Perfect Storm: Part 2

Wednesday, May 09, 2012

It's happening again. A global feel of "risk off" which is actually the sum of separate regional issues rather than a single global world shaker.

Europe now - Greece Back, Spain constant and a socialist whiff in the air. Socialist? Or perhaps just more bipolar. While right wing behaviour is easily tagged as "selfish", socialist behaviour is seldom considered such. However, TMM would wager a friendly fiver that the current wave of European socialism is about sharing someone else's wealth rather than their own. With Germany the "sharing" target of most European socialist's eyes, it is hard to see Germany following suit and moving left rather than right. At least not before the SPD win next year's election...

And who has just reappeared? Yes, that Gollum of Europe, Greece, and just like his Lord of the Rings role, this weak creature is back to twist and manipulate, follow and haunt the once strong and wise of Europe on their quest to save the Euro.

Amongst the Grexit paranoia and panic that has begun to build, TMM offer a few thoughts:

1) From the IMF/EU/ECB/German point of view, the direct cost of refusing to compromise, resulting in Syriza's reneging on the bailout agreement and defaulting is exceptionally high:

a) 70% of Greece's debt is now made up of official loans already disbursed: EUR 140bn.
b) The ECB owns EUR 40bn of Greek bonds.
c) Greek banks currently repo EUR 140bn with the ECB.

A Greek debt moratorium would thus impose exceptionally large losses on international creditors directly. To the above, the indirect costs would also be material as there is not a sufficiently large firewall to prevent the spread of contagion, nor do the Bundeathstar and EU policymakers more broadly truly appreciate the potential for contagion to accelerate beyond their ability to contain it. The magnitude of a such a sufficient policy response is just not even close to getting on the radar yet.

But even ignoring contagion, the direct costs are enough to blow up the ECB and very probably block any further IMF lending to European countries. Balancing against German arrogance/moral hazard concerns, it is not obvious that the Troika would refuse to compromise at all (despite the widely-held view that the Germans have had enough and will refuse), especially given the IMF reportedly were pushing at the last review for the fiscal consolidation to be spread out over an additional year. It is also worth noting that the cost to Europe (and especially Germany) directly would increase materially were the IMF's war chest not available for Spain/Italy.

2) The risk of Syriza ending up as the largest party - and so getting a bonus 50 parliamentary seats - is material. Assuming that they are able to attract additional support from the Left-leaning parties only (TMM don't think it is too much of a stretch to argue that the right-leaning voters are unlikely to vote for a hard Left party), and that New Democracy manage to hold onto their current level of support then on TMM's calculations a 2.2% swing from non-Syriza left leaning parties to Syriza would make them the largest party, with the additional 50 seats. That is not a massive hurdle, especially given that the momentum is now with them.

However, there has also been some dismay in Greek political and media circles at the performance of extremist parties. If Tsipras is going to be able to pick up more votes, he is going to have to seem a bit more mainstream or even more hard-left, given that the Communist party to the left of him are for leaving the EUR (he is against) and have refused to join him, while PASOK to the right of him are pro-EUR but obviously also in favour of the Memorandum. It's not easy to see whether he will pick up enough extra votes or not, but certainly very possible.

One thing that has struck TMM, in response to the German/EU statements on austerity commitment is the view that you do your homework or you leave the Eurozone. It is no coincidence that both Venizelos and Samaras have begun to try and discredit Tsipras' policy of defaulting, reversing austerity and structural reform but remaining in the EUR as a false choice - you cannot have only the good bit (EUR) without the bad bit (austerity). To reject the Memorandum is to leave the Euro.

If PASOK/ND can paint the likely upcoming election as a referendum on the Euro (to which 70%+ of Greek voters wish to keep), then the risk of an extremist government should fall, and a national unity coalition seems more likely. TMM wonder, perhaps, whether Papandreou's gambit last autumn should not have been so heavily crushed by the EU powers, for that was to be marketed as a referendum on the Euro. The Germans reap what they sow...

