Today’s News June 22, 2015

• Is This Complacency, Idiocy, Or Both?

  Submitted by Mark St.Cyr,

  If one listens to the financial media mavens give their detailed analysis of late, you would have thought the The Onion™ decided to try its hand at TV and radio.

  Since last Friday as they anticipated the most recent “jobs” report with bated breath to be announced, into this week that just ended. I have been left slack-jawed more times resembling the cartoon characters I grew with up as a kid. However, at least back then the cartoons were trying to be funny. Today, what is being touted as “serious insightful analysis” is so much more comedic – its tragic.

  As I awaited this months version of the report. I had playing in the background one of the financial shows that were parsing, and mincing the usual data points. When suddenly I heard a few statements that made me do the double-take of “wait…what?”

  As usual the schpiel is basically the same or formulaic on all of these program types. The host plays the sounding board as the guest plays “the seer of all that’s unseen by us mere mortal schlubs.” On this day in particular; replace “mortal” with “idiot” and you are closer to the truth of how you, or I, are looked upon by these masses of the so-called “smart crowd” perusing Wall Street today.

  And just to clarify; the word “idiot” is in quotes not in some air quote manner. Rather: that is the exact word used to describe people like myself (and maybe even you) that question their insight. So if you’re reading this – now you know where you may stand within Wall Street’s loving and caring mind. (I know it’s satire) For question their glowing analysis of dog crap? And it’ll be your nose they’ll attempt to rub in it. Elitist insight at its best.

  One of the reasons given why this guest could tell “the economy was doing much better than perceived” was: As he traveled about the country to places like the West Coast, and a few others. (The list was what anyone with half-a-brain would understand are at the epicenter of a pick your bubble flavor expansion) From his observation “These places are doing very well!”

  As I listened to the list of places that were ticked off where they had visited (as to speak.) One thing was quite obvious to anyone who was actually listening. The examples were from what one would infer to be: Silicon Valley (proper.) New York City (proper) etc., etc. My reaction was along the lines of, “Well – Golly! Who’da thunk that!”

  It makes one wonder exactly who do they think (or believe) we are when we hear these words of insight. I just can’t for the life of me understand the arrogance of so many on Wall Street today that take to the airwaves or print and talk down to others (especially those of us that presumably are their customers!!!) when anyone with a miniscule of business acumen can see they are nothing more than bloviating meme-of-the-momement pontificates. And people like this have the audacity to literally call people like myself (as well as you dear reader) “idiots” or “data deniers.”

  I could go on to list even more revelations in absolute meaningless insights I bared. I mean truthfully; how much financial “insight” or “analysis” to notice that places that are currently in a real estate or Silicon Valley bubble are doing “Very well?” Idiotic would be an understatement.

  How about what’s happening just outside these areas? Never mind 100, or even 50, rather, just 25 miles outside? Do they not want to venture (or speak) there? Or, is it for just as their analysis implies; as in that untold or unmentioned dirty little secret. i.e., Mom and Pop have no cash left to invest – so why bother going to a financial desert? Which so happens to be spreading almost as fast as the desert is reclaiming California. Both with no relief in sight on, or over the horizon.

  After all, just venture to any mall, Sears™, JC Penney™, Macy’s™, Walmart, McD’s™ and a cadre of others you’ll find just outside, and it’s hard too miss they’re having serious issues with either half filled shelves, sparse foot traffic, falling sales, revenue killing markdowns, adjacent retailer vacancies, or worse: the pre-vacant with their “going out of business sale” signs that stay up till the very end giving every other business within eye-shot an uneasy feeling to ponder daily. i.e., Am I next?

  They’re not “doing very well” as their neighbors like Tiffany’s™, or Louis Vuitton™ might seem to be just a stones throw away. But one has to be willing to go for a burger outside of town rather than the steak at the hotel. Or else, well you know.

  As stupefied as I was listening to all this dribble, just when I thought I heard it all, the coup de gras of “wait…what?” was spoken.

  In an explanation for clarifying their now informed insight, the reference given for what we all need to contemplate today is: “What the Fed. thinks is now bad or good, and what they’ll do about it.” i.e., “Does bad still mean good for stocks, and is worse still terrific?”

  I’m sorry. Maybe it’s me. However, weren’t we told by this crowd “to not believe the data – we were idiots?” For if that data is to be believed: What in the world does The Fed. have to do with stocks? Unless of course the undeniable truth is, that since QE halted 6 months ago – the markets have done little more than zig zag in a pattern reminiscent of (you guessed it) the birth of QE itself. Meaning: The Fed. is the market. Period.

  All you need to know is right there. For years people like myself and a few others were labeled as “idiots” or “data deniers” when we made the case there is no “market” in equities if not for The Federal Reserve and its interventionism. And for years we were told “the data states otherwise.” And now we are being told (or sold): All that matters is that the data remains bad, for if not, the Fed. may react in a way that fells the market! Again – you can’t make this stuff up. Personally I had to make a conscious effort as to not spew my coffee.

  The data (we said) if looked at through an eye of “truth be told” rather than the Three-Card-Monty version of “specious to be sold” there is no fundamental, financial, or any other reason these markets are to be at these levels (never-mind never before seen in history highs) other than a financial bubble being blown and fueled by the Fed. to proportions; that an impending “pop” could result in making the last crisis look like a cake walk.

  Now, suddenly (just to reiterate it’s only been some 6 months since the spigot of QE was shut off) as the markets have gone nowhere fast. Their “analysis” is now changing faster than a “double seasonally adjusted” data point. And we’re the idiots?

  Now persistent sell offs (which for years were all but forgotten) are followed by out-of-the-blue volume-less miracle rallies fueled by HFT stop seeking algos in the “most shorted” arena of stocks driving the main indexes from the ledges of scary cliffs – back to the heights of euphoria.

  This has now become common place as opposed to the one way market of just 6 months ago. Yet, this in turn still supplies headlines for the main stream media such as “Dow rallies impressive triple digits” or “The markets set another record today” on ___________ (fill in the blank with anything you wish like “a cat was petted today” because it just doesn’t matter. And will probably be closer to reality than what you’ll hear from the “experts.”)

  But the headlines mask the onerous implications underneath. For zag-zag patterns enable just what they imply: zigs to euphoria followed by zags to a portending abyss. It’s when the next zig after the last zag fails to show is when all heck breaks loose. And the last time we saw this type of action? QE1 was implemented. Not too worry though because – “This time it’s different!”

  Remember, if the economy was doing as well as we were told the “data” states: Why do we still need interest rates held as zero? Again – If housing is so swell, and employment is near statistical (cough, cough) full employment. And the markets are once again within their never before seen in the history of mankind highs. A raising of 1/4 of 1% is cause for concern? If not outright panic?

  Think this through with me…

  Why should anyone be concerned about the markets if the Fed. raised rates a miniscule 25 basis points? Or why should one ever question the omnipotence of the Fed. to save the markets at anytime regardless? Are they omnipotent or not?

  Just look at what was expressed via this Friday’s market reaction to the impending concern, as well as more probable than possible Euro Zone train wreck that could very well be coming apart at the seams. Not only with an exit by Greece, but also a default on their debt. Debt that by all accounts is intermingled with far-reaching tentacles within the financial markets, currency area, CDS markets, and more. All while Spain, as well as Italy look and ponder their own issues concerning the EU and more.

  Our markets not only didn’t care – they didn’t even shrug, blink, or wince. Talk about complacency. This is complacency turned up to 11!

  I ask again: How can it be implied that the markets are too fragile to deal with an unexpected raise of interest rates to (gasp) 1/4 of 1%, if all the “data” we were told has been showing signs of all this “improvement?” Or better yet: How can all that good data we were told (or sold) to accept as “truth” now mean it’s bad for the markets? Is this idiocy? Lunacy? I can’t tell, I guess I’m just too dumb to figure it out.

  And that reminds me. For if memory serves me correctly. We were told at the end of last year, as they began to contemplate this year. They (The Fed.) were most likely going to be ready in June based on what the “data” was showing then. And June came and went while they’re now singing the line “See you in September la, la, la….”

