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Last week was options expiration week (equities and indexes). This is the
week for market gaming as usually two things happen:
1) The Fed juices the market to provide additional liquidity
to Wall Street.
2) Wall Street uses the additional liquidity to gyrate the
markets to make sure as many options positions as possible expire worthless.
Today is Monday, which has become a rally day for stocks. However, there
are several large negatives on the horizon.
The first concerns Greece. For three years now we’ve been told that Greece
was “fixed.” It was not for the simple reason that you cannot fix a debt
problem with more debt. There are only four ways to solve a debt problem:
1) Default
2) Restructure (partial default)
3) Pay it off
4) Inflation (a default of sorts)
Greece cannot engage in #4 because, as part of the Euro, it cannot print
its own currency. This leaves one of the other three. Thus far, the IMF, ECB,
and EU Government have managed to avoid facing the music largely because
Greek politicians have been willing to sacrifice their economy in order to
remain in power.
This appears now to be changing. The current Greek ministers seem far more
willing to disagree with the Troika, to the point that there is talk of a
Grexit (Greece leaving the Euro) on the other side of the aisle, particularly
from Germany.
At the end of the day, it all boils down to money. Greece doesn’t have it.
In fact, its latest payment to the IMF was made using funds from
the IMF. The country is completely broke and has been raiding
social security funds and other Government vehicles just to keep the lights
on.
Greek banks have about 3 weeks worth of collateral on hand to remain
solvent. And the country as a whole has 14 debt payments worth over €5.5 due
within the next 10 weeks. This doesn’t sound like a lot… but for a country
that was able to only raise €450 million by raiding its municipalities in
April, it’s a gargantuan sum.
The Euro has found support at 1.05. The real issue will be just how much
Euro strength ECB President Mario Draghi is willing to stomach before he
smashes the currency down again. The lines to watch are below.
The Greek mess has lit a fire under Gold again, which appears to have
bottomed in both the Euro (blue) and the Japanese Yen (red). The one
exception is Gold priced in US Dollars mainly because the US Dollar has been
so strong for much of the last 9 months.
It is not surprising that Gold is moving higher against most major
currencies… the global Central Banks have openly declared a war on cash.
Globally over $5 trillion in bonds have nominal yields that are negative…
meaning that investors are PAYING for the right to own these bonds.
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