In light of the points in 1), should PASOK/ND manage to form a unity government, the Troika may provide a token compromise, either by relaxing a little bit or using Hollande's suggestion of a beefed-up EIB to invest in Greek infrastructure or something along those lines. TMM tend to think the latter is more likely.

3) Should Syriza manage to become the largest party, then despite Tsipras' desire to keep the Euro but default on everything, TMM reckon that a Euro exit would likely become inevitable - not out of choice, but as an "accident" arising from the following course of events:

  1. Troika refuse to back down on austerity.
  2. Default on ECB/Troika causes a lot of name calling & anger in Europe and elsewhere.
  3. Bank runs in Greece accelerate further.
  4. The ECB refuses to accept defaulted debt as collateral, cutting off the Greek banking system.
  5. The inability to access the ECB window means that de facto Greece is no longer part of the monetary union, it merely uses the Euro (like Montenegro).
  6. The resulting EUR140bn funding shortfall forces a sudden stop in the Current Account
  7. Imports collapse as payments cannot be made due to bondholder court judgements freezing payments.
  8. Food/fuel shortages, power goes off... riots move to a far more severe intensity. Perhaps the Army seize control, TMM do not know... but it seems reasonable to assume that during the political chaos a Euro exit would seem inevitable.

TMM's personal view is that a compromise of sorts will eventually be made because the costs in this gigantic game of chicken are astronomical on both sides, with some form of unity government formed that has a small bone thrown to them. It is paramount that ND/PASOK portray a new election as a referendum on Euro membership. And we should monitor the press over the coming weeks to check this. If the discourse in the media does not take this form by a week or so before the election, then TMM fear that Syriza will be able to consolidate its position and pick up the extra votes needed to become the largest party.

What to do? In the case of Syriza becoming the largest party, TMM will look buy a ticket to the theatre, buying downside in S&Ps and shorts in EM. TMM do not think trying to trade European assets directly is the right thing to do here given a lot is priced into them, and there are many uncertainties around capital controls and other legal aspects.

Should the discourse move towards Euro membership, then TMM do think it's worth trying to fade some of this Grexit paranoia. In the meantime, given that Equity Long/Short guys do not seem particularly exposed to risk (and large net-longs from this investor base have typically been seen into the larger risk aversion events since 2009)- see the Russell performance yesterday), increasing open interest in Eminis into the sell-off (argues either or both of gross book expansion beta hedging and new shorting) and general excitement on the IBs about range breaks that in the short term it looks a bit overdone to us.

Posted by cpmppi at 2:16 PM  


It always make me shudder when the rationale underlying a game of chicken is 'surely they're too smart to go over the edge'.

Anonymous said...
2:59 PM  

Your previous posts were to do the exact opposite. Is there a danger of reacting too much and ending up following the news? Once you get into the wrong rhythm, it is sure difficult to snap out of it. Everything you do will end up being wrong. Best thing to do is nothing for a while maybe?

Hotairmail said...
3:42 PM  

Hotairmail.. did you read the post correctly? We haven't changed our view. We have laid out a set of scenarios with what we would do in each case. The "play the short side" is only conditional on Syriza gaining control.

Our chosen favorite outcome is compromise both internally and externally because of the costs to all.

So.. to put it VERY CLEARLY in media sound bites, which everyone seems to need these days rather than considering nuances, J B T F D (see glossary)

Polemic said...
4:28 PM  

How about some $TEF with that nasty $STD?

Anonymous said...
4:53 PM  

wow good timing.. uncle sam came in with the buy orders, even for GDX!

But this greece stuff does get me worried, thanks for the additional info i guess i have to pay attention to this now

abee crombie said...
5:04 PM  

Analysis: Greek euro exit seen manageable, not catastrophic

some ppl believe this. Not me. I really think the banking system world wide will blow up if they leave the Euro but hopefully I am wrong

abee crombie said...
5:39 PM  

C says'
Some history.
Greece/Cyprus actually don't give much of a damn about the Euro and staying in it. They do care about staying in Europe though and probably for the same reason.A reason that is has now as it was years ago when they both took the dive. That reason to a significant degree was Turkey. They do not want be in a world where Turkey is growing stronger as they grow weaker and they certainly don't want that if Turkey were to swing more to the extreme on religion.
They both have Turkey looking at them from their back garden and they both remember well their historic relationship with Turkey.
The right and central parties should wave the Turkish threat falg to remind the voters exactly what else they get from being in the European Aid camp.

