Monday, July 13, 2015

More on Greece and China

Two articles caught my eye this afternoon.

First, you'll recall that last week I warned that China's stock market was on course to repeat the pattern of 1929's Wall Street crash almost exactly.  Well, CNBC agrees with me.

The Shanghai composite [index] rallied more than 60 percent from January to its mid-June high, then took a sharp turn lower, losing more than 23 percent of its value in the past 30 trading sessions. Since hitting a low of 3,507 last week, the index has bounced 13 percent. And while that volatility has some investors drawing parallels to the Nasdaq collapse in 2000, one top technician says the better analogy might be the Dow in 1929.

"We are seeing some similarities to what we had seen in the Dow where you had a very parabolic advance and then a sharp correction, followed by a relief rally and then ultimately there was a parabolic decline even further," technical analyst Craig Johnson said Friday on CNBC's "Trading Nation."

And while Johnson admits the outcome may not be exactly the same as 1929, the eerie similarities are enough to keep him away from China's stock market.

There's more at the link.  The pattern is unmistakeable - and as I said this morning, although the Chinese stock exchanges are rallying right now, that's only because trading has been suspended in almost all the volatile shares.  Furthermore, large investors have been prohibited from selling their shares at all.  That's a rigged market if ever I saw one . . . and not a single one of its fundamental problems have yet been addressed.  I don't see anything good coming out of this in the long term.

As for Greece, Ambrose Evans-Pritchard is vitriolic about the 'solution' being forced down that nation's throat.  He points out that the country is being "treated like a hostile occupied state".

The cruel capitulation forced upon Greece after 31 hours on the diplomatic rack offers no conceivable way out the country’s perpetual crisis. The terms are harsher by a full order of magnitude than those rejected by Greek voters in a landslide referendum a week ago, and therefore can never command democratic assent.

They must be carried through by a Greek parliament still dominated by MPs from Left and Right who loathe every line of the summit statement, the infamous SN 4070/15, and have only agreed – if they have agreed – with a knife to their throats.

EMU inspectors can veto legislation. The emasculation of the Greek parliament has been slipped into the text. All that is missing is a unit of EMU gendarmes.

Such terms are unenforceable. The creditors have sought to nail down the new memorandum by transferring €50bn of Greek assets to “an independent fund that will monetise the assets through privatisations and other means”. It will be used in part to pay off debts.

This fund will be under EU "supervision". The cosmetic niceties of sovereignty will be preserved by letting the Greek authorities manage its day to day affairs. Nobody is fooled.

. . .

Nobel economist Paul Krugman says the EMU demands are “madness” on every level. “What we’ve learned these past couple of weeks is that being a member of the eurozone means that the creditors can destroy your economy if you step out of line. This has no bearing at all on the underlying economics of austerity,” he said.

“This goes beyond harsh into pure vindictiveness, complete destruction of national sovereignty, and no hope of relief. It is, presumably, meant to be an offer Greece can’t accept; but even so, it’s a grotesque betrayal of everything the European project was supposed to stand for,” he said.

. . .

Let there be no doubt, it was the decision by the European Central Bank to freeze ELA at €89bn two weeks ago that precipitated the final crisis and broke Syriza’s will to resist. The lines of authority on this episode are blurred. Personally, I do not blame the ECB’s Mario Draghi for this abuse of power. It was in essence a political decision by the Eurogroup.

But however you dress it up, the fact remains that the ECB is by its acts dictating a political settlement, and serving as the enforcement arm of the creditors rather than upholding EU treaty law.

It took a stand that further destabilised the financial system of an EMU member state that was already in grave trouble, and arguably did so in breach of its primary treaty duty to uphold financial stability. It is a watershed moment.

What we have all seen with great clarity is that the EMU creditor powers can subjugate an unruly state – provided it is small - by shutting down its banking system. We have seen too that a small country has no defences whatsoever. This is monetary power run amok.

. . .

The truth is that Greece was already bankrupt in 2010. EMU creditors refused to allow a normal debt restructuring to take place because it would have led to instant contagion to Portugal, Spain, and Italy at a time when the eurozone had no lender-of-last resort or defences.

Leaked documents from the IMF leave no doubt that the rescue was intended to save the euro and European banks, not Greece. More debt was shoveled onto the Greek taxpayers in order to buy time, both in 2010 and again in 2012, storing up the crisis that Europe faces today.

. . .

The crushed Syriza leader must sell a settlement that leaves Greece in a permanent debt trap, under neo-colonial control, and so economically fragile that it is almost guaranteed to crash into a fresh crisis in the next global downturn or European recession.

At that point, everybody will blame the Greeks again, unfairly, and we will go through yet another round of bitter negotiations, until something finally breaks this grim cycle of failure and recrimination.

The deal will leave Greece so economically fragile that it is almost guaranteed to crash into a fresh crisis in the next global downturn

For the eurozone this “deal” is the worst of all worlds. They have solved nothing.

Again, more at the link.

Economist Herbert Stein famously said, "If something cannot go on forever, it will stop."  The situations in both China and Greece can't go on for even the short term, let alone 'forever'.  The instability in both economies is almost out of control.  I fear this is just the beginning.



Sunnybrook Farm said...

So what do we do with savings in the US? There doesn't seem any safe place.

Peter said...

If your savings amount to less than two months' routine expenditure, quite frankly I'd keep them somewhere safe at home. Not under the mattress, or where a casual thief will find them, but somewhere safe. If a 'bank holiday' hits us, at least you'll have access to cash for emergency needs - unlike those in Greece who didn't take that precaution before their banks closed. That also helps prevent any loss of money due to 'bail-in' rescues of banks.

BTW, make sure you keep at least half of your cash in smaller denominations ($20 or below). I try to keep two-thirds of it in smaller notes. In hard times, many stores will probably refuse to accept larger bills due to the risk of counterfeiting. Also, for your larger bills in particular, try to get the latest edition of the bills with as many anti-counterfeiting measures as possible. They're likely to be more trusted than older bills which can be more easily copied.

YMMV, of course . . .

Timbo said...

A slightly more nuanced take on the Greek situation would also take into account the taxpayers in the rest of Europe.

Spain , Portugal and Ireland also received bailouts and submitted their economies to reforms. Greece is on its third bailout and continues to live above its means. The responsibility for the current situation rests on the shoulders of the Greek prime minister. He had a better offer on the table, including partial debt forgiveness which he rejected and called his referendum. This ran out the clock on the existing debt repayment and changed the rules of the game. Debt write down was no longer available under EU rules and his exasperated partners offered much stricter terms including that public assets be sold.

Until Tsipras came into power, Greece was timidly on the road to fiscal responsibility. He employed 1,500 more public employees, promised increased pensions etc etc. this has had a negative effect on voters all over Europe. A tram driver in Germany earning 45k euros does not take kindly to supporting a the lifestyle of a Greek one who is on 60k euros...

Trimegistus said...

The Greeks, who borrowed money they knew they could never repay, are knaves.

The Germans, who lent money they knew could never be repaid, are fools.

The obvious solution: Greece leaves the Euro. Greeks have to pay their own way and actually decide what's worth paying for and what isn't. Germans lose the money they lent, and maybe learn not to trust knaves.

Timbo said...

Trimegistus, I agree that Greece will eventually leave the euro. However it isn't just Germany footing the bill. With the next bailout every resident in Spain (man, woman and child) will be stiffed for nearly 800€ each.