“Happiness is not the absence of problems; it is the ability to deal with them” — Steve Maraboli
Dear Clients and Friends,
Who’s tired of the Greek Tragedy? Raise your hand. The first Greek default occurred in the fourth-century B.C. when the 13 city states of the Delian League borrowed money from the Temple of Delos and defaulted on most of the loan. Greece’s financial history has been one of repeated defaults on sovereign-debt obligations with little or no lasting damage to other global economies. There have been at least five separate defaults in the modern era of Greece. The first occurred in 1826 during the early days of Greece’s fight for independence. Defaults then re-occurred in 1843, 1860, 1894 and 1932. In other words in modern times, the country has been in default for 90 years – or about half of its history as an independent nation.
Is a Greek default a nothing but a “one-off” event that will have limited impact on the global markets? I don’t know and I don’t think anyone else does either. According to a 2001 census, the island of Delos had a total of 14 permanent residents. Doug Kass correctly points out that, “In today’s flat, networked and interconnected world, no country is an island of Delos any more. History over the last four decades has demonstrated that increasingly, “contagion” is the natural consequence of sovereign debt default.” We all know that it is uncertainty and the fear of the unknown that roils the markets, not the actual events themselves. Peter Boockvar, Chief Market Analyst for the Lindsey Group puts this in perspective when he says, “Economically speaking, we should care less about Greece’s $240 billion economy. It’s meaningless in the global scheme of things. What has gotten the markets all worked up is 2 things I believe. One is the fear of the unknown in the grand experiment of the Eurozone that is on the cusp of seeing a piece break off and we don’t know what the potential ripple effects are. The other important thing that I feel has been a market factor is that it (a Greek default) has made investors reassess the risk they were taking in the bubble that has been the fixed income markets. The fact that almost the entire Eurozone region was able to borrow money at levels well below the US and that trillions of dollars of bonds had negative yields was truly astonishing. The air has clearly begun to come out of that balloon as evidenced by the 10yr. German Bond moving from a 0.07% yield to a 1% yield in 2 weeks. I think that the potential Greek default has a lot to do with that kind of a move.” My two cents worth…..how fast the air comes out of that balloon will determine whether we have market trouble or not. Market reactions aside, I have attached two articles. The first one is from Jared Dillian, author of the Daily Dirt Nap and The 10th Man. Here I think Jared really tells it like it really is. Are these negotiations really about debt re-structuring or just further “aid” to an already lost cause? The second article is from Jim Cramer where he does a really good job of explaining where each side in these negotiations is coming from. Reading it helped me to understand and appreciate why this whole thing is just a mess with no positive outcome. Here they are:
When a Bond Is Not a Bond
By Jared Dillian
June 25, 2015
I don’t know anything about Greece. I actually make it a point not to.
What I’ve found over the course of my career is that the closer people get to an issue, the worse their predictive power is. The forest-for-the-trees phenomenon. Like all the economists who do nothing but watch the Fed, every piece of data, every speech. Their track record in predicting interest rate moves is worse than everyone else’s!
I deliberately try to be dumb about things.
Some of my friends and clients know a lot about the Greek negotiations. There is a lot to know. I try to keep it simple:
1.The Greeks are communists
2.Everyone is incentivized to get a deal done, unless
3.The Greeks overplay their hand
There. Now I know everything there is to know about Greece. At the time of this writing, there was no deal in place, but it was starting to look promising.
Promising Isn’t the Word
People are starting to figure out that Greece is probably better off just defaulting and going back to the drachma. Painful, yes, but better than this perpetual bailout purgatory where everyone loses. Greece doesn’t make the necessary reforms, and Europe just keeps throwing good money after bad.
Which leads me to the point of this essay—if Europe bails out Greece once again, will they ever realistically pay it back?
Of course not. Everyone knows this.
Then it’s not really debt, right? It’s just aid. It’s a gift.
I think it’s time that people start being honest about what is going on here. This isn’t a rescue package, with covenants. It’s an aid package. If Europe wants to pay for Greece to pay all its civil servants (and its surprisingly large military), then fine. As we are starting to see, they’re less willing to do so when Varoufakis acts like a punk.
What does the profession of economics say about aid?
I’m not sure, actually. Though it seems that (in my experience) giving aid to countries stunts their growth. Five years of free trade is doing more for Africa than 50 years of aid ever did. I have some theories about charity in general, mainly that most of it has real externalities. So if you keep giving money to Greece, it’s only going to become dependent on… you get the picture. I am starting to sound like George Will.