  At the end of last year as we were transitioning into this one. All the hand-wringing was about a possible rate hike in June based on the improving data. Now that data showed (to both the Fed. as well as demanded by Wall Street) June needed to be off the table and Sept. is more likely of a probability. (key word again – “probability”)

  Some interject another reason for no hike at this past meeting was in reaction to the whole Greece thing, and the impending possible ramifications. However, we’re also told (by nearly every next in rotation fund manager on TV or radio) the impact to the U.S. for anything Greece related would be near nil for “We’re just not that exposed.”

  Let’s see: The Federal Reserve does have limited exposure I guess. I mean, they only deal directly with  “a few” European banks like those that are listed on the coveted “primary dealer” list. But is it lost on this so-called “smart crowd” those lowly few just happen to be the biggest banks in all of Europe! With probable derivative exposure of countless trillions of not only €uros, but Lord knows what else.

  Yeah, I guess they’re right. Nothing to see here. Move along, thanks for coming by! It’s not like our banks or markets may have intermingling exposure of trade derivatives, currency swaps, or anything like that I guess. What could possibly go wrong?!

  Talk about convoluted, nonsensical logic chains. And we’re referred to as “idiots” if/when we refuse to accept such nonsense as fact!

  So now I guess the question still remains: How does any Ivory Tower prognosticator, or Wall Street talking head, square all these circles?

  Simple – they don’t. They just act as if it they didn’t or won’t happen. Or, just continue to act as if we’re too dumb to answer.

  This is complacency, idiocy, and more – all turned up to 11!

  

  

  
  
  

  

• Fake Boobs, Flying Saucers, & Furniture: What's Your State's Stereotype?

  They are called stereotypes for a reason…

   

  

   

  Source: Yuri Tsvetkov

  

  

  
  
  

  

• Bond Trading Revenues Are Plunging On Wall Street, And Why It Is Going To Get Worse

  Among the renewed Greek drama, many missed a key development in the past week, namely Jefferies Q2 earnings, and particularly the company’s fixed income revenue: traditionally a harbinger of profitability for Wall Street’s biggest source of profit (or at least biggest source of profit in the Old Normal). And while not as abysmal as the 56% collapse in the first quarter, in the three months ended May 31 what has traditionally been the bread and butter of Dick Handler’s operation generated just $153 million in revenue.

  CEO Handler blamed that decline on a lack of trading in the market and fewer companies selling junk bonds.

  To be sure, Q2 was better than the paltry $126 million in the previous quarter, however, the streak of year-over-year declines is now becoming very disturbing for a bank for which an ongoing collapse in fixed income trading will spell certain doom for any ambitious expanion plans, and most likely will result in dramatic headcount reductions to the point where not even fired UBS bankers will be able to find a job at what has long been known as Wall Street’s “safety bank.”

  

   

  Unfortunately for both Jefferies and all of its other FICC-reliant peers, we have bad news: the drought in fixed income profits is only going to get worse for two main reasons: turnover, as a function of collapsing liquidity in all markets not just debt, has plunged to match the lowest levels in history, and while junk bond turnover is not quite record low yet, it is rapidly approaching its lowest print as well.

  

   

  But it is not just turnover that is cratering. Even worse is that as electronic trading is increasingly penetrating this final frontier for Virtu (which recently fully took over FX trading leading to now weekly if not daily USD flash crashes following a headline overload), in addition to lack of trading interest (because in a centrally-planned market nobody sells until everybody sells… into a bidless market), the bid/ask spreads are collapsing as every broker fights tooth and nail for those last remaining pennies.

  

  In short: anyone hoping that the Goldmans of the world will fare any better than Jefferies (which unlike the aforementioned hedge fund has far less revenue diversification and is thus forced to extract every possible dollar from the product line) in the fixed income trading drought, will be disappointed, and as a result very soon even that business which until the mid-2000s was Wall Street’s quiet goldmine will become commoditized to the point where Virtu algos make flash crashing junk debt a daily routine.

  Ironically, the only thing that can “save” this once-most profitable product line for Wall Street is the full-blown return of risk and volatility, resulting in a surge in trading i.e., selling. Just as ironic: the only thing which can save market cheerleading CNBC’s sinking ratings is a market crash.

  Well, CNBC may be too late for saving, but if Wall Street one day realizes that it will be best suited should another crash take place, then one can be certain that that is precisely what will happen. The only question is who will be the sacrificial lamb that unleashes the next risk tsunami in the post-Lehman world.

  

  

  
  
  

  

• Future Shock And The Greening Of America

  Submitted by Charles Hugh-Smith of OfTwoMinds blog,

  What I find fascinating is our limited ability to make sense of trends unfolding in real time.

  During our recent breakfast meeting in Berkeley, author/blogger Jim Kunstler suggested that the coherence of eras waxed and waned, and the present era was incoherent. By this he meant the narratives being propagated by the status quo no longer align with reality, and often conflict with one another, resulting in incoherence.

  There is a time lag of many years between fast-changing events and our ability to make sense of them, i.e. construct a coherent account or narrative of what we collectively experienced.
   

  Each era has its Big Events and trends, but the last era with truly ground-shifting changes that affected virtually everyone in the nation in one way or another was the 1960s. 9/11 increased airport security but other than that, the changes wrought by the Global War on Terror (GWOT) only heavily impact narrow slices of the state and populace–the armed forces and security agencies.
   

  The same can be said of the Global Financial Meltdown of 2008-09: the Zero Interest Rate Policy (ZIRP) destroyed the yield on savings, but the daily-life effects on most people have been relatively restrained compared to far more disruptive eras; some have seen their portfolios skyrocket in value, but most households have seen their real net worth decline. Social welfare did its job of providing a safety net for those who lost their jobs in the recession.
   

  The 1960s visibly changed society in a few short years, and less visibly, the economy. Two books published in 1970, at the end of the tumultuous 1960s, attempted to weave a coherent narrative of what everyone was experiencing: Future Shock and The Greening of America.
   

  Given that these books were embedded in the era, it's not surprising that some of their points appear naively off the mark to present-day readers: Future Shock: what the Tofflers Got Right and Wrong.
   

  Toffler's definition of future shock is a personal perception of "too much change in too short a period of time". I wrote about Future Shock and Douglas Ruskoff's Present Shock: When Everything Happens Now in Present Shock and the Loss of History and Context and previously, about Effort Shock and Future Shock.
   

  What I find fascinating is our limited ability to make sense of trends unfolding in real time. The Greening of America, for example, posited three types of consciousness.

  "Consciousness I" applies to the world-view of rural farmers and small businesspeople that arose and was dominant in 19th century America.

   

  "Consciousness II" represents a viewpoint of "an organizational society", featuring meritocracy and improvement through various large institutions; it dominated the New Deal, World War II and 1950s generations.

   

  "Consciousness III" represents the worldview of the 1960s counterculture, focusing on personal freedom, egalitarianism, and recreational drugs.

  Would we agree to these rough categories today? Society seems too fragmented to fit into only three categories; I outlined nine socio-economic classes and felt I was generalizing: America's Nine Classes: The New Class Hierarchy.
   

  If Future Shock and Present Shock have any predictive value, then we must conclude the speeding up of change is eroding our ability to make sense of present-day trends, as the velocity of change is outrunning our ability to construct coherent narratives.
   

  But just as a parlor game, let's ask: are there three modern-day equivalents of consciousness 1, 2 and 3?
   

  I propose three basic categories:

  1. Those who still believe the Status Quo narratives of meritocracy, a just central state, the market can solve everything and whatever it can't solve, the central state can, etc.

   

  Those in this class are finding the gulf between their Master Narrative and reality is widening to the breaking point.

   

  2. Those who are losing faith in the Status Quo narrative but are resigned to its eventual messy demise.

   

  Those in this class indulge in dystopian visions of the future, a world of zombies and warlords. This seems to serve as distraction and entertainment while also offering a rough-and-ready narrative that matches various data points.

   

  3. Those who have lost all faith in the Status Quo narrative but see its demise as enormously positive and a huge opportunity for the planet and individuals.

   

  I am of course in this camp. The only way forward is through the remains of the wasteful, bloated, corrupt and terribly destabilizing Status Quo. As it fissures, more cracks will appear for what is currently marginalized to become mainstream.

  We can give up, or we can busy ourselves with widening the cracks and making best use of the opportunities that are arising from the systemic failure of the old arrangements.

