Greece cannot be forced out of the Eurozone

Why the Eurozone will have to give in to Greece

  • Greece’s Government wants a managed default; not to leave the Eurozone
  • The ECB can make it very difficult for Greece to stay in the Euro,

 

BUT

 

The emperor is naked! There is no mechanism to force an exit and the ECBs supposed powers are irrelevant – see below the likely course of negotiations if they go to the brink and over it.

  1. Greece refuses to agree to austerity and threatens default.
  2. EU threatens to force them out of the Eurozone. Bluff called as there is no mechanism to force this on a country
  3. The ECB refuses to lend to Greek banks hoping that the Greeks will back down. Bluff called.
  4. ECB refuses to lend and the banks fail
  5. Immediate bank nationalisation by the Greek Government and a default on all the banks debt.
  6. This will be followed by immediate default on the Greek debt
  7. Greece then continues to use Euros within a nationalised banking industry, noting ECB can do
  8. Impact on Greece? Limited as the country is viable economically

Now, let’s watch what happens. My guess…..large amounts of Greek debt will be written-off – the market prices the debt now at 56% of face value – see here. The interest paid on this debt is now around 10%. Seems like a great deal – buy Greek debt and get 10% per annum and it’s in Euros – brilliant. Don’t do it.

Can the EU change the rules and create a mechanism to force an exit from the Eurozone? Hmmmm…….need to check it out. I suspect such a move would need to be adopted unanimously.

 

 

Bitcoin is tricky to combat – good!

Bitcoin – what is it? Think of it as a video game. It has rules but, unlike video games, Bitcoin is “distributed”. This means that the rules cannot be changed without every participant of Bitcoin agreeing. This means that the rules won’t change – ever. If there are better rules then a new Bitcoin will develop.

The rules say that Bitcoins can be exchanged, can be created and have a limit – they cannot exceed 21 million. They can be created by “hard work”, called “mining”. Basically anyone who has the funds can invest in computer hardware to create Bitcoins. The more that are created, the more difficult it is to create new Bitcoins. The return on investment, i.e. the return on investing time and money in “mining” Bitcoins, is high at the beginning and lower towards the end (on the basis of today’s technology).

What is great about Bitcoins is that they can be exchanged without banks, Governments and regulators. It is akin to barter and brings power to the people not to the institutions.

Note that should you buy Bitcoins then changing them back to “country currencies” is under attack by Governments. This is Bitcoins vulnerability but also it’s strength – if Bitcoin takes off, why would you ever want to exchange it for another currency!

 

Rise up O men of Greece!

I will not rest in my pleas to the Greek people to refuse categorically the pernicious austerity measures being implemented by their Government. Do not allow them to destroy generations of Greeks to save the bankers.

Some figures:

Greece joined the EU in 1981 and has spent at least $250 billion in defence spending since then. There debt is around $450bn. Remember that the German and French armament industry have done very well out of this as have their bankers who have lent Greece the money to gorge itself on missiles and such like. Greece is number 23 in the defence spending league!

I urge you to default on this debt! Say no to your Government now and make the Governments and bankers of the EU, the UK and the US face up to the consequences of their greed. Let’s cleanse ourselves and them in the process!

Public sector pensions – what do you mean you won’t tell me!

Write to your MP or anyone in Government and ask them for the amount that Public Sector pensions represent of total expenditure relative to the Private Sector? Will they tell you? Well your MP doesn’t actually know and can’t find out – the Treasury don’t report their figures like that sorry. They will tell you what Defense spending is but not what amount of Defense spending is related to pensions. Who asks the difficult questions of Government I wonder?

Typically a Public Sector worker will accumulate 1/60th of their final salary for each year worked. If they contribute 5%, i.e. 1/20th each year, so 1/20th of their average salary, and let’s say that their salary doesn’t increase, then for 10 years of work and a total contribution of 50% of their annual salary ONCE they receive circa 17% of their salary from the age of 60 EVERY YEAR!

Total madness whoever thought up this scheme – this is a bigger Ponzi scheme than Madoff’s!

Quantitative Easing – why?

The Government buys its own bonds from banks with money that it creates. Bond prices go up, interest rates go down and banks keep buying bonds of which there is a good supply since Governments are so indebted. The money supply goes up, there is no impact on economic activity except via two mechanisms – interest rates being low reduces borrowing costs for those on variable rates and the exchange rate weakens boosting exports. The latter is the undeclared objective – it is called “beggar thy neighbour”. It doesn’t work. When will journalists stop pandering and call a spade a spade?

