Quick! Buy the dips!
It didn’t take long for everyone to turn bullish again.
Greece agreed last week to continue half-heartedly trashing its economy so as to bail out the idiots who gave it all that money in the first place. Suddenly, the world was saved. The euro surged, along with most other ‘risk-on’ plays.
The analysts rushed to play catch-up. As Neil Hume observed on FT Alphaville yesterday, investment banks have now produced a swathe of bullish notes for the second half of the year.
All’s well that ends well, eh? Perhaps not quite. The Greeks may have been saved from default for now. But there’s a much bigger country currently wrestling with the spectre of technical bankruptcy.
The United States of America.
Europe manages to kick the Greek can down the road again
Europe has found a solution to the Greek crisis. That’s their story, and they’re sticking to it.
I’m not going to bore you with the details because frankly they don’t matter. The point is that most holders of Greek debt have now agreed to ‘roll it over’. In other words, as their existing holdings of debt mature, they’ll buy new stuff.
This ‘voluntary’ roll over would mean that Greece won’t be deemed to have defaulted on its debt.
S&P warned yesterday that this was patent nonsense. No one in their right mind would lend to Greece right now. That’s why two-year Greek bonds yield upwards of 20% in the market. So the rollover would count as a default in their book, at least temporarily.
The worry then was that the European Central Bank (ECB) would stop accepting Greek bonds as collateral for other lending. That would basically destroy the Greek banking system. However, it looks like the ratings agencies will be drawn into the big Greek fudge too. The ECB has said it will continue to accept Greek debt as collateral unless every agency deems Greece to have defaulted.
So the market’s off to the races again. Trouble is, another default deadline is looming. The US only has until August 2nd to agree to raise its debt ceiling, or it’ll run out of money.
People were worried about Greece being the sovereign version of Lehman Brothers. I’m not sure it’s possible to extend that metaphor far enough to describe what a default by the world’s biggest economy might mean. (You can check every day how both Greek and US long-term bond yields are doing.)
The US is not going to default on its debt (not this year anyway)
In the US, the politicians are still trying to find common ground on the country’s huge deficit. At one level, the debate over America’s debt is utter nonsense. The US debt ceiling (just above $14 trillion) is self-imposed. No one external is refusing to lend to the US here. The US just has to ask.
But at another level, it’s quite unnerving. If Greece teaches us one thing, it’s that markets care at least as much about appearances as they do about reality. The reality is that Greece is bust. However, if it can keep up a pretence of being solvent long enough, then everyone in the market hopes they can be long gone from the scene of the crime before someone else has to pay to clean up the mess.
Same goes for the US. If we reach 2 August and a deal isn’t done, then the US either has to stop paying some internal bills, which could cause chaos. Or it might stiff its foreign creditors. Which would be even worse.
Either option has disaster written all over it. And that’s why it won’t happen. If a bunch of feuding sovereign nations and their banking systems can get together and come up with a half-baked plan to sweep an economy that actually doesn’t matter under the carpet, then the politicians running the US should be able to reach a compromise that avoids financial armageddon.
However, that won’t stop markets from worrying about it as we draw ever closer to the deadline. So I wouldn’t be surprised if this burst of post-Greek relief gives way to more fear very shortly.
Global growth is still looking peaky
Particularly as concerns are growing again over the state of global growth. Australia’s central bank decided against raising interest rates again this morning. Up until a couple of months ago, another rise was seen as a foregone conclusion. Now the pundits aren’t so sure. Australia is dependent on China for its growth. With China warning of further rate rises to tackle inflation (also this morning), a slowdown would hit the country hard.
I’ve spent the last couple of Money Mornings writing about ‘buying low, selling high.’ Even if you are optimistic about growth prospects around the world, it’s hard to argue that growth plays are cheap.
What does look unusually low just now is the US dollar. If fears for the global economy grow, and the US manages to end the melodrama over the debt ceiling, I suspect the dollar could get quite a bit stronger towards the end of this year. We’ll look at what a stronger dollar would mean for your portfolio in the next issue of MoneyWeek, out on Friday (if you’re not already a subscriber, subscribe to MoneyWeek magazine). Meanwhile, if you are interested in playing currencies directly, you should be reading our free email on spread betting tips and tactics, MoneyWeek Trader.
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