103 Months of recovery, what could end it

After years of single-direction trajectory for the markets, the recent correction has jolted people from their complacency. Well, many people. The subsequent rallies are proof to one set that pressure has been taken out of the markets, and the upward track can restart. To others, the expression "dead cat bounce" continues to be the phrase of the week.

Being very clear, I do not know if the top has been reached, or is there more headroom in this market. I have no idea. None. Also being clear, while the discussion focuses on the US markets, there is nothing in here that either does not have or is not impacted by events and economic situations in other countries.

If the markets continue their advances, how far can they go, and for how long? Is theUS in the "demographic sweet spot" that I wrote about in August 2017? I asked if the fall in the US labour market participation rate had been strong enough to create sufficient pools of surplus labour to allow for multi-year growth as that surplus labour drip-feeds into the workforce. If it is, then there may actually be a few more years of growth in the economy and the markets. If not, then the third longest recovery in US history may come to a sudden end.

So what happens when this recovery comes to an end, and the US enters recession? At 103 months as of writing, this recover is the third longest since the end of theGreat Depression, and only 4 months short of being the second longest. The fourth longest was only 92 months, and the fifth a mere 73. This recovery is almost a year longer than its number four, and two and a half years longer than the fifth. Interestingly the longest lead up to the “dot-com” bubble and subsequent crash. Does this recovery have another 17 months, another year and a half, of additional steam, to tie the longest recovery? And if so, will we see continued growth in bubbles that we saw leading up to 2000? Or, do we have enough bubbles already?

Again, I cannot answer that because I simply do not know. The recent market "correction" was a wake-up call, and a reminder that it is not all "sunshine and lollipops". There are systemic pressures building up, and one day, the markets will switch from Bull to Bear. What might make that happen?

There are a number of potential catalysts that could provide the tipping point, and with that a sustained downward trajectory for the markets. The following list is not complete by any means, but gives an idea of the range of potential situations that could, once the fall is well underway, be pointed to as the catalyst.

Most important, there is not one situation that will cause the coming crash, and all are interlinked and interdependent. Each can, and probably will, impact and potentially exacerbate another or multiple others. If housing starts collapse, so will house prices, and with that the “wealth effect” tripping over into consumer credit (although in this example, consumer credit may stabilise instead of continuing to grow) and potentially rising default rates.

I will delve deeper into each one of these in coming posts, but for now, the following outline of each should serve to set the scene, so to speak.

Interest Rates: Off the back of rate hikes by the Fed, the Feb rate could reach as high as 3.25% or even 3.5% by late 2018. This will flow into the 10-year Treasury, already hovering around 2.9% up from a low of 2.06% only six months ago. Should the rate continue to rise, the flow-on effects will be felt throughout the debt-driven economy. At some stage, the forward potential negative impact on consumer credit creation and utilization capability will strike, and with that a sudden loss of confidence.

Inflation shock: Years of QE, QEII, Twist, Abbenomics, and ECB purchases has flooded the system with new money. Where has it gone, what why hasn't inflation appeared as so frequently predicted? Countering the assumption that the new money should be driving inflation, there is an argument that surplus labour is keeping wage inflation in check, and with the, general economy-wide inflation. If they are not making more money, then the average worker cannot drive up prices. What happens when a really bad inflation number prints - in the US, UK or Germany for example?

Budget deficits: But what is the single event that is used by media pundits to 20/20 explain what happened. Could it be a Congressional Budget Office projection stating that servicing of the national debt will exceed 8% of the 2019 federal budget (from a current 6% of the federal budget)? Or could it be a projection for $1 trillion budget deficits for the next four years? After all, no one believes the projected temporary increase in spending followed by a drop to a balanced budget level.

External Shock: Or maybe the markets will react to an external event or geopolitical risk event, such as a US strike against the nuclear capabilities or Iran or North Korea. The intervention in northern Syria by Istanbul has already resulting in a sharp drop in the Turkish stock markets. Such a shock could undermine confidence in international trade or fuel expectations of increased in input costs and commodity costs. The markets have been remarkably resilient to geopolitical risk over the past year, so any shock will probably need to be a big one. Ultimately, the list of potential geopolitical shocks is as long as you wish to spend reading or writing.

We should not forget that there are a number of major economies each under their own strains, with many of those strains being similar to those witnessed in the US economy. The UK has suffered a 5.7% drop in year on year private auto sales, with predictions for a further drop in car sales in 2018. And before saying "but they are a small country" remember that they represent 65 million people, and that this slowdown will impact German auto makers as well, providing some stress, albeit minor, to the German economy. 

Housing market: Bad news in the housing market could tip the scales, and send the marketing into a self-reinforcing negative spiral. This potential shock is tied closely to underlying interest rates, inflation, and the Wealth Effect based on an ever-raising stock market. A multi month sustained drop in housing starts, completed sales, or house prices could shock the markets, and become the 20/20 hindsight event that causes a crash.