  

  

  
  
  

  

• "It's Time To Hold Physical Cash", Fidelity Manager Warns Ahead Of "Systemic Event"

  As Jamie Dimon recently noted while discussing the perils of illiquid fixed income markets, the statistics around “tail events” can no longer be trusted.

  In other words, 6, 7, or 8 standard deviation moves that in theory should only happen once every two or three billion years may now start to show up once every two to three months. Evidence of this can be found in October’s Treasury flash crash, January’s fantastic franc fuss, and last month’s Bund VaR shock.  

  Why is this happening? Simple. There’s no liquidity left and the idea of efficient markets facilitating reliable price discovery is an anachronism. 

  Today’s broken, “mangled” (to use Citi’s descriptor) markets come courtesy of: 1) frontrunning, parasitic HFTs, 2) the post-crisis regulatory regime which, to the extent it’s well meaning, was conceived by people who never had any hope of evaluating the likely knock-on effects of their policies, and 3) central banks, who have commandeered sovereign debt markets, leaving a trail of illiquidity and shrunken repo in their wake. 

  Meanwhile, equity and fixed income bubbles continue to inflate on the back on central bank largesse and the only two options for rescuing a highly leveraged world are writedowns and/or inflating away the debt.

  So what is a savvy investor to do in this powderkeg environment? Simple, says Fidelity’s Ian Spreadbury: own gold, silver, and physical cash. 

  Via The Telegraph:

  The manager of one of Britain’s biggest bond funds has urged investors to keep cash under the mattress.

   

  Ian Spreadbury, who invests more than £4bn of investors’ money across a handful of bond funds for Fidelity, including the flagship Moneybuilder Income fund, is concerned that a “systemic event” could rock markets, possibly similar in magnitude to the financial crisis of 2008, which began in Britain with a run on Northern Rock.

   

  “Systemic risk is in the system and as an investor you have to be aware of that,” he told Telegraph Money.

   

  The best strategy to deal with this, he said, was for investors to spread their money widely into different assets, including gold and silver, as well as cash in savings accounts. But he went further, suggesting it was wise to hold some “physical cash”, an unusual suggestion from a mainstream fund manager.

   

  He pointed out that a saver was covered only up to £85,000 per bank under the Financial Services Compensation Scheme – which is effectively unfunded – and that the Government has said it will not rescue banks in future, hence his suggestion that some money should be held in physical cash.

   

  He declined to predict the exact trigger but said it was more likely to happen in the next five years rather than 10. The current woes of Greece, which may crash out of the euro, already has many market watchers concerned..

   

  Mr Spreadbury’s views are timely, aside from Greece. A growing number of professional investors and commentators are expressing unease about what happens next..

   

  “The problem is that people are struggling to work out how to diversify if QE programmes stop,” he said.

   

  Mr Spreadbury added: “We have rock-bottom rates and QE is still going on – this is all experimental policy and means we are in uncharted territory.

   

  “The message is diversification. Think about holding other assets. That could mean precious metals, it could mean physical currencies.”

   

  
  

  As The Telegraph notes, this is “an unusual” piece of advice coming from “a mainstream strategist” and it suggests the “serious people” are starting to realize that a certain tin foil hat fringe blog — which can already count LIBOR manipulation and HFT proliferation as examples of conspiracy theories turned world-changing conspiracy facts — may be correct to warn that if the current state of affairs persists for much longer, the “market” may one day be halted and simply never reopen.

  

  

  
  
  

  

• Greece Told To Have A Deal Ready Before Monday Meeting; Tsipras Submits Revised Plan With No Pension Cuts

  Update: the farce must go on because according to Bloomberg the “final final” Greek proposal never made it, and was, ahem, lost in tranmission: EU HAS RECEIVED NO NEW PROPOSAL FROM GREECE YET: EU DIPLOMAT – BLOOMBERG
  

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  With just under 24 hours until Monday’s final summit after which even JPMorgan now agrees the ECB will be forced to use a nuclear option and limit or cut Greek ELA thus imposing capital controls as a “negotiating tactic”, earlier today both France and Germany told Greece it must have a reform deal agreement with the Troika finalized and delivered before a crucial leaders’ summit between Athens and its creditors on Monday; in other words before trading opens on Monday.

  According to the FT, with the Greek cabinet meeting on Sunday to consider compromise proposals, François Hollande and Angela Merkel both telephoned Alexis Tsipras, the prime minister, to remind him he needed a “staff level” agreement with the European Commission, IMF and ECB ahead of the summit.

  They told him the summit was not for “negotiations” — which anyway would be all but impossible in a forum including all 19 eurozone members — and urged him to reach a deal with the institutions…. If a deal is reached, the two leaders said the parties could then start discussing a third bailout at the summit. France is believed to be open to discussing debt relief and restructuring for Athens, a top priority for Mr Tsipras, whose radical leftwing government won office in January setting Greece on a collision course with its creditors.

  As a result, the Greek cabinet has been summoned to a meeting at Tsipras’ Maximos Mansion residence on Sunday morning for a last-ditch meeting to hash out the government’s strategy. Here they are expected to discuss how Mr Tsipras can bridge his two seemingly intractable electoral mandates: to end austerity and block further cuts in spending while also satisfying creditors’ demands for reform to keep Greece in the Eurozone.

  And while the Greek negotiating position is one where any spending-cut compromise will be seen as a defeat for Tsipras – just yesterday the Minister of State Nikos Pappas used an interview with the country’s Ethnos newspaper to reiterate the government’s firm opposition to cuts to pension plans or wages – moments ago the Greek Prime Minister presented Greece’s proposal for a deal during phone talks on Sunday with German Chancellor Angela Merkel, French President Francois Hollande and EU Commission President Jean-Claude Juncker, according to Reuters.

  “The prime minister presented the three leaders Greece’s proposal for a mutually beneficial agreement that will give a definitive solution and not postpone addressing the problem,” it said in a statement.

  Bloomberg has the bulk of the proposed details:

  • Greek plan to unlock bailout funds includes proposal to eliminate early retirement options starting from Jan. 1, 2016, a Greek government official says, asking not to be named.
  • Plan includes levy on companies with more than €500,000 in annual profits
  • Plan includes increase in “solidarity levy” for individuals earning more than €30,000/yr
  • Creditors ask permanent fiscal measures equal to 2.5% of GDP, Greece proposes measures equal to 2%/GDP; proposes to cover difference of 0.5%/GDP with “administrative measures”
  • Greek govt would agree to target demanded by creditors for 1%/GDP primary budget surplus
  • Greek govt insists on 3 bands for VAT rates; creditors want 2 bands; Greek govt proposes to move more products to higher band of 23%, in order to cover fiscal gap
  • Greek govt has proposed zero deficit clause, debt break for Greek budget; clause would include automatic spending cuts in case threshold is breached
  • Greek govt would be willing to adopt additional fiscal measures, if agreement with creditors includes commitment to debt relief

  A quick frame of reference: in the US, Obama’s “fairness doctrine” tax hits above $250,000; in Greece the “solidarity levy” fairness threshold is €30,000.

  In summary: promises for higher revenues (which is problematic considering the Greek track record and the fact that it just spent 5 months haggling with the Troika instead of implementing even one actual reform) and none of the pension cuts so demanded by the Troika. Why are the country’s pensions such a sticking point?  To paraphrase the IMF’s Olivier Blanchard from his blog post last weekend:

  Why insist on pensions? Pensions and wages account for about 75% of primary spending; the other 25% have already been cut to the bone.  Pension expenditures account for over 16% of GDP, and transfers from the budget to the pension system are close to 10% of GDP.  We believe a reduction of pension expenditures of 1% of GDP (out of 16%) is needed, and that it can be done while protecting the poorest pensioners. 

  For Tsipras pension cuts are clearly a non-starter because as we said last week “he would almost certainly be promptly swept from power as Syriza renegs on its most solemn pre-election vow.”

  This is what else we said:

  With Greek tax revenues imploding and the hope of even a 1% primary surplus long gone as a result of the Greek economy grinding to a halt. Which in turn means that in order to be sustainable (and whatever happened to the IMF’s “sustainable” 2022 Greek debt/GDP forecast anyway), Greece has no choice but to cut both wages and pensions.

   

  Only the Greek government knows that such a move would be the start of the endgame, and will lead to either another technocratic government, a puppet of the Troika, or to an even more extremist government, this time from the ideological right.

