This week is going to be interesting, dear reader. The Greek people have overwhelmingly rejected the terms of the bailout deal imposed by the hated ‘creditors’ — the European Central Bank (ECB), the IMF, and the bureaucratic elite in Brussels.
According to preliminary results, the ‘No’ vote won out by 60% to 40%. Given the uncertainty of the result leading into the referendum — that is pretty overwhelming.
But what does it mean?
Well, the ball is firmly back in the creditors’ court. In a legitimate democratic process, the Greek people have clearly rejected years of depression and being made to pay for a debt pile that was also the responsibility of avaricious bankers, who got off scot free.
This is the creditors’ worst nightmare. Playing hardball and kicking Greece out of the Eurozone risks the beginning of the end for the currency union. But providing concessions means other countries will also line up for debt relief.
Given the ECB has just spend the past few years buying up tens of billions in peripheral government debt, it would be on the hook for massive losses in any generalised debt restructure.
And who ultimately bears those losses? Germany and France mostly, along with all the other member nations of the Eurozone in proportion to their size. Whether the losses could actually be absorbed is beside the point. Politically, it would be a nightmare.
There is no political will to bail out indebted countries. Which is why Germany is playing hard-ball. Letting Greece off the hook will be political suicide for Germany’s Angela Merkel. And we know politicians look after themselves first before giving a hoot about anyone else…even an entire nation.
The ‘No’ vote in Greece has put Europe’s creditors in a very difficult position. And good on them! A world where the common people bear all the burden for debts that are in large part the responsibility of private banks is a world of economic slavery. It is a template everyone should absolutely reject.
But in doing so, it upsets the status quo and upsets the markets.
So expect carnage in the market today to follow up on Friday’s big falls. At the time of writing, the market was still closed but brace yourself for red across the board today…apart from gold stocks maybe.
Over the past few weeks I have noticed a tendency by the mainstream media to say that the situation in Greece is nothing to worry about, that it is a ‘buying opportunity’ for stocks.
That may prove to be the case, but it’s a very naïve viewpoint. When the comments come from brokers or investment banks, it’s purely a case of talking up one’s book.
The truth is that no one knows how this will play out. There are many potential scenarios and not many are good ones for stocks — not in the short term at least.
And you can’t just view Greece and Europe in isolation. For Australia, there’s China to worry about as well.
Ah, China…the command economy meets unrelenting market forces…
You’ll recall that China tried to slow its building boom and property bubble during 2014. When things began to slow a little too quickly, the Communist Party tried to fire up liquidity and credit again.
But this time money went into the stock market, not the property market. It was the next get rich quick scheme in China. The Shanghai Composite Index doubled from December 2014 ‘til June this year. It was a wild ride.
But since peaking in mid-June, stocks have turned down. There is a whiff of panic in the air and the punters want a bail-out. From the afr.com:
‘The Chinese government has rolled out a series of emergency measures to prop up its faltering sharemarket and avoid any social unrest resulting from investment losses, after its two main exchanges lost more than a quarter of their value over the past three weeks.
‘These measures include a halt to a raft of planned initial public offerings, amid concern they will divert funds away from normal sharemarket investing, and the establishment of a stabilisation fund by the country’s top brokers.
‘The Communist Party newspaper, The People’s Daily, also warned people not to "lose their minds" and "bury themselves in horror and anxiety" as the "positive measures will take time to produce results.’
Maybe they will produce results, or maybe they won’t. But the signs aren’t too good.
Back on the 23 June, in the Port Phillip Insider, a subscriber only daily email, I asked Quant Trader Jason McIntosh what he thought of the Chinese stock market. Here’s what he wrote:
‘The secret to amassing a lot of money is to maximise a trend. Forget about picking tops. It’s all about riding the trend.
‘Chinese stocks are a great example. People have been calling ‘bubble’ for many months…yet it keeps climbing higher. Sure, this market could reverse and fall hard. But it could also keep rising.
‘The key to successfully profiting from a trend is your exit strategy. You want to stay in a move as long as possible. That’s how you maximise your gains. But you also need an exit plan. I’ve seen many people ride trend all the way back down.
‘I use what we call a trailing stop. It’s an exit point that rises with the market. A trailing stop’s job is to get you out when the market turns lower.
‘There’s a bit of strategy that goes into placing a trailing stop — more than I can go into today. Although I will say this. You need to give the market room to move. Nothing trends higher in a straight line. You need to allow for moderate corrections along the way.
‘If you’re long Chinese stocks, I’d stay that way. I would set a trailing stop at around 3900 and let the market do its thing.’
Well, the market has done its thing alright. It’s sitting around 3,686 points (see chart below) and will likely head lower today. That’s well past Jason’s ‘get out’ point. The upward trend is over and the only question is whether the market stabilises around here on government intervention or continues to fall as the punters exit.
From a global perspective, the unfolding Chinese market crash isn’t a big deal though. Involvement is largely confined to Chinese citizens and banks. There is little chance of ‘contagion’.
However, that it is occurring in conjunction with the unfolding crisis in Europe isn’t good for confidence. And as you know, markets can run all day on the fumes of confidence.
In a sign of how fragile global confidence is right now, the Aussie dollar traded this morning at around 74.5 US cents, its lowest level since May 2009. But it’s not just a confidence thing. The Eurozone is a major source of funding for Aussie banks. It’s where the big four and others go to raise ‘wholesale funding’ to satisfy our appetite for buying overpriced property.
Financial troubles in the Eurozone means more risk for Australia. A lower dollar is a reflection of that increased risk. Expect to see more of it as this Euro crisis continues to develop.
For The Daily Reckoning, Australia
PS. The situation in Greece just got more interesting, following the overnight referendum result. This Friday, Strategic Intelligence editor Tim Dohrmann will host a LIVE Q&A session on Facebook to discuss what’s going on in Greece and what it means for you. It’s free, all you need to do is go here to our Facebook page, click on ‘Like’, and then come back at noon on Friday for the live event.