Automotive Loans default rates: Current default rates are increasing, and the total outstanding loan period is also at a record high. In 2016 the average outstanding car load was 5.5 years. It is possible to get an auto loan at 72 or even 84 months duration. In addition, over 30% of used car trade-ins areunder water. Combine the two, and the consumer is likely to become trapped in the vehicle they are in, and with that trap will come a reduction in car sales, and an expectation of future poor performance by the automotive section, a sector that accounts for X% of the US economy.

Credit Card default rates: The American binge on consumer credit continues, and in fact never really stopped. Net savings rates are at historic lows of around 2% (average across the entire economy) while credit card debt continues to rise. This is unsustainable. The only questions are, what is sustainable and when will the bubble pop, and will we recognise that it has popped. A failure in confidence that consumers will be able to afford the current credit load will not come as a slow dawning, but will come as a sudden shock, and that shock could rock the markets.

Productivity: Linked so closely with that credit crisis is the concept that worker productivity will continue to improve. Yet for the past few quarters that has not been the case, or has been true at a much reduced level. A failure to continue to increase productivity will directly impact worker wages, company profitability and therefore achievement of earnings expectations. Again, a sudden realisation of future down-trend impact on company values may arrive as a shock, and may be the catalyst for a market collapse.

Environmental event: To this point I’ve focused purely on potential economic events or situations, and have avoided environmental events. These could range from the hurricane that breaks the insurance industry, storms in Europe that result in a short term economic downturn, or a major earthquake on the West Coast of the US. I’m ruling out volcanos and meteors, as the probability is simple too low. I’m not ruling out Climate Change related events or situations, major droughts, or resource depletion such as a collapse of the water table in the San Joaquin valley of California.

Maybe the "dead cat bounce" is just a slightly longer bounce, and the fall is already coming.

Whatever the trigger, when the fall in the markets come, it will be steep and quick, followed by months if not quarters of a cyclical bear market. And while I am writing based on the US economy and markets, the same issues highlighted above are true for so many economies, and any individual large economy could provide the trigger for a global rout.

Is the EU just Yugoslavia on a massive scale?

1.      Introduction

The 28 countries (soon to be 27) of the EU vary considerably in their economics, religion (or lack of), languages and national characters. Originally the creation of the EU was midwifed by the US after WWII, driven by a need to ensure both a “western” democratic, peaceful Europe, and common bulwark against the Soviet Union that their desire to create their own strategic depth. Following the fall of the Soviet Union, the EU grew to include former Easter European countries and consolidated membership on the Med with the inclusion of Greece. Overlaying everything was the introduction of the Euro in 2000; the common currency that now exposes the fundamental economic fragility of the entire European experiment. Meanwhile other pressures expose the centre's determination to impose their culture and cultural priorities on member nations.

All this bares a more than passing resemblance to Yugoslavia, formed out of the ashes of WWI, with Balkan enemies forced into a single national entity and economy with a faux common history, common currency and a similarly non-democratic central government. Yugoslavia was then reformed into a single country after WWII. Unfortunately, Yugoslavia was held together not by a common democratic system with open and free elections, but by a single party that exercised coercive control over a number of national groups, with central control in the hands of one national-ethnic group, the Serbians.

Equally unfortunately, the EU is being held together by a non-democratic system dominated by a single national / ethnic group that exercises coercive power over the economic and political activity of member nations. Perhaps the major difference, other than sheer size, between the two is leadership of Europe by a finance-dominated technocracy instead of a political party.

Further, the pressures of Brexit may well contribute to individual countries attempting to negotiate with the UK to cement their own best interests, to the detriment of the rest of the EU. President Macron of France has this week warned that such individual dealing may result in a “prisoners’ dilemma” problem, potentially splitting the EU. [1]

We must hope that when the inevitable breakup happens, what follows is a Slovenian divorce trajectory and not the Bosnian. The only realistic alternative will be a civil war of consolidation of European power in the hands of a single dominating ethnic group, with the potential for a result more similar to Syrian history of aligned ethic, clan and tribal groups under a dominant ethnic - tribal group. That didn't work out too well when exposed to external interference after the "Arab Spring".

That, after all, is what happened twice in the past century, resulting the 50 – 100 million deaths in those “World Wars”. [2]

So our resulting options are Slovenian or Bosnian in nature; individual national independence with the acceptance of the centre, or a bloody civil war designed to change the “reality” on the ground through the imposition of ethnic and cultural domination.

We’ve been down this road already, twice. I hope Europe and its constituent parts will take that former. My fervent hope is that the EU will find a way through. My fear is it might not.