  Overnight, Germany’s FAZ agreed with that assessment, noting that Greece creditors estimate country’s budget gap of €2b to €3.6b this month. The shortage won’t allow Greek government to repay IMF (even with a new injection of cash by the IMF) unless it cuts pensions, salaries as expenses amount to €2.2b by end of June.

  Based on the “final final” Tsipras proposal, these cuts are still missing,which in turn is a basis for a “non-starter” response by the Troika.

  As a result, Greece just played its final bluff. And now, as Yanis Varoufakis also wrote in in Germany’s Frankfurter Allgemeine Zeitung, Angela Merkel faces “a stark choice” ahead of the crucial summit of European leaders in Brussels on Monday.

  In other words the Greek parliament has washed its hands of the Greek fate, and a Grexit – if it happens – will be blamed on Merkel, if only in Greece.

  As a final reminder, with the fate of Greece clear to pretty much everyone, the only question is who is served with the blame for the unwinding of the “unbreakable” European monetary union. The game of final posturing continues.

  

  

  
  
  

  

• Goldman And SocGen Unleash The "C"-Word: ECB Alone Can't Contain Grexit Risks

  Unnamed "officials" have proclaimed a new set of Greek proposals received by Brussels tonight as "a good base," according to AFP, and thusly the Euro is very modestly bid. However, both Socgen (without a 3rd bailout of €60-80 billion over the next 3 years, Greek uncertainty remains high and leaves Grexit risk merely semi-stable) and Goldman (a deal will come only after the introduction of capital controls, a technical default on the IMF and issuance of IOUs/and a further build-up of arreas… and the damage resulting from a breaking of the integrity of the Euro would not be fixed by monetary policy alone) leave us wondering just who is buying Euros and US stocks and selling Swiss Francs as D(efault) Day looms and the 'C' word (contagion) spreads.

  Sure why not…

  

  A good early start to the rumor mill…

  #BREAKING Brussels receives new Greek proposals, which official says provide a 'good base'

  — Agence France-Presse (@AFP) June 21, 2015

  But SocGen remains unconvinced…

  At best, a semi-stable agreement is in the making

   

  In calling Monday’s emergency summit on Greece, European Council President Greece warned Friday that we are “close to the point where the Greek government will have to choose between accepting what I believe is a good offer of continued support or to head towards default”. He further added that “there is still time, but only a few days”. In Athens, the weekend saw a flurry of activity that concluded with a conference call with Prime Minister Tsipras, Chancellor Merkel, President Hollande and Commission President Juncker. Few details have emerged, however, on what was said on the call.

   

  Back in early June, both Greece and its creditors presented proposals for an agreement. At the time, Prime Minister Tsipras was told that any measures replaced must deliver the same fiscal impact. The proposed alternatives have, however, so far not been deemed credible by Greece’s creditors.

   

  Reducing tax exemptions: According to the news flow, the new proposal contains scrapping of a range of tax exemptions and a further reduction in early retirement schemes. The aim is to protect broader pensions from further cuts (the creditors want to see savings of 1% of GDP annually by 2016-17) and avoid a VAT increase on electricity. Furthermore, the creditors want no reversal of labour market reforms. Combined, Greek tax exemptions amount to around €3bn. 

   

  A six-month extension: Press reports suggest that in addition to unlocking the remaining €7.2bn of bailout funds, Greece’s creditors are preparing to offer a six-month extension of the current programme, allocating €10bn of bailout funds initially set aside to recapitalise banks to ensure that Greece has sufficient liquidity to meet its obligations until year-end. The Greek authorities fear that a short-term solution would leave the economy in a state of lingering uncertainty that would weigh further on confidence and thus growth. The next batch of PMI data will give an idea of how much damage the crisis has inflicted on business confidence. Meanwhile, bank lending rates remain high, and notably for SMEs (cf. charts below).

   

  CHART

   

  No talk yet of debt rescheduling: An important point for the Greek government is rescheduling of the debt. At the press conference after Thursday’s Eurogroup, President Dijsselbloem not that “We have not discussed this proposal, because the logical order of things is that we first reach an agreement on the terms of fiscal measures, reforms, etc. , before we look into the future. The Greek proposal was part of their vision of the future”. This confirms our view that there will be no “unconditional” debt rescheduling for Greece, i.e. this would come only after measures are delivered and is more likely to be part of the discussion of a third bailout programme.

   

  At best semi stable: If agreement is reached along the lines outlined above, it would to our minds be only semi-stable. First, implementation risks and political risks would remain elevated. Second, negotiating a third bailout programme for Greece is likely to be a challenging exercise. As a result, uncertainty would remain high, leaving Greece at risk of further economic disappointment. We estimate that the country needs €60-80bn over the coming three years, and that is assuming a still fairly benign economic environment and no new bank recapitalisation programme. Given the frail stance of the economy, the risk to our estimate is very clearly biased to the upside.

  And Goldman Sachs even less so…

  Our central case that a deal will come only after (or thanks to) the introduction of capital controls, a technical default on the IMF and issuance of IOUs/and a further build-up of arreas. The logic is that it is only when the cash constraint is fully binding and associated economic and financial stresses escalate that the Greek authorities would be able return to the negotiating table and compromise with official creditors. With many precedents to point to, we recognize that going into Monday’s policy meetings risks are skewed in favour of a last minute appeasement. This would allow a partial disbursement of funds withheld under Greece’s 5th review upon the passage of new measures, avert a credit event on the IMF and the ECB and buy time for more strategic discussions, i.e. push the problems to a future date. Should this not occur, and the base case be realized, risk would flip in the direction of outright Grexit.

  Mapping Market Response to Three Possible Scenarios

  To start, it is important to recognize that the financial risk emanating from developments in Greece is very specific. An increase in the correlation between Greek public debt securities and those of other EMU peripherals has not given way to a decline in asset prices of the proportions seen during 2011-12. There are good reasons for this. The majority of Greece’s public sector exposure is now with the foreign official sector (the roughly EUR 40bn of government bonds held in private hands are for the most part marked-to-market). As tensions have increased since the new Greek government took power, private claims against Greek banks (deposits and credit lines) have declined, with the ECB filling the void. Finally, the ECB has also been active in the secondary government bond market, and is expected to absorb between 40 and 80% of the gross supply of Euro area government bonds this year. The main effect of Greece thus far has been on volumes, and market liquidity. This is particularly evident in fixed income, especially in Euro area corporate credit. In our view, Greek risk would materialize on broader asset prices in much more prominent way if the chances of Grexit were to increase.

  Our market stance since the start of the second quarter has called for higher core rates and wider, more volatile peripheral spreads as the July bond redemptions approached. Here we map the three possible scenarios mentioned above to market responses, using the average spread between 10-yr Italian and Spanish government bonds to their German counterparts as a gauge (for brevity, we refer to this differential as the ‘bond spread’ henceforth).

  The ‘base case’: Should the imposition of capital controls and the introduction of IOUs prove to be the only way to reach a compromise, we would expect the bond spread to drift wider from the current 150bp to eventually as much as 200-250bp. To be sure, a ‘default’ and ‘capital controls’ are now consensus (going by our client interactions, we would say that at least 2-in-3 investors expect these joint events to occur). But by the same token, those anticipating Grexit remain a minority, as most point to opinion polls suggesting that the Greek population still wants to stay in the single currency. The reasons we are more pessimistic are twofold. Capital controls in Cyprus were an integral part of a negotiated package designed to restructure an insolvent banking sector.

   

  On the reverse, in the case of Greece, they would come because efforts to agree on a plan have repeatedly failed. Once cash is blocked and state payments are in other means than the EUR, the distinction between being part of the Euro system and not could start becoming more blurred. Also, the political and social reaction in Greece to a failure to find a compromise is unpredictable. After all, Europe has so far not offered a ‘growth strategy’ for its member states and too frequently remains a synonym for myopic austerity. As the base case unfolds, we think the market would adjust upwards the probability of Grexit.

