seedlings to grow.
ET: Well, you are talking to a Gen X-er who by definition are pessimistic…
NH: Well, look at it this way! If the S&P500 were to come down by 50% - and, my God, if we have a reversion to the mean in corporate earnings as well as a decline in some of these lofty PE valuations this might actually happen – look at the bright side. The Millennial generation can finally buy into America’s future at a good price. Look at what they are facing right now: very little return on their savings and very lofty prices that they have to pay to invest in their future.
So we often forget that these wrenching dislocating financial events, particularly for older generations, can create opportunities for the young, and often create space for something more durable for the times to be built.
I think we are going to see a lot of creative destruction both politically and socially. In fact we are seeing it this week with Grexit becoming widely recognized as more probable than not. I think this will lead to an unravelling of Southern Europe from the Euro and I think that the heightened tensions – from the Middle East to Putin’s Russia to the Far East – and again the fact that nobody is in charge, not even pretends to be in charge, will create problems.
For those of us remembering earlier times, this is disquieting, disorienting... I think better things will grow out of it, in fact they have to. Right now the youth of the world in the midst of these tensions are not happy. Their needs are not being met from the systems that are in place.
So I’ll just summarize it with Schumpeter’s phrase: creative destruction. That’s how I prefer to see what happens in a Fourth Turning.
ET: Actually another field that we believe urgently needs some creating destruction is mainstream economic thinking. One thing that is striking about your work is how accurate you have been so far in advance. And yet – not wanting to pick on anyone in particular – very few mainstream economists could see 2008 coming, if any. Is a deeper understanding of demographics and this generational interplay what is lacking in mainstream economics today?
NH: Oh, there’s so much to talk about mainstream economics, I really would not know where to begin…
ET: If you had to pick one thing...
NH: I would say in general the narrowness of the way economics is now taught and published and its inability to embrace a much more multidisciplinary way of bringing in the other social sciences is a big limitation the longer it comes to looking into the future.
ET: One of your companies publishes research which is widely read by top hedge funds and institutional investors. Is this based on the work that you have done over the years to enhance our understanding of possible economic, financial and societal outcomes, particularly in light of the limitations of mainstream economics?
NH: Yes, our company Saeculum Research publishes research to institutional investors.
By the way “saeculum” is the Latin word for century, but in this derivation not so much referring to 100 years but rather the Etruscan meaning which is a long human life. And we introduced that word in our book The Fourth Turning to describe the full cycle. You can sort of get my picture – the four seasons of a person’s life.
To our clients at Saeculum what we focus on is – more important to them than the long cycle – insights into how breaking generational changes at this moment are reshaping individual industries, from airlines to hospitality to artificial intelligence to big data. So we are looking very closely at people’s behavior, consumers, workers and investors, and looking at how a longer view helps us get a much more accurate fix on how things are changing this year and impacting the various brands and companies that they are investing in.
ET: That’s fascinating work. In addition to your books, which we vividly recommend, is there a site where people can go to get your latest insights and updates on your thinking?
NH: They can go to our website and sign up to a free newswire, where we are constantly alerting people, daily or weekly at their wish, on demographical and generational events and news and reports that we find interesting. There are also a number of links to publications that we have done, my own opeds and other things that we have written. So it’s a very important portal for entering into our world.
ET: Neil, this has been fantastic. Thank you very much for taking time off your busy schedule to talk to us. All the best with your work – hopefully the Fourth Turning will turn out to be OK!
NH: We certainly hope so! Thank you.
In the utopian world of US equities - where every dip is a buying opportunity and "The Fed's got your back," - it is blasphemous for anyone to suggest this state of affairs cannot go on forever is extreme. However, as China encountered an accelerated version of the farce that the US has experienced in the past few years, the same "The PBOC's got your back" mentality dominated every fundamental fact and central bank omnipotence was doctrine. That is until 2 weeks ago... when modest efforts to rein in exponentially-growing leverage pricked the new normal's narrative. Now every "save" by the government and every plunge protected is sold into by a desperate population burned...
This is what it looks like when a central bank loses control...
Couldn't happen here? That's what the Chinese said 2 weeks ago!
And by the way - it already did happen in America - twice...
By Neha Dasgupta and Manoj Kumar
Friday, July 3, 2015
The Reserve Bank of India and the finance ministry are in talks to scrap bulk import licences for a gold-silver alloy used by domestic refiners, months after relaxing curbs on gold imports, officials with direct knowledge of the discussions told Reuters.
Gold is India's second-highest import in value terms, and a jump in imports widened the current account deficit in 2013, sparking the country's worst currency turmoil since a balance of payments crisis in 1991.
An alloy of gold and silver, called dore, from which refineries produce pure gold, forms about 150 tonnes of imports each year and attracts a duty of 8.24 percent, which is less than the duty of 10.30 percent on refined gold.
The RBI wants to remove all restrictions on refiners while the finance ministry has raised concerns over tax evasion, the sources said. ...
... For the remainder of the report:
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John Coumarianos recently wrote an opinion piece for MarketWatch stating:
"...if you think low interest rates necessitate high stock prices, that wasn't the case in the 1940s when interest rates were low and stock prices were below their long-term average relative to past earnings.
True, we don't know what the market will do over the short term, but we know with some reasonable probability what it might return over the longer run. The Shiller PE and Tobin's Q provide some significant probability beyond zero with regard to future 10-year returns.
We don't have zero or no knowledge. We don't have certainty either, but it's probable that stocks will deliver anemic returns over the next decade given where Shiller and Q are currently. Incidentally, stocks have provided anemic returns for the past 15 years (less than 5% annualized for the S&P 500 SPX, +0.69% including dividends) with the starting Shiller PE for the period above 40. So talk that the Shiller PE has lost its mojo isn't accurate. The market delivered significantly subpar returns for the following 10- and 15-year periods starting from the highest Shiller PE on record."
I have discussed the importance of valuations and forward return expectations in the past (see here) but John's commentary is very important because it highlights a huge disconnect between what individual individuals THINK and how they ACT. Specifically, individuals believe they are truly "long term" investors and that they will make investments for very long periods of times (10years or more.)
However, as shown by repeated studies, that belief is confounded by the fact that individuals react to short-term market volatility and other inputs which leads to emotional decision making. Of course, the media/press/blog community is primarily to blame for these actions by focusing a spotlight on each data point within the financial markets rather than helping investors focus on the "long game."
One of the more useless discussions as of late has been on the irrelevance of high valuations as it relates to market returns of the next 12 months. To wit:
""The so-called CAPE, popularized by Professor Shiller of Yale is extended but unfortunately has no ability to predict stock price outcomes a year later," Citi's Tobias Levkovich said on Friday. 'Yet, that does not seem to confound the bears, which we find both intriguing and revealing about motive rather than study.'"
The problem is what I have addressed in the past as a "duration mismatch." Shiller's CAPE ratio is not about what happens in the next year but rather what returns investors should expect over the next 10 or 20 years. After all, we are saving and investing for our retirement, right?
The following two charts show the TOTAL (dividend reinvested) REAL (inflation adjusted) forward returns from every level of CAPE since 1900. I have noted with the red box the current range of CAPE.
The good news is that forward returns over the next decade or two have IMPROVED from the low levels witnessed at the turn of the century. The bad news is that forward returns are likely to be PRIMARILY a function of inflation and dividends more than capital appreciation. Unfortunately, most investors will do far worse.Job Growth In 16-54 Group Still Non-Existent
In one of the most over-hyped, and primarily useless, economic data points thrown at investors every month is the employment report. Why there is such a focus on this particular report is beyond me. However, there are several points of interest/concern with the most recent report.
First, the employment for June was not only weaker than estimated but previous two months were also revised lower by 60,000 jobs in total.
Secondly, part-time jobs soared by 161,000 while full-time jobs collapsed by nearly 350,000. However, even worse was the addition of 640,000 individuals that are no longer counted as part of the work force. That led to the decline in the unemployment rate to just 5.3%. (Think about that for a moment. Almost 94 million individuals sitting outside the labor force and the BLS suggests that 94.7% of the population is employed.)
Lastly, the most important aspect of the employment report is the number of individuals between the ages of 16-54 that are employed as it relates to the entire population of that age group. The reason for concern is this age group is primarily responsible for working, buying cars, houses, iPhones, and paying into the welfare support system. The problem, as shown in the chart below, is that the employment-to-population ratio for this group is not improving.
