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 JULY 2015 INVESTMENT JOURNAL: TROIKA TRIUMPHS
  • Greece rejects EU bailout terms then caves to EU demands
  • China launches massive QE amid stock market decline
  • NYSE halts trading due to technical failure

     

During July, US stocks made a comeback from the late June sell-off and had 2.2% gains for the month. International developed stocks (MSCI EAFE) also showed gains after most European markets temporarily discounted Greek issues. The real story for equities in July was in emerging markets, which lost more than 6% for the month and put those markets into the red for 2015, with a year-to-date loss of nearly 5%. Most bond categories remain flat for the year, except outside the US, which have performed poorly so far this year. Lastly, commodities collapsed in July, losing more than 12% in one month and the turmoil in that asset class is widespread.    

     

 

    

Looking out over the last 12 months, you can see in the chart below that only US Stocks (S&P 500) have had a positive return at 11%. International developed stocks have been flat and emerging markets stocks have lost 13% over the last year. Commodities are still the biggest loser looking back one year, losing 38% in a severe and ongoing bear market, though with gold holding up better over the last 5 years than commodities in general.
       
      
Events in July moved at breakneck speed, and will have far-reaching consequences. As the month began, all eyes were on Greece. The results of a national referendum on July 5th produced a decisive "No" vote when citizens were asked whether if they should compromise with the country's creditors. The No camp won 61.3 per cent of the vote, sweeping every region of the country. In a victory speech, Prime Minister Alexis Tsipras said "the mandate you've given me does not call for a break with Europe, but rather gives me greater negotiating strength...but this time the issue of debt will be on the negotiating table".

  

There was a scathing response from Berlin, which has refused to provide debt relief until Greece adopts and implements budgetary reforms. Jeroen Dijsselbloem, the Dutch finance minister who chairs the Eurogroup committee of his counterparts, warned: "This result is very regrettable for the future of Greece. For recovery of the Greek economy, difficult measures and reforms are inevitable. We will now wait for the initiatives of the Greek authorities."
   
The Greek people celebrated, typified by this quote from the FT: "Now we will be free from the Troika, from Mrs. Merkel, from them all. This is the right result," said Irma, a 45-year-old civil servant. "I love my freedom. I do not want to keep having that taken away."
                
Unfortunately, as we predicted last month, when talks resumed after the vote, the Troika hardened their stance and Greek leaders caved. Greek premier Alexis Tsipras, who will now go down in history as the man who literally sold out his country, agreed to contribute 50 billion euros worth of assets to an EU supervised Athens based bailout fund, and to adopt in three days reforms which had not be agreed upon by the Greek Parliament in the prior three years.

  

All in all, it amounted to the most intrusive economic supervision program ever devised by the EU, reflecting total capitulation by the Greek leadership and blatant betrayal of the will of the people. As we wrote in last month's Journal:  "...the bank closures and capital controls...will not end until Greece lays fully prostrate before the unelected bureaucrats of Brussels. Greece will be made an example of for any other Eurozone member who wishes to combat this utterly new form of economic totalitarianism."

 

Writing in the Financial Times, editorial columnist Wolfgang Munchau quickly summarized the enormous impact of the proposed (third) Greek bailout: "A few things that many of us took for granted, and that some of us believed in, ended in a single weekend. By forcing Alexis Tsipras into a humiliating defeat, Greece's creditors have done a lot more than bring about regime change in Greece or endanger its relations with the Eurozone. They have destroyed the Eurozone as we know it and demolished the idea of a monetary union as a step towards a democratic political union...in doing so they reverted to the nationalist European power struggles of the 19th and early 20th century. They demoted the Eurozone into a toxic fixed exchange-rate system, with a shared single currency, run in the interests of Germany, held together by the threat of absolute destitution for those who challenge the prevailing order."

   

Then, on July 15th the IMF, one of the three "Troika" members, came out in favor of debt relief (i.e. write-off of loans) for Greece. In a leaked memo to EU leaders ahead of an emergency summit, the IMF said "Greece's debt can now only be made sustainable through debt relief measures that go far beyond what Europe has been willing to consider so far."

  

Thus the IMF, based in Washington DC, now appears to be actively touting a position espoused by the Obama Administration, through U.S. Treasury Secretary Jack Lew, which called for debt relief before the Greek Referendum vote. This is a direct political challenge to Angela Merkel and the German position of "no relief". It is, in effect, the first visible crack in veneer of a united Europe that may eventually threaten the viability of their socialist system. (Many commentators applauded the "new" IMF position, writing that Greece will flee into the arms of a waiting Russia if this bailout goes through without debt relief.)

  

The Greek Parliament voted later in July to accept the bailout package from the EU, guaranteeing many more long years of austerity and belt-tightening. After this capitulation, the ECB finished their extortion by delivering almost 1 billion Euro loan guarantee to the Greek banking sector. Meanwhile, Greek banks "re-opened", but withdrawals continue to be limited and no movement of capital out of the country is allowed. Very predictably, businesses are closing at a record pace, and highly paid private sector workers (like doctors) are leaving the country. Tourism is plunging in the face of a doubling of the VAT tax. So much for "growth"! Unfortunately, this is the new face of modern warfare, and Greece is just an early test for what promises to be an EU wide conflict as member states grapple with the ability to repay debt as their economies stagnate.

  

Meanwhile, the Chinese stock market declined sharply in July, now down about 30% from the mid-June peak, the steepest fall since 1992:

    

  

                                               
Many retail investors piled into Chinese stocks as prices rose, borrowing to invest as margin limits were eased over the past year. Panic selling has now ensued. The Chinese government took extraordinary measures to halt the decline, including the suspension of trading in shares for major companies and a ban on selling shares by large shareholders. The Chinese central bank and state investment funds also bought shares, in an abrupt expansion of their version of "quantitative easing". These actions have caused many investors to question the openness and transparency of Chinese markets.                     
    
Where it stops is anybody's guess, but many are predicting significant ripple effects, seen already in declining commodity prices and weaker demand for exports of all types to China. Some are postulating that the Chinese will need to sell boatloads of US Treasuries to fund the stabilization of their domestic economy, especially if consumption declines in the face of evaporating stock market wealth.

 

Lastly, investors tried to process the effect of an extraordinary three and a half hour complete halt in trading for all stocks listed on the New York Stock Exchange on July 8th. Many immediately concluded that a cyber-attack was underway, but the NYSE quickly blamed a "configuration issue" (tech-speak for updating software). The glitch reminded participants of the fragility of electronic trading. The good news is that many, many online venues exist for trading stocks now, so the interruption on the NYSE did not distort prices - other bids and offers were supplied, and investors could continue to buy and sell as needed.               
   
We hope you have a great month in August, and thanks for reading our Journal!
 
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