Jun 01/15 – The Old Man and the Sea would have been better

2015-06-01 11am EDT  |  #Europe #gold #Greece #Hemingway #PBG #Petrobas

Over the week-end, Greek Premier Alexis Tsipras stomped down on the intensity pedal with an aggressive editorial in Le Monde. The Telegraph’s Ambrose Evans-Pritchard summed it up nicely:

Greek premier Alexis Tsipras has accused Europe’s creditor powers of issuing “absurd demands” and come close to warning that his far-Left government will detonate a pan-European political and strategic crisis if pushed any further.

Writing for Le Monde in a tone of furious defiance after the latest set of talks reached an impasse, Mr Tsipras said the eurozone’s dominant players were by degrees bringing about the “complete abolition of democracy in Europe” and were ushering in a technocratic monstrosity with powers to subjugate states that refuse to accept the “doctrines of extreme neoliberalism”.

“For those countries that refuse to bow to the new authority, the solution will be simple: Harsh punishment. Judging from the present circumstances, it appears that this new European power is being constructed, with Greece being the first victim,” he said.

The Greek leader, head of the radical-Left Syriza government, issued a stark warning that his country will not submit to these demands and will instead take action “to entirely transform the economic and political balances throughout the West.”

Over the past few weeks many have been blaming Greek Finance Minister Yanis Varoufakis for bungling the negotiations with his tough style. Tsipras’ week-end editorial lays to rest any idea Yanis is on a different page than his leader.

The Greeks have little to lose in these negotiations. Although their economy has stabilized, it is by no means improving in any appreciable way.

Unemployment is still running 26% and the economy is still mired in a vicious deflationary trap.

As negotiations have dragged on, money has fled Greece faster than Lindsay Lohan at a dry film promotional party. The Greek Target 2 intra-euro system liability has returned to levels last seen during the 2011 Euro crisis.

As capital has left Greece, the Central Bank has been forced to step in to make loans to the Greek banks whose deposits have disappeared. Even though the ECB is Europe’s Central Bank, there are still individual country Central Banks. These countries’ bank provide liquidity in times of need, and turn to the ECB to bridge their loans. This borrowing by a EU member Central Bank is called the Target 2 balance. The Greek Central Bank borrowing has exploded higher over the past six months, with total loans almost at the same level as during the height of the Euro crisis of 2011.

Although there is a group of retired Greeks who fear an exit from the European Union, the majority of Greeks realize there is little reason to continue along the current path of trying to repay money that simply can never be paid back. The money is gone, and pretending otherwise is just making the suffering all the worse. The Greek Premier has little to lose with such a tough negotiating stance. What is Europe going to do? Kick Greece out of the union? That probably helps the Greek economy more than it hurts. Yes, there would be an initial period of pain as the Greek economy experiences a big inflationary shock from a massive devaluation. But that would quickly be met with a surge in economic activity as tourism and other industries would spring to life. I don’t think the Greeks have anything to lose by going to the wall.

It is obvious that Tsipras has come to the same conclusion. I think he is prepared to default. He really doesn’t have a choice. He was elected with the mandate to stop the never ending self defeating austerity. Tsipras will frame the decision in such a manner as to demonstrate it wasn’t his choice. But there is no way Greece will blink.

The last couple of sentences of Tsipras’ editorial are an ominous warning to the rest of Europe:

“If some, however, think or want to believe that this decision concerns only Greece, they are making a grave mistake. I would suggest that they re-read Hemingway's masterpiece, "For Whom the Bell Tolls",” he said.

I can think of no better author for Tspiras to quote than Hemingway. Although I am a huge fan, the truth of the matter is Hemingway was an alcoholic who ended his own life at the hands of a shotgun. He was a deeply troubled soul, who lived life with an amazing lack of concern about the future. Just like Greece, he spent wildly with little concern about how the bills would be paid. He had four different wives, and between all the plane accidents and other missteps in remote parts of the world, it is amazing he lasted as long as he did.

Tsipras quoted For Whom the Bells Told. This has never been one of my favourite Hemingway pieces, and I think a much more appropriate novel to quote would have been The Old Man and the Sea. In this novel, an old experienced fisherman, Santiago has gone 84 days without catching a fish. He heads out alone to the gulf stream in attempt to end his unlucky streak. Santiago ends up hooking a huge marlin, who he battles for three days, until finally killing it. On his way home, a group of sharks are attracted to the marlin’s blood. Santiago ends up battling the sharks, but eventually succumbs to the sheer number of them, and they eat almost the entire marlin. The old fisherman barely makes it home, with nothing to show for his efforts except the remaining bits of carcass from the 18 foot marlin.

Although I believe the Greeks should hold tough in their negotiations, there will be no winners. Even if the Europeans cave, the Greek economy will not rebound enough to pay off the monster debts. And if instead Greece is forced to default, the ensuing chaos will cause a lot of short term pain. The Greeks are just like Santiago – desperately needing a change in luck, but I fear they will do no better than the old fisherman.


Kicking the can

If I were forced to guess the outcome, I would probably err on the side European officials will acquiesce to the Greek demands. At the end of the day, government officials want to kick the can down the road. No one wants to be the one who ushers in the next credit crisis. I don’t think any government will willfully take away the printing press. Although many will mouth words of fiscal responsibility, when it comes down to it, none of this “extend and pretend” will stop until the markets say enough is enough. To think otherwise is just naive.


US Dollar strength weighing on gold

The US dollar has been rallying over the past couple of weeks, and that strength has been weighing on gold.

Although it is tough to cheerful as gold slumps lower, gold bulls shouldn’t be too despondent. Gold is acting pretty great in the other major currencies.

Here is a chart for European holders:

We are no where near the lows. Gold has been hanging tough expressed in Euros.

And in Yen, the picture is downright bullish:

So yes, gold in US dollars is sucking wind, but in most other currencies, it is behaving quite well. Gold bulls, hang in there!


Please file in the bat shit crazy folder

Last month when Mexico came to market with their 100 year bond denominated in Euros, I thought I had seen it all. Well, this morning Petrobas announced they are floating half a billion of 100 year notes at a yield of approximately 8.85%. Yes, this is the same Petrobas that had bankruptcy concerns a few months ago when oil dipped to $42. Let’s see, PBR 5 year Credit Default Swap is sitting near the highs, yet investors are willing to lend them money for 100 years.

Makes perfect sense. Lending PBR for a century sounds like a terrific idea – put me in for 25.

Thanks for reading,

Kevin Muir

the MacroTourist