In other words, while the media gets overly excited about monthly job growth, the reality is that job growth has been little more than just a function of overall population growth. This isn't something the fosters long-term economic expansions that generates higher levels of prosperity.Sector Valuations
John Gabriel recently penned a piece for Morningstar discussing valuations across sectors saying:
"Metrics like price/earnings ratios, or P/E, often contain a lot of "noise." By now we have probably all heard of those infamous special one-time noncash charges that can wreak havoc on earnings statements. But management also has several levers it can play with to "massage" the income statement. For example, the waters can be easily muddied by adjustments to the tax rate or an asset's depreciation schedule. Because earnings can be easily manipulated, many investors prefer using a price/sales ratio. But there are also drawbacks with P/S--namely, it tells you nothing about profitability."
This is all very true in the short-term. However, as noted above on overall market valuations, valuations above long-term averages precede lower long-term returns. As shown in John's table below, with the exception of Energy, due to the recent plunge in oil and stock prices, every single sector is trading above, or well above, their 10-year average.
This is particularly the case with historically more "defensive" sectors such as Healthcare, Materials, Staples and Industrials that would be the beneficiaries of sector rotation during a market correction.
The potential problem for investors is that due to the "yield chase," which was fostered by Central Bank interventions, there is a real danger that "dividend investors" may suffer a much bigger correction in the future than has been seen historically as valuations mean revert.
Valuations, as always, should not be used as a market-timing device. However, what valuations can tell us, particularly at elevated levels, is that future returns are not only going to be disappointing on the average, but the eventual mean reversion process will be more destructive than most investors realize.
Just something to think about.
Earlier this week the embattled Greeks delivered still more body blows to the rotten regime of Keynesian central banking and the crony capitalist bailout state to which it is conjoined. By defaulting on its IMF loan, walking away from the troika bailout program and taking control of its insolvent domestic banking system, Alexis Tsipras and his band of political outlaws have shattered a giant illusion.
Namely, that the world’s debt serfs will endlessly and meekly acquiesce to whatever onerous, eleventh hour arrangements might be concocted by their official paymasters——even when these expedients are for no more noble or sustainable purpose than to forestall a Monday moring hissy fit among the gamblers in the world’s financial casinos.
So at midnight on June 30 the proverbial can was not kicked again as scheduled. Instead, Greek democracy kicked back. And it is to be hoped that the end result will be a mighty boot to the tyranny of the status quo in the form of a resounding “no” vote on Sunday.
The latter would clarify that everything at issue between the parties is false. There is no way to pay Greece’s debts, modify the troika austerity plan, save the euro, rescue Greece’ banking system or stabilize Europe’s hideously mispriced and distorted debt markets.
Its all going to blow and it should. The entire European mess has been concocted by statist politicians and policy apparatchiks who falsely and arrogantly believe they can defy the laws of markets, sound money and fiscal rectitude indefinitely.
The truth lost in all the meaningless “puts and takes” of the latest negotiations is that the Greek state was bankrupt five years ago; it can not reform, save, skimp, or grow its way out of its crushing debt, and should stop looking for ways to accommodate its paymasters. It urgently needs to default massively and decisively, and is in a ideal position to do so.
That’s because the clowns who run the troika have taken themselves hostage. That is, they have shifted virtually the entirety of Greece’s unpayable debts from private banks and bond funds to the taxpayers of Europe, the US, Japan and even the unwary citizens of Peru, Senegal and Bangladesh.Here is the debt in 2009–mostly owed to private banks and bondholders—compared to Greece negligible private external debt today. In the case of the French, German, Dutch and Italian banks and other private lenders, for example, outstandings have been cut from $100 billion in 2009 to barely $15 billion today. By contrast, here is the pea under which Greece’s massive debt is hiding today. Namely, almost all of it has been shifted onto the backs of the taxpayers of these Eurozone nations.
Moreover, as the New York Times noted with respect to this massive shift, the most aggressive punters have made a killing. One of them noted quite explicitly that when hedge funds started buying Greek government bonds in 2012:
“People made their careers on that trade,” Mr. Linatsas said.”
Indeed they did. And now taxpayers around the planet have been stuck with the due bill. Specifically, $250 billion or nearly 80% of Greece’s $320 billion of fiscal debt is directly owed to the EU facilities and the IMF; and upwards of half of the balance is indirectly owed to European taxpayers because $45 billion of Greece’s T-bills and bonds are either owned or funded by the ECB.
If Tsipras were not so badly advised by his pro-euro Keynesian advisors like Varoufakis, he would realize that there is no point in negotiating with the troika at all because Greek concessions can not possibly lead to the only two things that count. That is, meaningful debt relief or reentry into world bond markets.
In fact, the sole reason for compromising—nay capitulating—-is to keep the euro, and that is a snare and a delusion.
Accordingly, a clean default on this massive burden of official debt is in order for two reasons. First, Greece’s government never asked for the giant bailouts of 2010 and 2012 which transferred their onerous debts to the world’s taxpayers. The $250 billion outstanding was forced upon them by Brussels and IMF officialdom in order to protect the German, French, Dutch, Italian and other banks; and to insure that when the markets opened on innumerable Monday mornings, there would be no inconvenient turmoil on the stock exchanges or in the bond pits.
Secondly, the troika cannot give honest debt relief anyway. That’s because officialdom is now petrified of their own taxpayers—-whom they have betrayed and baldly lied to from the very beginning. Thus, the IMF has now loaned Greece $35 billion in gross violation of its own credit standards and long-standing rules. Were it ever to take the huge write-offs that are objectively warranted by the actual facts of Greece’s economic and fiscal situation, it would be eaten alive in the legislative chambers of its member governments.
Indeed, in the case of the $6 billion share of the loss attributable to the US quota, the Republican congress would have a field day investigating the incompetence and misdirection underlying the IMF’s role in the Greek bailout. The IMF would never again achieve a congressional majority for a subscription funding increase—effectively putting it out of business.
And that’s nothing compared to the political explosion that would be unleashed in the national parliaments of the Eurozone itself—– were proper debt relief to be granted. As shown below, the Germans are on the hook for $56 billion of the direct fiscal debt, but that’s not the whole of it by any means. Through the backdoor of the ECB, German taxpayers have also loaned Greece another $36 billion in the guise of liquefying the collateral of the Greek banking system.
“Liquefying” my eye!
The Greek banking system is hopelessly insolvent; the so-called “Eurosystem” obligations shown below are nothing more than fiscal transfers. Accordingly, what the clueless Angela Merkel actually accomplished during five years of weekend Gong Shows was to bury her taxpayers under $92 billion of liabilities—–nearly all of which are off-budget and unacknowledged.
Her desperate and mindless temporizing in order to remain in power thus constitutes a monumental political lie and betrayal. Were this to be exposed by a major write-down of the Greek debt,it would lead to an instant fall of her government.
The same is true for the rest of the Eurozone—only the facts are even more egregious.
France’s share of the fiscal debt is $42 billion and its total obligation including the ECB exposure is $70 billion. But France has not had a balanced budget in 40 years; is suffering from record unemployment and a decaying economy that has been suffocated by socialist taxes and regulatory dirigisme; and will soon join the triple digit club on its public debt. Accordingly, its government is petrified by even mention of Greek debt relief.
Then you have Italy buried under a 130% debt-to-GDP ratio and an economy that is 10% smaller in real terms than it was 7 years ago. So it is not surprising that its paralyzed, caretaker government does not wish to contemplate even the prospect of a write-down on the $37 billion of fiscal debt owed by Greece or the $60 billion of total exposure.
Then there is the crook and fiscal phony running Spain. No wonder Mr.Rajoy has practically threatened to take out a contract on Alexis Tsipras’ life. Spain’s economy is still grinding away 15% below its boom time peak and its government is faking its fiscal accounts to a fare-the-well. Still, its public debt continues to rise toward 100% of GDP.
So its cowardly government would rather consign the Greek people to permanent depression and debt servitude than own up to the $42 billion it has loaned the Greek state and banking system in order to keep the European banks and bond funds afloat.
After generations of fiscal profligacy the Greek government should not worry about re-entering the capital markets at any time soon. It should resign itself to running primary budget surpluses for the indefinite future based on whatever domestic political consensus it can cobble together on the matter of taxation, pension reform, divestiture of state assets and weaning its crony capitalist leeches and special interest groups from their stranglehold on the Greek state’s depleted coffers.
Under such an all-Greek fiscal regime, it need not worry about its $250 billion of official fiscal debt or even the $130 billion of Euro-system obligations. Here’s why.
None of the governments which foisted these obligations on Greece will survive a blanket default. The more likely scenario is that the successor governments—–almost certain to be anti-EU—- will disavow the guarantees undertaken by the EFSF and demand haircuts from the underlying bank and bond holder claimants. Stated differently, a Greek default on its $150 billion of EFSF funding would trigger a domino effect back to the status quo ante.