Anonymous said...
5:40 PM  

C says'
Come on LB spit on that DXY please and help me out here .

Anonymous said...
5:43 PM  

"In the meantime, given that Equity Long/Short guys do not seem particularly exposed to risk (and large net-longs from this investor base have typically been seen into the larger risk aversion events since 2009)- see the Russell performance yesterday), increasing open interest in Eminis into the sell-off (argues either or both of gross book expansion beta hedging and new shorting) and general excitement on the IBs about range breaks that in the short term it looks a bit overdone to us."

Sigh, I've read that three times and it doesn't make any sense. I thought I knew macro trader-lingo.

Quant said...
5:48 PM  

An excellent, well-thought post amidst all the noise.

willem said...
5:57 PM  


I went from gloom to doom to a bit of vroom in the space of 3 sighs.

Thanks for taking the time on this one, chaps.

ntwsc said...
6:15 PM  

C says'
We needed something to blow back down to test Ftse 5500 .Ok,done that,now if we are all duly bored with European walls of worry for the time being what say we give shorty some brown underpants?

Anonymous said...
6:39 PM  

Trouble is, there's another footsie gap a lot lower down.

Only sayin ;)

ntwsc said...
6:51 PM  

LB spent the opening half hour in NY looking at the screen and watching all his limit orders filled in no time at all and then going "Cor blimey, Guv'nor! I've really got a fakking big plate full of Paella and escargots now".

Selling now b/c Greece is in a bit of a pickle really does seem a bit hysterical at this point. It's not like we are sitting here buying shares in NBG or any super dodgy US crap. We did buy TOT, ÖMV and more TEF, among other things.

As for the blokes who bought my long bonds this morning, LB says Cheers and YOURS! It was worth the wait.

EEM and EWJ are joining GDX in the bouncy house. [TMM, we need a bouncy house pic for tomorrow's post]. I expect we will see Europe join the party in the morning, especially after more non-apocalyptic Chinese data. Then we might see Mr Shorty get a visit from Cold Steel.....

Leftback said...
7:04 PM  

Syriza isn't just "hard left". They are ACTUAL communists. They even have a Maoist party in there.

You must understand that their perception of how economies work differs radically from ours. So dropping off the edge might actually be seen as a bonus for them, as it would allow them to, for example, nationalize the bank system.

Anonymous said...
7:18 PM  

LB thinks we are well and truly in a sort of Cold War type situation in Europe where Mutually Assured Destruction awaits all of the participants if the bailing and can-kicking ever stops. So we would suggest that it will not stop, at least for the foreseeable future. We therefore suggest fading these extreme TEOTWAWKI trades. The big tell for LB will be to see a reversal of the recent Yennish trend, as proof that the long slow retrace from USDJPY 84 is now complete.

Looking around the globe, we don't really like FTSE or ASX much, too much commodity exposure there. We still don't like the US b/c too many punters have rose-colored spectacles on. So if we were going to punt in an index fund it would probably be China, India or Japan (or even core Europe). For the time being at least, we are more than eager to unload our stores of US Treasuries to those timid souls who would like to take them off our hands.

BoE to announce QE in the morning. You can hear the printing presses rolling....

Leftback said...
7:22 PM  

C says'
LB, I appear to be batting 3 from 3 this AM,in no particular order,India,Japan, and China with some adds to Ftse picks which have held relative strength in the pullback todate.

Anonymous said...
7:45 PM  

C says'
As for "TSIPRAS" all we need to do is wave a picture of his grandma looking worried as 3 Turkish blokes stroll past her gate and he's toast.

Anonymous said...
7:48 PM  

Great post.