What we do know is that if the Greek government issues more 10-year bonds—it will never pay them off. And it can’t refinance. So who would buy such a bond? It will default eventually, right?
That is the interesting question.
You see, as long as Europe (Germany) is willing to shovel cash into the money pit and call it debt, not aid, they will keep Greece afloat, and Greece never defaults, and nobody ever has to realize losses on Greek bonds, on which the recovery rate will surely be zero.
They are putting the pretend in “extend and pretend.” You pretend that Greece can pay it back, so if you’re a bank, you can keep the bonds marked at par on your balance sheet. So the accounting value (par) is different from the market value (60 or whatever), which is different from the economic value (zero).
Everything finds economic value eventually.
In my career, I’ve never seen anything like this. Sure, I’ve seen companies refinance that shouldn’t have been able to refinance, but that pales in comparison to this. It’s not debt. It’s aid.
My guess is there are geopolitical concerns at play here too. I saw a headline the other day about Washington being concerned that Greece was going to end up in Moscow’s orbit. Too late! They are communists.
I will go a step further and say that in 10 years’ time, Greece will be a less pleasant place to visit. I am beating around the bush. I think it will be a very unfree place. Ironic, isn’t it?
It’s Up to the Germans to End the Greek Debt Crisis
By Jim Cramer Follow | Jun 25, 2015 | 11:25 AM EDT | 1
Maybe the talks aren’t anything like we think they are. Maybe when these various ministers get together there is a much more common theme that doesn’t leak out.
It goes like this. First, the Greeks pitch: “you can’t afford to keep kicking this can down the road, so you can either crush those who own our bonds in euros or we will crush them in drachmas.” In return, the Germans are saying: “You haven’t done what we want and you get nothing.”
In other words, they aren’t even having the same conversations. The Greeks want a default and are offering the Germans — and it is just the Germans, as these other countries are bystanders — a default that’s either in euros, orchestrated by the Germans, or in drachmas, orchestrated by the Greeks.
The Greeks want the Germans to agree to cut the amount owed by Greece altogether by two-thirds NOW, and they will start getting paid back NOW in euros, or they will get 30 cents on the euro in drachmas sometime in the future when the Greeks feel like paying, if they feel like paying at all.
The Greeks think they are offering a pretty darned good deal because Greece will most likely bounce back more quickly in drachmas than in euros. The Germans just want their money back. Period.
Two different conversations. If you can call them conversations.
That’s why these talks are going so horrendously. The Greeks have nothing, so they have nothing to lose. The Greeks know the Germans have everything and have way more money than they need, so they can lose something to preserve their ill-gotten, euro-derived bounty.
Think about it: there’s going to be a default someday without massive forgiveness on this debt, because the Greek economy, even if going full tilt, is not going to generate enough income to pay back the roughly 280 billion euros ($313 billion) it owes to the IMF, the European Union, the European Central Bank, European governments, banks and private investors. That’s just a fact of life.
You could, theoretically, cut and stretch out the debt payments, and that had at one point been the offer to the Greeks, but the Greeks don’t want ANY debt payments if the principal isn’t slashed by two-thirds. Without that two-thirds cut — and yes, I am being arbitrary but that’s the percent that makes sense to the Greeks — a stretch-out of payments just means another trip to the bargaining table a year from now, something I think Germany now feels is simply insufferable.
I know, the Greeks sound like pigs, but this is a democratically elected government that has one mandate, and that mandate is to make no more sacrifices. All sacrifices must be made by the other side. All sacrifices must be made by those who have benefitted mightily by the euro. All sacrifices have to be made by the Germans.
We tend to forget right now that there has been a huge winner with the euro and, frankly, a lot of losers. Germany’s been the winner — and a big, selfish winner at that, with all of its insistence on austerity and moral turpitude. Sure, the euro may work for some companies in some countries, but it isn’t like their countries’ economies wouldn’t be doing BETTER without the euro. They are just stuck.
Germany isn’t stuck. Germany thrives. Look at the numbers. Looks at the stocks! The manufacturing companies that do well in Europe are almost all German. They aren’t from these other countries. The German economy is unbelievably strong. There has been no pain whatsoever experienced by Germany, and its companies can sell into the rest of the euro region — and now, with this crisis and a further weakened euro, to the rest of the world — better than ever. The country is virtually debt free and has done nothing to stimulate the rest of Europe. It’s pretty much all been one way. They don’t even have to have a defense bill. We pay that!
