June 22, 2015

Greece has defaulted before too

According to my research, the first Greek default occurred in fourth-century B.C. when the 13 city states of the Delian League borrowed money from the Temple of Delos and defaulted on most of their loan. 

Greece's financial history is one of repeated defaults on sovereign-debt obligations. Most led to market dislocations, but limited or no long term systemic damage. In modern times, the country has been in default for nearly 90 years -- or about half of its history as an independent nation.

There have been at least five separate defaults in the modern era. The first occurred in 1826 during the early days of Greece's fight for independence. Defaults then recurred in 1843, 1860, 1894 and 1932 during the Great Depression.

That said, Greece isn't the worst country in terms of repaying its bills. For example, Venezuela and Ecuador have each defaulted on their debts on 10 different occasions.

Still, I hear many in the media incorrectly suggest that Greece is a "one-off," and that a default would have a limited impact on markets.

Perhaps that was true in 400 B.C. -- or even in the 19th or 20th centuries -- but in today's flat, networked and interconnected world, no country is an island of Delos any more. History over the last four decades has demonstrated that increasingly, "contagion" is the natural consequence of country defaults.

As Greece begins to slip into the abyss of capital controls and default, we've already seen signposts of contagion as the bond-yield spread between Germany and other Eurozone states is widening.

The France/Germany 10-year spread has almost doubled in the last three trading days. European and U.S. equities have also begun to roll over, and Chinese stocks are also taking a spill.

Take it from me: Greece will eventually default, and Greece banks will fail.

Here's the sequence I expect:

   - European central banks and the ECB will take meaningful hits and will implement a nonsensical scheme to deal with the writeoffs.
  -  Other banks (which are all leveraged) will also take writeoffs on inter-bank lending and repos.
  - Berlin will blame Athens.
  -  Athens will blame Berlin.

Upon default, the euro could experience a beatdown and the U.S. dollar might rip higher. That will serve as a "tightening" move in America, placing pressure on commodities and emerging markets worldwide and exports and corporate profits here at home.

Treasuries will likely rise in price and drop in yield, while a decline in global stocks seems probable.

Most importantly (at least to me) is the possible contagious impact on Spain, Portugal and Italy -- where yield spreads will widen and yields will continue to gap higher, as I've addressed in the past. In the extreme, even the EU's existence could be in peril.

Sell-side brokerages interpret a Greece default -- their ideas are bountiful and their concerns are limited, as they see the problems as contained. But no good will come from Greece's financial problems in a flat, networked and interconnected (and, over there, a leveraged) world.

And in a world that already has liquidity issues, there likely will be other unintended consequences that we know not of yet today, as well as deep-rooted secular headwinds. Think, for example, about possible dislocations in the derivatives market.

My advice? Don't take Wall Street's brown acid, and err on the side of conservatism.

Tactically, as I've recently written before, I would favor the cash and bond-equivalent market sectors (REITs, utilities, closed-end municipal-bond funds, etc.) over cyclicals and industrials this summer.

In the broadest sense, my view remains that we're currently building a broad and important market top, and my baseline expectation is that we're now making a transition from bull market to a range-bound market.

To me, the next stage on both fundamental and technical grounds is a move towards a bear market/correction, which is coming into clearer focus.

VIA http://www.thestreet.com/story/13188395/2/more-greek-drama-airbnb-vs-marriot-takeaways-from-the-fed-best-of-kass.html