Direct costs to the IMF/EU/ECB of a Greek exit are currently higher than I had recognized. So far Greece has not appeared to exploit their positional power but potential new coalitions seem far less passive.

Woj said...
9:03 PM  

Did some index fund punting from the long side for the first time in ages. Nothing especially clever here, just one of those things that tends to work more often than not at low Tsy yield extremes like this one.

Leftback said...
9:05 PM  

Point to note: SYRIZA cannot gain the extra 50 seats, even if they come first in the next round of elections... Some sort of regulation to do with the fact that they are a collective of parties, not a coalition. Sorry to throw a spanner in the works :)

Anonymous said...
10:16 PM  

Point to note: SYRIZA cannot gain the extra 50 seats, even if they come first in the next round of elections... Some sort of regulation to do with the fact that they are a collective of parties, not a coalition. Sorry to throw a spanner in the works :)

Anonymous said...
10:16 PM  

Point to note: SYRIZA cannot gain the extra 50 seats, even if they come first in the next round of elections... Some sort of regulation to do with the fact that they are a collective of parties, not a coalition. Sorry to throw a spanner in the works :)

Anonymous said...
10:16 PM  

though buyers in US have been present for the past few days (seen on the ramp up at certain times in the day) i am not sure what charts LB is looking at regarding EEM, EWJ or India. They all look pretty bearish to me. I am erring on bullish side but this 'testing' is uneasy on the stomach

I'm not liking where reds are going either

abee crombie said...
10:40 PM  

A couple of highly especulative thoughts. Does the "responsible and patriotic" guys from Pasok/ND truly wants to win? I am realy sure that this guys are above this kind of machiavelian gamble with the country, but wouldnt It be better for them to wait on the sidelines for now, wait for the whole thing to implode and then come back as saviours of the new drachma with the possibility of presiding over the eventual recovery instead of the long (and dubious) path to internal devaluation?
And what if the leftist turns the whole "referendum on the euro" as another example of how the center is just a puppet of Berlin?
I also wonder what will happen to the "firwall" if and when the average german discover that the money they lent to the greeks is basicaly gone and, on top of that, there is another holes to be closed on the financial system and a bigger funding gap on the periphery...
As for the concern with the short term adjustment of the current account, I wonder if Moscow or Beijing would let this once in a lifetime opportunity to gather the eternal gratitude of the Helenic republic. News about the death of History have been greatly exagerated. And, if that happens, Washington (and eventualy even Brussel) is not going to be very concerned about "moral harzard".

Anonymous said...
3:14 AM  

If Syriza can't form a government, then that throws the ball back to the more bail-in oriented parties once more. It will take more than a few mis-steps right here and now to produce a Greek exit in the immediate future, and the market may start to notice this, starting tomorrow.

In the mean time one or two sharp eyes may notice a spot of, you know, commerce and economic activity going on in places like Asia, with people using energy and also companies making profits.

The talking head universe and blogosphere are astoundingly negative, with many of the same InvestTools™ now negative again, who were all over this market at SPX 1420 but hated it at 1200.

That's how we see it on this rainy night in the US. Don't be surprised if we wake up in the Bouncy house and there is a bit of Cold Steel before long.

Leftback said...
3:49 AM  

The jury is still out on whether my entries yesterday were too early ,or not ,but technically there was nothing wrong with them and frankly you either have to take them consistently when they say "go" ,or you should do something else like needlepoint.

Greece,no exit ,no exit,no exit. Large non voting element from the
1st election will vote to stay because the Turks are still out and Constantinople to Instanbul might as well be yesterday to a Greek. All the politicos have to do here is start thinking up new Turkish names for Athens and they will be comfortably.Just find me a Greek/Cypriot who can resist throwing their arms around when Turkey enters the conversation and you will see what I mean. Europe is more than just a Euro indeed the Euro is the very least of it.

Anonymous said...
7:19 AM  

C says'
In any case this is more than Greece. My comments the other week about Spain have become extremely topical when the auditors pushed the eject button on Bankia.One can only see more forthcoming in similar vein for the other Spanish banks as it appears the game of pretend we can sell this crap at current book value appears to be coming to it's natural conclusion.

