“Europe is already surrounded by a geopolitical ring of fire.”
Stocks are sacred. Except those in Greece where no one knows when banks will reopen and what currency or IOUs or whatever they will dispense when they do reopen, and no one knows how Greek businesses are supposed to function under these circumstances, how they’re supposed to pay their employees and produce and sell things and provide services. And no one knows what Greek stocks are worth because the Athens Stock Exchange remains closed.
But elsewhere, stock valuations must be propped up no matter what happens in Greece.
On Monday morning in Tokyo, during the first minutes of trading, the Nikkei was down 1.6% despite the ongoing QQE by the Bank of Japan. So BOJ Governor Haruhiko Kuroda himself stepped in.
While the BOJ’s underlings were – the markets assumed – busy buying equity ETFs as promised in the BOJ’s QQE action plan, Kuroda came out in the classic manner with a statement to jawbone the markets in the right direction:
Although direct economic and financial linkages between Japan and Greece are limited, the Japanese Government and the Bank of Japan remain fully prepared to deal with possible developments in Greece. In this respect, the Japanese Government and the Bank of Japan convened a meeting this morning.
The Bank of Japan, in close cooperation with relevant domestic and foreign authorities, will continue to carefully monitor developments in financial markets.
Finance Minister Taro Aso said the government was confident that the EU had established enough safeguards to respond to market disruptions. “I understand that European countries … are calling on the Greek government to act responsibly,” he said.
Then Reuters added this:
Both Kuroda and Aso did not mention how Tokyo may respond if developments in Greece jolt markets. But the central bank’s first line of defense would be to inject massive liquidity to calm markets, sources have told Reuters.
It did the job, or so it seemed. Stocks halted their slide and bounced a little. But then the magic dissipated, and the Nikkei swooned over 500 points before ticking up a smidgen to close down 428 points or 2.1%.
In Europe, where few of the policymakers that have to deal with Greece appear to have gotten much sleep, the ECB will step in and do its magic, according to a note by Geopolitical Research of Canada’s National Bank Financial:
In the short term, the European Central Bank will attempt to manage the fallout from the Greek vote and potential Grexit by significantly increasing its purchase of government bonds and other debt from the remaining Euro zone countries in order avoid a dramatic rise in yields.
Everyone is expecting this, and the expectation alone will limit the selloff. To make sure everyone gets it, the ECB said on Monday in a press release that it is “closely monitoring the situation in financial markets” and is “determined to use all the instruments available within its mandate.”
That would be the short-term aspects. Over the longer term – say, over three days – Europe faces one heck of a mess, according to the folks at NBF’s Geopolitical Research:
Europe is already surrounded by a geopolitical ring of fire. Large parts of North Africa and the Middle East are in chaos, Ukraine is beset by civil war and economic collapse, and relations with Russia remain tense. The collapse of Greece would mean that Europe would have to worry about yet another quasi-failed state on its periphery.
Chilling.
Eurozone markets closed deeply in the red: the German DAX down 1.5%, the French CAC 40 down 2.0%, the Spanish IBEX 35 down 2.2%, the Italian MIB down 4.0%…. Italy feels the pain.
Then there’s China. It has its own problems: a wondrous stock-market bubble that has become a national priority but has been crashing for three weeks; and an economy that has entered a hard landing and is now at risk of getting hammered by the very stocks that had propped it up over the past 12 months. The Chinese government doesn’t need Greece to feel panic.
Anticipating what a No-vote would do to stock markets around the globe, and thus to China’s elaborate stock-market rescue efforts cobbled together in emergency meetings last week and this weekend, Chinese authorities acted swiftly, and before anyone else.
On top of all the other measures already decided by that time, late Sunday the market regulator, China Securities Regulatory Commission (CSRC) announced that the PBOC would inject capital into a CSRC subsidiary, the China Securities Finance Corp, so that it would deploy these funds to encourage brokerages to lend even more money to their clients so that they can buy even more stocks on margin.
When I wrote about this spectacle on Sunday, I concluded: “Watch the fireworks when this moolah ignites.”
And it did ignite. At the open, the Shanghai Stock Index soared over 300 points as all these widely hyped efforts had some effect. Then the magic wore off, and at one point, the index dipped into the red, before closing up 89 points.
“But don’t just look at the index. Most investors are still crying: 646 stocks down vs 259 up in Shanghai; 1071 down vs 226 up in Shenzhen market,” George Chen at the South China Morning Post observed. The largest companies and state-controlled entities carried the market. The rest, forget it.