   

  The ‘accommodation’: Probably spurred by news of a gathering at the highest political level, investors have started to hope that an appeasement is in sight. After all, this would conform to the pattern of Euro area negotiations seen in the past. A compromise could be centred around the structure contained in the 5th program review (e.g., higher direct taxes, some changes to access to pensions, etc) and -conditional on the Greek government passing measures in Parliament – unlock just enough financial resources to allow the government to make payments to official sector creditors during the Summer months and pay wages and pensions. This would probably lead to more strategic discussions over the second half of the year, with no major concessions until after the Spanish election booths are closed. The market would likely salute another ‘kick to the can’ with a relief rally. This could take the bond spread 20-30bp tighter to the 120-130 area, as hedges are covered and quick gains are sought. German Bunds in this scenario would still stay in the 80-90bp range. But without indications on what the strategy for Greece entails, however, we doubt that intra-EMU capital flows and market liquidity would materially improve. The Greek government would still operate on a very tight cash constraints, deposits might continue to decline, and the economic contraction extend.

   

  ECB President Draghi stated at a press conference on 03 June that a ‘strong agreement’ for Greece should have four characteristics: ‘produce growth’, have ‘social fairness’, be ‘fiscally sustainable’ and ‘address the remaining sources or factors of financial instability in the financial sector’. The order in which Mr Draghi chose to order these elements is significant. What, in our view, would meet the criteria for a strong deal is (i) an emphasis on deep structural adjustments and their timely implementation, (ii) realistic growth and primary balance targets and (iii) an explicit re-profiling of public debt, possibly going beyond the promises made to Greece in November 2012. Realistically, seeing this happen on Monday is far fetched, but a move in this direction in coming months could see the bond spread returning below 100bp by the end of the third quarter.

   

  The Road to ‘Grexit’: As discussed previously there is a myriad of possible interim currency arrangements, including dual currency circulation, which would qualify Greece still being formally ‘in’ but de facto having a foot out the door. In the extreme event of Greece introducing a new currency and defaulting on its exposures vs the ECB and the other Euro area member countries, we have stated that the bond spread could widen to 350-400bp, involving yields on BTPs and Bonos of around 4.00%.

   

  A widespread assumption is that if we were to head this way, the ECB would intervene to stem financial contagion in other EMU members. An effective way of doing so would be, for example, instructing national central banks in the core countries to purchase bonds issued by peripheral member states, signalling cross-country risk transfers (currently, each central bank is buying its own debt so that credit risk is not mutualized).

   

  Provided they are pre-emptive, policy countermeasures of this sort would support financial asset prices. But the damage resulting from a breaking of the integrity of the Euro would not be fixed by monetary policy alone, in our view. For all its specificities, the failure to keep Greece in the Euro would highlight the limitations of the growth and fiscal arrangements of the current Euro area policy framework, offer a precedent to other governments (and their oppositions), and crystallize the convertibility risk on all Euro area securities. Institutional upgrades to the economic and monetary union, along the lines of those included in the Four Presidents Report which European leaders are to discuss at the end of this month, would be required to overcome the ‘shock’. A key dimension over which these upgrades would be judged is the degree of ex ante risk sharing among Member States they involve. Examples include Euro area-wide bank deposit guarantees or an embryonic Euro area Treasury.

  *  *  *
  Crucially – as we already noted – the most important factor tomorrow will be the ECB's decision and implicitly the potential collateral availability. Before talking heads spout their usual blather on last minute deals and how great they are, perhaps a detailed read of the collateral problems ahead is in order (or – quite simply – you are entirely unqualified to judge the next steps).

  

  

  
  
  

  

• Credit Market Warning

  Submitted by Chris Martenson via PeakProsperity.com,

  There are large signs of stress now present in the credit markets. You might not know it from today's multi-generationally low interest rates, but other key measures such as liquidity and volatility are flashing worrying signs.

  Look, we all know that this centrally planned experiment forcing financial assets ever higher is simply fostering multiple bubbles, each in search of a pin. As all bubbles do, they are going to end with bang.

  I keep my eyes on the credit markets because that’s where the real trouble is brewing.

  Today’s markets are so distorted that you can reasonably argue that there’s not much in the way of useful signals emanating from them. And I wouldn’t put up too much of a counter-argument. But it's my contention that the bond market is the place to watch as it will provide the most useful clues that a reckoning has begun. And when these markets eventually return to earth, there will be blood in the streets. 

  While some may hope that rising yields are signaling a return to more rapid economic growth, or at least that the fear of outright deflation has lessened, the more likely explanation is that something is wrong and it’s about to get… wronger.

  Rising Yields

  Let’s begin with the first canary in this story, rising yields. The yield of a bond, expressed as a rate of interest, moves oppositely to its price. The higher the price goes, the lower the yield goes. The lower the price, the higher the yield. Imagine the relationship like a playground see-saw.

  Over these past few weeks and months, we’ve seen yields moving up quite a lot across a wide variety of bonds, at least in terms of the percentage size of the move (yes, the yields are still historically low by any measure).

  Again, not everybody thinks this is ominous. Some think it’s a healthy sign that growth, as well as a "healthy" return to inflation, is on the way:

  Interest rate climb brings out optimists

  Jun 16, 2015

   

  WASHINGTON — Consumers, businesses and investors are facing an era of higher borrowing costs as some of the lowest global interest rates in modern history begin to rise.

   

  Yet the message from most economists is a reassuring one: Rates won't likely climb fast or high enough to inflict much damage on economic recoveries in the United States or Europe.

   

  Part of the reason for the optimism is that rising rates are a healthy sign: They mean that U.S. and European economies are strengthening, people are spending, companies are hiring and prices are starting to rise at more normal rates. The risk of too-low inflation — which typically slows spending and makes loan repayments costlier — has receded.

  (Source)

  However it’s not entirely clear that these rising rates have anything to do with better economic prospects or higher inflation.

  Why?  The world’s markets have been primarily driven by liquidity flows.  The headwaters of that river are the easy money policies of the world’s central banks.  From there, the river picks up steam as corporations issue debt to buy back their shares.  Adding gasoline to the fire, margin loans are extended, and speculators lever up to chase assets world-wide.

  Add it all up, and fundamentals don't really matter at times like these. The huge flood of money and credit swamps everything.

  Which means that the signals themselves become the news. And at this time, the direction of the tide of this money/credit flow is the signal that matters most.

  And what is it telling us. That money is now beginning to move out of the credit markets. This is a huge development.

  Take a look at these following charts of German, Spanish, Italian, Portuguese, and US sovereign debt yields. Note that the yields have risen despite the beginning of the recent QE program in Europe. They are back to where they were in November 2014, and have risen by more than 100% from the lows in many cases:

  

  

  

  

  

  There are a competing variety of explanations for these yield hikes, but since they are occurring across numerous countries — and in the corporate and junk bond markets as well — it suggests that instead of any particular economic or fundamental explanation, liquidity is being pulled out of bonds generally.

  And why not? After years of bonds going straight up in price courtesy of central bank interventions, bonds have become a massive bubble. Perhaps enough buyers have finally realized that it's time to start selling before things get ugly.

  One immediate impact will be on mortgage rates, which have finally ticked back above 4% recently:

  Mortgage Rates Top 4% in Test for Housing

  Jun 11, 2015

   

  Mortgage rates vaulted above 4% for the first time this year, posing a challenge to the housing market’s strengthening recovery.

   

  For the week ended Thursday, the average rate of a 30-year, fixed-rate mortgage rose to 4.04% from 3.87% the previous week to the highest level since last October, according to mortgage-finance company Freddie Mac.

   

  The increase followed a Treasury-market sell-off over the past week that drove yields higher on most kinds of bonds. Bond yields rise as prices fall.

  (Source)

  Of course this will have an impact on real estate, but probably not too much yet. In the immediate term, sales volumes will cool as people wait for rates to ‘get back into the threes’ before taking on a mortgage.

  Stocks Are For Show, But Bonds Are For Dough

  All told, since the March highs in bond prices some $625 billion has been wiped off of the global sovereign bond index. That is a lot of vaporized capital. And rates are still incredibly low. Imagine how much more could be lost if rates were to march back up to their historical averages.

  The conclusion here is that you should keep your eyes firmly on the bond markets because they will signal for us that a change in trend has occurred well before the equity markets will. These rising yields should have your full attention. 

  The reason we care is because when the bond markets finally turn, all of the grotesque market distortions induced by the central banks are going to snap violently. The process will be fast, chaotic and exceptionally destructive for everyone who is not prepared.

