Calling Each Other’s Bluff

deflation resize medium

Well, it’s the last day of the financial year. The heavy fall in the market over the past week or so will shave a few hundred billion off the nations’ superannuation balances.

For the 12 months to 30 June, the ASX 200 is pretty much flat, depending on where it finishes up today. The future indicates a 34 point loss at the open but given the uncertainty, the market could finish anywhere. That is, down a lot more — or even up on the day.

Of course there are dividends to take into account. If you owned the banks for example, you’re sitting on a decent dividend and maybe a small amount of capital growth. But overall it’s been an uninspiring year.

That’s what happens when you mix the wheat with the chaff. The underperformers combine with the outperformers to provide an average return. The trick, of course, is to separate the investment wheat from the chaff.

There are always instances of one or two disasters ruining the performance of a portfolio. You’ve probably experienced the same thing.

You can read about a strategy that overcomes this problem below. Jason McIntosh, designer of the algorithmic trading system Quant Trader, calls it ‘elegant simplicity’. It’s fascinating stuff so I urge you to read on below.

And being the last day of the financial year, it’s your last chance to secure a big discount on a subscription to Quant Trader AND claim a decent tax deduction. Check it out here.

Moving back to the overnight action, and Europe was hit hard. Here’s how the major European exchanges fared:

Germany: -3.56%
France: -3.74%
Spain: -4.56%
Italy: -5.17%
Portugal: -4.76%

In short, it was pretty ugly. But not surprising considering the market was happy to ignore the building tensions between Greece and its creditors for weeks. The market simply assumed both sides would blink before the situation turned critical.

The other important focus point overnight was the bond yields of the other highly indebted Euro nations. Let’s have a look:

  • Portugal saw its 10-year bond yields rise 34 basis points to 3.02%.
  • Italian and Spanish 10-year bond yields both jumped 24 basis points to 2.38% and 2.34% respectively.

That’s hardly a disaster for any of these countries, but keep an eye on the trend. If they keep rising, it will become a headache for Europe and the euro.

Much of what happens next will depend on the outcome of Sunday’s referendum. I don’t think Greece’s creditors saw this coming. They probably expected Greece to fall into line just prior to the repayment deadline to the IMF, which expires tonight/tomorrow our time.

Instead, Greece upped the stakes big time and called its creditors’ bluff. From Bloomberg:

Greek Prime Minister Alexis Tsipras said European leaders don’t have the nerve to throw his country out of the euro, striking a defiant tone just hours after imposing capital controls on a country in economic freefall.

As Greeks come to terms with a new reality that’s trapped their money inside the country’s banks, 12,000 people gathered in the central Syntagma Square with banners that read “Our lives do not belong to the creditors.” Tsipras, who passed by them en route to a televised interview, said the cost to the 19-nation bloc of Greece leaving would be “enormous.”

The creditors are obviously outraged. The elites of Europe are not used to small nations standing up to them and daring to jeopardise their euro project.

But despite appearances, Greece has a strong hand. The cost of Greece leaving the Eurozone would be enormous. Greece has around €320 billion in total government debt, held mostly by the European Central Bank and the IMF. If Greece leaves the Eurozone that is quite a hole to fill.

If Greece votes no in Sunday’s referendum, then they will be in a much stronger position to negotiate a better outcome for staying in the Eurozone, which is clearly the better deal for everyone.

But with Tsipras saying that Europe doesn’t have the nerve to throw Greece out, he risks turning this from a rational to an emotional negotiation. Because if Europe then turns around and calls Greece’s bluff, throwing them out of the Eurozone, it’s likely we’ll get a lot more turmoil and volatility in the months ahead. It will be a matter of time before the market then moves on to Portugal, Italy and Spain.

It’s impossible at this stage to work out how it will end. I know there’s a lot of talk about a ‘Grexit’ now looking likely but it’s too early to come to such a conclusion. This still has a long way to go.

Greece’s moves over the past few days are a high stakes ploy to wrest negotiating power off the creditors, not necessarily an admission that they will leave the Eurozone.

So expect to more volatility in the days to come. But the real fireworks will start next week when we know the outcome of the Greek referendum.


Greg Canavan+,
For The Daily Reckoning, Australia

Join The Daily Reckoning on Google+

Greg Canavan
Greg Canavan is the Managing Editor of The Daily Reckoning and is the foremost authority for retail investors on value investing in Australia. He is a former head of Australasian Research for an Australian asset-management group and has been a regular guest on CNBC, Sky Business’s The Perrett Report and Lateline Business. Greg is also the editor of Crisis & Opportunity, an investment publication designed to help investors profit from companies and stocks that are undervalued on the market. To follow Greg's financial world view more closely you can subscribe to The Daily Reckoning for free here. If you’re already a Daily Reckoning subscriber, then we recommend you also join him on Google+. It's where he shares investment research, commentary and ideas that he can't always fit into his regular Daily Reckoning emails. For more on Greg go here.

Leave a Reply

1 Comment on "Calling Each Other’s Bluff"

Notify of

Sort by:   newest | oldest | most voted
slewie the pi-rat
slewie the pi-rat
1 year 3 months ago
slewie’s ‘FLATION Report ~for US Monday ~US Dollars only BLOOMBERG COMMODITY INDEX 100.8; -0.4; [-0.40%] US Dollar INDEX 94.9; -0.5 [since Friday] TODAY ONLY! $1.00 Special! U-Pik-Em-‘Flation!!! when i read: “Oil fell over 2% on uncertainty about Greece that sent the U.S. dollar lower.” [Chris Mullen], i had the thought: hey! that just about says it all! now i see that Greece is playing the “we can’t be kicked out of the EURO-zone” card. of course, people have been talking about just that aspect for what seems like years, now. and now! heeere’s Tsipras: “The EU treaties make no provision… Read more »
Letters will be edited for clarity, punctuation, spelling and length. Abusive or off-topic comments will not be posted. We will not post all comments.
If you would prefer to email the editor, you can do so by sending an email to