Musings on Midyear and the Greek Crisis

July 1, 2015

What is it about the cusp that separates the first and second half of the calendar year?  The Greek government’s failure to meet its debt payment to the IMF on June 30th brings to mind the devaluation of the Thai bhat on July 1, 1997 that lit the match and ignited a devastating Asian debt crisis.  Most times in my experience, an event fraught with risk that is known to the market well in advance tends not to cause havoc.  The Y2K scare is one example, and July 1, 1997 had been circled on calendars more than a decade in advance because that was when Britain’s lease on Hong Kong was to expire.  Feared market disorder when sovereignty over Hong Kong would revert to China had led Hong Kong authorities in October 1983 to peg their currency to the USD, a strategy that lives on successfully to the present day.  So markets weren’t zinged by the change of Hong Kong’s status at mid-1997, but many developing economies not restricted strictly to Asia were instead engulfed after that date by the maelstrom unleashed by Thailand’s devaluation.

Greece’s problem remains far from resolved at this writing, and a “yes” vote in Sunday’s referendum will not solve the underlying problem, which is that the Greek economy cannot break out of its depression by staying the course of troika-mandated reforms.  To be sure, the coming six months almost surely will be more traumatic for the Greek people if a “no” vote is cast, but I’m not at all sure that the same will be true if one considers a longer time horizon like the next five or 25 years.  It is ironic that Germany, which arguably not more than 75 years ago perpetuated one of the greatest atrocities ever of man against man, should feel entitled to claim the moral high ground in this or any dispute between peoples, let alone the country that gave the world democracy.  Creditors as well as borrowers accept risk that ought to be shared when something goes terribly wrong as it has in the case of Greece.  As Polonius councils Laertes in Hamlet, I, iii,

Neither a borrower nor a lender be;

For loan oft loses both itself and friends,

and borrowing dulls the edge of husbandry.

Accustomed to many last-minute solutions kicking the can down the road, investors were wrong-footed by the strange twist that the latest five-month-long Greek talks took in the final week of June.  Many remain in denial.  And while Greece’s missed payment to the IMF remains a fact that changes the nature of whatever talks, if any, are held next week and beyond, one manifestation of continuing denial is to now assert as one newsletter I received did that Grexit is really not a big problem after all.  What ultimately matters is the health of the U.S. and global economies.  The data have been mixed, so there is plenty of tid-bits in the numbers to selectively build a case that U.S., European, Japanese, and even Chinese prospects have improved and will continue to do so, notwithstanding however the Greek situation resolves itself.  I find this logic worrisome, not because it might prove wrong.  Global growth may indeed pick up momentum, or alternatively such could sputter.  I’ve been around the macroeconomic forecasting process long enough to know that it’s often a crap shoot full of surprises that go unforeseen in advance by all but the few.  See the last two U.S. recessions for starters. 

What worries me most, however, is that the thought process behind deciding that any drag from a Greek default will at most exert a transitory impact and be outweighed by sound economic fundamentals appears to be a classic case of Alamo economics.  In these instances, a forecast is staked out, and when ever information to the contrary arises subsequently, the author of the forecast parses the news in such a way as to preserve the original forecast.  Alamo economics, so named for the willingness to defend a crumbling position to the bitter end, leads to analysis that is subjective, not objective.

Because of uncertainties like Greece and not knowing how the U.S. and other economies might react to Fed tightening, June was a very volatile month in foreign exchange.  The euro and sterling each traded in high/low ranges that were 5.0% wide versus the dollar.  The New Zealand, Australian and Canadian dollars had ranges against their U.S. counterpart that were 7.2%, 4.8% and 3.6% wide.  The Swiss franc’s trading corridor was 3.8%, and the yen’s was 3.2%.  For the most part, the dollar is now stronger than its June mean.  An exception by a small margin involves the yen, which became very well bid during the flight to safety days of the Great Recession.  It would be tragic for Abenomics if that pattern were to repeat itself now in the fallout of an intensifying crisis in the eurozone. 

Finally at this midpoint of 2015, I’m thinking about some ironies in the United States.  One is the shooting in Charleston, South Carolina that seems to encompass the two big pieces of unfinished business in the U.S. Constitution.  The first concerned slavery and states versus federal rights, which ultimately were settled only in part by a great war in the 1860s but whose embers still burn as racial hatred and widening cultural disparities in the union.  The other issue is the meaning of the second amendment, which mysteriously is the one of ten bill of rights amendments with few explanatory notes left by the founding fathers.  I also continue to wonder about the juxtaposition between America’s explosive change in telecommunication with a proliferation of “Aps” on the one hand and what continues to be a sub-standard trend in labor productivity, which rose 0.9% on average in 2013, then 0.7% last year, and fell 3.1% between the first quarters of 2014 and 2015.  It’s all very puzzling and may mean that the best and the brightest of inventive minds aren’t doing a bad job, just the wrong job.

Copyright 2015, Larry Greenberg.   All rights reserved.  No secondary distribution without express permission.

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