Quick Shots - 01/Jul/2015

Greece Is Now In Default

It's weird how they've been beating about this bush but Greece is in default as of last night when they failed to pay that 1.6billion euros. They couldn't pay it because the IMF wouldn't lend them any more bail out money unless they cut pensions instead of raising taxes. The weird thing of course is that the people Greece failed to pay was the IMF. Yes, that's right, all these 5 years, the money has been cycling through Greece to keep paying its debts right back to the people bailing them out. The apparent convoluted and seemingly redundant move of money is of course because the IMF bought the Greek bonds to stop bond holders getting a haircut except those Greek bonds are tied to trillions of derivatives sitting on Deutsche Bank's ledgers and if they blow up, it really will be Europe's Lehman Bank moment.

So what happens now? There are many scenarios, but they're all made doubly complicated because Alexis Tsipras announced a referendum for his people as to whether Greece should or shouldn't accept terms from the Troika. In a nutshell, if the referendum votes No, it opens the door to the Grexit and backs Tsipras' hardball tactics with the Troika. If they vote Yes, it sort of steals the thunder from the Syriza Government. Either way it's nice to see the country that gave us words like drama and democracy is going to the mats with both.

'Prexit'

Unbeknownst to most of he world, Puerto Rico is also about to default. Once again, this one is mired in some strange complexities that make the situation worse than it appears on paper. Basically, Puerto Rico is not one of the states of the USA. It is a 'commonwealth' which allegedly means it can't declare bankruptcy like a city the USA, which means it is a little like Greece in that it can't get out of its functional union with the USA and it can't pay its debts. It's a little interesting this is coming to a head at about the same times Greece is trying to wind up its farce.

China's Share Market Crash

It was only a couple of weeks ago in the middle of June people were noticing how much the Chinese share markets had risen in such a short span of time. All kinds people were coming out of the woodwork to place bets on the markets and lo-and-behold they had share bubble going in no time flat. Now there's a big correction going on and it has sunk 20% from the peak, which is of course the definition of the start of a bear market.

I bet a lot of mum-and-dad investors in China would be spooked by that; but you had a market with terrible fundamentals drawing enormous amounts of money. Some of the companies being listed were no better than shell companies with nary a product to their name. It's the classic model of bubble behaviour when too much money is chasing not enough good stuff; that show yo get the kind of frothy market you have in China. It's like that anecdote about Joe Kennedy who sold short on equities in 1929. It is said that once he saw a shoeshine boys giving stock advice, he knew the bubble had to be over. Let me tell you they had articles about exactly that in April this year.

If you can't read tea leaves, the least you can do is read history.