Greek Contagion Abyss Looms – Wealth Preservation
Strategies
Greece, EU and Banks Staring Into Abyss
Markets Are “Irrationally Exuberant” - Gods Punish
Hubris
“Invisible Hand” Propping Up Sanguine Markets
Short Term Considerations
Long Term Considerations
Best Case Outcomes
Worst Case Outcomes
Wealth Preservation Strategies
We are here, staring into the abyss. The greatest monetary
experiment of the modern world - the euro, encapsulating the
largest middle class market of consumers ever assembled is about to
face its greatest test to date.
To say anxieties are high is an understatement. Normally the
broad markets will weigh up downside risk as the markets formulate
and assimilate varying views on matters of importance, but not so
in this case.
The markets are decidedly sanguine, as if an “invisible hand” is
propping them up, guiding them, nudging them, buying any dips in
stock and bond markets and maintaining calm.
The VIX measure of U.S. stock volatility, is languishing at 15 -
not even whimpering. Gold, that other key barometer of risk, has
only seen slight gains and languishes at $1,200 per ounce.
It is as if the fire alarms have been turned off despite the
fire beginning to rage.
Is the Working Group on Financial Markets or Plunge Protection
Team (PPT) working tirelessly through proxy Wall street banks to
keep gold depressed and prop up leading benchmarks such as the
S&P 500 and thus the wider markets?
There are many that believe that Wall Street banks and central
banks work closely together and coordinate policy and market
interventions. They are sometimes dismissed as “conspiracy
theorists.” Despite much evidence showing that banks have
manipulated and rigged markets frequently.
Ironically, those that dismiss this as conspiracy theory are the
same people who would say that if the central banks and governments
are not propping up and intervening in markets, they should be.
If central banks are not already
“market makers of last resort” then it
seems likely that they soon will be and indeed overnight the IMF
has called for this.
Such interventions simply paper over the cracks for a period of
time - meanwhile the fire is burning, the structure is crumbling
and will ultimately collapse.
A Greek exit from the euro would change everything. The greatest
change being simply doubt and fear regarding the outlook for other
vulnerable EU nations, EU banks and the EU banking and financial
system.
From that day forward every statement from every EU official
will have a risk premium attached to it.
They will say this and that, but the market will here "maybe"
this, "maybe" that. As such the costs of participation in every
financial transaction will alter, as the accounting for "what if"
scenarios slowly gets priced in.
This change in risk perception and pricing, rather
counterintuitively, is in fact a good longer term development. The
markets have become increasingly captive by non elected and elected
officials within the world monetary apparatus.
These ‘hidden hands’ have, and are, over anxious and seek to to
quell market volatility and market dislocation in what they believe
to be in the interest of the public good. They believe that
market volatility is a bad bad thing - when in fact nothing could
be further from the truth.
It was this same hubris and "super man" mentality that created
the first global financial crisis and indeed financial crises
throughout history.
The same mistakes are being made over and over again. Market
hubris and official hubris is rife. How apt - Greek gods liked to
punish those guilty of being overconfident and arrogant.
We are seeing this misdiagnosis being played out in the current
negotiations between the Troika and the Greek government.
Ultimately the effect of a Greek exit could manifest in any number
of ways, with far reaching consequences for our
interconnected global capital market with all of its regulatory
gaps, opaque credit structures and massive $200 trillion and
growing debt burden.
Short term considerations
capital controls and extent of
bank collapse and bail-ins
credit market contagion
Greek euro exit
rising government bond yields and interest rates
geopolitical considerations and Russian influence
Long term considerations
higher interest rates
stock market fall
“PIIGS” contagion
global contagion?
effect on Germany (arguably the greatest Euro benefactor)
loss of confidence in ECB, monetary union and euro
increase in nationalism
makes Brexit more likely?
Best case outcomes
Greek default - ECB blinks and continues liquidity support
Greek get a deal to peg debt obligations to growth and spread
repayments over the very long term
stability returns, bailout countries return to more solid
economic growth as interest rates begin to slowly normalise
Greece and its new currency start recording significant growth
in a post debt overhang world
Worst case outcomes
capital controls across Europe until Greek exit is managed
Greek exit in a messy way, euro credit seizes up as collateral
bombs go off - “Lehman II”
bail-ins imposed on depositors across world - further
devastating depositors, small and medium enterprises and our
economies
banks and hedge funds smell blood and start rounding on the
next weakest member, shorting bonds and local markets, forcing an
exit
likely Italy, Spain, Ireland, Portugal and in time France
targeted in terms of interest rate sensitivity
Euro becomes a lame duck currency, all countries start to
prepare for an exit orderly or otherwise. New euro launched with
exclusively northern European industrial economies
collapse of western banking system...for a period of time
Wealth preservation strategies
Speculate by going short euro and long drachma and Greek
assets
Own USD, NOK, HKD, SGD, CHF in safe banks in safe
jurisdictions
Diversify cash holdings to non European banks and offshore
institutions
Own physical precious metals in safe vaults in safe
jurisdictions
Short term considerations
Greek banks have haemorrhaged over €30 billion since October.
