Double Dip Recession and Greece

Sometimes I feel that we are talking ourselves into a double dip recession! Spanish and Italian bond yields up again. VIX up. Europe is a ticking time bomb, the US will keep hitting its debt ceilings, just like they did in August 2011 and 2012. There will be a strong smell of bullsh!t at the teddy bears picnic.

And how can the USA be allegedly recovering while Europe is shrinking? All the big yank companies have huge exposure to the shrinking eurozone. Spain’s 24% unemployed people won’t be buying Dell computers, Microsoft software or Apple iphones. They won’t be taking their kids to MacDonald’s or buying them Coca Cola.

Are the PIGS, Portugal, Italy, Greece, and Spain, going to be the trigger point for a 2010 economic collapse?  Portugal, Italy, and Spain have serious structural problems. It is possible that these all come home to roost all at the same time in 2013. If it does I would not be surprised to see the Euro fall dramatically and the Dollar surge higher. While bubbles lead to deflationary spirals and bailouts lead to inflationary spirals we may be at the tipping point of which is really going to take hold, inflation or deflation. No one has ever been able to offset deflation, ever. So, why do so many people think that we can offset the deflationary spiral now? This is going to be interesting to say the least….my suggestion is to follow the trends and let the markets tell us what to do and how this is going to unfold.

Remember, Greece isn’t the Only Problem

While the debt situation in Greece is plastered all over the front pages today, remember that they are not the only problem. Their European neighbors in Portugal, Italy, Ireland, and Spain all have massive debt problems as well.   Japan is another one with huge debt problems and they have been in a massive deflationary spiral for decades. And the US has more than its fair share of problems as well.

Here in the US alone we have Trillion Dollar deficits as far as the eye can see with no end in sight. On top of that several states are in huge trouble, as well. The main point behind this post is that there are many more shoes to fall both in the US and abroad. So, keep your eyes open and realize that there are still substantial risks to this recovery and the global economy.  The question is now will these countries make the tough decisions necessary to get themselves back on track or will they destroy their currencies by borrowing more and printing money? I haven’t seen any tough decisions made yet…

I dunno why we ever lend to the Greeks…according to one article I read they have spent 50 of the last 200 years not repaying their debt. A poor credit risk if ever there was one.

It is like giving the local gambler, £100 whenever he asks, they have a history of poor money management, people retiring at 53 on 95% of their salary, billionaires paying less tax than a cleaner, strikes me the reason they are moaning is not that they are facing austerity measures more a reality check!  It’s hard to imagine how pissed off the Greeks must be life as they know it has been turned upside down, yes we have all read the stupid way they run business and crazy pension schemes, it reminds me of the parallels between world economies and the premier league, unfortunately Greece have done a portsmouth.

And it also seems most countries economies are run with the same ineptitude as most football clubs the sums do not add up and this is why a lot of people are coming up with the A scenario, politicians are just not qualified enough to make the correct decisions to steer us out of this crisis and it’s even worse if your politicians are wearing handcuffs i.e. from the European Union or as in our case from the European Union and from our own making in electing a coalition government.

I suppose what Greek people have to accept now are the effects of default and exit – lower wages cuts in this and that – but remaining in euro with support of big countries. but they are still going to be expected to pay back money, which they simply haven’t got, and will not have. So yo no comprendo…

In any case I’d be careful about shorting this market, whatever comes out of Greece and let’s face it it’s not going to be good with unemployment running at 22% and a party who intends to throw out any non Greeks, doing well in the polls.  The problem is that the Euro countries are simply throwing good money after bad imo, you keep bailing banks countries out,it will come to a point, where nobody will be able to pay anybody back and we will see a crash that will make 08 look like a blip,this is pencilled in to happen in 2013, can’t remember where I read the 2013 quote now but i suppose it is possible…

The Greek/Spaniard living next door to you owes you a money, he can’t pay you back because he’s doesn’t have a job and is spending more than he’s earning. He’s getting £100 a week in benefits but its costing him £110 a week to pay his bills. He’s going £10 deeper into debt every week. Would you lend him more?

Having said that it was only 13 years ago that Russia defaulted and went bust. Look where they are now. Same for Argentina and Iceland. Countries soon recover. The issue for us is what happens to the debt and what effect it has such as bank bail outs. In other words the debt gets passed to tax payers in other countries and bank shareholders.

The consequences inside those three countries shortly after default was food shortages, very high unemployment, high inflation and very reduced social benefits. Beware companies that trade inside Greece such as GBO?

What would have happened if the UK banks (RBS, Northern Rock,etc), hadn’t been given any bailout?

Thousands of businesses would have gone bust, it would have infected other banks causing thousands more businesses to go bust. There would have been an inability of some remaining businesses to pay wages to staff or to pay their suppliers causing food shortages in shops & fuel shortages – in general a deep depression or worse.

Is Italy the next Greece?

