Over the past few weeks and months, I have often wondered why Greece and many in the EU were at loggerheads over the debt issues and other issues. If all sides were aligned to resolve these issues and work out a debt repayment structure that promoted success, then it makes sense to me that some solution could be achieved rather quickly.
So, why then, after 5+ months of negotiations and discussions, are we at this point in time with this event?
After a bit of research into the debt issues and how the EU enacted the Greek bailout structures, one thing kept formulating in my head about this entire process.
Why would Greece force a seemingly self-destructive move within the EU while alternate solutions were likely available? Could it be that I’m missing something in the equation as I understand it?
Then, one concept came to mind and certain pieces of the puzzle started falling into place.
“Desperate people with little hope are capable of very desperate actions/motives.”
Given this assumption and the position that the current situation in Greece (debt agreements, economic contraction, GDP contraction, humanitarian issues and continued general economic contraction cycles) as well as the assumption that the EU and IMF were staunch in their position regarding payments and structures created with the 2010 and 2012 bailout events, this would put Greece in a very difficult position to continue with the current plans for debt repayments while trying to keep their people functioning.
Imagine what it would be like to be drowning in debt, constricting your economic output in an attempt to meet your debt obligations, watching your country and people crumble and suffer while attempting to meet your obligations. At some point, a decision is made that “it is better to fight this injustice and deal with the consequences than to continue to starve and drown in debt”. Think of other countries that have taking a seemingly self-destructive path when facing desperate situations.
- The USA did this when the Revolutionary War against the British started
- England did this to fight the Germans in WWII.
- The Israelites overcame the rule of the Egyptians.
- Marcus Brutus overcame the rule of Julius Caesear.
Throughout history, many times the underdog has stood up, fought against tremendous odds and made an effort to change the environment or circumstances presented to them. Many times this has failed to enact change, but there are times when change has lead to tremendous opportunity and cooperation between peoples and nations.
I’m beginning to see the situation in Greece as less of a Greek failure to maintain economic standards, of which I’m sure an argument can be made and won, but more of a “stance of defiance” in regards to the EU/IMF rule and oppression. Given two choices, drown by another’s hands or potentially drown by my own actions, I know I would select the later. The freedom to fight for what one believes are God given rights without the oppression and rule of others is an essential component of the US Constitution.
Establishing a viewpoint that aligns with Greece based on these assumptions, why would it appear that Greece is committing suicide by making choices that directly align itself against the EU and IMF? Directly in the path of destruction and hardship. Further under water and, in the process, dragging many global nations with it? Why would one small sovereign nation make the decision to fight the ruling powers and take on the world?
The only answer I have at this time is that the decisions by the Greek’s is that of a desperate people attempting to overcome a direct threat to their survival by attempting to severely disrupt the ruling authority/economic environment in such a way that changes and alteration are forced to be enacted. Shaking things up in such a manner will likely result in redrawing of objectives, intent and outcomes that may improve the overall abilities of all parties to participate in success.
Taking a look at some relative figures and information, we can see from these graphs that any contagion event resulting from a Greek default will likely immediately affect Germany, France, Italy and Spain. Throughout the course of the negotiations, Greek leaders have continued to state that “a Greek default would lead to others leaving the EU”, specifically mentioning Italy and Spain. The combined risk exposure for all four countries is a little over $200 Billion – not a small amount.
Now, if we consider the global impact to wealth and potential impact to GDP from a sustained contraction in the financial markets, we might have a clearer picture of how a contagion event could lead to a disruption event of such magnitude that a change would be the only logical outcome.
Taking a look at this next chart shows that global wealth within the markets (as of 2014) was nearing $65 Trillion. Yet, we also know that the US market and China have been increasing rather dramatically over the last few years. Granted, the US markets have been stalled for the past 5+ months, but they are still near all-time highs. Because of this, we’ll assume the global wealth within the financial markets is just above $70 Trillion at this time.
Historical recessionary events, as shown in this chart, have resulted in a minimum of a 30% decline in global wealth. The deepest decline event occurred with the 2008-09 Global Credit Crisis (resulting in just over a 50% decline). For this example, let’s take a look at variant declining valuations and how they would result in additional economic pressure (think GDP and asset valuations) for many developed countries.
|$71 Trillion Peak||Total ($Trillions)||Proj GDP Event||Proj Asset Event|
|20 % Contraction||-$14.2 Trillion||-0.5~1.0 GDP||-18~30% Valuation|
|30 % Contraction||-$21.3 Trillion||-0.75~1.5 GDP||-22~37% Valuation|
|40 % Contraction||-$28.4 Trillion||-1.0~2.0 GDP||-25~45% Valuation|
|50 % Contraction||-$35.5 Trillion||-1.5~3.0 GDP||-30~60% Valuation|
Monday’s global market move (generally down 2.5~3.5% for all major indexes) resulted in a wealth loss of a little over $2 Trillion based on the initial reaction from the Greece event. My expectations are that this event will continue to play out, resulting in extended pressure events in the markets, over the next 2 to 4 weeks. I will be paying very close attention to the Weekly charts of the major markets to determine just how severe any contraction might become. The first level of concern is the 10~15% level.
The Chinese Shanghai Class A market is another factor. Having already dropped over 20% in recent trading, the Greek contagion event may add fuel to the drop in the coming days. Over the last weekend, the Chinese Government attempted a three-prong counteraction to these moves by trying to stall the downward price move. We’ll have to see how it plays out over the next few days and see how the Greek/EU event unfolds globally.
I’m certain of one thing now, the Greek move was brilliant in one facet, they went all-in on their belief that the resulting economic events would lead to a forced renegotiation of objectives and global event outcomes. They really didn’t have anything to lose (as is often the position of very desperate peoples) and they took a calculated risk that a Greek default (at this time) would result is a series of economic waves that would likely disrupt the regional and global environments enough to enact change.
Much like Marcus Brutus, taking the opportunity to enact change (however the method), when the stars are aligned and momentum can be capitalized upon, can provide a strong advantage. Whenever anyone takes this measure, risks abound. Success will be measured over the next few months in regards to how a resolution is enacted and who is involved in securing the resolution. The danger of this type of event is the “old-school thinking” may attempt to dig-in and maintain “traditional order” within this chaos. This is often the failed thinking of the ruling class.
Quantum Physics teaches us that “all possibilities are available to us at all times” and that “the most likely entity to survive and succeed in any environment is the one that is most likely to adapt to changes within that environment”.
Thus, be prepared for all types of events that may unfold. The likelihood of a continued global market contraction seems fairly high at this time. Watch China and the EU for early signs of further contraction. The US, Canada and others may be somewhat immune from any moves initially, but as I stated above, inability to adapt to changes within the environment will lead to severe failures.
As an investor, my critical numbers are a 10% contraction in the S&P and/or Nasdaq as well as a 15% contraction. These would be my early warning signals that the US markets may have more exposure than I may have initially expected. I would also watch GOLD for any move above $1240~1250 from these current levels. This would indicate that a general panic in the markets is driving assets into the gold market as protection from a larger event.
I will try to keep all of my readers updated as this event unfolds over at my Global Financial Reset Website.
Co-Authored: Chris Vermeulen & Brad Matheny