Over €2 billion was withdrawn between Monday and Wednesday and
likely as much since then as the talks intensified and the
situation worsened this week.
The problem can only have been exacerbated by an ECB official's
suggestion at a closed door meeting on Thursday - in response to a
direct question from Dutch Fin Min Jeroen Dijsselbloem - that the
Greek banks would not open on Monday as reported by Reuters.
The ECB later denied that this was the case but clearly capital
controls are on the table. That being said Bloomberg reports that
"the Governing Council of the European Central Bank plans to hold
an unscheduled call on Friday to discuss Emergency Liquidity
Assistance available for Greek lenders, according to two people
familiar with the plans".
Whether the ECB agrees to raise the ceiling on the ELA is not
certain. The leak reported by Reuters suggests that certain parties
are happy to provoke bank runs in order to force the hand of the
Greek government.
We may soon see capital controls imposed in Greece as depositors
are bailed-in to try keep the banks afloat.
At the start of June the European Commission ordered 11 EU
countries to enact the Bank Recovery and Resolution Directive
(BRRD) within two months or be hauled before the EU Court of
Justice. EU regulators ordered 11 countries to adopt the
new
EU deposit bail-in rules.
Were another serious crisis to materialise with regard to
European banks and markets in the coming days on the back of a
Greek default it seems likely that emergency legislation would be
put in place that would allow bail-ins to take place.
Whether the ECB provides ELA to save all Greek banks, just the
strategically important banks or none at all will likely be decided
as much by political factors as financial ones.
A widespread banking crisis would weaken the resolve of the
Tsipras government but would present unforeseeable contagion risks
to Europe's interconnected financial system despite Dijsselbloem's
assurances that the EU is prepared for all eventualities.
In January, JP Morgan highlighted in a report that exposure to
Greek debt among banks in France and Germany is relatively low but
warned that peripheral nations - particularly Italy - were at risk
of contagion.
It is unclear if core eurozone banks can absorb losses from
Greek exposure but in the short term it would likely lead to a
tightening in capital markets as distrust among financial
institutions cause them to hold their reserves.
Italian, Spanish and Portuguese bond yields rose in a very
jittery market after a eurozone finance ministers' meeting ended
yesterday with no breakthrough in the deadlocked Greek debt talks.
Italian, Spanish and Portuguese 10-year yields were five to
seven basis points higher at 2.35 percent, 2.34 percent and 3.16
percent, respectively this morning.
In the short term, government bond yields could surprise and
yields decline again. However in the medium and long term,
government bond yields are only going to go one way and that is
higher with attendant consequences for our
$200 trillion in debt saturated world.
Longer term considerations
Geopolitical considerations are to the fore and yet rarely
considered by most analysts.
Greece may decide that its interest - painful though it may be
in the short term - lies outside of the eurozone. Certainly its
experience since the launch of the euro in 2001 has been an
unmitigated disaster.
Between 1960 and 2001 Greece enjoyed more or less constantly
improving prosperity. Total production increased 600% in that
period - more than double that of Germany. Post-euro Greece's
productivity has plummeted 26%.
Were it to pull out of the single currency, it would not be
without powerful friends in the region. Today, Tsipras is visiting
St. Petersburg for a meeting with President Putin where they will
sign a non-binding agreement on bringing Russian gas into Europe
via Greece.
The "Turkish Stream" project would see a pipeline from Turkey go
through Greece and eventually to Austria via Serbia and Hungary.
Russia seeks to bypass Ukraine and to bring NATO member Greece into
its sphere of influence would greatly undermine NATO.
While the Greeks have insisted that they have no intention of
availing of Russian financial assistance it is a fact that such
assistance has been offered and remains an option.
The BRICS New Development Bank comes into operation next
month.
Faith in the ECB would be greatly undermined and with it faith
in the euro currency. For half of it lifetime the euro has been in
crisis. With the exit of Greece it will be apparent that the
architects of the euro system may not be omniscient and that the
euro is by no means guaranteed a permanent existence.
Were Greece to exit the euro, wilfully or not, it would lead to
surge in nationalism in Europe. We have seen hostility towards
Greece being whipped up in sections of the German media and vice
versa.
Among peripheral states there are large swathes of the
population who now view the EU as a destructive force in their
societies. As mentioned above, Greece was economically successful
prior to the launch of the euro.
Both Spain and Italy were also industrial powerhouses pre-2001.
But having to compete with their northern neighbours on an equal
currency footing has destroyed their export capacity. In these
countries many people believe that austerity has has been foisted
upon them to protect a project that has not benefited their
societies particularly well.
