Estimates have been made as to the cost of a Greece exit
Writes Ambrose Pritchard at the Telegraph, (Hat tip Bob Wenzel)
Eric Dor's team at the IESEG School of Management in Lille has put together a table on the direct costs to Germany and France if Greece is pushed out of the euro.
These assume that relations between Europe and Greece break down in acrimony, with a full-fledged "stuff-you" default on euro liabilities. It assumes a drachma devaluation of 50pc.
Potential losses for the states, including central banks
They conclude:
The total losses could reach €66.4bn for France and €89.8bn for Germany. These are upper bounds, but even in the case of a partial default, the losses would be huge.
Assuming that the new national currency would depreciate by 50 per cent against the euro, which is realistic, the losses for French banks would reach €19.8bn. They would reach €4.5bn for German banks.
Sounds about right.
I doubt that the US, China, and the world powers would sit back if the EU tried to "teach Greeks a lesson" by making life Hell for them.
There would be massive global pressure on Europe to handle the exit in a grown-up fashion, with backstops in place to stabilize Greece. The IMF would step in.
And here is the part to worry about.
More from Mr. Pritchard,
Needless to say, the real danger is contagion to Portugal, Ireland, Spain, Italy, Belgium, France, and the deadly linkages between €15 trillion in public and private debt in these countries and the €27 trillion European banking nexus.
The ECB will likely resort to printing of money in the scale like never before and will likely be backed by the US Federal Reserve.
If hell breaks lose and the Euro comes undone the more money printing will be unleashed by independent central banks to protect their banking system.
As a side note, this is about the preservation politically protected banking system which has functioned as an integral part of the current structure of political institutions—the welfare-warfare governments and central banks.
So we should expect markets to be highly volatile in either directions as events unfold.
Just a reminder, I bring this up NOT to scare the wits out of market participants (funny how from being a perceived Panglossian analyst, I am precipitately seen as the present day Jeremiah). Some people reduce stock market logic into a groupthink fallacy ("either you are with us or against us").
Paradoxically, the article I quoted above comes from the mainstream.
I am simply presenting the risks that faces the marketplace given the current conditions.
As an old saw goes, pray for the best, prepare for the worst.
As to whether Greece will exit the Eurozone or is beyond my knowledge. The Greek government emerging from the June elections will decide on that. I can only guess or toss a coin. But I can either act to ignore this or include this in my calculation for my positioning.
The fact is that in case the new Greek government decides to opt out of the EU, this would have a material impact on the marketplace—all over the world, the Phisix not withstanding.
Since the overall impact to the markets will likely be unknown, except for some numerical estimates to rely on (which may or may not be reliable) and where the psychological impact cannot be quantified or even qualified, such environment is called as uncertainty.
The current conditions suggests of greater than usual uncertainty. Add to that the China factor and the Fed’s monetary policies.
So, for me, it pays to keep a balanced understanding of how the local markets may become vulnerable to a contagion transmission from external events, than from blindly embracing or getting married to a single position.
I always try to keep in mind the legendary trader Jessie Livermore’s precious advice: There is only one side of the market and it is not the bull side or the bear side, but the right side
Since the markets are about managing opportunities, then opportunities will arise for profits, and opportunities will also arise for wealth preservation.
For now I see the right side of the trade as balancing my portfolio tilted towards the preservation of resources.
On the other hand, I must add that bloated egos will eventually be humbled by the marketplace.
Many of the world’s wealthiest families have reportedly been hedging their portfolios from the risks of financial meltdown via a ‘catastrophe portfolio’.
From the Reuters
The world's wealthiest families have embarked on damage limitation rather than seeking to boost their fortunes as financial turmoil erodes their riches, with some so worried they are putting their money in 'catastrophe' portfolios.
"We have to explain to our clients, it's not about making money these days, it's about keeping wealth," said Ivan Adamovich, head of the Geneva operations of Swiss bank Wegelin.
With inflation eating away at people's nest eggs and rock-bottom interest rates making living off capital increasingly difficult, many rich people are taking new risks just to stand still, private bankers said.
"We have already inflation higher than interest rates in many markets ... Unless you take some risk you will not achieve a level of return just maintaining (wealth)," Pierre de Weck, head of Deutsche Bank's private wealth management business, said at the Reuters Wealth Management Summit in Geneva.
Adamovich said a model portfolio designed to protect people's wealth in the face of global catastrophe has attracted more interest as financial turmoil spread in recent months.
The "catastrophe portfolio" allocates one third of money to gold, one third to defensive and internationally diversified blue chip company shares and a third to the debt of ultra safe developed countries.
In my view, there is NO such thing as a catastrophe portfolio or a portfolio designed to weather the proverbial storm. That’s because whether it be cash, bonds, gold or blue chips, all are subject to market or systematic risks which entirely depends on the character of the coming crisis.
Hyperinflation would be good for gold and bad for cash, but a systemic deflation from a major banking system collapse contagion would likely do the opposite. On the other hand, wars may adversely impact blue chips or transnational companies, while ‘ultra safe government debt’ could be a delusion if their welfare system has soaked up on too much debt from having an economy that consumes more than she produces or earns. Of course there are possible gray areas, such as debt defaults.