Finally admission that adding money does nothing to reduce debt

UK, last 20 years. Bankers freed from regulation shower politicians with money and jobs after politics. Politicians continue to deregulate the financial markets. The financial markets run wild and start heaping debt on to debt of ever more spurious pedigree. No one is worried because everyone is making money.

Suddenly the whole thing explodes. The bankers are now in a position to ask for favours under threat of devastating the economy. 1 trillion of favours. The Bank of England reduces rates and starts pumping in money to keep up the bond prices. Woe betide us if they ever fell.

Finally, only in the last few days have articles appeared that state that Governments are helpless and that with no more to  borrow they can do nothing if the developed economies slip into recession again. Where are the bankers now? The bankers are on their boats mate!

More on splitting up the banks

Myners was quoted in the Telegraph on 23rd January 2010 as saying “The argument is that hedge funds, private equity and proprietary trading are a source of risk – that is not our general view. In the UK, the three activities were not responsible for RBS, HBOS or Northern Rock, who, on the whole, failed in the rather classic way of making bad loans.”

This is either stupid or disingenuous. Banks made bad loans because an investment bank would then, for a large commission, underwrite (using their prop desks) the repackaging of these loans to others – hedge funds, other banks etc.. Banks therefore could make any loan and flip it keeping the fee and moving on to the next borrower.

How hedge funds and prop trading didn’t contribute to this I do not know.

I can certainly excuse Private Equity from the equation – these guys are mostly borrowers and are in any case unrelated to the banks.

One very interesting and tricky issue is how can splitting up the banks by itself offer a solution to the securitisation of these loans? The answer, and Myners is right here perhaps (although he hasn’t given this as the reason), it doesn’t. Stopping banks from making mad loans and flipping them is best curbed by either capital requirements or outlawing the activity by forcing banks to hold a significant portion of all loans that they make.

Another ruse from Obama

Obama is a big disappointment. Never has someone offered such hope and disappointed more. As a master of politics he is becoming rather transparent. Two examples, first a call for a world without nuclear weapons for which he won the Nobel peace Prize (while continuing two wars perpetrated by the Bush regime). Second a call for a total freeze on all settlement growth in Palestinian occupied territories including what is termed as “natural growth”. Both these statements were clearly ridiculous.

Most recently we have “break up the banks!” It won’t happen. If I had the cash I would be long in banking shares and would have been for at least 6 months. Politicians don’t depend upon people’s votes but on the support of business and in particular the bankers. What is wonderful about this statement is that the breaking up the banks if not easy – there is a huge grey area between taking deposits and simple lending and the more exotic activities such as securitisation. This gives Obama a lot of room to negotiate with the inevitable opposition yet still come out with a win or at least what can, in time for the next election be termed one.

In my view banks that take deposits should not be able to carry out any activities apart from lending to individuals and businesses. I would exclude proprietary trading of course and any equity investments. In addition I would exclude any commission-based activities such as underwriting, broking and M&A. The later are best practiced by independent operations with no conflict of interest as it most often described (what I would describe as “unfair advantage or even insider trading”).

Who is going to support that? The people yes but politicians….? You just be joking. Viva la revolucion!

Quantitative easing – easy solutions won’t work!

Sorry to say but this one won’t work either. If the Government is a net purchaser of Government bonds (what they sell less what they buy is negative) then they are indeed increasing the cash available for purchasing other assets. Let us assume that the £75bn of Government purchases over the next few months does indeed result in a net inflow, what will happen to this cash? Will it indeed result in greater lending to consumers and corporates?

The problem is that there are too many ways that this cash can be employed without lending to consumers and corporates increasing. Government bonds are liquid – selling them is quick and easy. If the problem facing banks was that they needed to realise cash from liquid investments and couldn’t then this form of quantitative easing would solve the issue. Unfortunately the issue for banks is the extent of their non-liquid investments, so called level 2 and level 3 assets. Level 1 assets can always be sold and turned into cash.

Be a bear until the summer

One of the most amusing investment strategies that I hear today is to buy incrementally. The logic is that you won’t be able to call the bottom so invest gradually and you will at least average down if the market falls further and be in the market when the bounce happens. This investment strategy assumes firstly that the market is within 10% to 20% of its bottom and that when the bottom comes there will be a bounce of at least 20% that anyone not in the market will miss.

Anyone following this strategy should be take into account the following:

Continue reading “Be a bear until the summer”

Bail-out bill through – so why is the stock market not reacting postively?

Well of course the argument is that if it hadn’t passed things would have been even worse. This is patently not true. At its first pass, when voted out, markets fell to the level they are at now. This was before there was any hope of the bill being resubmitted. Continue reading “Bail-out bill through – so why is the stock market not reacting postively?”