In the core of the eurozone there is also a surge in nationalism
as taxpayers resent what they see as their subsidising of
inefficient and unproductive welfare states. However, Germany has
derived enormous benefit from the euro project through its ability
to export across Europe to countries whose currencies should be
much weaker than its own.
Germany and the other core nations may ultimately decide to go
it alone and establish a new joint currency of the costs begin to
outweigh the benefits of the current system. Indeed, plans were
drawn up to do just that in 2011.
Alternatively the terrible experience of the single monetary
union may out the German people and elites and indeed other
Northern Europeans completely off monetary unions and we may see a
reversion to national currencies.
The scepticism towards the EU displayed by many voters in the UK
can only be reinforced as the current fiasco continues to unfold.
David Cameron's promised referendum on Britain leaving the EU will
likely receive more support as Europe's unmanageable problems
continue to fester.
Stock markets, currently levitating on the panglossian narrative
that we live in the best of all possible worlds - despite dismal PE
ratios and stagnation in real economies around the globe - would
likely be jolted from their slumber. With rising rates the ability
to prop up markets with practically unlimited QE cash would be
greatly impaired.
The contagion would likely spread to peripheral eurozone nations
like Italy, Spain, Ireland and Portugal whose banks are still on
life support. The ability of the powers that be to contain the
cumulative effect of multiple bank crises on the eurozone core is
debatable.
Wealth preservation strategies
In the short term the dollar is regarded as a "safe-haven". So
long as the prevailing psychology remains the dollar should provide
a degree of protection for those seeking to avoid euro
contagion.
U.S. assets are still extremely popular despite increasingly
poor fundamentals.
Allocations to global equities and bonds should be reduced.
Cash should be diversified and spread around in different
non-European banks and institutions. For high net worth seeking
wealth preservation in the form of cash, owning a few of the safer
currencies remains advisable. These include the Norwegian krone,
Singapore dollar, Hong Kong dollar and the Swiss franc.
The most effective hedging instrument and
safe haven asset remains gold bullion. We
advise clients to own physical gold and silver in the safest vaults
in the safest jurisdictions in the world.
Must-read guides:
Protecting Your Savings In The Coming Bail-In
Era
From Bail-Outs To Bail-Ins: Risks and Ramifications
– includes 60 safest banks in the world
MARKET UPDATE
Today’s AM LBMA Gold Price was USD 1,198.15, EUR 1,058.86 and
GBP 755.65 per ounce.
Yesterday’s AM LBMA Gold Price was USD 1,198.00, EUR 1,050.65
and GBP 752.42 per ounce.
Gold rose $15.00 or 1.26 percent yesterday to $1202.10 an ounce.
Silver climbed $0.03 or 0.19 percent to $16.20 an ounce.
Gold in Singapore for immediate delivery was essentially flat at
$1,200.11 an ounce near the end of the day, while
gold in Switzerland was also flat. Gold is
tethered to the $1,200 an ounce level and remarkably gold traded in
an extremely tight range of just $3.40 in the last 10 hours -
between $1,198.20 an ounce and 1,201.60 an ounce.
Gold in USD - 1 Week
Gold is on track for its second weekly rise aided by a
softer dollar, the Greek debt debacle and the U.S. Federal Reserve
chairperson, Janet Yellen’s, dovish comments from this week’s
monetary policy statement.
The Fed said yesterday that a rate hike would come only after
further improvement in the U.S. labor markets and more confidence
that inflation would rise. The Fed is estimating lower rates now in
2016-2017, than those which had been forecasted in March. In
addition, most policy makers are in favor of hiking rates only once
this year or waiting until next year.
Shanghai Gold Exchange premiums were at $2 an ounce to the
global benchmark, from a premium of about $1-$2 yesterday. In
China, surging stock markets appear to have drawn investors away
from the yellow metal in recent months but the recent sharp falls
in the Chinese stock market may lead to renewed Chinese demand.
Gold in GBP - 1 Week
In India, gold bars are now trading at discounts, which shows a
dip in demand, attributed to the beginning of the rainy monsoon
season.
The European Cental Bank (ECB) has called an emergency meeting
today and the European Union (EU) has one scheduled on Monday.
Trying to get an agreement for Greece to meet its debt repayments
due at the end of the month is the agenda. The debtors and
creditors are deeply divided.
Gold in EUR - 1 Week
Gold has seen
safe haven haven demand increase as a
Grexit probability rises although many are surprised that the gains
have been quite muted. This may be a case of muted so far and gold
will likely outperform other assets in the coming days if the
situation further deteriorates which seems likely.
In late morning European trading gold is up 0.02 percent at
$1,200.57 an ounce. Silver is down 0.25 percent at $16.14 an ounce,
while platinum is up 0.15 percent at $1,084.76 an ounce.
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