2.      Forced Friends

After two twentieth century wars for central European domination, Germany and surrounding nations lay in waste. As the perpetrator of the wars, the Morgenthau Plan of 1944 was to create an agrarian Germany that would never again have the industrial might to create and field an army strong enough to dominate Europe. Roosevelt himself wrote "Too many people here and in England hold the view that the German people as a whole are not responsible for what has taken place – that only a few Nazis are responsible. That unfortunately is not based on fact. The German people must have it driven home to them that the whole nation has been engaged in a lawless conspiracy against the decencies of modern civilization."[3]

This plan was never going to survive the realities of post-war Europe, and the need initially to feed and rebuild, and ultimately to face down the Soviet Union. And in Western Europe there was only one industrial power. As Yannis Varoufakis points out in his book "And the Weak Suffer What They Must?", even at the end of the Second World War in April 1945, defeated Germany still had over double the factory capacity of France.

And so while Germany was forgiven for the war (including 70% of its debt) in order to become the industrial bulwark against communism, the rest of Europe was required to play along, pretending that is was just a few strange creatures called “Nazis” that perpetrated war and destruction across Western and Eastern Europe, deep into European Asia and across the Mediterranean. France was none too pleased, as the initial stages of what became the EU started specifically in order to enable Germany to rebuild its industrial base while (hopefully) limiting the ability or need for Germany to convert that industrial based into a war machine, again. France and the Benelux (Belgium, Netherlands, and Luxembourg) countries had little option but to attempt to contain Germany, just as the Americans used Germany to help contain the USSR. German containment took the form of NATO and the economic links that lead to a strong Deutsche Mark and eventually to a strong Euro. Yet the source of the strong Deutsche Mark was the economic disparity between Germany and the rest of Europe, a disparity that exists today.

Fundamentally then, the EU began as an economic union in which former adversaries were cajoled into merging interest to the ultimate benefit of all (or so the theory) with the immediate and lasting greater benefit to one - Germany. Friends they pretend to be, but memories are still there on one side, and while forgiveness may be official, forgetfulness and re-framing is the rule. Crimes against occupied countries and peoples were committed by "Nazis" not by Germans. To this day it is almost impossible to find a German whose father or grandfather was a Nazi, or who committed war crimes. In the formerly occupied countries, people today remember growing up sitting on their grandmother's lap, hearing tales of the occupation.

These memories do not disappear when those that went through the occupation die, these are the memories that forever undermine the politically and socially appropriate forgetfulness required for countries and peoples to work together.

The treatment of Greece by the German Finance Ministry and the ECB (not to mention the IMF, etc) has done little to encourage forgetfulness or forgiveness. The forgiveness of German debt after multiple aggressions still burns Greece, as German (and to be fair, French and other) major banks and national institutions gouge the pitiful remaining Euros out of Greece to protect their non-Greek shareholders and governments.

While Greece is probably the most visible example of how the EU is failing Europeans, there are other examples across the continent. These range from economc disadvantage, cultural suppression, loss of legal sovereignty, and the imposition of demographic choices opposed by the individual member countries.

3.      Yugoslav breakup

It is important to remember that Yugoslavia was a multi-ethic "republic" and an economic union, forged out of the First and then again out of the Second World Wars. So in many ways Yugoslavia provides a model of the EU, including multi-generational cultural integration and an enforced political as well as economic union. Yugoslavia was also an economically successful country, certainly when compared to the rest of the Warsaw Pact and other Socialist countries.

So why did Yugoslavia fail?

While there were a number of contributory causes, the death of Josip Broz Tito in 1980 began a long process of dis-union and resurgence of nationalism, driven in no small part by each of the constituent national groups losing faith in a centre dominated by one of the nationalities; the Serbians. With its capital in Belgrade, it was always natural that Serbia would be the dominant nationality.

Yet Yugoslavia had come through a period of significant market liberalisation and economic growth, and had, in large part, achieved reasonable and consistent GDP growth through increase international trade. Unfortunately that liberalisation stagnated due in part to internal demands of additional democracy in Croatia.

In his paper "Socialist Growth Revisited: Insights from Yugoslavia", Leonard Kukić demonstrates that Yugoslavia was able to demonstrate considerable economic growth through the 1960s and 1970, but were unable to continue that growth into the 1980s.

"Given their capacity to embark on radical reforms during the early years, how come Yugoslavs were unable to reform their economy later on? Policy makers were aware of remedies, but politics got into way. Duˇsan Bilandˇzi´, a historian and a politician, reports in his memoirs that in 1970 the Central Committee of the CPY accepted draft proposals aimed at liberalising capital markets and entry of firms (Bilandˇzi´c, 2006). The aim of these policies was to diminish or eliminate the apparent labour distortions. However, these policies were abandoned with the flaring of political and ethnic tensions by the 1971 calls for democracy in Croatia, a member republic of Yugoslavia.