  Agreeing with this view is a former Fed staffer who went public this week with similar concerns:

  Former adviser to Dallas Fed's Dick Fisher, Danielle DiMartino Booth speaking in a CNBC interview slams The Fed for "allowing the [market] tail to wag the [monetary policy] dog," warning that "The Fed's credibility itself is at stake… they have backed themselves into a very tight corner… the tightest ever." As she writes in her first Op-Ed, "The hope today is that the current era of easy monetary policy will have no deep economic ramifications. Such thinking, though, may prove to be naive… All retirees’ security is thus at risk when the massive overvaluation in fixed income and equity markets eventually rights itself."

  (Source)

  I’ll go further and say it is not just retirees' security that is at stake, but much more than that. Our financial markets may simply stop working when this "mother of all bubbles" — comprising both equities and bonds — finally bursts.

  Given the much greater size of money and credit that will be desperate to find an exit, and the lack of remaining options the central bankers have now versus then, the 2008 crisis may look tame in comparison.

  In Part 2: The Warning Indicators To Watch For Trouble In The Bond Market we examine the key factors that will signal the kind breakdown in bonds that could cause a chain-reaction conflagration across all financial markets.

  After 90 months of risk-free money inflows courtesy of the world's central banks, all the major market players are addicted and dependent on that ever-rising tide. What will happen when that tide reverses (and likely, all at once)? It's looking like we may be about to find out.

  Click here to read Part 2 of this report (free executive summary, enrollment required for full access)

  *  *  *

  What is perhaps even more worrisome – the credit cycle has turned and a dismal sense of deja vu is about to come upon US equity markets…

  

   

  

  

  
  
  

  

• Water Wars Crush California Wineries: "Whoever Has The Longest Straw Wins"

  Eerily reminiscent of the determinedly evil oil baron from the movie 'There Will Be Blood', Reuters reports the growing tensions amid California's drought-stricken wineries are boiling over: "There is way too much demand. I blame a lot of vineyards like other people do… It's a matter of who has the longest straw at the bottom of the bucket." No one should worry though, because the government is here to help – with a new water management agency…

   

  Between 1990 and 2014, harvested wine grape acreage in the growing region around Paso Robles nearly quintupled to 37,408 acres, as vintners discovered that the area's rolling hills, rocky soil and mild climate were perfect for coaxing rich, sultry flavors from red wine grapes. But, as Reuters reports, in the last few years, California's ongoing drought has hit the region hard, reducing grape yields and depleting the vast aquifer that most of the area’s vineyards and rural residents rely on as their sole source of water other than rain.

  Across the region, residential and vineyard wells have gone dry. Those who can afford to – including a number of large wineries and growers – have drilled ever-deeper wells, igniting tensions and leading some to question whether Paso Robles' burgeoning wine industry is sustainable.

   

  "All of our water is being turned purple and shipped out of here in green glass," said Cam Berlogar, who delivers water, cuts custom lumber and sells classic truck parts in the Paso Robles-area community of Creston.

   

  "There are a lot of farmers who are going to have to farm with a hell of a lot less water."

  But, spurred by the drought, California Governor Jerry Brown last year signed a package of bills requiring groundwater-dependent areas to establish local water sustainability agencies by 2017. The agencies will then have between three and five years to adopt water management plans, and then another two decades to implement those plans.

  Some residents worry that Paso Robles can't wait that long.

   

  Aquifer depletion is difficult to model, but one report for the county of San Luis Obispo projected that, even with no additional growth, the water drawn from the basin would exceed that going in by 1.8 billion gallons annually between 2012 and 2040.   

   

  "If it goes on unmanaged for another 10 years, it could reach a point where we couldn't correct it," said Hilary Graves, who makes wine under the Mighty Nimble brand. 

   

  Graves is a fourth-generation farmer whose ancestors came to California as migrant workers after losing everything during the Dust Bowl.

   

  "I would like to not have to retrace my family's footsteps back to Oklahoma and Arkansas," said Graves. 

  In a divisive 3-to-2 vote, county supervisors recently decided to move forward on creating a new water district that will be governed by an elected nine-member board.

  But many long-time residents and some of the region’s winemakers worry that large, well-funded newcomers will spend freely to get sympathetic board members elected and then stick local landowners with huge bills for infrastructure projects that disproportionately benefit the larger players.

  Fifth-generation farmer Cindy Steinbeck, of Steinbeck Vineyards & Winery, helped found Protect Our Water Rights (POWR), one of several groups that have sprung up around the region’s water issues, and, as Reuters reports, is deeply skeptical about a new water agency. Her group is urging land-owners to join a quiet title action to protect their water rights, and would rather see the courts oversee any plan to manage the basin’s water.

  "We are fighting the big boys," said Steinbeck, who says her goal is to prevent family farmers from being pushed out of Paso Robles.

   

  The region will be "an important test case for how other highly-stressed groundwater basins might introduce new regional oversight," said Jay Famiglietti, senior water scientist at NASA's Jet Propulsion Laboratory.

   

  The Paso Robles Agricultural Alliance for Groundwater Solutions (PRAAGS) has been the driving force behind the district. Its board includes a representative from J. Lohr Vineyards & Wines, and at least one director affiliated with Harvard's property interests in the area.

   

  Other district supporters include Justin Vineyards and County Supervisor Frank Mecham, who voted to establish the new agency.

   

  Mecham says he understands residents’ concerns about it, but he also understands the need for water management. Mecham’s great, great grandfather lost his cattle ranch in the area to a drought.

   

  "This is the cold, hard reality: You will be managed one way or another. You’ve got to pick your poison," he said.

  *  *  *

  As we previously noted, this is only the beginning of the water wars.

  

  

  
  
  

  

• More and More Warn That a Crash is Coming

  More and more insiders are warning of a potential systemic event.

  The first sign of real trouble concerned a number of investment legends choosing to close shop and return investors’ capital.

  The first real titan to bow out was Stanley Druckenmiller. Druckenmiller maintained average annual gains of nearly 30% for 30 years. He is arguably one of if not the greatest investor of the last three decades.

  In 2010, he chose to close shop, foregoing billions in management fees.

  Druckenmiller was not alone. In 2011, investment legend Carl Icahn closed his hedge fund to outside investors. Again, here was an investment legend who could lock in billions in investment management fees choosing to close up shop.

  He has since stated he is "extremely worried" about stocks.

  The list continues.

  Seth Klarman used to manage the fourth largest hedge fund in the US. A legendary value investor (copies of his book Margin of Safety sells for over $1,500 on Amazon), Klarman returned billions in assets under management to outside investors citing “too few” opportunities in the market (again, a legend stating that the market was overvalued).

  Even the perma-bulls are speaking with their actions.

  Warren Buffett, perhaps the single biggest cheerleader for stocks in the last 100 years, is sitting on a record amount of cash. The reason is obvious: the market is dangerously overpriced.

  His partner, Charlie Munger recently commented that he has not bought a single stock in his personal portfolio in over two years. This would once again indicate an investment legend stepped out of the market a year or so ago.

  Beyond the legends, institutional investors have been net sellers of stocks in 2014 and on into 2015. The same goes for hedge funds.

  Do you think they’d be doing this if they thought stocks were offering a lot of opportunities and value today?

  And finally, we get to today, where one of the largest asset managers in the world at Fidelity stated that we are heading for a “systemic event… similar to 2008” and that owning precious metals and physical cash is a good idea.

  The punch line?

  This was a bond fund manager. One of the class of investors who have poo poo’d Gold and physical cash in the past because those assets pay next to or no dividend.

  And even HE is warning that it’s time to take safety and prepare.

  Smart investors should take note of this now. It is a MAJOR red flag to be watched closely.

  If you've yet to take action to prepare for this, we offer a FREE investment report called the Financial Crisis "Round Two" Survival Guide that outlines simple, easy to follow strategies you can use to not only protect your portfolio from it, but actually produce profits.

  We made 1,000 copies available for FREE the general public.

  As we write this, there are less than 50 left.