In return, ask yourself, what has Germany sacrificed? If it wants to be partners with Greece and doesn’t want the euro hurt, then it has to authorize transfers to Greece in return for the preservation. But that transfer is somehow unfathomable to them. That’s why I call Angela Merkel Herbert Hoover in a pant suit. Merkel sounds like Hoover before even he recognized that there had to be fiscal sacrifices to help the poor — even if it was their own fault (which by the way, it wasn’t.).
To me, at this point, it isn’t the Greek position that’s absurd, it’s the German position. This government in Greece is repudiating the debt because it was elected by people who threw the bums out who took the debt in return for austerity that obviously has not worked.
Sure, you could argue the Greeks haven’t given it the old college try. But I could just as easily argue that the lenders should have known better. The Greeks should never have been allowed to borrow as much as they did, and now the lenders should suffer for their ignorance and their pie-in-the-sky hopes that Greece would change. They were the idiots who thought that Greece would enact real reform. The Greeks just took the money and tried to fix things, but didn’t have the heart or will to do so. Shame on them for taking the money? I say shame on the bankers for lending it to them, which is why I feel very little sympathy for the German position.
Before you get too critical of my “support the deadbeat” view, consider two important skeins of thought.
First: President Obama’s Justice Department socked the big banks with billions in penalties for ostensibly lending money to people who couldn’t afford it and not knowing better when they did it and then demanded to be repaid. Sure, in some cases the banks just packaged the loans to those who couldn’t afford it and then sold them to pensioners and hedge funds and mutual funds. In other cases, they solicited the loans that couldn’t be paid off. So they, ultimately, paid a steep price for lending to those who couldn’t pay them back. But they paid it because they didn’t have to go to jail and the shareholders footed the bill anyway. The bankers, like the Germans, will do just fine.
What’s Germany’s price been for lending money that they should have known couldn’t be paid back? NOTHING. Our Justice Department would be indicting the German politicians and bankers who approved these loans to Greece!!!
Second, why can’t Germany make a transfer payment to Greece? What would be so wrong with that? One of the most praised ideas in the history of our nation was the Marshall Plan, when we helped Europe — including our sworn enemy, Germany — get back on its feet after World War Two.
We sacrificed because we were in better shape than they were and we knew it would be for the common good, which, by the way, it was.
Germany’s in better shape than anyone. Why can’t it just take a hit and write off this darned country? It either does it now or does it later.
That’s why I increasingly doubt that we are going to get a deal. Given the pools of capital out there that are now revealing themselves — from the Russians (they may not be doing well but they have enough to help the Greeks) and the Chinese — why the heck are the Greeks even bothering with this nonsense? They can get short-term financing from the “east” or the “communists” to pay the bills while they set up a drachma-based economy. It could be a huge win after a short, ugly, blip down.
So, when you think of it like that, when you understand that the Greeks think they are deserving of a Marshall Plan while the Germans are playing this out like they are a World War One creditor to Greece, you can understand that the talks almost have to end badly.
Once you get your arms around that, you are going to be in better shape for this weekend, because that, I believe, is precisely where the talks have gotten to, and, realistically, to call them “talks” is a giant joke being played on the media and the markets.
Don’t be fooled. The Greeks want a second Marshall Plan. The Germans want their pound of flesh like the Allies got at Versailles. Ironic, isn’t it?
In the interest of always trying to stay informed, I hope that you found the articles of interest.
P.S. Overseas buyers snapped up more than $100 billion in U.S. real estate in the past year. China, Hong Kong and Taiwan were the biggest buyers accounting for $28.6 billion in sales. Canada ranked second at $11.2 billion, followed by India with $7.9 billion of purchases. The money was spent primarily in Los Angeles, San Francisco, Seattle and New York.
M. Bart Herring, head of product management at Mercedes Benz USA, “What is going to happen to automobile technology over the next 20 years is the equivalent of the first moon landing.”
The Sunnis and the Shiites still control 57% of the world’s proven oil reserves.
Steven Schwarzman, CEO of the Blackstone Group says that the next financial crisis will come from the hands of politicians and regulators who have “constructed an expansive and untested regulatory framework that will have unintended consequences for liquidity in our financial system. Since the implementation of Dodd-Frank in 2009, the number of community banks has shrunk by 41%”
Sources: 361 Capital, Jared Dillian, Doug Kass, Real Money Pro, Seeking Alpha and Mauldin Economics
Ken Beach, President of Cascade Investment Group, member FINRA & SIPC. Cascade Investment Group is not a tax or legal advisor. You should always consult with your tax advisor or attorney before taking any actions that may have tax consequences.