The inability of Yugoslavia to cope with the 1979 oil shock was compounded by a major domestic shock. The lifelong president of Yugoslavia, Tito, died in 1980. He was replaced by an ineffectual collective presidency containing nine members. They lacked political capital to pursue planned reforms."[4]

The breakup of Yugoslavia and the following civil war is frequently "blamed" on the Serbians and their attempts to create an ethnically cleansed territory that included major portions of Bosnia. Ultimately Slobodan Milosevic was convicted of war crimes in The Hague, and died in prison. Numerous other Serbians have been tried and convicted, as have Croatians and others.

It is also worth remembering that there was a history of inter-communal violence on a massive scale during WWII in particular, with the Croatians Ustaše responsible for the deaths of hundreds of thousands, and had the goal of an ethnically pure Croatia. While we (now) think of the Serbians and the primary culprits, they look to a long history of being the underdog, fighting to protect their culture and society.

So the lack of strong central government, faltering economic performance, long memories, rejection of a centrally imposed mono-culture, and rising nationalism worked together to doom Yugoslavia.

4.      Next for Europe

Probably the single largest difference between Yugoslavia and the EU today is the lack of large scale inflows of economic migrants (politically correctly labelled "refugees") from Africa and war-torn Middle-Eastern countries. This influx, aided and abetted by EU member countries public comments and demonstrations of welcome or at least acceptance on arrive, has created a new dynamic not present in Yugoslavia prior to its breakup; an imposed external cultural disruption seemingly imposed by the central government, in this case the EU with its mandatory quotas imposed on member countries.

The issue is not immigrants, as the Open Boarders policy has facilitated the flow of Europeans between countries for almost two decades. The issue is the forfeiture of national sovereignty, with the illegal immigration issue providing the highly visible demonstration of such forfeiture. It has been too easy to label Europeans as racist for opposing illegal migration, yet to do so sweeps under the carpet the far wider range of issues that are associated with centralised determination of individual cultures, nation-level priorities, and the ability of the dominant participants to override the desires of local peoples and communities.

Below are a few of the strains facing Europe in the form of specific country tensions with the EU. These are not the only tensions, and while none of these may be the spark, quite possibly one of them could.

5.      The Precarious State of the EU: Other pressures

The United Kingdom is by far not the only European country or region that is experiencing problems in the relationship with Brussels. The European experiment continues, and at its heart remains a struggle between demands for regional and national sovereignty, and the desire for a continued concentration of power in the centre. How this will end remains an open question, the experience of the UK is only one example of the stresses that Brussels is experiencing, some of which challenge the current nation-states that make up Europe, while others challenge the very concept of a single unified Europe.

The following are five (only) specific examples of the ongoing stresses on the European Experiment. These will not go away quickly, and some threaten the very cohesion and assumption of an "Ever Greater Union" as demanded by Brussels and the European Commission. There are a number of other examples of stresses, and we will watch these evolve over the coming months and years.

1.    

2.    

3.    

4.    

5.    

5.1.   Catalonia

On October 27th, the Catalonia Parliament declared independence.  This was foreshadowed by the family of the Catalan president (Carles Puigdemont) leaving the country the day before. How Europe and the EU respond over the coming weeks and months will impact the viability and future of the EU and the European Commission. It is no surprise that the UK has rejected any suggestion that it should recognise Catalonia, for to do so would undermine any hope of a successful Brexit negotiation.

After arrests and (gentle) suppression, new elections were held in December 2017. Voter turnout was high, at around 80% of eligible voters, and the pro-independence parties won.

The mess in Catalonia will not be getting better any time soon, and it was the Spanish Government's fear of contagion that resulted in the strong and immediate rejection of any Scottish dreams of joining the EU as a separate country. That contagion appears to have come to fruition, after decades of perceived grievances by both sides, and a not-fully forgotten legacy of the Franco era.

With the referendum, Article 155 of the Spanish government, and now a renewed electoral mandate for independence, we can only watch and hope that this does not become the European Union's first fully fledged civil war. Regardless of the outcome, this cannot and will not remain a Spanish problem.

5.2.   Austria

The recent elections in Austria should not come as a shock, as there has been a growing backlash against centralised Brussels control and usurpation of national priorities, with the immigration crisis providing the catalyst for demands for greater local authority. Yet the Austrian People's Party, the conservative party founded in 1945, instead of running in second place, finds itself with the highest percentage of the vote and number of seats, and with the ability to go into coalition with the right wing party, the Freedom Party of Austria.

"Austria became the latest European country to take a sharp turn right on Sunday, with the conservative People's Party riding a hard-line position on immigration to victory in national elections and likely to form a government with a nationalist party that has long advocated for an even tougher stance."[5]

"If there's one topic that really dominated the campaign, its migration and integration," said Sylvia Kritzinger, a political analyst at the University of Vienna. "Especially with Kurz, it always came back to immigration. We had very little discussion of the issues beyond that."