In any event, the only alternative to this sequential chain of defaults or punishment of Eurozone taxpayers is to send in the German and French armies. But unlike the Ruhr in 1923, there are no coal mines, steel mills or other significant industrial assets in Greece to occupy. The geniuses at the troika have essentially made massive unsecured loans that are uncollectible—–proof positive that, among other things, governments shouldn’t be in the banking business.
So if Syriza gets its “no” mandate Sunday and if meaningful debt relief is impossible, what is it exactly that it would negotiate for from an arguably strengthened position? The conventional answer, of course, is continued ECB support for its banking system and retention of the euro. But both of these objectives are invalid, and are just gateways back into subservience to the Troika.
Since Greece is already irrevocably knee deep in capital controls it need only complete the process and nationalize the banks since they are irreparably insolvent anyway. For instance, Greece’s three largest banks with available public data—–Alpha Bank, National Bank of Greece and Eurobank Ergasias—–have upwards of $60 billion of non-performing loans, which represent nearly one-third of their total book of $180 billion. In addition, they also have $50 billion of bonds and other investments—much of which was issued or guaranteed by the Greek state.
Against the massive imbedded losses in these totals, by contrast, the three banks have only $9 billion of tangible book equity excluding their worthless tax-deferred assets. In short, neither the stock or the long-term debt of these banks have any recoverable value at all.
As part of a housecleaning at these wards of the state, therefore, tens of billions of bad debts would be written off including the debt of the Greek state. And the massive $130 billion of ECB claims would be primed by the claims of domestic depositors.
To be sure, most of the deposits have already fled the Greek banking system and there is upwards of $50 billion in euro notes and coins in the billfolds and mattresses of Greek citizens and multiples of that in off-shore bank accounts. Nevertheless, under a proper state directed liquidation and clean-up of the Greek banking system, the remaining domestic depositors would be made the senior creditors of a shrunken but solvent banking system. The eurosystem’s $130 billion of claims, including the ECB’s lunatic extension of $90 billion in ELA funding to the Greek central bank, would be forced to take a deep haircut on the subordinated claims it would hold after a restructuring.
Given what needs to be done with respect to Greece’s massive fiscal debt and its insolvent banking system, why would Syriza want to make post-referendum concessions to the troika for the privilege of staying in the euro?
The short answer is that is wouldn’t and shouldn’t. After the necessary fiscal default and nationalization of the Greek banking system the euro is a club no one would want to join.
Stated differently, underlying the present fraught confrontation between Greek democracy and the troika’s financial oppression is an epochal catch-22. The sweeping debt relief on which survival of the Greek economy depends would unhinge European politics, discredit the so-called European project and shatter the flawed and unsustainable money printing regime underlying the euro.
Indeed, if the Greeks do not waver after a successful rejection of the status quo on Sunday they will not need to feel lonesome about returning to the Drachma. The Italian lira, Spanish peseta, Portuguese escudo, the French franc and countless more will be back in short order.
Think of that. The IMF out of business. Merkel and Brussels gone. The Bundesbank and D-mark restored. The Keynesian money printers discredited. The front-runners and speculators in the casino carried out on their shields.
Now that’s a referendum that the world desperately needs.
Having bounced midweek on 'hope' of a deal and 'faith' in Draghi's containment, European stock markets are tumbling back to the post-Greferendum lows of Tuesday. Italy and Spain are now down 5.5 to 6% and as the European close nears - and the realization thanks to The IMF that the vote is a simple Yes/No to debt haircuts - stocks are being sold and volatility is picking up. Bond spreads are leaking higher but it is clear that what Draghi really 'contained' was EURUSD which remains only marginally lower on the week.
European stocks' downside appears to not be 'contained'...
but EURUSD remains well 'managed'...
European risk has never traded at such an extreme level relative to US risk... ever. But when looking for the best bang for your Greferendum-trading buck - are you better off buying higher vol in Europe or lower US vol? Or, as Goldman Sachs explains below, what are the highest payouts on bets for a rebound...
Europe is pricing significant event risk while the VIX @16 is only 1 pt above its 2015 avg - Europe's "VIX" trades at more than double that of US "VIX" - this has never happened before...
Impact of Greek crisis on US Economy: Impact via financial conditions not trade
European sovereign concerns have renewed over the course of the month. The outcome of the July 5 referendum in Greece posts higher uncertainty over the future negotiations. In a recent US Daily: Limited Spillovers from Greek Turmoil So Far (June 29, 2015), our US economics team analyzed two of the primary channels that the Greek debt crisis could impact the US economy: (1) international trade flows and (2) financial conditions.
- Channel 1. International trade: Little impact. Our economists estimate that any cyclical spillovers through trade may be small as exports to Greece are less than 0.01% of US GDP. Even a broader Euro area slowdown may have limited impact on US trade as exports to the Euro area only constitute around 2% of US GDP.
- Channel 2. Financial conditions: Intensification of Euro area crisis => Equities down, US 10y lower, dollar stronger. While spillovers from trade may be limited, the impact on US financial conditions could be more sizable. Our economists’ analysis of the impact of Euro area crisis events on US financial conditions between 2010 and 2013 showed that intensifications of the Euro area crisis typically lead to lower US Treasury yields, lower SPX levels, a stronger dollar and tighter overall financial conditions. They estimated that in 2012 the Euro area sovereign crisis, at its peak, shaved about one percentage point off of US real GDP growth. In a recent study they highlighted two primary findings: (1) A hypothetical one percentage point slowdown in Euro area growth could slow US growth by around 0.15% over the next six months; (2) Changes in US financial conditions have sharper effects on US growth with a 100bp tightening in financial conditions slowing our US current activity indicator by about 0.6 percentage points over six months.
Historic VIX move yet the VIX dropped back to 16 and the SX5E/SPX vol ratio is near a 15y high
Prior to Monday June 29, the US equity options markets had been pricing Greece as a non-event. After the breakdown in negotiations between Greece and its creditors and the Greek Prime Minister’s call for a referendum, the VIX finally took notice.
- The VIX: As of Friday June 26, the VIX was at 14; slightly below its average over calendar years 2013 and 2014 of 14.2. Fast forward to Monday June 29th and the GREK ETF which tracks Greek equities was down -19.4%, the DAX dropped -3.6% and the S&P 500 declined -2%. The VIX played catch-up landing at 18.85, up 4.8 vol points on Monday, a 99th percentile event back to 1990. As of the market close Wednesday July 1, the VIX was back to 16.1, exactly one-vol point above its 2015 ytd average of 15.1. S&P 500 10d realized volatility stands at 14.6 and 1m at 11.9
- SX5E vol is at a record high vs SPX: The ratio of EURO STOXX 50 to SPX 1m implied volatility serves as a proxy for the relative short-term event risk being priced in Europe versus the US. SX5E implieds have traded at an average ratio of 1.26x SPX implieds since 2000 (a 26% premium). By last night’s close, the SX5E/SPX vol ratio hit 2x, one of its highest levels on record, and well above the ratio of 1.7x attained during past European flare ups from 2010-2013.
Greece remains unpredictable: 10y Italian & Spanish bond spreads to Bunds may reach 200-250bp
The Greek referendum is scheduled for Sunday July 5 and the outcome of the referendum and surrounding negotiations remains highly uncertain. With Greek equity markets closed, one way to look at stress levels in Europe would be to gauge Italian-German and Spanish-German 10y yield spreads. Ten-year Italian and Spanish spreads to Bunds were recently trading around 145 bp. Goldman Sachs economist Francesco Garzarelli believes that spreads could reach the 200-250 bp range if IOUs are introduced and capital controls remain in place for an extended period. Under a more bearish scenario, he believes that Italian and Spanish spreads to Bunds could widen to around 300bp in the event of 'Grexit'.
And so Goldman asks, are investors better off buying elevated optionality closer to the source of concern (Europe) or buying lower volatility in the US?
Highest payouts under European downside scenarios: European indices offer > 6:1 payouts
Sensitivity analysis: It’s not surprising that European indices show the highest betas to spread widening across global indices. Exhibit 5 shows that the DAX could be down -12.6% per 100bp increase in the 10y Spanish-German spread if the index followed its typical beta to spreads (SX5E: -13.4%). That is more than double the expected shift in the S&P 500 of -4.9%.
