Submitted by Bill Blain via Mint Partners,
“I may be wrong, but I’d say you’re lucky to be alive and I think we might say the same for the rest of Southern California….”
As some wit in the West End pointed out.. the New Greek Finance Minister is very aptly named: “Mr That’s-a-lot-of-loss”
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As I return to the office after a proper breakfast in the West End, I’m a tad worried about the market’s complacency. Euro’s took a soft shoeing through Tuesday but it reversed along with peripheries on apparent rumours of accelerated ECB QE buying. The flight to quality has benefited Bunds, Gilts and Treasuries, but stock markets continue soft on the diminishing hopes that a messy Greek Divorce, Grexit and Default can be contained.
Yet… With this brewing crisis around Greece, the fact the Shanghai stock market is exposing all kinds of uncomfortable truths about China, (for instance, the lack of competitiveness, overleverage, massive over-expectations in valuations, the failure of the stock market as “bread and circuses” for the middle classes, and the fears of the party at a troublesome time), and the big bond reversal in the last quarter… and its perhaps surprising that things aren’t a whole lot worse. It’s no wonder global commodity markets are flimsier than a chocolate tea-pot. The first half of the year was pretty torrid… but it could still prove pleasant compared to what may be coming.
I’m wondering if Global Markets are poised on the edge of the precipice about to take a step forward?
My mind keeps wandering back the few weeks before the Lehman crisis erupted. No one could quite believe it could ever happen. But having observed the growing crisis as Northern Rock wobbled in 2007, the big banks suffering, and watched how quickly a quietus was delivered to Bear Stearns, it came as little shock to my team and I as we traded bank paper in extremis as Lehman went to the wall. In hindsight it became blindingly obvious to everyone. The sheer complexity of modern finance was exposed.
And, remember, Lehman was a crisis contained. It could have been a billion times worse if all the US banks had gone down dragging the whole global economy not to its knees, but six-feet under. Only prompt and decisive action by the US followed by others stopped the Global Financial Crisis becoming a Global Financial Extinction Event. Overly dramatic perhaps.. but without strong leadership the Global Financial Crisis of 2008 could have been much much worse.
Some regular Porridge correspondents have commented that I’ve been blasé about the threat of a new financial catastrophe – which is probably because I’m suffering a surfeit of happiness since I married my sweetheart Nicky. Personally, I want to believe than nobody would be so stupid as to let it happen again..
But I am increasingly worried it could happen. That doesn’t mean I’m a bear.. I’m just saying perhaps it’s time to trim and reef the sails, and batten the hatches lest it get rough in coming days.
The factor that really worries me this time is Leadership and the lack thereof.
When Mr Junker tells me the EU has a plan for GREXIT – I am thinking he’s a truly crap poker player.. Liar, Liar, pants on fire.. At the end of last year I surveyed the porridge readership for “no-see-ems” and both China and Greece figured on the lists. I am not convinced the convoluted and bureaucratically top heavy institutions of the EU and ECB will prove “fit for purpose” as Greece unfolds in coming days.
We’re facing a potential catastrophe in a worst case Greek Scenario – that a messy Greek default and Grexit could spark a recapitalisation of the ECB, call on guarantees for the EFSF and a host of other knock-ons including most of non-core Europe concluding the Euro simply ain’t worth the trouble. I fear I’m waiting in vain for some European hero to emerge who can guide us to a satisfactory conclusion … it aint Junker, and it’s not Draghi’s job.
I am even more worried the Chinese stock crash could escalate out of markets and into a China Syndrome pitting the populace and an increasingly dictatorial Party at odds. Histories of communist society are rich with crisis, purges and coups covered up with pogroms against rich farmers, the middle classes, and profiteers as cultural revolution. China’s fading stock market frenzy, following the property crash, the growing realisation they’ve made the country an environmental disaster zone, and the realisation it’s a country that’s grown middle aged before it got rich are massive challenges for the party to overcome.. Bread and Circuses won’t cover it...
Meanwhile, my eye was drawn to the Junk market y’day after Bank America suggested large swathes of the junk market are poorly positioned to meet a Fed rate hike later this year/early next. Not a bad point.. the bulk of junk debt has more than 4 years to run. BoA also point out the credit metrics, which have been unexpectedly resilient in the wake of the global credit crisis, are starting to turn negative with downgrades outrunning upgrades by 2:1!
Suddenly folk are asking if low hi-yield returns make sense any more… If the only reason to hold junk is because there is no immediate pressure on the Fed to hike rates – that sounds like a high-risk parking trade…. So I remind everyone of my short the HY market via ETFs – a trade I called last year.. far too early.. but it’s a trade which the time will come!
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