Markets Macro Technicals Sven Henrich

The Greek Butterfly Effect

butterflyMany times nothing happens for a long time. Then all of a sudden everything happens at once. Like a dam break. It builds slowly and then it bursts. Example: Who would have ever thought the Confederate flag would be taken down across the South during the same week that a rainbow flag is symbolically hoisted across the entire country? Just because things seem unthinkable doesn’t mean they won’t happen.

Take the global debt construct as another example. For decades the world has immersed itself in ever higher debt. The general attitude has been one of indifference. Oh well, it just goes higher. Doesn’t really impact me or so the complacent rationalize.

When the financial crisis brought the world to the brink of financial collapse the solution was based on a single principle:

Make the math workable.

In the US the 4 principle “solutions” to make the math workable were to:

1. End mark to market which had the basic effect of allowing institutions to work with fictitious balance sheets and claim financial viability.

2. Engage in unprecedented fiscal deficits to grow the economy. To this day the US, and the world for that matter, runs deficits. Every single year. The result: Global GDP has been, and continues to be overstated as a certain percentage of growth remains debt financed and not purely organically driven.

3. QE, to flush the system with artificial liquidity, the classic printing press to create demand out of thin air.

4. ZIRP. Generally ZIRP has been sold to the public as an incentive program to stimulate lending and thereby generate wage growth & inflation. While it could be argued it had some success in certain areas such as housing, the larger evidence suggests that ZIRP is not about growth at all.

If ZIRP’s true goal were to stimulate growth the result of this:

CB

…would not have produced this:

GDP vs Sales

No, ZIRP’s true purpose is actually much more sinister:

To make global debt serviceable. To make the math work without a default.

Here’s the reality: If we had “normalized” rates tomorrow the entire financial system would collapse under the weight of the math. In short: Default.

Which brings us to Greece the butterfly, the truth and indeed the future:

Greece for all its structural faults is the most prominent victim of fictitious numbers. From the original Goldman Sachs deal to get them into the EU based on fantasy numbers and to numerous bail-outs, the simple truth has always been the same: The math doesn’t work.

It never has and it never will until there is a default on at least some of the debt.

And in this context the Greek government’s move to call for a public referendum on July 5 may be a very clever strategic move as it forces the issue of math.

Here’s the strategic frame-up: Ultimately what Greece needs is debt relief. Big time debt relief to make the math work.

The global cabal of creditors, ECB, EU, and IMF do not want that. Why not? Because the very second they do this the classroom will look like this:

best_kid_raising_hand

Everybody would want a cut on their debt starting with Italy, Spain, Portugal etc. and the dominos would be rolling.

No, they do not want this as a default would require acknowledging that debt matters.

What are the alternatives? Greece’s referendum move risks putting a debt deal up for a vote to citizens. When has that ever happened? Have Americans every voted on their government’s debt spree? Have citizens ever had a say on their central bank’s policies and balance sheet expansions? The answer is no. This so ever important element of our global economic system is completely removed from voters.

And so Yanis Varoufakis is very much correct in highlighting this open secret:

No, voters are very much not permitted to participate in this decision making process. And hence the only reason a Greek referendum may actually proceed is this: To make an example of Greece. You want to default? Watch what we will do to Greece.

But that’s a big gamble for the EU, for the ECB, the IMF and everybody else including China and the US. Why? Because all of them have carefully orchestrated a construct that they do no want to see disturbed. It’s not an accident that we have seen 46+ rate cuts this year. It’s not an accident that China announced another rate cut just a day after Chinese stocks plummeted 7% this past Friday. It was no accident that the Fed’s Bullard talked about QE4 in October the moment US stocks got close to a 10% correction.

No, you see their primary mission in their timed actions and their words: To make the math work. And to continue to make the math work.

And hence Janet Yellen is not delaying rate hikes because she is “data dependent”. She is dealing in reality: Over $18 trillion in US debt (and ever growing) a large portion of which needs to be refinanced over the next 5 years. And higher rates will become an ever larger burden on the discretionary budget of the US. And the world, heavily indebted that it is, has the same problem:

Debt

Math.

So this next week is not so much about Greece the butterfly, but it is about keeping the butterfly from becoming a hindrance to the math working globally. And the Greek government knows this. They are negotiating on the basis that a bad Greek deal from Europe’s point of view is better than a default. Angela Merkel wanted a concluded Greek deal before markets open on Monday. Now she has a mess.

And in the world of gamesmanship every percentage drop in the #DAX will enhance Greece’s negotiation stance. This past week saw a massive rally in the #DAX in the hopes that a deal would certainly be positively concluded.

Now this weekend all this bullish sentiment may find itself tested come Sunday night and Monday morning unless Europe blinks quickly. China is doing its part to support the construct with this latest rate cut, but the ECB can’t be happy about its QE program challenged by the constant Greece distraction:

DAXM

As we outlined in technical charts a default of Greece would risk a structural repeat of 2011:

SPX W

And it couldn’t come at a worse time:

COMPQM

No, odds are they’re not going to let Greece default. They can’t afford to. The math has to work.

For more charts please refer to our Technical Charts segment.

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28 Responses »

  1. Seems the current Greek government is the first that isn’t willing to play the let’s-pretend-the-loans-perform game any more and attempts to “defect” from the game. Regardless of their outcome, it sets a precedent. Others will get the same idea, and not just governments. What then? Will all the world’s money-printing be enough?

  2. TINA for Greece = default.

    Burden is way high.

  3. Well written. Congratulatons

  4. Interesting how profoundly conventional wisdom assumes that a Greek default – which now appears likely and possibly even unavoidable) – is guaranteed to produce an exit from the Euro.

    If I had to guess, I’d think that the most probable outcome over the next few weeks is a practical default and a harsh Greek banking crisis, with capital controls and panic in the streets, but with Greece continuing to use the Euro as currency. Even if the ECB and IMF and European Commission wanted to throw the Greeks out, what mechanism do they have to force the Greeks to stop using the Euro? It’s a free-floating currency, after all . . . . . .

  5. A great piece. The main motivation for Troika2 was always ‘pour décourager les autres’ by inflicting merciless humiliation.
    https://hat4uk.wordpress.com/2015/06/26/the-missing-pieces-in-the-greece-v-troika2-puzzle-a-final-analysis/

  6. so what does all this mean for the US market?

    • should have maybe called it a greek cocoon, as greece refuses for years to repay along illegal banking practices, being free of the overhead, they would be solvent much sooner and these banks handcuffing everyone in debtors prison with imaginary money, could all dry up and wilt away , they are no more than a powerful puff of air, the people need to bring the banks to court, no one knows ,well a handful do,what the hell they are doing and how they took a 750 billion $ probelm to trillions and growing, we need to hose this raging fire of lies and pilfering quickly

  7. Thanks for the marvelous posting! I seriously enjoyed reading
    it, you will be a great author. I will be sure to bookmark your blog and will often come back later
    in life. I want to encourage that you continue your great job, have a nice day!

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