Best bang for the buck if spreads widen: After controlling for current option prices we estimate a potential payout of 8-to-1 using FTSE MIB options if the 10y Spanish-Germany spread widens to our economists’ bear case of 300 bp with DAX and SX5E puts offering payouts of around 7-to-1. Under the more modest assumption that spreads widen to 225 bp, our results indicate that investors are still better off buying European indices. Expected payouts on DAX and SX5E are 3.3-to-1, nearly double the S&P 500 payout of 1.7x. There are of course several caveats, the correlations between spreads and equity movements are not high (DAX: - 0.51; SPX: -0.31 over the last year), but that also may imply that under a correlated sell-off we may be underestimating the sensitivities. The US could also trade spread widening as a Europe specific event with European indices reacting much stronger than those in the US, which may argue for sticking with European indices consistent with our results. Expected payouts under 10y Italy-Germany spread widening leads to higher payouts and is shown in Exhibit 6.
Scenarios assuming the DAX moves down another -10%: The beta of the SX5E to DAX returns is 0.94, about 2.4x that of the S&P 500 (0.39) and even after controlling for higher option prices expected payouts using SX5E puts are nearly 1.6x higher than SPX puts. DAX options screen attractive with potential expiration payouts of 3.3:1, FTSE MIB (2.9:1), SX5E (2.8:1), SPX (1.7:1).
While buying high vol is never an easy task, we find it interesting that, at least at this stage, European indices are still screening attractive under a risk-off event. Given higher option prices put spreads may be an attractive alternative over outright put purchases.
Positioning for a rebound? Highest call payouts in Europe.
Our economists (and most investors that we have spoken with) believe that Greece will remain a member of the currency union, but the probability of 'Grexit’ has increased significantly. We have received a number of questions from investors looking for upside exposure, to either play a rebound or to hedge existing shorts.
Under a 10% up-move in the DAX: As of the time of this writing the DAX is down -9.7% from its ytd high. We estimate call option payout ratios assuming the DAX moves halfway (approximately +5%), or all the way back (+10%) to its high, and each index follows its historical beta to the DAX (Exhibit 8). Under the bullish assumption of a return to the high (+10%) we find SPX calls would have a hypothetical payout of 2.9:1 if the index moves up 3.9% in-line with its beta to the DAX versus payouts of 3.6x for the DAX and 3.2x for the SX5E.
Caveats: All of our analyses assume trades using 1m options. Given the spike in short-dated options, investors may benefit from pushing out in the term structure given that implied volatility term structures are sharply downward sloping in Europe. A Greek resolution may also take an extended period of time, another argument in favor of using longer-dated tenors.
Risks: The maximum loss from buying a put option is the upfront premium paid. The maximum loss from buying a call is the upfront premium paid.
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So now they do it. Now the IMF comes out with a report that says Greece needs hefty debt restructuring.
Mind you, their numbers are still way off the mark, in the end it’s going to be easily double what they claim. Not even a Yanis Varoufakis haircut will do the trick.
But at least they now have preliminary numbers out. The reason why they have is inevitably linked to the press leak I wrote about earlier this week in Troika Documents Say Greece Needs Huge Debt Relief. If that hadn’t come out, I’m betting they would still not have said a thing.
It’s even been clear for many years to the IMF that debt restructuring for Greece is badly needed, but Lagarde and her troops have come to the Athens talks with an agenda, and stonewalled their own researchers.
Which makes you wonder, why would any economist still want to work at the Fund? What is it about your work being completely ignored by your superiors that tickles your fancy? How about your conscience?
Why go through 5 months of ‘negotiations’ with Greece in which you refuse any and all restructuring, only to come up with a paper that says they desperately need restructuring, mere days after they explicitly say they won’t sign any deal that doesn’t include debt restructuring?
By now I have to start channeling my anger about the whole thing. This is getting beyond stupid. And I did too have an ouzo at the foot of the Acropolis, but I’m not sure whether that channels my anger up or down. The whole shebang is just getting too crazy.
For five whole months the troika refuses to talk debt relief, and mere days after the talks break off they come with this? What then was their intention going into the talks? Certainly not to negotiate, that much is clear, or the IMF would have spoken up a long time ago.
At the very least, all Troika negotiators had access to this IMF document prior to submitting the last proposal, which did not include any debt restructuring, and which caused Syriza to say it was unacceptable for that very reason.
Tsipras said yesterday he hadn’t seen it, but the other side of the table had, up to and including all German MPs. This game obviously carries a nasty odor.
Meanwhile, things are getting out of hand here. It’s not just the grandmas who can’t get to their pensions anymore, rumor has it that within days all cash will be gone from banks. And then what? Oh, that’s right, then there’s a referendum. Which will now effectively be held in a warzone.
It’s insane to see even Greeks claim that this is Alexis Tsipras’ fault, but given the unrelenting anti-Syriza ‘reporting’ in western media as well as the utterly corrupted Greek press, we shouldn’t be surprised.
The real picture is completely different. Tsipras and Varoufakis are the vanguard of a last bastion of freedom fighters who refuse to surrender their country to an occupation force called the Troika. Which seeks to conquer Greece outright through financial oppression and media propaganda.
Tsipras and Varoufakis should have everyone’s loud and clear support for what they do. And not just in Greece. But where is the support in Europe? Or the US, for that matter?
There’s no there there. Europeans are completely clueless about what’s happening here in Athens. They can’t see to save their lives that their silence protects and legitimizes a flat out war against a country that is, just like their respective countries, a member of a union that now seeks to obliterate it.
Europeans need to understand that the EU has no qualms about declaring war on one of its own member states. And that it could be theirs next time around. Where people die of hunger or preventable diseases. Or commit suicide. Or flee.
All Europeans on their TV screens can see the line-ups at ATMs, and the fainting grandmas at the banks, the hunger, the despair. How on earth can they see this as somehow normal, and somehow not connected to their own lives?
They’re part of the same political and monetary union. What happens to Greece happens to all of you. That’s the inevitable result of being in a union together.
Don’t Europeans ever think that enough should be enough when it comes to seeing people being forced into submission, in their name? Or are they too fat and thick to understand that it’s in their name that this happens?
The July 5 referendum here in Greece is not about whether the country will remain in the EU, or the eurozone, no matter what any talking head or politician tries to make of it. The narrow question is about whether Greeks want their government to accept a June 26 Troika proposal that Tsipras felt he could not sign because it fell outside his mandate.
That the Troika after the referendum was announced then pulled a Lucy and Charlie Brown move on Syriza, and retracted the proposal, is of less interest. Lucy always pulls away the football, and Charlie Brown always kicks air. He should wisen up at some point and refuse to play ball.
However, at the same time, though it’s highly unfair to burden the Greeks’ shoulders with this, the referendum has a far broader significance. It is about what and who will rule Europe going forward, and we’re talking decades here.
It will either be a union of functioning democracies, or it will be a totalitarian regime in which all 28 nations surrender their independence, their sovereignty, their votes and then their lives to Brussels and Berlin.
Democracies are about one thing first and foremost: the people decide. If you can’t have that, than why would you have elections and referendums? Those then become mere theater pieces. Like we already have in the US, where if anyone can explain to me the difference between the Clintons and the Kardashians, by all means give it a go.
Since it’s clear that Berlin is by far the strongest voice in the three-headed monster the Troika has become, it’s no exaggeration to say that what we see unfold before our eyes is yet another German occupation of Greece. There are no tanks and boxcars involved yet, but wars can be fought in many ways. And scorched earth can take up many different forms too. It’s the result that counts.
In the meantime it has somehow become entirely acceptable for politicians and media from foreign countries to tell the Greeks what to do, who to vote for, and what to make sure happens after.
European Parliament chief Martin Schulz even dares claim that Syriza should resign if the vote is yes, and it should be replaced with a bunch of technocrats. It’s none of your business, Martin. Or yours, Bloomberg writers, or Schäuble, or anyone else who’s not Greek. Shut up! You’re all way out of -democratic- line.
It’s up to Greeks to decide what happens in their country. It’s both a sovereign state and a democracy. The utmost respect for this should be the very foundation of everything we do as free people, whose ancestors fought so hard to make us free.
How come we moved so far away from that, so fast? What happened to us? What have we become?
The Greece’s referendum, due to take place on Sunday, remains an open question with pollsters and analysts alike. Polls have shown mixed results in favor of the “yes” or “no” vote to austerity commitments needed in return for aid.
Whatever the result, most analysts agree the impact on Greece’s govt, the country’s banks and the markets is uncertain at best and the country’s fate in the euro still at risk
S&P says the probability Greece will exit the euro zone has increased to about 50% following the govt’s decision to hold a vote.
