Wednesday, July 29, 2015

Greece -- what now

Will they or wont they?

One thing is clear the process is far from being over, aside from that absence of debt forgiveness -- only extension of maturity they ECB seems to be kicking the ball down the lane even further.  However, Greece has just discovered the limits to its sovereignty, when the President announced the re-opening of the country's stock market to be told by the ECB, that non, Monday was not a good day after all!  The limits of sovereignty explored by the people (and government) of Greece.

So what now, well barter is back in a big way!  People no longer having access to the government's payment system (e.g. Euros) are resorting to plain and simple barter.  That usually increases transaction costs, removes the power of taxation -- no "stinkin" 20% VAT, and inefficiency.  On the other hand it allows people to eat, so that's something right.

The breakdown of government has to be near, clearly the efforts to get all the ECB inspired legislation is hitting massive roadblocks, and its only going to get worse.  However, for the people they will realise that they can do without basic services -- at least until the electricity grid shuts down. The issue is serious, the players are now seeing the effects of Europe's crazy solution.  Because of capital controls the economy is in meltdown, lots of companies are shutting down because they no longer have access to goods from abroad (i.e. outside of Greece), that means unemployment is about to rise, and capital owners are about to see their wealth drop precipitously.

It is increasingly hard to see how a happy (in eurozone) outcome can be generated.  In fact, the pressures on ordinary greeks (and their government) may prove to be too much, election are certain to beckon before the end of the summer, who will replace the current government, will they be more trustworthy?

No closer to an endgame, the game has become painful

Monday, July 20, 2015

Canada and Australia

Two resource rich countries nearly identical stories -- I wrote about this risk years ago; Canada and Australia are second derivative countries, largely open what happens to these economies is largely driven by what happens elsewhere.  In the case of Canada and Australia that elsewhere is China -- Australia more directly than Canada but the end results are the same.

Case and point, both currencies flirted with US dollar parity (CAD even reached 0.95 at one point), now both are trading in the 1.30/1.35 range.  Usually, for manufacturing companies in country this would be very helpful, but the reality is that both countries manufacturers have sought over the years to insulate themselves from currency fluctuation (trust me its possible), although a 37% drop from its peak is hard to plan for...

Bottom line both economies are now suffering because their customer (China) is having a bit of a hard time.  The question then becomes how long will this situation persist?  The question then becomes where is China going.  There is no doubt that the current "situation" is unsustainable -- the reaction of the Chinese government to the most recent stock market "correction" is somewhat out of character.  After all the market was up nearly 120% over the past 12 months -- a 30% correction should not have cause the Chinese government to stop all IPO, suspend nearly half of all stocks  and brand "stock sellers as traitors".  Something more serious is happening here -- as many commentators have noted the stock market is not a very important portion of the Chinese economy (when compared to the real estate market), the over-reaction would seem to hide more serious concernes.

Anyway, this is not about China (well it is a little bit), but Canada and Australia are suffering from the same "sickness":  both are wide open economies that rely on the sale of natural resources to keep their economies strong -- when international demand falters; then Canada and Australia suffer.

Canada and Australia are perfect example of second derivative countries -- its is the world's overall economic health that determines how well they do.  Here in Canada general elections are just around the corner (this autumn) and you can bet that all parties are going to work extra hard on promoting their ideals and solutions are Canada's faltering economic growth -- when in fact Canada's growth has little to do with Canada -- but how fast China gets its mojo back!

Monday, July 13, 2015

Greece -- an deal has been stuck, but will it stick?

One clause of the Greek/EU/ECB/IMF agreement felt wrong; Sunday trading -- this was considered an essential change that Greece has to enact.  Greece had to allow, even promote Sunday trading, this was an essential demand from Germany.  And yet if you ever travel to Germany (or France) you will notice that everything is shut! If this was so essential to the economic health of Greece, well then you would expect other European nations to enact/have similar laws, but this is not the case.  

The Greeks have just bought themselves a lot of money (necessary) to repay their lenders (German/British and American financial institutions -- and the providers of credit protection (CDS) must be breathing in relief).  Greece just got $90 billion that should keep them going until early 2016 -- their repayment/refinancing obligations run at around Euro 10 billion a month.  I've not seen/heard about any debt forgiveness or loan extension. 

There is no doubt that massive changes are about to occur in Greece, the Greeks themselves are in for a shock and a difficult time, but they got a taste of economic armageddon when the ECB effectively shut down the banking system.  One item missing from the agreement:  Debt forgiveness.  Greece will never be able to repay its outstanding debts, debt forgiveness should/must be part of the solution, but the asymmetry of power -- Greece has no cards left, allow Germany to dictate terms that itself would never agree to abide by in terms of economic changes.   

It is more than likely that I have lost my bet that Greece will leave Europe and the Euro.  Although my bet still has nearly 21 months until it expires.  The demands on Greece were onerous, the concessions appear to be few, and in fact if Greece could not afford $ 340 billion in debt, I am not clear how an additional $90 billion will help -- it just seems to me that the can was, once again, kicked down the road (BTW I am fully aware that most of the $ 90 billion will be used to refinance existing debt... so the overall debt burden may not rise as much as $ 90 billion).

Time will tell 

Tuesday, July 7, 2015

Did you know how many people are running for the president of the United States!

