The outcome of the Greek referendum surprised all, even those who believed a NO vote was imminent. As NOTES has written ad nauseam, the referendum card was the nuclear option for Prime Minister Tsipras and he played it for a resounding impact. Chancellor Merkel was furious with Tsipras for having the audacity to challenge the EU elite by going to the people and testing the concept of the general will. The financial media and its purveyors of pabulum could only see this move by the Greeks in its impact upon the equity markets–and marginally the global bond markets. The outcome for the debt markets is a mixed bag for some bonds rally while the debt of smaller peripheral economies take a hit as the risk-off trade is initiated to the possible negative fallout from the lopsided Greek vote of NO.
The continual surprise and failure to see the significance of the Tsipras move is another prime example of Yra’s First Law of Finance: Money Is Fascist. Why? It has been a constant that investors crave stability over democracy. A stable strong state with guaranteed payment of debt is always preferred to a capricious electorate that challenges the policies of a corrupt, inefficient government. Crony capitalism with a strong military has been the preferred destination for investment from time immemorial. (Fascism is pejorative to some but for this discussion it merely connotes a system where the ideal of trains running on time is more important than individual rights.) Whether Greece stays or goes is not the issue facing Chancellor Merkel. It is releasing the concept of the contagion of referendum that scares the German governing class.
What happens when the guarantors of the European credit card want to vote on whether they desire to keep transferring German wealth to support the spendthrift habits of their European brethren? What if the German electorate was asked if it wanted to finance a European bond with its AAA credit rating? How would the Germans vote on the issue of the ECB paying negative interest rates on seven-year money while inflation is running at 1.5% and German unemployment at record lows?
Now, the classic europhile response is that Germany benefits from the low rates and a weakened euro through the strength of its global exports, but would that really placate a German middle class receiving negative real and nominal interest rates on its savings? One day some one will challenge Merkel and put it to a vote. Other one-dimensional thinkers would say it would be disastrous for the Germans to opt for a democratic challenge to its representative government’s decisions on the EU and ECB for the DAX would fall and a global economic crisis would ensue from a potential break-up of the EU.
Therein lies the rub for Tsipras has played the nuclear option and the fallout may well spread across the rest of Europe. The intransigence of Djisselbloem and others, in an effort to teach the Greek “commies” a lesson, has reverberated into the halls of Brussels.
For all global macro traders there is a great lesson learned during the past year: Four elections have taken place and the pundits failed to successfully predict the outcomes. First, the U.S. Congressional elections were a resounding defeat for the Democrats; Second, the Israeli elections surprised all the pundits; Third, Prime Minister Cameron’s outright victory in the British elections; and fourth, the NO vote on the Greek referendum. It seems that in the world of social media and tweets the world of analysis has become an ECHO CHAMBER and the sycophants of financial wealth talk only to each other and merely receive whatever their access contacts wish them to hear. It’s tough to discern facts in a world guided by the last price in the SPOOS.
***Merkel and Hollande are meeting separate from the whole European Commission to discuss potential outcomes for Greece. President Hollande is fearful that a failed state of Greece will generate increased support for Marine Le Pen and the right-wing Front National. Remember, the basis of the EU was one for all and all for one (see ROTTEN HEART OF EUROPE, p.99 of the 2012 edition) for if the EU fails to support Greece the French will see it that the EU and its commitments to each other are vacuous guarantees. If Germany will not ante up for the pittance of Greece, what will happen if Spain, Italy or France were to be in need of a financial support package?
Le Pen has been campaigning on an anti-euro platform because of the austerity measures pressed so hard by Germany. Add the anti-immigration element to the Front National’s campaign and President Hollande is very concerned for the political future of France’s mainstream political parties. The euro establishment played a bad hand in opposition to Prime Minister Tsipras in Greece and further punishment in retaliation will only lend support to the other extremist parties plaguing present European politics.
***Tonight the Reserve Bank Of Australia will announce its interest rate policy at 11:30 p.m. CST. RBA Governor Glenn Stevens usually delivers a succinct overview of the global economy in explaining the rationale for the RBA‘s policy stance. The aussie has been very strong against the kiwi for the last two months, which may provide Stevens with cover to push for another rate cut. Coupled with KIWI weakness has been the drop in iron ore prices as well as other industrial metals, resulting in less capital investment in Australia. The uncertainty about the strength of China’s economy is something to pay attention to in the RBA release for the Aussies have been the best light unto the darkness of real China data.
If the RBA cuts rates, be patient as to the effect on the Aussie dollar as it was sold hard today as commodity prices were under pressure due to the equity market’s response to the Greek referendum and rising uncertainty about China. If the RBA surprises with a rate cut and the AUSSIE rallies it will signal that the market has priced in the slowdown in the Aussie economy and will begin to look for growth in response to record low interest rates.