And since there is enough confusion as is, the following summary from Bloomberg answers most of the unknowns associated with Sunday's popular vote:
WHEN ARE RESULTS DUE
- Polling stations will be open from 7am to 7pm local time and the result may be known before midnight
- Pollsters haven’t confirmed if there will be exit polls; if there are any, they will come immediately after the polls close
- Software distributor SinglularLogic, which has been hired to run the vote counting and data processing, should be able to provide an estimation of the winner a few hours after polls close
- JPMorgan expects ~90% of votes will have been counted by midnight, based on past general elections in Greece; vote counting could be even faster this time as it’s a yes or no question
WHAT ARE GREEKS BEING ASKED TO VOTE ON
- The question, underlying documents and process have been released here: http://www.ypes.gr/el/Elections/referendum2015/
- “Greek people are hereby asked to decide whether they accept a draft agreement document submitted by the European Commission, the European Central Bank and the International Monetary Fund, at the Eurogroup meeting held on June 25 and which consists of two documents”
- The government has been at pains to tell voters that this isn’t a vote on euro membership but a vote on the terms of any bailout agreement
- Greek Prime Minister Alexis Tsipras says he’ll sign a deal on Monday either with “yes” or “no” vote; not an option for Greece to leave euro
- Finance Minister Varoufakis told Bloomberg TV it’s about “how to stay in euro” that he would resign if people vote “yes”
- European officials have criticized the government for asking people to vote on a deal that is no longer on the table after the country’s bailout expired on Tuesday; don’t agree that “no” vote will facilitate Greek government’s negotiating position
WHAT DO THE POLLS SHOW
- Opinion polls are mixed so far with a poll commissioned by Bloomberg News showing 43% intend to vote “no” and 42.5% backing a “yes” while 14.5% remain undecided; survey was conducted by the University of Macedonia Research Institute
- An Alco survey for Ethnos Poll shows the “no” vote with 43.4% and “yes” vote with 44.8%
- A ProRata poll earlier in the week said the “no” vote led while a GPO survey found 47.1% support for the “yes” campaign
- Analysts for the most part still expect the “yes” to win out although JPMorgan says the initial polls surprised them, making an already uncertain outcome alittle more uncertain
- Citigroup expects a “yes” vote but say public opinion will likely remain highly fluid and subject to events such as official statements and the degree of social unrest, if any
- Eurasia says risk of a “no” vote is quite high at around 45% though still expect a “yes”
WHAT IF IT’S YES
- If there is a yes vote, outcomes are ultimately likely to prove stabilizing but could remain chaotic for some time, JPMorgan says
- Base case is Tsipras stands down and a national unity government is formed under technocratic leadership
- Forming a new government won’t be easy, BoFAML says; parties supporting “yes” camp hold only 106 seats; that suggest 45 MPs from the current govt would have to jump ship for a government to be formed
- There are also technical issues about whether or not general elections could be organized in the middle of the summer, suggesting the country may be in limbo for at least a few more weeks
- Citigroup analysts say securing a deal with creditors on Monday will be easier said than done, and negotiations could drag on for weeks, challenging efforts to reopen the banks
- A ‘yes’ vote, followed closely by the resignation of Tsipras and Varoufakis is likely to be the most market-friendly outcome, Goldman Sachs analysts say
WHAT IF IT’S NO
- Greek PM Alexis Tsipras said yday a “no” vote is decisive step toward a better deal, not a vote to leave the euro
- Former Greek PM Kostas Karamanlis says a “no” vote on Sunday would lead to Greece’s expulsion from heart of Europe
- A ‘no’’ vote would probably require a political intervention unlike any we’ve seen as yet to row back from Greek euro exit, JPM says
- The dynamics of increasing banking and payments dysfunction would shorten the timescale for such an intervention to a handful of weeks at most
- BofAML says wouldn’t expect the creditors to change their proposal; without new official funding, Greece will enter uncharted territory
- Risk is Greek bank holiday lasts well beyond next Monday, BBH says; on a “no” vote, it’s clear the ECB would not increase ELA
HOW WILL MARKETS REACT
- If the result is a “yes”, European equities are thought to be the asset class with most attractive risk reward, Barclays says
- A “yes” vote should boost risk appetite and give investors more confidence that the Fed will hike rates later this year, Credit Agricole says
- Expect USD to be among the main beneficiaries under this outcome; any relief rally in euro should be short-lived
- A “no” vote will be a risk-negative outcome that will fuel Grexit fears; euro should fall, especially against the majors and market visibility will worsen significantly
- It could take months before we know the ultimate fate of Greece; if hopes of a deal remain alive, markets may even return to their holding pattern after the initial sharp selloff
Reprinted from the Freeman
Arthur Firstenberg sued his neighbor over a WiFi connection. Firstenberg asked for more than $1 million in damages due to the radiation emanating from his neighbor’s wireless router, dimmer switches, and other devices that we take for granted nowadays.
Free-market economist Steven Landsburg argues that Firstenberg’s case shows the weakness in the standard libertarian approach to property rights, but he confesses that he doesn’t have a fully satisfactory legal doctrine to suggest instead.
Landsburg is fighting a straw man. Libertarians have nothing to fear from the Firstenberg case.
First of all, Murray Rothbard himself showed the proper way to dismiss such lawsuits, as we’ll see shortly. But even if judges adopted Firstenberg’s “absurd” views — namely, that he had the right to be free from photons from outsiders on his own property — the members of a free market community could quickly bargain around this (apparent) absurdity and reach a sensible outcome.
Reductio ad straw man
Here is Landsburg’s analysis:
This case is about as good as it gets if you’re looking for a reductio ad absurdum to libertarian dogma about the absolute right to control one’s own body. If we accepted that dogma, Mr. Firstenberg would have an excellent case. More than one economist has tried to refute the libertarian position by concocting hypothetical lawsuits over “penetration by photons”. Thanks to Mr. Firstenberg, we no longer have to resort to the hypothetical.
Landsburg is no doubt alluding to David Friedman, who — with his training in physics — has come up with clever thought experiments to show the limits of conventional libertarian legal analysis. For example, in “Natural Rights + ?” Friedman writes,
One problem with the version of libertarianism exemplified by Rand, Rothbard, and their followers is its lack of any logical foundation sufficient to persuade the unbeliever of its strong claims…. And another is that, taken literally, it sometimes gives the wrong answer: I cannot turn on the lights in my house without prior permission from every landowner whose ability to see them demonstrates that my photons are trespassing on his property.
Both Landsburg and Friedman are recoiling against (what they perceive to be) adogmatic libertarianism in the approach to property rights. The primary work in this tradition is The Ethics of Liberty, in which Rothbard starts from first principles and deduces at least the broad outline of what the law code would look like in a free society. Beyond other possible objections to this approach, Landsburg and Friedman think it self-evidently leads to “the wrong answer” on what we might deem a nanoaggression — namely, sending a physically harmless amount of photons onto another person’s property.
I have two lines of response to the Landsburg/Friedman critique. First, I am not certain that the “absolutist” approach to property rights does entail the absurdities that they claim. Rothbard dealt with exactly this problem in “Law, Property Rights, and Air Pollution.” Here is his solution:
Consider the case of radio waves, which is a crossing of other people’s boundaries that is invisible and insensible in every way to the property owner. We are all bombarded by radio waves that cross our properties without our knowledge or consent. Are they invasive and should they therefore be illegal, now that we have scientific devices to detect such waves? Are we then to outlaw all radio transmission? And if not, why not?
The reason why not is that these boundary crossings do not interfere with anyone’s exclusive possession, use or enjoyment of their property. They are invisible, cannot be detected by man’s senses, and do no harm. They are therefore not really invasions of property, for we must refine our concept of invasion to mean not just boundary crossing, but boundary crossings that in some way interfere with the owner’s use or enjoyment of this property. What counts is whether the senses of the property owner are interfered with.
But suppose it is later discovered that radio waves are harmful, that they cause cancer or some other illness? Then they would be interfering with the use of the property in one’s person and should be illegal and enjoined,provided of course that this proof of harm and the causal connection between the specific invaders and specific victims are established beyond a reasonable doubt. (emphasis added)
I hasten to add that Rothbard’s analysis was not ad hoc, a desperate attempt to rescue his system from the corner into which he had painted himself. No, before bringing up radio waves, Rothbard had developed the principles of strict liability, strict causality, the burden of proof, procedural rules, and the crucial distinction between trespass and a nuisance. Moreover, Rothbard quoted from legal scholars throughout his discussion; this was not mere armchair pontificating.
Living with absolutism
Let’s move on to my second line of defense. Suppose that Rothbard misunderstood the implications of his own approach, and that Landsburg/Friedman are right. Specifically, suppose that judges who adopt a strict property rights framework would have to agree that people have the absolute right to be free from photons emitted from others. When an odd fellow like Arthur Firstenberg sues his neighbor, the judge can’t simply dismiss the case as being silly.
