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Greece warns the world – ‘no more pretending and extending’!

Feb 9, 2015 at 3:25 pm in Market Commentary by Provenance

There is something different about Greece’s new finance minister, Yanis Varoufakis, which markets don’t yet seem to have woken up to. He speaks the truth.

Since the Financial Crisis erupted in 2008, there has been an obstinate refusal among policy makers to accept the true nature of the challenges facing the global economy. Lead in no small part by ex-Fed Chief Ben Bernanke, central banks around the world have opened up the monetary floodgates, certain in the knowledge that the problems in front of them could be solved by an unprecedented surge of liquidity.

Seven years later, and after trillions of dollars of Quantitative Easing, the great structural economic flaws present in 2008 still lurk beneath the surface of the so-called recovery. Economies and governments remain absurdly over leveraged. All levels of society carry far too much debt. Genuine growth is lacking. The workforce continues to be underutilised and its spending power diminishes by the month. Were it not for the salve of “unconventional” monetary policies, it is hard to see how the financial system would have survived in its current incarnation.

Desperate to appear in control of this dire situation, politicians have seized upon austerity as the solution to all the world’s ills. They would have us believe that through sustained spending cuts all those busted balance sheets can be repaired.  What none of the proponents of austerity have been able to bring themselves to admit is that those busted balance sheets are beyond repair. The debt-driven economic model of recent decades has failed. It encouraged profligate spending and generated gross inefficiencies. The huge imbalances it created can only be solved by a proverbial resetting of the economic clock.

In other words, a large-scale default looks inevitable.

Perhaps facing such a stark reality is beyond the gift of most politicians. After all, the implications of a large-scale default are genuinely frightening. If not handled properly they could be catastrophic. Without wishing to sound like an apologist for the lack of leadership we’ve suffered in the past seven years, I have some sympathy for why no one has been prepared to speak the unacceptable.

At least, that is, until now.

Step forward Mr Varoufakis.

In one of his first public statements, on assuming his role in the newly elected Greek coalition government led by Syrizia, Mr Varoufakis delivered a stinging rebuttal to the policy response inflicted upon Greece this decade;

‘We are not prepared to carry on pretending and extending, trying to enforce an unenforceable programme which for five years now has steadfastly refused to produce any tangible benefits. The disease we are facing in Greece at the moment is that a problem of insolvency for five years has been dealt with as a problem of liquidity.’

In just fifty-seven words, Mr Varoufakis has been able to express what all those who have gone before him have failed utterly to.

It now remains to be seen whether or not he matches this eloquence with action. Judging by the reaction of the European Central Bank, it looks like some in the political elite are taking this development in Greece seriously.

On Wednesday the ECB announced it would no longer accept Greek government debt as collateral for loans. This was tantamount to an admission that it expects a further Greek default, possibly even a total one. Naturally this caused a mini-panic in markets, with the major indices selling off sharply. However, this reaction proved to be extremely short-lived and by the end of the week equities were once more on their seemingly irrepressible march higher. The Dow closed on Friday within touching distance of that psychologically crucial 18,000 mark, buoyed by a positive jobs report earlier in the day.

Overnight and much of the reporting has settled down. ‘Worry not, all is well once more, buy stocks’ is the general consensus.

But is this a wise move?

Fighting the trend is usually the death of a spread betting account, but on a fundamental basis it is extremely hard to make much of a valuation case for buying into this market. After six years of near straight gains, the casual expectation that stocks will just keep going up looks like folly of the highest order. Equally, the apparent acceptance that a “Grexit” from the euro and associated default on Greek sovereign debt is nothing to worry about could be downright dangerous.

Calling a market top is notoriously tricky, but keeping a decent reserve of cash at this stage of the market’s lifecycle could prove to be a very sensible step indeed.

IMPORTANT: The posts I make are in no way meant as investment suggestions or recommendations to any visitors to the site. They are simply my views, personal reflections and analysis on the markets. Anyone who wishes to spread bet or buy stocks should rely on their own due diligence and common sense before placing any spread trade

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