Also, since the conventional markets have been greatly influenced by pervasive bubble policies and political interferences, then my conjecture is that the ramifications from the actions of political authorities will remain as major factors in determining the risk environment.
This makes taking action from reading and analyzing the political tea leaves a better and a more flexible approach than a one-size-fit-all portfolio.
From Joel Greenblatt, author of The Little Book That Beats The Market and The Big Secret For The Small Investor, as interviewed at the Forbes [bold emphasis added]
if you look at top performers over the last decade, the top 25% of managers that have outperformed – came out with the best record for the last ten years – 97% of those top managers spent at least three years in the bottom half of performance.
79% spent at least three years in the bottom quartile of performance. And almost half, 47%, spent at least three years in the bottom 10% of performance. So all their investors left if they did that, but these are the ones who ended up with the long-term record. Most people leave them, most people don’t stick around for long enough.
Some important pointers from Mr. Greenblatt’s excerpt
Two lessons from planting (farming) which can be applied to investments:
1) time is essential or a prerequisite for a fecund harvest (in equities, outsized payoffs) and
2) we reap what we sow.
From such perspective one should realize that a portfolio built for the long term would likely undergo or endure early testing periods where underperformance represents a necessary but insufficient groundwork for prospective outperformance “Alpha”.
Next, short term yield chasing activities represents as the common sin or shortcomings by the average investor.
Little has such adrenalin rousing actions been comprehended as a tactical folly based on two cognitive biases:
-hindsight bias or “inclination to see events that have already occurred as being more predictable” (or Mr. Warren Buffett’s rear view mirror syndrome) and
-survivorship bias or “logical error of concentrating on the people or things that "survived" some process” or chasing of current winners or market darlings.
Finally, the short term yield chasing approach vastly underperforms long term portfolios (see chart from Legg Mason’s Michael Mauboussin “A Coffee Can Approach”) since this represents as high risk-low return tactic which significantly diminishes returns.
Bottom line: Focus on the long term on the platform of understanding how the market works or has been evolving. In short, surf the bubble cycles.
From one of Warren Buffett’s best advise ever:
Look at market fluctuations as your friend rather than your enemy; profit from folly rather than participate in it.
From a recent public disclosure, Bob Wenzel of the Economic Policy Journal [EPJ] lists the current portfolio holdings of Presidential candidate Ron Paul.
From EPJ,
Here's Ron Paul's portfolio:
Agnico Eagle Mines
Allied Nevada Gold Corp.
Alumina Common
Anglo Gold Ashanti Ltd.
BrigusGold Corp. Com MPV (formerly Apollo Gold Corp)
Barrick Gold Corp.
Claude Research Inc
Coeur D'Alene Minds Corp.
Dundee Bancorp
First National Bank of Lake Jackson
Gold Corp Inc
Hecla Mining Co.
El Dorado Gold Corp.
IAM Gold Corp.
Kinross
Lexam Explorations Inc.
Mag Silver Corp.
Metalline Mining Co.
Mutual Securities Inc.
Newmont Mining Corp.
Pan American Silver
Petrol Oil and Gas
Prudent Bear Mutual Fund
Rydex Dynamic Venture
Rydex-Ursa Mutual Fund
Silver Wheaton Corp
Texas Dow Employees Credit Union
Texas Gulf Bank
Virginia Mines Inc.
Vista Gold Corp.
Viterra Inc
Wesdome Gold Mines Ltd.
Ron Paul practices what he preaches, unlike many social utopians (politicians and their zealots) who lack convictions to act on what they believe in.
Mr. Paul has been mostly long gold and other commodities while short the stock market (Prudent Bear Mutual Fund and Rydex-Ursa Mutual Fund)
Importantly Cong. Paul, according to Mr. Wenzel, has held on to this portfolio mix for a long time, which means Mr. Paul's portfolio should have pretty much an above-average return, considering how commodities have outperformed stocks and bonds over the years. (chart above from David Rosenberg but goes from August 1999-2009-the big picture)
I wonder how Mr. Paul’s portfolio would fare relative to the Sage of Omaha Mr. Warren Buffett.
``I’m hopeful that the answer is obvious: the market reflects vastly more information than the individuals. Yet we persist in listening to individuals in order to explain the markets. Executives point to analyst reports or discussions in the media to try to understand what’s going on with their stock. The media find an esteemed strategist to explain yesterday’s market move. Don’t ask the ants, ask the colony. The market is the best source for understanding expectations.” Michael J. Mauboussin
I’d like to point out that NOT all bullmarkets are the alike.
Bullmarkets come in different phases which effectively translate to different approaches in the management of portfolios under such evolving circumstances.
Thus it would be a darned big mistake to treat bullmarkets like a one-size-fits-all or a “whack a mole”[1] game- where everytime a mole randomly pops out of the hole, one takes a whack at them with a mallet in the hope to score a point.
Unlike the whac-a-mole, the goal isn’t about scoring points. In the financial markets, the goal is about maximizing profits—unless there are more important sublime goals that supersedes the profit motive such as thrill-seeking or ego tripping (i.e. the desire to brag about the ability to “time the market”—which bluntly speaking is based MOSTLY on luck).