Then what? Landsburg and Friedman seem to think they’ve proven their point, but let’s push it. What happens in such a world? Does everyone commit suicide to avoid going to prison?
No, that’s not what would happen. Firstenberg would (by stipulation) get the judge to issue an injunction against his neighbor; she would have to stop emitting photons onto Firstenberg’s property. One problem right away is this: it is physically impossible for her to comply with the injunction, and even if the sheriff comes and puts her in jail, shucks, she is still (however weakly) “invading” Firstenberg’s property — for example, by exerting a slight gravitational force on his couch — because her body has mass. Even if the authorities give her the electric chair, her dead body will invade poor Firstenberg’s property. (Plus, the electrocution itself would send even more electromagnetic radiation his way; the guy can’t catch a break.)
There’s another twist. If her lawyer is clever, Firstenberg’s neighbor will file a countersuit, pointing out that he is invading her property with all of hisphotons. I don’t know what the legal precedent is, but I could imagine an “absolute property rights” judge ruling that you can’t use the power of law to stop someone from committing an invasion that you yourself are constantly reciprocating.
The real solution to these silly brainteasers is that people would come to contractual agreements to avoid such messes. In the modern world, few people ever stumble upon truly virgin territory that they must homestead. On the contrary, just about everyone rents an apartment or buys land from a previous owner. The builders of a new housing development, or the owners of a new apartment high rise, could have clauses in their agreements explaining the rules that the new buyers or tenants must endorse. Right now, in the real world, people buying a new house may have to agree to the rules of a homeowners association, which sets limits, for example, on how loud they can play music at 2:00 a.m., or whether people in the development are allowed to put political campaign signs on their front lawns. To impose such rules isn’t to limit property rights; it merely clarifies exactly which rights the new buyers obtain with their purchase.
Why we need legal theory
Human interactions will always be messy and unpredictable, which is why we will always need judges to issue opinions on particular conflicts. However, it is still worthwhile for legal theorists to write treatises and essays advocating particular philosophies that judges may wish to adopt when making their decisions.
Contrary to the claims of Landsburg and Friedman, modern physics doesn’t provide obstacles to the application of strict property rights. Rothbard dealt with the problem of harmless nuisance in his famous legal essay, and the market process itself would contract around any remaining bottlenecks.
To suppose that WiFi connections could cripple a free society is a bit like a socialist worrying that free labor markets might lead to starvation: What if nobody wants to be a farmer?
The Greece impasse set to culminate on Sunday continues to have a massive impact on at least one stock market, unfortunately it is the wrong one, located on a continent which is mostly irrelevant to the future of the Greek people (unless that whole AIIB bailout does take place of course). We are, of course, talking about China which as noted earlier, started off horribly, plunging over 7% with over 1000 stocks hitting 10% limit down, then in the afternoon session mysteriously recovering all losses and even trading slightly higher on the day, before the late selling returned once more, and the Shanghai Composite plunged to close down 5.8%: a ridiculous 20% total roundtrip move!
This brings the total drop since the highs less then three weeks ago to just over 28% (and 33% for the Nasdaq-equivalent Shenzhen) the biggest 3-week plunge in 23 years.
What is most troubling is that, as we noted last night, this clear bubble bursting is not done with the government's blessings - as should have been the case since a crash was clear to anyone - but despite the government constant attempts to intervene and prop up the bubble.
It all started with appeals to buy and hold because, well, it's patriotic: "Fan Shaoxuan, a senior executive at Weibo TV who has more than 12,000 followers on Sina Weibo, posted a photograph showing the slogans: “Hold stocks with confidence. Win glory for the country even if you lose the last penny."
Then overnight Bloomberg reported that in one sign of utter desperation, China is telling underwater investors to literally "bet the house on stocks" because under new rules announced Wednesday real estate is now an acceptable form of collateral for Chinese margin traders, who borrow money from securities firms to amplify their wagers on equities. Clearly this also means if share prices fall enough, individual investors who pledge their homes could be at risk of losing them to a broker.
While the rule change was intended to help revive confidence in China’s $7.3 trillion stock market, down almost 30 percent in less than three weeks, analysts say securities firms may be reluctant to follow through. Accepting real estate as collateral would tether brokerages to another troubled sector of the economy, adding to risk-management challenges as they try to navigate the world’s most-volatile stock market.
“It does come across as relatively desperate,” said Wei Hou, an analyst at Sanford C. Bernstein & Co. in Hong Kong. “Globally, illiquid assets such as real estate are not accepted as collateral as they are very hard to liquidate.”
“Brokers are not stupid,” said Hao Hong, a China strategist at Bocom International Holdings Co. in Hong Kong. “I don’t think they would be willing to take this kind of collateral.”
For more on China's margin debt and Umbrella Trust problem read our article from earlier in the week:
But the real desperation was revealed overnight when China effectively hinted anyone caught shorting would be put in front of a firing squad (metaphorically, we hope)
BREAKING: China suspended 22 short-selling accounts of stock index futures amid stock market crash - @Reuters ???????????????????22????????
— George Chen (@george_chen) July 3, 2015
It wasn't just the shorts: a crackdown on "manipulators", which really means sellers, has also been launched:
China's securities watchdog announced Thursday it will investigate suspected manipulation of the stock market following weeks of plummeting stocks and future markets. Zhang Xiaojun, spokesman of the China Securities Regulatory Commission (CSRC), said they will investigate possible illegal activities occurring in multiple markets. He said they have tracked irregularities between securities and futures trading.
Even Morgan Stanley was mysteriously dragged into the blame game:
State newspaper backed by PBOC named Morgan Stanley a foreign bank with "suspicious purposes" in Chinese stock market pic.twitter.com/PEF0ZHYifH
— George Chen (@george_chen) July 3, 2015
And if indeed the Chinese government is now helpless to halt the all out rout which, as we have warned countless times over the past 6 months, will leave millions of Chinese "traders" with nothing and thus desperate and angry, then the next step is also very clear and was laid out last week in a note by Nomura which warned that "A Market Crash "Poses Great Danger To Social Stability."
Because a civil war over a market crash is all this worlds needs right now.
Hopefully there will be no civil war in Greece after this weekend's referendum which those who are not watching their paper "profits" vaporize in China, will be watching closely as tthe fate of the Eurozone may well depend on the outcome of the vote.
For now, however, unlike in China European trading is muted perhaps because unlike in China, the European Central Bank long ago became the primary marginal source of risk demand.
In what will most likely be a front-loaded session with the US away from market today, price action has been relatively subdued. In terms of the current state of play, the latest Ethnos poll shows there is not much between the 'yes' and the `no' vote, while Varoufakis remains optimistic that a deal can be done in the event of a `no' victory, although his European counterparts fail to share his optimism. Therefore, given the uncertainty surrounding the event, markets started off on a relatively tentative footing with equities drifting lower with selling pressure relatively broad-based while fixed income products have been provided a bid tone.
Elsewhere, in FX markets EUR/USD has been relatively resilient to the otherwise dampened sentiment for Europe. This is likely a continuation of the recent trend which has seen prices largely swayed by carry trade flow which sees purchases of EUR when the market is presented with bad news. AUD/USD has continued to extend on losses after stops were tripped on the break of June low of 0.7587. Of note, AUD underperformed overnight following lower than expected Australian retail sales data (0.3% vs. Exp. 0.5%), while soft Chinese HSBC PMI readings further weighed on the currency. Finally, GBP was lent some support by the latest services PMI data (58.5 vs. Exp. 57.5).
In the commodity complex, WTI and Brent crude futures trade with minor losses in the wake of yesterday's Baker Hughes data. In terms of commodity specific newsflow, participants continue to keep an eye on negotiations between Iran and their counterparts with the latest reports suggesting Iran are finally paving the way to allow inspectors access to some of their nuclear facilities. With this in mind, some have suggested that sanctions could be lifted by as soon as December.
According to Genscape, flows from the Marathon to Catlettsburg pipeline have increased to 210k bpd from 141k bpd. (RTRS)
In metals markets, spot gold and silver trade relatively unchanged while Nickel extended on recent losses overnight in the wake of disappointing Chinese PMI data. Iron ore prices continue to be weighed on by increasing supply levels with reports suggesting that China will allow Vale's 400,000 tonne mega-ship access to its ports
In summary: European shares remain lower, though are off intraday lows, with the basic resources and banks sectors underperforming and real estate, tech outperforming. Euro-area services PMI rises in line with estimate, U.K. services PMI above. Greeks split evenly on Sunday’s referendum, poll shows, more than 4 in 5 want to keep euro. ECB said to extend backstop to Bulgaria. Shanghai Composite drops 5.8%. U.S. markets closed for holiday. The Spanish and Swiss markets are the worst-performing larger bourses, the Dutch the best. The euro is stronger against the dollar. Japanese 10yr bond yields fall; Spanish yields decline. Brent crude, WTI crude fall.