Anonymous said...
7:49 AM  

Won't be putting trying to catch any knife around here....that is 2-3 week plays...Sorry Polimec,watching the lean hogs open interest doesn't interest me one iota, first chance I get to hit the bid...just watch this...

Amplitudeinthehouse said...
8:04 AM  

Just posted this to the wrong article so definitely need that second cup of coffee to get going.

Can understand you view,but not everything out there is a "knife".
For example,I've been backing basic food sellers like SBRY and TSCO in the weeks behind because these guys could find the blowoff in comms and now oil a big help in holding margins moreover people still need to eat.Meanwhile they pay off around 5% at these levels.
In other places like Japan /India/China same story for me,but also their banks for the most part are not up to their necks in crap so any monetary loosening will help them and I'm sure that loosening will be on the way much sooner than later now.
For me we are now firmly in a game not of all boats being floated ,but one of picking and running then repeat and wash based upon seasonlity and policy expectations.
I also have limit orders to be filled on energy ,but not yet !

Anonymous said...
9:08 AM  


When trading from your angle,agree..though I don't trade single quick those guys.

Amplitudeinthehouse said...
10:04 AM  

C says'
Come on Merv tell us what we already know!

"Single names" ,well I suppose so,but actually it's more sectors
1st and names 2nd and it isn't something I do all the time to the same degree.
When every boat is floating so to speak I have a different approach,but in markets like this I change weight and tactics.

Give me a right good blowoff and I will wake up on morning one doing something different again. Probably getting limit orders filled on energy and small cap etc .

It's never going to make me into a Soros ,but it does appear to work.

Anonymous said...
12:05 PM  

C says'
Thanks Merv,quick ,but useless as usual.

Anonymous said...
12:15 PM  

C says'
Only in the interests of combatting the intelectually challenged garbage in the media let me tell you how hard/impossible it has been to ,in no particular order;
1.Get booked in Ile de Re Saint-de Marie this summer - the French are obviously suffering !
2.Get booked in Italy with a quality hotel this summer.Some availablility but apparently running out quickly as Luigi and mates are holing up where the tax inspectors should have no problem finding them.Look for the car with the horse dancing on it's bonnet !

Yes,it's really tough out there !

Anonymous said...
1:04 PM  

worth a read for all us armchair quarterbacks on greek politics...

Anonymous said...
1:11 PM  

C - not sure it should be a headline or a footnote, but by exercising the BFA converts rather than diluting Bankia equity they saved the latter's equity holders at the expense of the stubs of the original cajas that owned BFA. Not often you'll see that in this world.

Charles Butler said...
1:48 PM  

Isn't this market fun? (NOT). LB did tell you yesterday that we fancied a day in the Bouncy House:

Bouncy House

When we are thinking about Spain and Greece, it really helps to listen to some people who actually know something about it, like Charles Butler on Spain for example, and TURN OFF THE TELLY!

Leftback said...
2:46 PM  

We sold all our US fixed income yesterday and suggested Japan, India and China as longs, to go with our Spanish paella and a few energy stocks.

Let's see how we did, kids:

US 10y yields up. Check.
EWP up. Check.
EPI up. Check.
EWJ up. Check.
XLE up. Check.
FXI/EWH down. Miss.

5/6 gets you a 1st at most British universities! (We won't get into a discussion of US grade inflation).

Look and learn, punters, look and learn.

Leftback said...
3:01 PM  


Got a candy rush?

Markets fun,yes they are,they really are as long as we remember to smile at the losses as well as the gains.
Yesterday and this AM we had above average hedging/shorting and the problem they have now (and have we not all had it at some time) we are at Thursday and our position is going against us with a weekend looming so what do you do if you wake up Friday am and the Asian markets have already done it for you as well? That's why the most important day of the week imo is always Friday.

Anonymous said...
3:13 PM  

Watch Walmart close a gap in Food retailers and watch Wells Fargo which I think may go for a new high because it is ahead of the game on lending in the US.