Nevertheless it always pays to first to identify the phases of the bullmarket before deciding on how to approach deal with it.
To borrow the bubble cycle as defined by market savant George Soros, we can note of the following phases[2]:
-the unrecognized trend,
-the beginning of the self-reinforcing process,
-the successful test
-the growing conviction, resulting in a widening divergence between reality and expectations,
-the flaw in the perceptions
-the climax
-the self reinforcing process in the opposite direction
Bubble cycles reveals of these recognizable patterns from the hindsight view (see figure 4).
Figure 4: Stages of The Boom Bust cycle
But unfolding bubbles can be identified real-time by the prevailing market actions, the psychology that undergirds market action, as well as economic data on credit dynamics. Remember, booms are always lubricated by credit—a sine qua non of all bubble cycles.
And this has been NO stranger to us.
For instance, the Philippine Phisix has had minor boom-bust cycles within the secular bullmarket cycle of 1986-1997 (right window).
One would note of the Soros boom tests in the two marked red ellipses which closely resembled the typical boom bust paradigm (left window).
In 1994-1997, the climax or the “massive flaw of perception” had been highlighted by the prominent label of “Tiger Economies”[3] (new paradigm) on the ASEAN-4, which of course, turned out to be a massive flop.
As a side note, let me tell you that the Philippines won’t be anywhere near a Tiger Economy UNTIL we learn to adapt and embrace economic freedom as a way of life. Boom bust cycles will not substitute for real growth from free trade. Instead what these policy induced actions will bring about is a false sense of prosperity and security which eventually will be unravelled.
Yet, if we read or watch media, and assume that the people imbues what media says as gospel of truths, then the prospects of a “Tiger Economy” remains an ever elusive dream. As corollary to this, the belief in the salvation by the political leadership who is assumed to take the role as economic messiah is a sign of either ignorance or immaturity or dogmatic espousal of superstition as truth.
Going back on how to read market cycles, the point I wish to make is that one should be cognizant of the operational phases of the market cycle, and adapt on the actions that befit the underlying circumstances.
At present, I would say that the Phisix has been transitioning from the “successful test” towards the “growing conviction” phase.
Figure 5: PSE Sectoral Groups: Industry Sector Rotation and Tidal Flows
And this phase will be characterized by sporadic explosive moves on select issues. But these activities will be rotated among specific issues or among issues within sectors.
So issues or sectors that may seem to have been in dormancy or has materially lagged will likewise see rejuvenated price movements overtime, while current market leaders may stall or temporarily underperform. Remember the axiom—no trend moves in a straight line, this should always apply. Otherwise those that manages to move in temporary defiance of this, would eventually pay a steep price later (Remember the BW scandal?). Hence, every action has its corresponding consequence.
And as the major benchmark continues to rise; the price levels of almost ALL issues will likewise keep in pace but differ in terms of degree, the timing and the time-motion of each price actions. But eventually, the cumulative actions would produce a net effect of having the “rising tide lifts all boats” phenomenon.
This has long been our Machlup-Livermore model.
For instance, today’s top performing sectors used to be last year’s laggard and vice versa (see figure 5).
During the last quarter of last year, the mining industry (black candle) and the service sectors (light orange) led the Phisix (red circle), and all the rest (red-banking, blue-holding, green-commercial Industrial and maroon-property) performed dismally.
And up to this point, last year’s top performers have essentially traded places with last year’s laggards, where the latter have taken much of the today’s limelight. Remember the proclivity of the crowd is to read today’s action as linear, hence while crowd may be right in major trends they are always wrong during turning points. And this applies both to specific issues and general activities on the marketplace.
And one of the latest spectacular moves has been in the property sector (maroon) which has likewise been among laggards going into July (the property sector was the third worst performer then).
But last week appears to be payback time for key property issues, as the property benchmark spectacularly skyrocketed by over 8% to nearly take the top spot which it now shares with the leaders.
And I’d venture a guess that based on the relative impact of inflation on stock market prices, today’s laggards will be doing a redux of last year’s actions soon.
To be blunt, the rotational effects will buoy the service sector and the mining industry. And a glimpse at the chart seems to show that such phenomenon may have already commenced!
Let me add that as the growing conviction phase deepens (I would presume that a break above the 2007 high should underscore this), the frequency of rotational explosive moves will increase.
Thus, trying to “time the market” will only result to missed opportunities, the chasing of higher prices and an increasing risk exposure to one’s portfolio.
Bottom line: We shouldn’t essentially “time” the market per se as the mainstream would define it, instead we should identify, read, analyse and act according to the whereabouts of the bubble cycle.
In other words, any “timing” must focus on the possibility of the emergence or rising risks of a major inflection point, in accordance to the stages of a bubble cycle. Meanwhile, all the rest of the one’s subsequent actions should be focused on the virtues of “waiting” and some “rebalancing”.
[1] Wikipedia.org, Whac-A-Mole
[2] Soros George, The Alchemy of Finance p.58
[3] Wikipedia.org Tiger Cub Economies