- S&P 500 futures little changed at 2068.5
- Stoxx 600 down 0.2% to 384.8
- German 10Yr yield down 1bps to 0.84%
- MSCI Asia Pacific down 0.4% to 146.4
- Gold spot up 0.2% to $1168.9/oz
- Eurostoxx 50 -0.3%, FTSE 100 -0.2%, CAC 40 -0.3%, DAX -0%, IBEX -0.4%, FTSEMIB -0.3%, SMI -0.3%
- Asian stocks fall with the Sensex outperforming and the Shanghai Composite underperforming; MSCI Asia Pacific down 0.4% to 146.4
- Nikkei 225 up 0.1%, Hang Seng down 0.8%, Kospi down 0.1%, Shanghai Composite down 5.8%, ASX down 1.1%, Sensex up 0.5%
- Euro up 0.26% to $1.1113
- Dollar Index down 0.21% to 95.91
- Italian 10Yr yield down 3bps to 2.29%
- Spanish 10Yr yield down 5bps to 2.26%
- French 10Yr yield down 1bps to 1.29%
- Brent Futures down 0.7% to $61.6/bbl, WTI Futures down 0.7% to $56.6/bbl
- LME 3m Copper up 0.1% to $5799/MT
- LME 3m Nickel down 0.2% to $12170/MT
In conclusion, here is the traditional overnight market recap courtesy of DB's Jim Reid
I'm sure this comment will come back to haunt me but it looks set to be a quiet day given that the US will be celebrating Independence Day and the rest of the market will be in a holding pattern ahead of Sunday's Greek referendum. Given I've just said this, cue mayhem to break out somewhere today. I'll just be glad to be in the office away from the adoring crowds at home as on primetime TV in the UK last night my wife, bump and Bronte were on a small section of "Dogs. Their secret lives". In the unlikely event you're interested let me know and I'll send you a short clip.
The Greek go to the polls on Sunday with voting taking place between 7am to 7pm local time which is 2 hours ahead of London time. As yet there is no confirmation that an exit poll will be conducted but if there is this will clearly be the starting point for Sunday night/Monday morning's fun and games. We expect results to start filtering through after around an hour with the closeness of the result dictating whether we'll know the outcome before Asia opens.
DB will be hosting a conference call on Sunday night 9pm London time to discuss where we are at that point. The dial-in details are at the end. We recommend that you dial-in 15 minutes ahead of the start of the call as we'd expect high demand.
Yesterday markets briefly put Greece to one side to focus on a slightly below market US payrolls print (223k vs. 233k expected). A cumulative 60k of downward revisions to the previous two months was also announced and having peaked at 2.462% in the moments before the reading, 10y yields tumbled about 10bps following the print before closing at 2.382% and 4.0bps lower in yield on the day. The Dollar index also pared some early gains before eventually closing -0.20% down on the day. US equities were more muted meanwhile with the S&P 500 (-0.03%) and Dow (-0.16%) broadly unchanged on the day. Following the report, we also saw a decent re-pricing across Fed Funds contracts. The Dec15 (-2.5bps), Dec16 (-5bps) and Dec17 (-5bps) contracts all declined to 0.290%, 1.030% and 1.740% respectively and in terms of what’s priced in now, Bloomberg are reporting that based on futures contracts, the probability of a September hike fell from 35% (on Wednesday) to 29% yesterday, while the probability of a December move fell from 72% to 67%. The moves were seemingly sharper in the moments immediately following the report before markets settled down, but still a reasonable re-pricing.
An interesting story also came out of the ECB yesterday after we heard that the Bank widened the eligible assets under its purchasing program to include 13 state-backed (or part state-backed) companies. The new additions appear to
have been identified as ‘agency issuers’, although interestingly some of the names are also members of some European corporate bond indices raising the questions of why other companies with government ownership haven’t been included. One to keep an eye on.
Ahead of Sunday it was actually a fairly quiet day for headlines out of Greece yesterday (relative to the last week or so). Finance Minister Varoufakis said that he ‘will not’ continue in his post in the event of a yes vote while Tspiras rather vaguely said that in that event he would ‘put in motion procedures foreseen by the Constitution’. The IMF also suggested that the cost of a third program for Greece through 2018 would be around €52bn. In a report, the Fund also argued that Greece would need debt sustainability measures including a doubling of maturities on existing loans. In anticipation of Sunday, DB’s George Saravelos noted in his latest outlook published yesterday that the referendum appears to be too close to call. He says that irrespective of the outcome, there is unlikely to be an immediate resolution of the crisis the next day. A yes vote still carries risks while a no vote opens a wide range of possibilities. Interestingly, George notes the domestic political situation is becoming a lot more tense. Yesterday four coalition government Independent Greek MP’s were said to have voiced their disagreement with the referendum and called for its withdrawal, stating that they would vote yes. This should be seen in the context of a government majority of 11. As we go to print, the results of the latest poll (run by the University of Macedonia) have in fact just hit the wires which show an even split of votes at 43% each for yes and no. The remainder were said to have been undecided or declined to answer.
Staying in Europe, equity markets were fairly subdued in the region for the most part yesterday, declining once the US session kicked in. The Stoxx 600 (- 0.91%), DAX (-0.73%) and CAC (-0.98%) all fell, while steeper declines were felt in the FTSE MIB (-1.43%). Sovereign bond yields moved wider generally. 10y Bunds moved 3.3bps wider to 0.844%, while in the periphery Italy (+3.0bps), Spain (+3.4bps) and Portugal (+7.7bps) also moved wider. Interestingly, Greek 10y (-25bps) yields moved lower for the second consecutive day. 10y yields in Sweden were sharply tighter (-8.8bps) meanwhile after the Riksbank cut the repo rate by another 10bps to -0.35% and surprising the market. The Riksbank also announced that it is to expand the bond purchasing program by an additional 45bn kronor, adding to the already 80-90bn kronor program.
Recapping the rest of yesterday’s data, in conjunction with the payrolls report we also saw the unemployment rate tick down two-tenths of a percent to 5.3% (vs. 5.4% expected) and to the lowest level now since April 2008. DB’s Joe Lavorgna noted the fall was supported by a plunge in the labour force participation rate, which fell to 62.6% from 62.9%. This is in fact the lowest reading since October 1977. Average hourly earnings disappointed (0.0% mom vs. +0.2% expected) having stayed unchanged during June and resulting in the annualized rate dropping down to +2.0% yoy (from +2.3%). The household survey also reported a 56k decline in employment during the month. Meanwhile, initial jobless claims rose 10k last week to 281k (vs. 270k expected) while factory orders for the month of May fell by more than expected (-1.0% mom vs. -0.5% expected). Finally the ISM NY rose 7.1pts to 63.1, the joint highest reading this year. Euro area PPI was the only notable highlight of a quiet European data calendar yesterday, with the 0.0% mom reading for May below expectations of +0.1%.
Refreshing our screens this morning, it’s all about China once again where the Shanghai Comp (-3.25%) and Shenzhen (-3.14%) have taken yet another steep leg lower this morning. The Shanghai Comp in fact traded as much as 7% down at one point with the index now nearly 12% lower this week alone (including a high-to-low range of nearly 16%). This index is now on track for its steepest three-week decline since 1992. There are reports (Bloomberg) that the China Securities & Regulatory Commission is investigating recent short selling activity and is set to ‘strictly’ punish any signs of manipulation found. Elsewhere, it’s fairly weaker across the board. The Nikkei (-0.22%), Hang Seng (-0.23%), Kospi (-0.25%) and ASX (-1.17%) have all tracked the move lower. Meanwhile data in China has done little to help lift sentiment. The compositeJune PMI reading has fallen 0.6pts to 50.6, dragged down by a 1.7pt fall in the services reading to 51.8. In Japan the composite reading declined 0.1pts to 51.5, while the services reading rose to 51.8 (+0.3pts).