  To pick up yours, swing by….

  http://www.phoenixcapitalmarketing.com/roundtwo.html

  Best Regards

   

  Phoenix Capital Research

   

   

   

   

   

  

  
  
  

  

• Geopolitics Will Trump Economics In Greece

  Submitted by John Browne via Euro Pacific Capital,

  Based on the continued failure of the negotiating parties to make any substantive progress in the talks over Greek debt payments, the financial world is tied up in knots over a possible Greek exit from the European Union. The uncertainty has manifested in both high and low finance, with a sharp sell-off in bonds, particularly EU and Greek government debt, and heightened retail withdrawals from Greek banks as depositors become wary of capital controls that would be imposed in the case of an exit. All concerned parties should likely breathe easier. Despite Greece's almost complete lack of financial integrity, neither NATO nor the EU can afford the political cost of a Greek exit from the EU.

  The unacceptable specter lurking behind the EU negotiators is that, if Greece is shown the door by the EU, Russia or even China might step in to provide financing to Greece in return for a strategic foothold in Western Europe and gateway to the Eastern Mediterranean. This is a possibility that Europe cannot abide. In short, international political ramifications will trump any economic or financial issues.

   

  As reported several months ago in this column, modern Greece has been used continuously by Europe as a bulwark against unwanted incursions. In the 1820s, Greek independence from Ottoman Turkey was financed and supported by Western powers as a way to contain and rollback Turkish influence in the Mediterranean. In the 20th Century, Greece became a key battleground of the Cold War, with the West expending considerable blood and treasure to ultimately keep socialist Greece from falling into the Soviet orbit.

   

  Although the Greeks received countless sums from abroad, Greek governments have been notoriously feckless, and have been instrumental in ensuring their nation's economic demise. By opting for generous socialist entitlements and blatantly anti-capitalist regulations, Greek governments decided to borrow irresponsibly to meet its obligations.

   

  With the formation of the European Union (EU), strenuous efforts were made to include Greece to prevent the rise of Communism. This encouraged the surreptitious acceptance of untruthful economic statistics to facilitate Greek membership, both of the EU and the Eurozone.

   

  Eurozone membership gave Greece access to vast amounts of cheap debt, offered largely under the false assumption that an early conclusion of a single political union would offer an implied EU guarantee for Greek debt. It was similar to investors assuming, erroneously, that the debt of Freddie Mac and Fannie Mae carried the 'implied' guarantee of the U.S. Government.

   

  But, as was the case with Fannie and Freddie (whose collapse many believed would have plunged the U.S. into deep Depression), the political cost of failure was too great to accept. Therefore, the financial costs of technical failure had to be borne by citizens. In addition, over the past few years, much of the Greek debt has been transferred from EU banks to EU governments that have the much abused ability to pass the bad debt onto future generations of their citizens.

   

  Likely aware of this, the Greek government has faced off repeatedly against some of the world's most powerful politicians and central bankers, winning time and yielding little.

   

  Even more importantly, when Greece's socialist Prime Minister Alexis Tsipras faces Germany's Chancellor Angela Merkel, he knows that she is acutely aware that any soft deals offered to Greece may be seen as a precedent encouraging Portugal, Ireland, Italy and Spain to push (even acting as a united block) for similarly favored treatment. Furthermore, any perceived increase in the prospect of a potential break-up of the EU might encourage voters in Great Britain, in the 2017 referendum, to vote to leave a sinking ship. A British exit could put an end to the European dream and place at risk trillions of dollars' worth of European debt and even the Euro-currency itself.

   

  In addition to these serious concerns, Merkel has one overriding fear. Should talks break down, Greece will likely go searching for other sources of funding. It may find many willing givers, all with strings attached. Russia may offer funding to Greece in return for a naval base. If not Russia, even China might attempt to offer a vast, soft funding rescue package in order to buy entry to the European and NATO landmass. It is no secret that China has a strong interest in taking over operations of the Port of Piraeus, one of the largest ports in the Mediterranean.

   

  While Merkel and her supporting fellow EU leaders may talk tough to Greece's leaders, they know it is politically unacceptable to allow a financial default to open the way to EU dissolution or the slightest possibility of a Russian or Chinese strategic incursion.

   

  As a result, whatever the eventual financial costs to EU taxpayers of a Greek default, the political costs of a Greek exit are likely to be seen as unacceptable. Therefore, after much posturing, delays and threats, I believe that the chances of an actual Greek exit are far lower than are commonly believed. Most likely the EU will allow a covert Greek default, disguised for the time being by extended repayment schedules, bogus refinancing formulae and possible delayed haircuts as bonds mature. They may insist that such moves are not a technical default. Despite that absurdity, our obedient press corps may even concur with such a characterization, and investors may be so thrilled that a relief rally occurs in stocks and bonds. Extend and pretend will once again be the only acceptable manner to confront our intractable problems.

   

  

  

  
  
  

  

• Artist's Impression Of The New Crusades?

  Deniers Repent…

  

   

  or face the consequences…

  

   

   

  Source: Townhall and Investors.com

  

  

  
  
  

  

• Who Said It?

  And now, a blast from the past. Guess who said it (source):

  … the long-term deficit and debt that we have accumulated is unsustainable. We can’t keep on just borrowing from China, or borrowing from other countries because part of it is, we have to pay interest on that debt. And that means that we’re mortgaging our children’s future with more and more debt, but what’s also true is that at some point they’re just going to get tired of buying our debt. And when that happens, we will really have to raise interest rates to be able to borrow, and that will raise interest rates for everybody — on your auto loan, on your mortgage, on — so it will have a dampening effect on the economy.

   

  … So we are going to have to deal with our long-term debt. As I said before, the biggest thing that we can do on that front is to deal with entitlements. 

   

  … Most of what’s driving us into debt is health care. And so we’ve got to drive down costs.

   

  …  it’s time for reform that’s built on transparency and accountability and mutual responsibility — values fundamental to the new foundation we seek to build for our economy
  

   

  … I will repeat again that my administration is going to seek to work with Congress to execute serious entitlement reform that preserves a safety net for our seniors, for people with disabilities, but also puts it on a firmer, stable footing so that people’s retirements are going to be secure not just for this generation, but also for the next generation.

  Incidentally, here is the CBO which showed just this past week what the “firmer, stable footing” looks like:

  

   

  Don’t know the answer? Here’s a hint – it’s the same person who said this in 2006:

  The fact that we are here today to debate raising America’s debt limit is a sign of leadership failure. It is a sign that the U.S. Government can’t pay its own bills. It is a sign that we now depend on ongoing financial assistance from foreign countries to finance our Government’s reckless fiscal policies.
   
  Over the past 5 years, our federal debt has increased by $3.5 trillion to $8.6 trillion. That is “trillion” with a “T.” That is money that we have borrowed from the Social Security trust fund, borrowed from China and Japan, borrowed from American taxpayers. And over the next 5 years, between now and 2011, the President’s budget will increase the debt by almost another $3.5 trillion.
   
  Numbers that large are sometimes hard to understand. Some people may wonder why they matter. Here is why: This year, the Federal Government will spend $220 billion on interest. That is more money to pay interest on our national debt than we’ll spend on Medicaid and the State Children’s Health Insurance Program. That is more money to pay interest on our debt this year than we will spend on education, homeland security, transportation, and veterans benefits combined. It is more money in one year than we are likely to spend to rebuild the devastated gulf coast in a way that honors the best of America.
   
  And the cost of our debt is one of the fastest growing expenses in the Federal budget. This rising debt is a hidden domestic enemy, robbing our cities and States of critical investments in infrastructure like bridges, ports, and levees; robbing our families and our children of critical investments in education and health care reform; robbing our seniors of the retirement and health security they have counted on.
   
  Every dollar we pay in interest is a dollar that is not going to investment in America’s priorities.

  Still confused? The answer, of course, is this person.

  

  
  
  

  

• UK Government Study Finds: If Nothing Is Done, Expect Civilizations' Collapse By 2040

  Authored by Nafeez Ahmed via Medium.com,

  New scientific models supported by the British government’s Foreign Office show that if we don’t change course, in less than three decades industrial civilisation will essentially collapse due to catastrophic food shortages, triggered by a combination of climate change, water scarcity, energy crisis, and political instability.

  Before you panic, the good news is that the scientists behind the model don’t believe it’s predictive. The model does not account for the reality that people will react to escalating crises by changing behavior and policies.

  But even so, it’s a sobering wake-up call, which shows that business-as-usual guarantees the end-of-the-world-as-we-know-it: our current way of life is not sustainable.