The small-cap and tech focused ChiNext index plunged 4.3%. And Hong Kong’s Hang Seng, being left to its own devices, plunged 828 points or 3.2%, the biggest one-day drop since 2011. Another sign that central banks are approaching the end of their desperate road to manipulate stock markets endlessly higher.
After having lured even street vendors and farmers into highly leveraged stock market positions that have now collapsed, is the Chinese government worried about popular upheaval? Read…. Panicked Chinese Government Imposes Desperate Measures to “Aggressively” Rescue a Lot More Than Just Crashing Stocks
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Monetizing the stock market. Great idea.
Anyone interested in the IPO of my gambling-debt-backed securities fund?
Yes?
Great! I can guarantee you a 50% return in 6 months. That is, you’ll get half your money back 180 days after investing. I will send you an address where you can send the unmarked small bills for your shares.
Doesn’t it feel like we’ve reached a peak in stupidity? How about a peak in PC? How about peak Big Govt? Peak manipulation? Peak stock prices?
The stupidity seems to end only after the corpses start to pile up. This time around I have a suspicion they will not stop until the death count adds up to a billion.
Prior Greek government officials obtained money by selling bonds that they fraudulently over stated Greek GDP to obtain and never intended to pay. In Greece, they gave their actions the air of legitimacy by using some of the money for salaries and pensions. But they also used a lot of that money to fill their Swiss and Cayman Island personal bank accounts, and to purchase NYC and London real estate in “untraceable” trusts and corporations.
Protestant ethic requires borrowers to pay their debts. But nobody seems willing to look behind the charade and recognize that it was not the people of Greece that borrowed all the money. In reality much of the money was taken fraudulently and hidden by prior Greek rulers. Moreover, nobody seems willing to take any measures to recover that money, many billions of which are still in shady bank accounts, and the real estate is certainly still in existence.
Perhaps everyone wants to just punish the Greek people for electing such shady rulers in the past. Or perhaps the debt collectors are themselves shady characters who do not want to open up pandoras box.
Not disagreeing, but, Nancy Pelosi is worth over 100M. How did that happen? She’s was lucky for the last 30 years?
Yeah,…Nancy, like the Clintons, really leveraged her corruption possibilities to the max. Wouldn’ t it be cool if money became worthless? And all the politicians had currency they couldn’t use????? For us little people, life goes on.
Yeah right ! The first thing Congress does when it passes a law is to exempt themselves from it. Nancy Pelosi is generationally wealthy because her husband plays the market using information she picks up in her day to day activities. It’s all perfectly legal you understand.
She is walking proof of the adage that people don’t go into government service to do good, they go into government service to do well.
I sense that no one really knows how things will unfold with this GrEEK tragedy or comedy. Sure there are many “experts” who think they know with the ready scripts for this horror movie especially for the Greeks but I think lot of hidden debt skeleton bombs will be exposed like Puerto Rico debacle and may be the spark that starts the forest fire engulfing EU even if the Troika act calm like things are in control.
Just wait till the counterparty risk CDS and CDO monsters banksters peddled as some kind of insurance start unwind and drag others down with it. And there’s no US government owned AIG this time to pay everyone off.
It’s institutionalized corruption, from top to bottom, and it is everywhere.
BTW, the CDSs should have already been triggered, since Greece has already defaulted three times, but everything is so rigged they won’t let it happen.
ISDA is the body that gets to declare “default” for purposes of CDS’s and if they don’t declare it, it didn’t happen. And guess who staffs the decision making members of ISDA …
Regards,
Cooter
Ah the plot thickens. From Phoenix Capital:
Greece however is not the REAL issue for Europe. The REAL issue concerns the derivatives trades that are backed by Greek debt.
Modern financial theory dictates that sovereign bonds are the most “risk free” assets in the financial system (equity, municipal bond, corporate bonds, and the like are all below sovereign bonds in terms of risk profile). The reason for this is because it is far more likely for a company to go belly up than a country.
Because of this, the entire Western financial system has sovereign bonds (US Treasuries, German Bunds, Japanese sovereign bonds, etc.) as the senior most asset pledged as collateral for hundreds of trillions of Dollars’ worth of trades.