Last week over lunch a friend who is an analyst for temporary staff consultants said that the trends in Italy indicate that the industrial and commercial economy has been growing by 7% year-on-year for at least 5 years. This is a marker for growth. It may be that other older industries are slipping and shedding staff. The optimism is that there is some growth in Italy that is absorbing some unemployment. His conclusion FWIW is that Italy is not the problem country. If he is right, then IMHO Italy will benefit from losing Berlusconi and if it can collect taxes, get tougher with public sector and the corruption in the south etc they can fix it.

Update June 2012: I think there’s a fresh load of sh!t heading right for the debt fan. Merkel and Sarkozy have had a divorce, this new French bloke Hollande doesn’t want to impose austerity to bring his country in line with EU legislation. Someone needs to tell him that you cant spend more that you earn. Then of course we have our old friends the Greeks waiting for handouts that they will never be able to repay, and (the market seems to have forgot them) now their Spanish cousins waiting for the opportune moment to throw the biggest load of sh!t yet. I’m keeping my head low ….Ho! And, if that’s not enough don’t forget that yank debt clock is still ticking very fast towards its upper limit which will be hit later this year.

Comment by trader Henry: Does austerity work? Once you borrow you have to pay it back & if you borrow too much it causes pain when your debt is called in. If you don’t do it voluntary you will have it imposed on you. Bankruptcy is always worse than an IVA but the terms of an IVA are very strict such that if you default you do go bankrupt. The UK took the pain in the 1970’s by sticking strictly to what the IMF imposed on us. Many others have had to take the same pill or they have gone bankrupt through lack of discipline. You can’t expect to grow your bank account while paying back huge debts so its a case of accepting austerity until the debts have been unwound. The UK, US & PIGS are no exception. There is no other way – pay back your debts or go bust.

The problem with Greece is there’s nobody left to pay the debt. They’ve put the keys through the letter box and walked away. The creditors will be left holding the baby. I see the Greeks throwing their toys out of the pram but in the end they have to default or accept the austerity imposed by the IMF. If they go for bankruptcy no amount of civil unrest will stop the supermarket shelves from emptying or having no money to pay wages for teachers & health workers. Their imports will rise to prices they can no longer afford and their businesses won’t be able to get loans for working capital. Its Argentina/Russia/Iceland all over again.

Update August 2012: Visitor Comments:

– Picked family up from airport yesterday after holiday in Crete. They spent time with a Greek business couple who say hotels are less than half full and are worried they will not earn enough money to see them through winter, talk of paying back handers to get ‘better’ medical treatment, fires started by ‘opposition supporters’ to scare off tourists and the tax man randomly demands taxes from local businesses that they can’t pay. Does not paint a good picture.

– Had lunch today with someone from Spain. She said that she was pretty sure Spain would need a full bail-out quite quickly and confirms there are simply no jobs. She said they already have a lost generation. Her kids are 13/11 and bilingual…she thinks they will come and work in UK or abroad. The press in Spain suggests that the ratings agencies are creating a problem with their constant downgrades. She is an English teacher, so is coming at this purely from what she sees and reads.

Update September 2012:

Comment by trader Henry: ECB gets its money like any other central bank. They have control over interest rates and money supply, so they can print or remove whatever is needed – cash or bonds. They were set up as lender of last resort to the EU banks but that duty has now been extended to EU states. However, banks or states that want last resort support have to ask for the bailout and all usual strings are attached to the loans (bonds buying). If I put my socialist hat on I’d say those strings are usually aimed at making society poorer in the short/medium term. The end result is inflation – it’s unavoidable in the long term. Oil & food will go up. Equities will go up. Wages will go up. But only over the longer term.

Imo a similar solution will result in the US as a means to avoid the F/C. Similar is going on in the UK with our continuous bond printing. Inflation, inflation, inflation. It’s the easiest, most politically acceptable way to reduce debt. A decade of 4-5% inflation and you’ve cut your debt in half. From an investor’s perspective, I see solid blue chips as inflation protection. That is why I believe large market caps are outperforming AIM at the moment and will do for some time.

The latest move on the euro zone’s bailout fund means states won’t go bust or leave the Euro but it will mean more austerity if they want support. Short term that may hurt equities earnings.

Update June 2013: 

While the PIIGS (Portugal, Ireland, Italy, Greece, and Spain) seem to be dominating the headlines right now I warned about this months ago.  I also think that we should pay particularly close attention to how this plays out and everything that is going on over in Europe because there are similar problems in the US. It is only a matter of time before they will have to implement austerity measures, (cuts in gov’t spending) which should cause unemployment to increase again and pressure on house prices.  While the Fed has done a masterful job of putting a band-aid on this problem they haven’t cured it by any means. Long term I am still bearish.  I know it sounds crazy but that’s what I see happening.  My point is that you should enjoy this rally while it lasts because this isn’t going to end well when the music stops. Until then I have no problem playing the long side…