Anonymous said...
3:22 PM  

C says,
By the way LB that's bad advice to stop watching the media.Pretty often you can by watching the media get a feel for the kind of tempo of emotion they are creating amongst the market and although I wouldn't rely on it solely it's actually one of things I like to see and particularly when it arrives at technical points as well. It's not foolproof as nothing really ever is,but it does appear to have the probabilities running with it.

Anonymous said...
3:26 PM  

Actually we are always smiling, "C" and today's comment above was tongue-in-cheek. Nobody could actually be that obnoxious, not even LB....

So we are just having a little fun and trying to reduce the tension. Knife catching is a tough occupation.

Leftback said...
4:30 PM  

interesting to note that even Cisco is hinging its forecasts on the Europe debacle (and to a lesser extent India) .

More risk on/risk off type talking. Everything is so self reinforcing.

abee crombie said...
4:46 PM  

RORO, baby.

China industrial production tonight. After last night's import/export numbers, expectations may be low for this data point. It was interesting that markets didn't sell off on the bad news.

No data in the US until Empire State Tuesday and US IP on Wednesday. Seems as thought this market is ripe for a relief rally. Check the fibs. SPX 1379-1383 look like the numbers.

LB trying to hit singles here...

Leftback said...
4:57 PM  

lak still call for a recession soon.

Triangle in Spoos.. hopefully we get some resolution tom

abee crombie said...
9:57 PM  

Can't remember who it was (abee?) who said in the comments a few days ago that US structured credit was a nice recovery play, but a tough nut to crack. Well ... that was prescient, wasn't it?

Dee Dee Humberside said...
11:28 PM  

JPM! Series 9 the gift that keeps on giving

Anonymous said...
12:39 AM  

LB would like to be the first to use the phrases: "Jamie Dimon", "massively over-rated" and "arrogant c*ck-s*cker" in the same space. [Looks around for black helicopters]. Perhaps this complacent c*nt will now send his 20111 salary and bonus back to his shareholders. (of whom I am not one).

It seems as though the London Whale was recently harpooned. It also appears that they were engaged in something rather banal and idiotic like interest rate swaps that went bad. If any of us did that we'd be up the creek without a paddle. This is going to bollix up the markets for about 24 hours tomorrow. Then we'll get back to stuff to that actually matters.

That's the news from NY. It did stop raining, though, so we have that going for us.

Leftback said...
2:27 AM  

Why such use of the C word? Is this a British thing?

Steve said...
2:54 AM  

Several thoughts. It's hard to know how big this is or how "contained" it will be, but you can bet Bernanke has known about this steaming pile for a while. It is likely that this brings QE3 closer, and that we will see gold strengthen. Just a guess.

Thank God we don't own any US banks. Likewise, absolutely zero positions in US credit as of yesterday. Finally, almost a relief to have been taking on risk in Europe of late, rather than the US.

We can probably expect US HY credit to cease defying gravity, at least for a few days. Mean reversion can often provide some nice trading opportunities. This may end up being another Soc Gen/Kerviel, which incident had a half life of about 5 days, before we got back to macro fundamentals.

It does seem that the Volcker rule should be amended again, perhaps to include the removal of one CEO testicle for each Rogue Trader incident > $1B?

Leftback said...
2:55 AM  

Why such use of the C word? Is this a British thing?

Typo. We intended to invoke the English king, Cnut.

Leftback said...
2:57 AM  

Chinese inflation easing. That raises the likelihood of easier monetary policy. Industrial production data out in a few hours, and that might be the most important macro data of this bizarre week.

Leftback said...
3:26 AM  

C says'
Remembering to smile ,flatten this weeks entries ,yours. That's me for the week.

Anonymous said...
6:36 AM  

As for Dimon he typifies everything that is still wrong with Corporate banking .Not that is that he can make mistakes which we all can,but that he remains an arrogantly overpaid mediocre talent. JPM must stand for (J)ust (P)isspoor (M)anagement.

Anonymous said...
6:55 AM  

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