The global derivatives market is roughly $700 trillion in size. That’s over TEN TIMES the world’s GDP. And sovereign bonds… including even bonds from bankrupt countries such as Greece… are one of, if not the primary collateral underlying all of these trades.
Greece is not the real issue for Europe. The entire Greek debt market is about €345 billion in size. So we’re not talking about a massive amount of collateral… though the turmoil this country has caused in the last three years gives a sense of the importance of the issue.
Spain, by comparison has over €1.0 trillion in debt outstanding… and Italy has €2.6 trillion. These bonds are backstopping tens of trillions of Euros’ worth of derivatives trades. A haircut on them would trigger systemic failure in Europe.
In short, the EU’s worst nightmare is a debt haircut or debt forgiveness for Greece because it opens the door to Spain or Italy asking for similar deals down the road.
And that’s when you’re talking about REAL systemic risk
When politicians delegate their responsibilities to bankers this is what you get.
It’s really funny how ZIRP’s and NIRP’s are turning on their creators like Frakenstein’s Monster.
Why so? Because, plainly put, through over six years of what was supposed to be a one time emergency measure, central banks have painted themselves in the tighest corner. They have literally nothing left in their quiver but direct purchases of ETF’s, bonds and other financial products to stave liquidation off for a little longer.
At this point cutting rates, reserve rates or whatever doesn’t work anymore: Switzerland and Sweden are already in full NIRP territory and all they achieved was keeping their currencies from appreciating too much against the euro while China’s move on reserves was worth perhaps an afternoon’s respite.
Yet trust in central bank’s omnipotence is still at an all time high: traders are absolutely sure somehow the ECB, the PBOC and the BOJ will keep the party going not for a few weeks, but forever.
Today I even heard people saying European stocks are “a safe bet” because if there’s a hiccup the ECB will swoop in and prop up the CAC, DAX, MIB and their toxic brethren to infinity and beyond.
This is the “Santa Claus” economy we often speak about: a childish belief in magic. It’s the main driver of today’s zombie economy where Chinese cabbage farmers take a loan to play stocks or overleveraged Italian families buy cars they cannot afford on credit.
Personally I believe Santa Claus will win… short term. Direct stock purchases by the BOJ and, perhaps, the ECB, tight regulation by Chinese authorities, a massive increase of the present QE program by Frankfurt will do the trick of lulling markets and consumers back to sleep… for a little while longer.
But present fundamentals are atrocious and aren’t getting better. Everywhere one looks outside of the three present bubbles (stocks, cars and housing) the situation is already well past “brace yourself for a rocky ride”. The moving attempt by speculators armed with cheap credit to buy into the commodity “dip” to make a killing by betting on a financial/debt driven consumption boom is ending in tears. If you think oil is bad, just look at copper: these guys are getting slaughtered and there’s no bailout in sight for them.
To compound the problem, not only consumers are already leveraged to the hilt, but they had to deal with a deadly combination of stagnating/swooning wages on one side and unreported inflation on the other. Here in MC-land, cheese is up 11.2% in the first six months of the year and in the past four years beef has increased a massive 42%. Does this look like “deflation”?
When people buy new cars like there’s no tomorrow but cut food purchases, it’s time to pause and reflect.
In the end central banks are fighting a desperate and ultimately losing battle against liquidation of bad (in some cases really bad) investments and repricing on every single item, from lawnmowers to palm oil. Since 2008 they have left no stone unturned, condemened countless millions to deal with the worst job market I’ve seen in my life, raped savers, relied on some of the worst lies I’ve ever heard to avoid one of the most basic law of economics: liquidation.
Yes, they’ve lost but this doesn’t mean they aren’t done with us yet. May the Gods help us and our children when they’ll really have their backs against the wall. An animal is at its most dangerous when it’s mortally wounded and cornered.
I have decided to call it our “Magic Beans” economy. Feel free to use the fairy tale of your choice.
We had some fires here in the bay area this weekend caused by fire works. What a great idea during a drought to launch bottle rockets into the brown dry brush. However, I think the bankers and politicians are about as smart.
It does not matter if the indicators say there is no deflation. The effect is a slow down in spending and the rcognition there was no recovery.
The guy in Maine who tried to shoot a mortar off his head, Wasn’t he a banker?
I think of it as the popcorn economy. The heat under the kernels has exploded the first few, and as the others intensify it sounds like a hailstorm and then tapers off to just a few late pops, no matter how hard you shake the pan. Some never pop and some get burned.