Moving on, as discussed at the top, this morning our Euro HY monthly reviews H1 and updates our outlook for H2. At the start of the year we felt it would be a positive year for HY credit with our firm bias for single-Bs (on a cheap relative value basis) and for a better H2 than H1. The better H2 was due to concerns that Greece and the Fed would cause volatility and periods of weakness in H1 before a resolution in the former and a turn more dovish for the latter in H2 as growth struggled to meet the consensus and the Fed's forecasts. This theory is going to be tested in the days, weeks and the months ahead but we stick broadly to the same script even if the Greece saga looks set to continue longer than we could have imagined at the start of the year. This week's price action has given us some comfort that Greece can be contained even if an accident would lead to a period of risk-off. Expect the ECB to provide more stimulus and the Fed to err on the side of caution in this scenario.
Single-Bs are no longer the stand-out relative value they were at the start of the year and all four rating main corporate rating bands (As through to Bs) are now back grouped broadly together again from a relval perspective for the first time in 18 months. In this time single Bs have gone from being very expensive a year ago to very cheap 6 months ago. Because we think credit will have a better H2 than H1 we still would have a preference for single-Bs and HY in general over IG but it’s more because of a desire to be exposed to high beta and the higher carry now rather than an obvious relative value play.
Our central case scenario is that European HY spreads will be 90bps tighter by YE 2015 with no Grexit and no Fed hike. However with scenario analysis assessing various Greek and Fed risks the weighted average tightening by year-end is around 40bps. Please see the link in your mailbox from Nick Burns in the last hour or so for the full report.
Wrapping up, with a US holiday today it’s a fairly quiet data day ahead. News flow in Europe will be centered on the final composite and services PMI readings for the Euro area, Germany and France as well as readings for the UK, Italy and Spain. Euro area retail sales are also due while it goes without saying that Greece headlines will be closely watched ahead of Sunday’s main event.
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Ideologies are mind-killers, all of them, because they are all (severely) flawed. The ideological labels which are so frequently parroted in our societies are terminology which has lost all meaning. This begins with the fact that our political/economic ideologies are not practical blueprints for creating and managing economies (and societies).
These ultra-popular buzzwords are the theoretical models of philosophers. With philosophy (and philosophers) now banished to the lowest rung in the world of academia, how can the work of philosophers be regarded as the (supposed) epitome of political and economic wisdom, in these same societies?
The other reason why these political/economic buzzwords do much more to confuse than enlighten comes from the fact that most of the people who bandy about these terms have little-to-no idea of what these theoretical models actually represent. Nothing illustrates this principle better than the grossly-abused buzzword “capitalism”.
As always, sound analysis begins with definition of terms. What is “capitalism”?
a) Capitalism is competition.
b) Capitalism is free markets.
c) Capitalism is a system of equal (economic) opportunity, an inevitable byproduct of having free markets and competition.
What do we see in our own, supposedly “capitalist” systems?
We see the opposite of competition. We see economies which have been almost entirely carved-up into the domains of a handful of mega-oligopolies.
We see the opposite of free markets. We see markets where a single, financial crime syndicate marches these markets (collectively) higher and lower, like some gigantic, synchronized yo-yo. Bubble and crash. Bubble and crash. Every eight years.
We see the opposite of equal opportunity. We see an economic system where the deck is ridiculously stacked in favor of engorging the oligopolies still further, and throttling small business and the individual entrepreneur.
In real capitalist systems, oligopolies (and monopolies) are the Ultimate Evil, and we have very strong laws in all our regimes, to prevent these economic abominations from ever coming into existence. In our pseudo-capitalist perversion, these corrupt governments have simply refused to continue to enforce these laws. Instead, our traitor regimes worship the oligopolies (and the Oligarchs who hide behind these corporate fronts). “Too big to fail” has become the mantra of all.
In real capitalist systems, there is no such thing as too-big-to-fail, only too big to exist. Corrupt and/or insolvent entities are supposed to be put to death, as the sole mechanism for purging malinvestment, and restoring economic health to that system.
Japan is the proof of this principle (and proof of our own perversion of it), in reverse. A quarter century of “too big to fail” has brought nothing but perpetual economic stagnation, and skyrocketing debt. Western economies reinforced that proof, by copying Japan’s failure, and copying Japan’s consequences: skyrocketing debt and perpetual stagnation (at best).
As a matter of simple arithmetic, nations with skyrocketing national debts must implode into debt default. As a matter of simple arithmetic: nations with skyrocketing debt and stagnant economies must implode much, much sooner.
How perverted has the term “capitalism” become? How meaningless? As noted in a recent commentary, we have two economic models which are both (universally) described as “capitalist”. Yet not only are these models different (entrepreneurial capitalism and neo-feudalist capitalism) they are opposite to each other. As a matter of elementary logic, no concept, model or system can be its own opposite.
However, there is an even more-fundamental perversion of our pseudo-capitalist system. It is a principle so fundamental that by itself it is responsible for the cancerous, parasitic rot, in our once-thriving/once-prosperous societies.
“Capitalism”, as the word directly implies is a system of capital. Why do we hail those successful (crooked?) enough to accumulate wealth (i.e. capital)? Because in any/every real capitalist system, these entrepreneurs invest this wealth directly, back into the system. We rarely see this, in our pseudo-capitalist perversion.
What we have instead, openly acknowledged by the bankers, politicians, and media drones alike is “a credit-based system”. Why is a credit-based system a perversion of a capital-based system (i.e. real capitalism)? In one word: interest.
Real capitalism, where the wealthy invest their wealth (i.e. capital) directly into the system, is a clean system. Every penny of that capital goes directly into generating new economic growth, new jobs, new wealth, and more prosperity. But what we have instead is a grossly inferior, totally parasitic, and hopelessly unsustainable version of this model: creditism.
In creditism (as opposed to capitalism), wealth is not invested directly into the economy. Rather, it is loaned into the economy, and thus virtually every penny of actual investment is encumbered by useless, parasitic debt.
As a matter of simple arithmetic, we can predict what must result from any government foolish enough to adopt inferior/parasitic/unsustainable creditism, rather than adhering (more or less) to the principles of true capitalism. All such economies must end up drowning in debt. Every increment of investment means an increase in debt, and thus an increase in (parasitic) interest payments, compounded, in perpetuity. The result is obvious to anyone with sufficient intellectual firepower to operate a calculator.
Look around us, and what do we see? We see Lemming Regimes, proving this elementary principle, perpetuating the same, failed system (creditism) which – as a matter of simple arithmetic – must result in our complete economic destruction. Total suicide.
The epitome of his insanity, perversion, and suicide is the surreal melodrama known as “the Greek crisis”. What do we see here? We see an economy which everyone agrees is bankrupt. And what do the “creditors” of this economy (the ECB, EU, and IMF) demand that Greece agree to? Taking on much more debt.
Here the arithmetic descends to the level of fingers-and-toes. A bankrupt entity – by definition – cannot afford to continue to service its present debts, at all, period. Obviously (using one’s fingers and toes) it’s easy to “calculate” that such an entity cannot possibly take on even one more penny of additional debt.
In this perverted, pseudo-capitalism which we can only call “creditism”, the solution to bankruptcy is more debt. Total suicide. Absolute insanity.
What does (real) capitalism preach? The solution to insolvency is always (without exception, ever) to “restructure the debt”. Here we can divide insolvency into two categories: those where it is necessary/desirable for the insolvent entity to continue its existence, and those where it is necessary/desirable for the entities to be liquidated (i.e. the “too big to fail” Big Banks).
Where it is necessary/desirable for the entity to continue its existence (as is the case with any sovereign nation), capitalism dictates that the “restructuring” reduce the debt-level down to (clearly) manageable proportions – without exception, ever.
What have we seen Greece’s (new) government insisting upon, as it attempts to negotiate with the insane, corrupt “Troika”? It wants its debts reduced to manageable (i.e. post-Austerity) proportions. For this, the corporate media has relentlessly and unequivocally labeled Greece’s government as being “radical, left-wing”.
Greece’s negotiating position is the only negotiating position for any rational/reasonable entity, in any (real) capitalist system. The Corporate media characterizes Greece’s capitalist proposal as being “radical, left-wing”. This can only mean, in the insane perversion of creditism, that true capitalism itself (competition, free markets, equal opportunity) is now equated as being “radical, left-wing”.
In such a world of institutionalized insanity, it behooves us all to cease to use the ideological buzzword “capitalism”. As has been clearly demonstrated, this word is now nothing more than a perverted euphemism used by corrupt Liars – to attempt to deceive the brainwashed masses into accepting (and even endorsing) policies which are the antithesis of everything that our economies and societies used to represent.
Say “no” to the perversion and propagandizing of the term capitalism. Instead, demand that our corrupt governments openly acknowledge our creditist system (in honest, non-euphemistic language) for what this really is: parasitic, cannibalistic, suicidal, insanity.