For most of the past two years, these two conservative parties have polled at a combined greater than 50% support, and the snap election called this year has created the opportunity for these two to rule without the need for centrist or left-of-centre support.

Should the new government in Vienna actually follow through on their platform, they will quickly find themselves in the same situation as Poland, potentially having their voting rights restricted, or more.

5.3.   Poland

Poland is not alone in its desire for full EU membership on its own terms, and recent Polish law has been in direct conflict with EU legislation and regulation. Poland's primary objective in joining the EU was freedom of movement and economic advantage, with an ultimate joining of the Eurozone. Security from Russian hegemony was achieved, they hope, by joining NATO. This was designed to balance against the need for, and to reinforce, the concept of collective defence.

Yet Poland is a profoundly conservative and Roman Catholic country now joined to a sectarian Europe. Recent Polish law has been in conflict with the EU to the point that Brussels has discussed sanctions against Poland. While there is no realistic chance that Poland would exit the EU, it may contribute to a paralysed Brussels unable the marshal the 27 votes required for almost anything.

As recently as August 2017, there were threats that Poland could lose its voting rights in Brussels. Such a move would not engender much support from other marginalised EU members.

"The fact that a European tribunal decision is rejected so arrogantly is evidence of something very dangerous in my opinion — it is an overt attempt to put Poland in conflict with the European Union," Tusk said. (EU President and former Polish Prime Minster)

Tusk noted that several actions of the Polish government appear to be "very controversial" and could risk the country's continued EU status. Brussels has already been considering triggering Article 7 of the EU treaty, a legal process which could suspend the country's voting rights.

"It smells like an introduction to an announcement that Poland does not need the European Union and that Poland is not needed for the EU," Tusk noted.[6] 

5.4.   Belgium

The two primary cultural groups in Belgium have a long history of working together, primarily because the country was created as an artificial buffer state between Germany and France in 1830. Roman Catholic Flanders and Roman Catholic Wallonia historically had less to fear from each other than from their Protestant or Anti-clerical peoples of the Netherlands and France. The second half of the 20th Century and the creation of the EEC reduced those external threats, and created the conditions for sectarian conflict. While Belgium is not going to collapse into civil war, it has been referred to as the "First Bosnia". [7] 

In 2010 Belgium managed to go for 541 days without a government, and the two regions continue to co-exist, but with continued moves to greater regional autonomy. This was after the 196 days without a government in 2007. [8] (https://en.wikipedia.org/wiki/2007%E2%80%9311_Belgian_political_crisis)

With Flanders contributing close to 80% of GDP while accounting for 65% of the population, a breakaway, or even a devolution that strips Wallonia of tax revenues, will force Brussels (EU, not Belgium) to face the prospect of a further long period of no-government in Belgium, or potentially a desire for full independence by Flanders.

5.5.   Czech Republic

And so, with 61% voter turnout, the Euro-sceptic oligarch Andrej Babis is to be the new Prime Minister of the Czech Republic. The October 20 election puts Mr Babis in line to form a new government.

"The 63-year-old made his estimated $4bn (£3bn) fortune in chemicals, food and media - but he has also faced numerous scandals including a fraud indictment and accusations he was a communist-era police agent. He says he would not bring the Czech Republic in to the Eurozone but he wants the country to stay in the EU, telling Reuters he would propose changes to the European Council on issues like food quality and a 'solution to migration'."[9] 

This represents a core EU member states that has turned from the even-closer union demanded of Brussels, making the "every closer union" appear to be more for a French, German, Dutch, and Belgian dream than an actual potential outcome for the foreseeable future.

6.      Slovenia or Bosnia?

With the stresses in Europe, and that disparity that has been caused by a semi-centralised union devoid of effective internal transfers, and therefore with countries unable to create balance through exchange rate management or regulatory discretion, pressures continue to build, ultimately to a breaking point.

If Germany, and to a lesser degree France also, radically changes their outlook and policies to be “Europe-first, then Germany” instead of “Deutschland über alles” then there is hope. The changes required would be at the political, economic and cultural level and would be so far reaching as to ensure the swift demise of any government that attempt to implement the needed changes. Therefore I hold out little hope that German will enable the changes needed to keep Europe together.

So our resulting options are Slovenian or Bosnian in nature; independence with the acceptance of the centre, or a bloody civil war designed to change the “reality” on the ground through the imposition of ethnic or cultural domination.

We’ve been down this road already, twice. I hope Europe and its constituent parts will take that former.

