The big news this week was that the EU agreed to terms on a Greek bailout.
Greek haircuts vs Greek debt cuts
When is 50% not 50%? When you exclude sovereign and pension fund debt!
Sarkozy: Greece should never have been allowed into the euro zone
Sarkozy will not be in power much longer as French elections are coming up soon. What happens then? The can has just been kicked to the new leadership.
Now the question becomes who is going to buy Greek debt in the future? Anyone? The fallout from this agreement will be that the market rerates Greek and EU debt to higher yields.
We should think about what is happening for a moment. Private creditors are asked to take a 50% haircut while the sovereign nations and pension funds take none. Should this be declared a credit event? Absolutely, if it is not then the CDS market loses all of its clout and power but maybe that is what the EU really wants from this agreement.
Remember the Greek ‘austerity’ program where they are going to shift 30,000 workers to a labor reserve where they get paid 60% of their salary? This bond restructuring is a lot like that.
The press releases all look nice but when you drill down to the details you find out that appearances can be deceiving.
Let me present a quote from Slovakian opposition leader Richard Sulik, “A few years back, we survived an economic crisis. With great effort and tough reforms, we put it behind us. Today, Slovakia has the lowest average salaries in the euro zone. How am I supposed to explain to people that they are going to have to pay a higher value-added tax (VAT) so that Greeks can get pensions three times as high as the ones in Slovakia?”
Get ready for increased election and political risk over the next twelve months in Europe as a backlash begins to show itself at the polls.
I am not short the markets… yet. The market can stay irrational longer than you realize and being short is all about having your facts correct and timing. I can stay long gold and silver and patiently wait for the opportunity.
I will take the lesson from Whitney Tilson and Netflix. You can be correct on your assessment but off on timing and the market can stay irrational longer than you realize
Much like the collapse in 2008 and Netflix, this short trade will require patience and timing is everything.
So I will wait patiently for that day to come staying long gold, silver, and select technology stocks until the market turns but all the while maintaining my bearish slant on the global economy and stock market.
In any case, don’t fight the tape but as we get closer to the old highs from here it would be prudent to decrease leverage and monitor your exposure to the banking sector. Third quarter accounting gimmicks, leveraged bond facilities, and debt writedowns cannot hide the skeletons that are being stuffed into closets. At some point the closet door does not shut and the skeletons all fall out.
I will just wait over here by the door.
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