Yesterday morning’s indications that Alexis Tsipras had blinked proved to be correct and markets took that as the starting gun for a phenomenal rally. The CAC, the DAX and the IBEX all ended up 3.8% on the day, the MIB was up 3.4%… and so on and so forth. The broader Euro Stoxx in fact rallied over 4% and, for good measure, the Athens ASE index closed up a full 9.0%. Job done? Do me a favour!
Not that there is an agreement yet but if one should come to fruition and should it be passed by all involved, the Greek Parliament included, what do we end up with? More to the point, is a bad deal better than no deal at all?
We have been given insight into some of the general proposals – I mean general for there is nothing specific (as usual) and nothing about how what has been proposed is going to be implemented – which Tsipras has put in front of the creditors. Pension costs will be addressed, the rich will be taxed more efficiently and VAT will be simplified from the current six bands so that the frictional cost of the tax can be lowered. Somehow, this all sounds rather like what we heard five years ago, most of which was not delivered.
I am now basically beyond caring. I have spent years looking at the economic realities, as I did when the single currency was first proposed at Maastricht, and have had to learn the hard way that the “political will” does not do cost/benefit analysis in the same way most of us do. As long as the politicians can reap the benefits while the tax-payers bear the costs, all is well in the garden.
The effects of the can being kicked down the road were on display even though the it hasn’t actually been kicked yet. Spanish 10-year bonds had another storming day while Bunds were again under the cosh. The former, which traded at 2.50% last week are at 2.06% this morning while the latter are now again back above 0.9%. On Monday of last week, the spread between the two was 158½bp; this morning that number is 117 bp.
This sort of volatility does nobody any credit and it condemns traders and investors alike to be nothing but passengers in a game of high-stakes poker. The old proverb is that he who pays the piper calls the tune. Wrong! Mainstream private sector lenders might no longer be providing capital to Greece but they are providing capital to those who are providing capital to Greece. As yet, the creditors have made no concessions on debt relief although I cannot imagine that anything Tsipras laid on the table did not come with a rider to that effect.
Barely have the stock markets leapt higher when the first voices are already being heard which suggest selling aggressively into the rally. Do if you like. These markets have nothing to do with value and are all about sentiment. Until I hear the likes of Warren Buffett coming out and suggesting that stocks are cheap and worth buying, I will not be chasing anything. Anyhow, why would the DAX rally nearly 4?. If Greece does get resolved in whatever way and the euro then recovers sharply, methinks they should be going the other way. From a philosophical perspective, the Greeks gave us logic. They are now teaching us how to disregard it. I truly give up as I see Europeans begin to punt around in equities in the way the Chinese love to.
Only Fools and Horses
There has been much written about the percentage losses in Chinese markets. The Shanghai Composite shed 13% in five days which might look like a lot but is in reality no more than watching the froth being blown off the top of a glass of beer. In fact, all it has done is to give back the gains of the previous three weeks.
In 1981, James Clavell wrote “Noble House”, a pot-boiler about a trading house or “hong” in Hong Kong set in the early 1960s. It was reading that book all those years ago that I first learnt that to the Chinese, betting on stocks and betting on horses is much the same thing. Forget all the metrics used by Western analysts to price an equity. It was in fact, if I’m right, John Maynard Keynes who observed that there is nothing to be gained by buying stocks that are cheap. Money, he concluded, having lost most of his personal fortune in the Crash of ’29, is to mainly to be made by picking stocks which are going to prove to be popular. Simples!
There is currently so much monetary stimulus in the financial system that nothing is rationally priced. We can no longer see the forest for the trees. There is much talk about this and that metric and this and that economic release but overall it’s about not about a lot more than simple, old-fashioned momentum.
On French PMI and figs
This morning, French Manufacturing PMI for May came out at a significantly better than expected 50.5; the first reading above 50 since April last year and the Composite PMI hit 53.4, the highest since 2011. Does one buy on the good news or sell because it might bring the end of the ECB’s easy money period closer? Neither nor.
Markets don’t give a fig for the realities and will probably continue to act like nothing more than a bunch of teenagers on ecstasy. My guess is that we’ll rally further today and then sell off again tomorrow.
Have fun.