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[1] http://www.telegraph.co.uk/news/2018/01/04/emmanuel-macron-warns-against-eu-splits-brexit-perils-prisoners/

[2] https://www.diffen.com/difference/World_War_I_vs_World_War_II

[3] https://en.wikipedia.org/wiki/Morgenthau_Plan

[4] http://personal.lse.ac.uk/KUKIC/Kukic_SocialistGrowthRevisited.pdf

[5] http://www.chicagotribune.com/news/nationworld/ct-austria-election-20171015-story.html

[6] https://www.cnbc.com/2017/08/04/tusk-poland-european-future-in-question.html

[7] https://orientalreview.org/2017/10/11/forget-catalonia-flanders-is-the-real-test-case-of-eu-separatism/

[8] https://en.wikipedia.org/wiki/2007%E2%80%9311_Belgian_political_crisis

[9] http://www.bbc.com/news/world-europe-41708844

Grexit: The "Left" Failed Again, and Europe continues to fail Greece.

Soon, the Prime Minister of Greece will be forced to accept that capitulation did not save Greece, and that he has failed. Not only did he fail, but he failed in every way. Not only did he not achieve any concessions from Europe (read Germany), the IMF, ECB or European Parliament, he also failed to deliver the mandatory legislative changed demanded by the creditors. He failed to reform the Greek government, and instead has spend nine months perpetuating an already disastrous status quo.

Sadly his personal failure to stand by his values, and more importantly to meet his obligations to the 61% of voters who said "OXI", will taint not only his memory, but the entire "Left" for years to come. Meanwhile for his failure of nerve, the Greek people have lost a year of potential recovery, or at least the additional pain before the recovery has been postponed by a year, and the base from which they will begin their recovery has been reduced even further.

But nobody should be of any doubt, there will be a Grexit.

The Greeks know that the only way is out. Is Tsipras simply trying to hold power long enough to feather his nest (and create a future personal revenue by 'saving' the EU)? Does he really think that he will be loved for his treason?

How much longer before tractors blocking highways and undertakers going out in sympathy strikes leads to mass demonstrations in downtown Athens? Riots of farmers are already happening in Athens. General Strike anyone?

Greek Tractors about to block the highway

Greece's masters, also known as the European Commission and the Reichstag, meanwhile vilify Greece for its response to the flood or migrants (oops, refugees) that pour across its borders from Turkey, their NATO ally.

So while we have two themes here; subjugation by European powers, and exploitation by a NATO ally, the core problem is the treason of the Prime Minister. He claims a "mandate" from the post-treason snap election, an election in which the choice was the current traitor, or the previous traitors.

And in the snap election, the voter turnout dropped significantly from the referendum, to just over 50%. Looks more like voter apathy then a mandate.

Meanwhile the Center (Brussels and Berlin - if two places can be "the Center") lambaste Greece for not spending their last Euro on stopping migrants from getting in, and then moving on to wealthier European countries. After all, would you want to be an economic migrant to Greece right now?

Migrants are coming in through Greece because it is the "easy" route, and appears to have the defacto blessing of the Turkish government in their 2500-year war against Greece. If, in the logic of the Center, Greece can stop boats from landing on their islands (or sinking part way with the Greeks being the ones expected to pull the living and the dead from the water), then surely a country that is not broke, that is getting massive aid to address their refugee / migrant crisis, can afford to run a basic police force that can identify the starting and gathering points for people smugglers on their own territory.

Unfortunately the only thing that Tsipras is accomplishing is delaying Greece's recovery, while making the starting point even deeper.

Why Everyone Wants a Grexit

All the wrangling and grandstanding in Europe today has one purpose; to force Greece out of the Euro while convincing all other countries to stay in the Euro. The Germans and the Troika want Greece out, even though they cannot say it out loud. The Greeks want out, even though they cannot say it out loud. And they all want the Grexit for their own reasons, little of which have anything to do with the good of Europe of the Euro per se.

So Wow, OXI (No) won, and by a landslide. Surprised? Then again, anyone listening to anything coming out of Greece should have expected it. With the deal off the table, a Yes vote would have been the equivalent of signing up for German Language lessons. A Yes vote was simple capitulation to Berlin and Brussels, even if dressed up as a vote for stability. OXI was an affirmation of the independence of Greece and the Greek people.

I wrote on April 15th, 2015 that the Grexit was inevitable, and it still is. Sure, there is another conference, and there will be another after that. Nothing will be achieved in these conferences; if the Greek government does not agree to capitulate to serial defaulter Berlin and Brussels, aka The European Branch of Goldman.

And nothing will be agreed because it is already accepted that the loans cannot be repaid, that the debt is unsustainable. Therefore, asking Greece to demonstrate how they can pay back loans that they cannot repay is asking them to lie, again. If the Troika, Germany and the rest of Europe are willing to pretend, then maybe. But nobody is pretending any longer.

