This morning the EU finance ministers met in Latvia for another of their ongoing talks about the Greek financial crisis. In a somewhat childish display, the frustration of the European leaders clearly shone through with the leaked reports about the meeting.
Greek Finance Minister Yanis Varoufakis was heavily criticized by his euro-area colleagues amid mounting frustration at his refusal to deliver measures to fix his country’s economy and release financial aid, according to three people familiar with the talks. Euro-area finance chiefs said Varoufakis’s handling of the talks was irresponsible and accused him of being a time-waster, a gambler and an amateur, one of the people said.
There were unconfirmed reports that the German finance minister also added “yeah, and you’re ugly and your mother dresses you funny!” The search for the perpetrator of the vandalism on Varoufakis’ car (pictured above) is still ongoing, and it is a pure coincidence that German finance minster Wolfgang Schäuble was heard muttering something about “an Audi made by my people, and paid for with my people’s money, driven by a Greek who won’t pay for it” right before he went for a 15 minute “bathroom break.”
Although I sympathize with the EU finance ministers about the lack of Greek progress in their reforms, they are being played for fools. The EU officials have already had to stop imposing deadlines for the simple reason that they don’t work on Greece:
Euro zone finance ministers will not set any deadline for Greece to come up with reforms to get more funding because such time limits lead to brinkmanship in negotiations, a senior euro zone official said on Tuesday.
It is quite obvious that the EU doesn’t want Greece to default way more than the other way round.
There is no doubt that the Greeks are getting squeezed for cash. They recently had to order all extra bank deposits be sent to the Greek Central Bank so they could make payroll, but apart from this emergency measure, the Greeks show no signs of blinking. They are continuing to play it cool.
In the mean time, the EU Finance Ministers are resorting to name calling. Someone should give them a lesson in negotiation tactics. The reality is that the Greeks will take this to the wall. The EU should accept that nothing will change until the point where the Greeks can’t make a payment, and then the real negotiation will occur.
Instead of wasting their time talking about reforms that the Greeks won’t adhere to, the EU should be spend that time getting their markets ready for the Greek exit from the European Union. If the EU isn’t going to blink, then that is the path we are headed on.
We are in a monster game of chicken. The Greeks have repeatedly told the EU that they have no intention of swerving. As the two parties are approaching each other, the Greeks have doubled down on their commitment. In the mean time, the EU is getting scared and is screaming at the Greeks to swerve, but the Greeks are simply staring ahead and repeating their intention not to veer off course. Maybe the Greeks will swerve at the last moment – I don’t know. But they are playing this game infinitely better than the EU, and this morning’s name calling shows who is feeling more insecure.
Where’s the excitement?
Yesterday the Nasdaq closed at an all time high. You would think that this would be reason for excitement. Yet the feeling in the market is somewhat muted. There is no frothy exuberance.
There seem to be precious few celebrating the move to new highs.
And why is this? Why aren’t we experiencing the same euphoria as during the DotCom bubble? Where are the shoe shine boys giving us stock tips?
The answer came be summed up by the next few charts. Have a look at the equity flows over the past few years. Pay special attention to 2014 and 2015. Apart from one month, they have all been outflows. And not only are they outflows, but they have been big ones.
The public has been selling this rally, not buying it. They have been taking chips off the table, not adding to it.
But then, who is buying? That answer can be found in the next chart. This graph measures the equity flows of buybacks in the S&P 500 versus investor flows.
Notice how during the DotCom bubble in the late 1990s the buybacks were actually smaller than the domestic equity flows by investors? Then contrast that to the experience of the last decade where the buybacks dwarf the investor flows.
The world’s Central Banks are force feeding liquidity into the system, and it seems like the main way it is getting used is by companies issuing debt to buy back their own equity.
Some of the patients are refusing the force feedings. In those cases, the added liquidity simply sits fallow on the banking system’s balance sheet, driving down risk free rates. In a truly bizarre development, there are even Central Banks that have taken to monetizing their balance sheet directly by purchasing equities. Here is an excerpt from an article last year describing the Swiss National Bank’s equity purchases:
The Swiss central bank used its swollen currency reserves to invest in more American companies as its U.S. stocks soared in the last three months of 2013.
The value of the Swiss National Bank’s U.S. equity portfolio rose 6.7% to $25.6 billion from $24 billion at the end of September, according to a filing with the U.S. Securities and Exchange Commission on Friday.
The SNB’s stock holdings run the gamut of corporate America and include high-tech giants Apple Inc. and Google, as well as retail behemoth Wal-Mart Stores Inc. They also include Jos. A. Banks Clothiers Inc. and Men’s Wearhouse, two U.S. menswear chains that have waged a months-long battle to buy each other.
The bank’s foreign currency reserves have grown more than 800% over the past five years because of its market interventions to check the rise of the Swiss franc. The central bank had 435 billion Swiss francs ($480.8 billion) in foreign exchange reserves at the end of 2013.
The Zurich-based bank has used some of the additional currency to buy equities, which represented about 70 billion Swiss francs at the end of 2013. The SNB doesn’t reveal the countries in which it holds stocks except for Finland and the U.S., which both require disclosures by large investors.
The Swiss central bank declined to comment on its equities portfolio other than to say its investment strategy follows a broad index of countries. Analysts said the central bank was unlikely to affect equity markets when it adjusted its holdings. “The SNB is…a passive investor,” said Alessandro Bee, an economist at J. Safra Sarasin in Zurich. “Its buying or selling of individual shares is unlikely to trigger large market moves.”
The SNB hasn’t disclosed the performance of its equity portfolio, which constitutes 16% of the value of its currency reserves. U.S. stocks gained 9.7% in the final quarter of last year as measured by the performance of the S&P 500.
By contrast, the value of the SNB’s gold reserves slumped 11% in the final quarter to 35.6 billion francs, resulting in a provisional book loss of 9 billion francs last year.
The SNB owns 5.74 million shares of Exxon Mobil Corp., down 2.2% from the previous quarter. A 17% rise in the price in the fourth quarter pushed the value of its holdings in the oil giant 15% higher to $581 million.
It is not like the Swiss National Bank is alone in their equity purchases. There are many other Central Banks that have taken to “investing” directly in equities, with the Bank of Japan being the largest.
I find it mind boggling that the world’s Central Banks are monetizing their balance sheets with equities, yet this is given barely a passing mention by market strategists. This development is bat shit crazy, yet no one even blinks an eye.
All of this explains why we have so little excitement as the Nasdaq hits new all time highs. The biggest buyers are companies re-levering their balance sheets and Central Banks. No wonder CNBC’s viewership is suffering so badly, most Central Banks don’t allow TVs in the office…
Thanks for reading and have a great wk-end,
the Macro Tourist