First off, I knew there were a few Republicans in the run, but I didn't know that the total was 14 with two more probables.  On the democrats there are five declared -- but realistically that race is done, Ms Clinton is well ahead in all the polls -- Sanders/Chaffe and Webb are all there to make sure that the left is well represented.

On the Republican side you've got the Christians:  Huckabee/Santorum.  On the far right you've got Cruz/Paul/Walker/Jindal and the crazies:  Trump/Carson  the funnies you've got Trump,Trump and I forget the third one (e.g Perry).  Then the corporatists:  Bush/Christie/Fiorina/Pataki/Graham probably forgetting someone.

On thing for sure, while the GOP was hoping for a more serious primary than last time -- they didn't get their wish.  Trump is certain to be a nightmare as is Cruz he is trying to prove that he's to the right of Gengis Kan!

Why are so many people running this time, why has the GOP been unable to get things under controls.  One reason is that the GOP doesn't actually control anything.  That's shocking but its true. The Democrats are less unruly, and don't really have a true "left wing" whereas the GOP has the Tea Party, the Evangelical, the Koch Brothers, each with their own funding and PAC money.

I still think that one of the corporatists will win the nomination, but the damage they will suffer getting there may be too much (to win the general election).  The reality is that Trump is showing the American voting public who the real GOP is, and its not pretty, there is no doubt that his initial polling success considering his bigoted statements is a clear indication of the debate the GOP will have over the next few months.  16 candidates will tear each other apart, before they are allowed to focus on Hillary!  The real issue for the GOP is that they NEED the ethnic vote, and the way they are behaving they will not get it!  George Bush got nearly 26% of the ethnic vote, by the time Romney was defeated a second time -- that number was down to 12%.

Even the corporatists face difficulties; Bush saw his wealth explode 8 fold between 2008 and 2015, while America was going trough a difficult time, Bush was advising the banks...Cruz is certain to pull a few stunts to show his "real conservative agenda", suppression of the Supreme court, Constitutional Amendment to ban same sex marriage.  By Q1/2016 there will be need to raise the debt level -- once again.  His famous filibuster to nowhere is certain to come again.

The real action is where?

So while the world has been focusing on Greece, a small country that accounts for less than 1% of Europe GDP (Yes I know they are people too), the real "global" risk issue is taking place the other side of the world (rather literally!).  The Chinese markets have been having a terrible time, you see over the past 12 months the the CSI 300 [China's equivalent to the FTSE100] has been on a tear -- its up more than 100%, the index has doubled.  Just so that we are clear, profitability has not changed, what has changed is the p/e -- its gone from an expensive 15x to a eye watering 31x.  That's more expensive than anything in the world.  This is a prime example of irrational exuberance (and just a bit of greed too).  What China's investment public has realised is that what's important is not what the intrinsic value of a company is a generator of wealth, but rather what other shmuck is ready to pay for it.  The Chinese stock market became the equivalent of a "fine art auction"; the underlying assets is almost irrelevant it's what the other guy is ready to pay for the trinket that counts!

Now, as long as the road was going uphill (at any rates prices were going up) China's government was happy(ish) but now that the ride is going the other way -- in a rather spectacular fashion, they Chinese government is paying close attention.

Over the past few days they've taken the following action:

  1. Stopped all IPO -- to reduce supplies 
  2. Central banks bailed out stock trading companies
  3. Government banned pensions from selling stock
  4. Rumours that government is using central bank as buyer of last resort
  5. Suspend trading in many many stocks (160 so far) 
Despite these efforts, the stock market continues to fall (despite an 8% upward bump Monday) we are back in the downward spiral.  The investors are being rational, they don't want to be left holding the bag.

The fundamentals never supported such prices, already there are strong assumptions that most Chinese companies "cook the books" which is something we North Americans are well acquainted with (this is not a Chinese sickness -- we all do it), and so what's the value of a Chinese company (based on its stated revenues and assets) is a big guessing game.

However, at issue here are not the companies themselves rather investors (with severe limitations in what they can invest their cash in) all going to the same well -- the capital markets!  The Chinese government tried to deflate the housing bubble -- with some success (at least the pace of growth has slowed), The Chinese government has also cracked down on "near banks" -- second tier lenders that have kept small private companies alive -- the big banks only lend to SOEs so the investing public has looked for the next investment vehicle, and that's the stock market -- well it was until a few weeks ago.

What does this mean?  

Another government will try to slow the inevitable slide in stock prices; as one commentator recently said, China will need a bigger boat fund if they want to continue in bailing out the market, banning short selling is bound the be near the corner, liquidation of ETF (and certain connected derivatives) may also suffer.  I don't know how ETF are built in China -- in Europe ETF are mostly synthetic so that the ETFs don't actually own the underlying stock, rather the "arranger" enters into a number of complex derivatives transaction that generates the same return -- at a fraction of the cost... at least until the whole thing implodes.

China has been the engine of global growth for some years now, absorbing an increasing amount of available resources and keeping prices "up".  That now seems to be changing, the question is will China suffer the same consequences as Japan when that economy slowed?  One thing for sure, this bodes poorly for resource rich nation -- CAD watchers watch out -- the 0.70c to the US dollar is on the horizon...  Remember the CAD peaked at 1.09 to the USD, its now at 0.72c.  

Time will tell