And while Prime Minister Tsipras insists that he does not want to leave the Euro, those statements are for the "centre-left" of his party and the wider population, as they face insult after insult from their European brothers. In reality, Tsipras has no intention of staying in the Euro, and is actively creating the situation that enables an exit that can be "blamed" on the Troika, Germany and France.

Greece’s prospects of staying in the eurozone have dwindled further after the Prime Minister Alexis Tsipras arrived at an emergency summit of his fellow eurozone leaders in Brussels without a concrete plan to resolve his country’s debt crisis.

Eurozone leaders and ministers struggled to contain their incredulity as Mr Tsipras and his new Finance Minister, Euclid Tsakalotos, could only offer oral outlines of their request for another bailout, despite the EU’s demand for fresh proposals after last Sunday’s referendum rejected the previous bailout terms. The Independent

All Tsipras need to do now is wait for the news to gets out that Europe will demand that all Greek bank accounts be raided in a "Depositor Bail-in" - the numbers vary from as little as 30% of all account values greater than €8,000 up to "What have you got, hand it over". This would see what little is left in any Greek bank account confiscated. Think Cyprus without any mercy.

Once that is presented as part of the in-or-out proposal from the Troika, Tsipras, with no money left in the banks, will have the support he needs to introduce a New Drachma.

Two Options, One outcome

Because we need to be clear, there are, from the Loan Sharks perspective, only two options. I'm sure they've gamed this out already, but I see only one longer-term outcome.

1. Write a deal that will save Greece, and watch the other countries demand the same.
2. Punish Greece, leading to the introduction of IOUs (also known as New Drachmas) and force Greece out of the Euro.

Both of these lead to the same longer-term outcome: death of the Euro, but option 2 pushes it out to someone else's watch. With option 1, the demanded bailouts and write-off of the other countries will bankrupt Europe. With option 2, Greece does an "Iceland" and after more pain, begins recovering, though from a lower base, resulting in evidence that there is successful and meaningful life after the Euro.

There is no 3rd option, the "do nothing" option, because "do nothing" resulting in the actualisation of option 2.

It is important to remember that the decisions that are being made by all sides are NOT about saving Greece or the Euro, or France, Spain, or any of the rest. It is all very personal. It is about saving the stashes of dosh that these people have made, saving their status, and saving their jobs. And this goes for everyone involved in this.

Greek Political Unity

Tsipras is doing what he's doing because this is the only way that he saves Syriza from political oblivion. The other Greek parties are supporting him because (unsubstantiated, but my own guess) they know that if they do not, there are "perp walks" in their futures. If there wasn't the implied threat from the Greek Parliamentary Committee on the debt, then they would each be doing everything they can to undermine Tsipras and Syriza.

Beyond the threat of the Parliamentary Committee findings, there is the "Lost List" (the ""Legarde List") of individuals with significant bank account at the Geneva branch of HSBC in Switzerland, a list of 1991 names that then Finance Minister Giorgos Papaconstantinou, um, lost. There is a much longer list of 80,000 names that Syriza is looking at. There will be plenty of politicians and various ministry officials on that list.

So the deal is pretty simple, support Syriza in getting Greece out of the Euro and implementing a recovery programme, or go to jail. I think we have the basis for a Greek Government of National Unity, headed by Syriza and Mr Tsipras. We might even see the return of "V for Varoufakis".

The Loan Sharks

The Loan Shark enforcers are in a difficult position and must decide which will be worse, general rebellion across the Zone from a "saved" Greece option, or a punished Greece facing more pain as a warning to France, Spain and the rest. It must be difficult to know that whichever choice you make, in order to save your own stash of dosh gained through screwing Greece in the first place (the lenders AND the Greeks who did the deals), more suicides, closed businesses, lost futures, are on your head. But hey, you were (and are) just "doing God's work".

So there is no way out for any of them. Save Greece, lose the Eurozone. Kill Greece, save your stash and kick the dead-Eurozone can into the next guy's term in office. Then, like the Dark Lord Cheney, you can blame your unmitigated disaster on the next poor schmuck.

Greek Bankers and former MPs are going to jail

This might just be Syriza's "way out" of the Grexit, and the way they can stay in the Euro, while destroying PASOK and Nea Democratea's (ND) ability to regain power. Earlier this week, on 17th of June 2015, a special committee of the Greek Parliament released their report, and in so doing, have put Greek bank executives, Finance Ministry heads and MPs from the former ruling parties on notice: you have iron bars in your future.

Rewind to earlier this year, when Syriza established a Parliamentary Committee, the “Debt Truth Committee” to determine how much of the €320 billion debt is legal, and recommend how much of that debt to unilaterally cancel as illegal. On the 17th the committee reported their findings. In perhaps the biggest non-surprise of the saga, the committee has reported that the "Troika’s arrangements is a direct infringement on the fundamental human rights of the residents of Greece. Hence, we came to the conclusion that Greece should not pay this debt because it is illegal, illegitimate, and odious."

