With Greece, “Europe” has nothing to be proud of

So Greece has exited the bailout. Wonderful. Great. Fantastic. I guess this means that the Germans have squeezed all the blood they, and their French puppets, can from that stone. The numbers of Greeks that will have died as a direct result of the “austerity” that was imposed on Greece will never be known, but that number will be dwarfed by the numbers of Greeks that have had to flee their country in search of work, only to become the highly educated baristas and shop and factory workers of Europe.

We can argue that Greece should never have taken the loans, and that indeed they should be paid back. That’s what you do with loans. 

A stronger argument is that those who made the loans should also be culpable, knowing as they did that Greece could never repay the loans, and knowing that they would push the default and pain onto others (the Greek people and/or European and international banks and through them to the shareholders of those banks). Equally culpable are the handful of Greece politicians and functionaries who aims to profit by continued electoral victory and control of the government, and by personal wealth from their part in the scamming of the Greek nation.

Just as there were those in the communities persecuted by the Nazis who collaborated for whatever reason, so there were Greek government officials and politicians who collaborated with the German and European banks to take loans that they knew could never be repaid.

Yet it is the behaviour of the various European players once the loans were made that shows the perfidy of the “European”, and their willingness to see other European children and elderly die for profit, and to see an entire generation without work. 

Germany, the ECB, IMF and we cannot forget the French banks (and others) have acted as the loan-sharks of “Europe” happily destroying one of their own “family” for profit. 
Further evidence of the impact on Greece from the austerity programme comes from a Bank of Greece report from 2016.

“The report of the Governor of the Bank of Greece reckons surveys conducted by Greek Statistic Authorities (ELSTAT) and according to which:

• a significant increase of 24.2% of people aged 15+ suffering from chronic health problem or chronic disease.
•  increase of more than 15% of people who limited their activities due to health problems in 2014.
• percentage of low-weight (below 2.5 kg) births increased by 19% in 2008-2010, and that this is associated with long-term negative effects on the health and the development of children.

Citing OECD data of 2013, the BoG underlines that 79% of the population in Greece was not covered with insurance and therefore without medical and medicine due to long-term unemployment, while self-employed could not afford to pay their social contributions.”

A January 1st, 2017 article in the Guardian makes the impact clear. “Figures released by the European Centre for Disease Prevention and Control recently revealed that about 10% of patients in Greece were at risk of developing potentially fatal hospital infections, with an estimated 3,000 deaths attributed to them.”

And so Germany profits from dead Greeks, and the French support their overlords, to ensure the security of their own banks.

Meanwhile, the rest of Europe bumbles along, hoping that one day the Germans will “share” some of the wealth that they continue to accumulate, to the detriment of the rest of Europe. On the German side, one wonders if they worry that one day the rest of Europe will say “enough is enough” and either leave the Eurozone or demand that Germany begin to contribute to the parts of Europe that pay for their current account surplus.

Source Wikipedia

One chart shows clearly the situation in Europe today, and why the Eurozone is in such danger. It is not the debt of Greece, or the bailouts for German and French banks and the ECB, it is the current account surpluses and deficits across Europe.

Without Europe to and the Euro to “level” costs and prices across Europe, the German Deutschmark would be so overvalued as compared with other European currencies. The Euro ensures that Germany is “cheap” while removing the options or ability for European competitors to adjust their costs and pricing via free-floating currencies appropriate to their monetary policies.

Greece stands out in the chart, with the massive drain in the early years of the century, with artificially low prices for imports and easy credit, much of which is reflected in the net Current Account surplus in Germany.

Now that Greece is officially out of the bailout, it is time for Greece to regain control of its currency, and of its future. The New Drachma is needed, and a Grexit a must for the future of Greece. It may also be the only action that can save Europe from Germany, if only by showing Germany just how important it is that they "share the wealth" or risk their own economy.

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.