This provides the Greek Parliament with a legal opinion to allow them to abrogate the loans. Wipe the slate clean. Clear the ledger. Stop the payments. Thank you, it's been fun.

This also gives the Greece government the authority to arrest Greece Finance Ministry officials and politicians. And under EU law, the Greek government could issue an arrest warrant for IMF and ECB officials. Would an EU arrest warrant for IMF chief Christine Lagarde be honored next time she gets off an airplane in Europe?

The Troika's objective

As I posted a couple of days ago, the "end of history" crowd needs the elected government of Greece to fall, to ensure the myth of the eternal victory of liberal western capitalist democracy as the sole survivor of Cold War One (CW1).

"If we want to date the moment when the Atlantic liberal order lost its authority – and when the European Project ceased to be a motivating historic force – this may well be it. In a sense, the Greek crisis is the financial equivalent of the Iraq War, totemic for the Left, and for Souverainistes on the Right, and replete with its own “sexed up” dossiers." (from Ambrose Evans-Pritchard at the Telegraph of 19 June 2015) 

It is easy to listen to the Troika's rhetoric of Greece the Failed State and to assume that more and deeper cuts and systemic changes are required. It is also easy to assume that Greece has not changed, and is the laggard in Europe. Yet looking at the numbers and we see a country that has implemented systemic changes that would destroy any ruling party in any Western country, from France or the UK, to the United States.

Could France, Germany, the UK or the USA cut its government payroll by 28%? Could any of them cut their average pension by 61%?

As Evans-Prichard goes on to say "We all know the argument. The EU is worried about political “moral hazard”, about what Podemos might achieve in Spain, or the eurosceptics in Italy, or the Front National in France, if Syriza is seen to buck the system and get away with it." All the while forgiving and forgetting the Moral Hazard that is incumbent in the IMF, ECB enforcement of the original loans and lending (investing) in Greece.

The price

With the loans being declared illegal, Syriza now goes into negotiations early next week looking to see what the Troika is willing to bring to the table. If the only things on offer are more years of hardship and continuing a program that "directly affected living conditions of the people and violated human rights, which Greece and its partners are obliged to respect, protect and promote under domestic, regional and international law" (Exec summary, Chapter 6) , then Syriza walks away, declares the loans void, and says "see you in court".

Greece would not even need to leave the Euro, as it will still be the legal currency of the country. There will be no need for a New Drachma with an instant 50% devaluation. Euros would continue to flow through the economy, and Greece's primary budget surplus would make it, theoretically, one of the better performing governments in the Eurozone, if not the world.

Suddenly, while Greece will be locked out of international capital markets, the immediate need to access those markets to service the debt will disappear. Not that simple of course, but a much stronger negotiating position.

Syriza's "get out of jail" card

For Syriza to stay in power, they will need an "out" to demonstrate to two constituencies that they represent the break from the past.  

They also need to deepen their roots throughout the Greek bureaucracy. After all, after 40 years of sharing power between PASOK and ND, all ministries, especially Finance, are stocked with bureaucrats who know how to please moderate socialists and moderate conservatives, but most of all know how to outlast whatever political party is in power. Just like almost every Western capital city.

Syriza needs to clear out the functionaires more closely aligned with the two (formerly) major political parties, and replace them with economists and functionaires aligned with a leftist socialist economic agenda. 


Syriza's "go directly to jail" card

What better way, then to frog-march to jail the ministry functionaires who wrote the papers that supported the politicians who negotiated the deals that the functionaires in Athens and Brussels (and Washington) then agreed. As long as those functionaires remain in place, more papers will be written demonstrating why the previous papers represented the only way forward. For syriza to make any progress, they must ensure those papers are never written. How better than to fire the functionaires (on the grounds of course, of #1 the functionaires committed illegal acts and #2 Greece still needs to streamline the bureaucracy and therefore must cut heads).

Of course, this is not exactly in the individual best interests of the functionaires - thus the importance of the “Debt Truth Committee”.

If the Committee states that the loans were illegal, as they have, then Syriza has all it needs to remove the functionaires pending trial. And to arrest and smear any sitting MP from PASOK or ND who was in any way involved in negotiating, speaking in favour of, or voting for the bailouts. 

So Syriza, the legitimately elected representatives of the Greece people, will negotiate for reductions in the debt burden, while at the same time shoring up their longer term position in Greece itself by surgically removing the functionaires who work to undermine them from within the ministries. They will try the politicians and former MPs who voted for the bailouts. As with Iceland, we will see what democracy really means, the democratically expressed will of a people translated into real pain for those who screwed the people.