  The new models are being developed at Anglia Ruskin University’s Global Sustainability Institute (GSI), through a project called the ‘Global Resource Observatory’ (GRO).

  The GRO is chiefly funded by the Dawe Charitable Trust, but its partners include the British government’s Foreign & Commonwealth Office (FCO); British bank, Lloyds of London; the Aldersgate Group, the environment coalition of leaders from business, politics and civil society; the Institute and Faculty of Actuaries; Africa Development Bank, Asian Development Bank, and the University of Wisconsin.

  Disruption risk

  This week, Lloyds released a report for the insurance industry assessing the risk of a near-term “acute disruption to the global food supply.” Research for the project was led by Anglia Ruskin University’s GSI, and based on its GRO modelling initiative.

  The report explores the scenario of a near-term global food supply disruption, considered plausible on the basis of past events, especially in relation to future climate trends. The global food system, the authors find, is “under chronic pressure to meet an ever-rising demand, and its vulnerability to acute disruptions is compounded by factors such as climate change, water stress, ongoing globalisation and heightening political instability.”

  Three steps from crisis

  Lloyd’s scenario analysis shows that food production across the planet could be significantly undermined due to a combination of just three catastrophic weather events, leading to shortfalls in the production of staple crops, and ensuing price spikes.

  In the scenario, which is “set in the near future,” wheat, maize and soybean prices “increase to quadruple the levels seen around 2000,” while rice prices increase by 500%. This leads to rocketing stock prices for agricultural commodities, agricultural chemicals and agriculture engineering supply chains:

  “Food riots break out in urban areas across the Middle East, North Africa and Latin America. The euro weakens and the main European stock markets lose 10% of their value; US stock markets follow and lose 5% of their value.”

  The scenario analysis demonstrates that a key outcome of any such systemic shock to the global food supply?—?apart from “negative humanitarian consequences and major financial losses worldwide”?—?would be geopolitical mayhem as well as escalating terrorism and civil unrest.

  The purpose of exploring such scenarios is to prepare insurers for possibilities that are now more likely than previously assumed. The Lloyd’s report points out:

  “What is striking about the scenario is that the probability of occurrence is estimated as significantly higher than the benchmark return period of 1:200 years applied for assessing insurers’ ability to pay claims against extreme events.”

  That leading insurance companies are now attempting to factor in potential losses from such crises is a major step forward in pushing the financial sector to recognise the dark-side of the current system of fossil fuel dependence.

  The report concludes:

  “A global production shock of the kind set out in this scenario would be expected to generate major economic and political impacts that could affect clients across a very wide spectrum of insurance classes.”

  It would have “major consequences for companies’ investment income,” with the potential to “generate losses that span many years.” It would also result in political instabilities that take “decades to resolve” while imposing “greater restrictions on international business.”

  Governments want answers

  The scenario was developed for Lloyds by the Anglia Ruskin University team with the British Foreign Office’s UK/US Task Force on Resilience of the Global Food Supply Chain to Extreme Events.

  The Foreign Office’s food resilience Task Force began to come together late last year. An FCO document from February 2015 for a Task Force workshop throws light on its rationale, direction, and participants.

  “The taskforce is looking at plausible worst case scenarios of disruption to the global agri-food system, caused by extreme weather events,” the document explains. Taskforce projects aim to “improve understanding of how changing extreme weather events (severity, type, frequency, geographical impact) may impact on global food security” and to “identify how market and policy responses may exacerbate or ameliorate these effects.”

  Of particular concern to the FCO’s taskforce is to determine “how large shocks in agricultural production could occur (e.g. floods, droughts, wind storms),” how these would translate into “crop reductions,” and “how society responds to high food prices or limited local availability.”

  Although coordinated by the FCO, other British government-backed programmes are involved, chiefly, the Global Food Security Programme and UK Science & Innovation Network, together representing the Department of Environment, Food and Rural Affairs (DEFRA); the Department of Health; the Department for International Development (DFID); the Government Office for Science; the Department for Business, Innovation and Skills; and the Scottish and Welsh governments.

  On the US side, government involvement was limited to the Center for Integrated Modeling of Sustainable Agriculture and Nutrition Security (CIMSANS), which is supported by the US State Department, and USAID’s Famine Early Warning Systems Network.

  Another participant was the Consultative Group for International Agricultural Research (CGIAR), whose membership includes the UN Food and Agriculture Organisation (FAO), the United Nations Development Programme (UNDP), the World Bank, the European Commission, the Asian Development Bank, and the African Development Bank, among many others.

  Collapse

  I had been in touch with the Anglia Ruskin GSI team for a while, having previously reported on some of their work?—?and this month joined GSI as a visiting research fellow.

  Earlier this year, I attended an invite-only GRO steering committee meeting of scientists, technologists, financiers, economists, and academics, where GSI’s Director, Dr. Aled Jones, delivered a detailed presentation on the modelling work done so far, what it implied, and where it was leading.

  Dr. Jones was previously Deputy Director of the Programme for Sustainability Leadership at the University Cambridge, where he was Director of the British government’s flagship Chevening Fellowships Economics of Climate Change Programme, supported by the UK Foreign Office to deliver the FCO’s Strategic Framework. Jones also chairs a working group of the UK government’s Department for Energy and Climate Change’s Capital Markets Climate Initiative (CMCI).

  Jones’ GRO initiative has received direct funding from the Foreign Office to develop its modelling capacity, and he is a co-leader of the FCO Task Force’s working group on ‘Impacts’, where he and his team apply the GRO models to assess the way crop reductions would affect global food security.

  GRO is developing two types of model: an Agent-Based Model to explore short-term scenarios of policy decisions by simulating social-economical-environmental systems; and a System Dynamics Model capable of providing projections for the next 5 years based on modelling the complex interconnections between finite resources, planetary carrying capacity, and the human economy.

  “The financial and economic system is exposed to catastrophic short-term risks that the system cannot address in its current form,” Dr. Jones told us.

  He described GRO’s use of the Agent-Based Model to capture and simulate the multiple factors that led to the 2011 Arab Spring events.

  By successfully modeling the “impact of climate-induced drought on crop failures and the ensuing impact on food prices,” he said, the model can then be recalibrated to “experiment with different scenarios.”

  “We ran the model forward to the year 2040, along a business-as-usual trajectory based on ‘do-nothing’ trends?—?that is, without any feedback loops that would change the underlying trend. The results show that based on plausible climate trends, and a total failure to change course, the global food supply system would face catastrophic losses, and an unprecedented epidemic of food riots. In this scenario, global society essentially collapses as food production falls permanently short of consumption.”

  Another steering committee member raised their hand: “So is this going to happen? Is this a forecast?”

  “No,” said Jones. “This scenario is based on simply running the model forward. The model is a short-term model. It’s not designed to run this long, as in the real world, trends are always likely to change, whether for better or worse.”

  “Okay, but what you’re saying is that if there is no change in current trends, then this is the outcome?” continued the questioner.

  Jones nodded with a half-smile. “Yes,” he said quietly.

  In other words, simply running the Agent-Based Model forward cannot generate a reliable forecast of the future. For instance, no one anticipated the pace at which solar and wind energy would become cost-competitive with fossil fuels. And the fact that governments and insurers are now beginning to scope such risks, and explore ways of responding, shows how growing awareness of the risks has the potential to trigger change.

  Whether that change is big enough to avoid or mitigate the worst is another question. Either way, the model does prove in no uncertain terms that present-day policies are utterly bankrupt.

  Limits to growth

  GRO’s System Dynamics Model takes a different approach, building on the ‘World3’ model developed by scientists at Massachusetts Institute of Technology (MIT), which famously forecast that humankind faced impending “limits to growth” due to environmental and resource constraints.

  In popular consciousness, the ‘limits to growth’ forecasts were wrong. But recent studies, including one by the Australian government’s scientific research agency CSIRO, confirm that most of its predictions were startlingly prescient.

  Dr. Jones and his team at Anglia Ruskin University have taken this confirmation several steps further, not only by testing the model against the real world, but by recalibrating it internally using new and updated data.

  “World3 was a very good, robust system,” he told us. “Some assumptions were incorrect and misparameterised?—?for instance, life expectancy is smaller than assumed, and industrial and service outputs are larger than assumed. And the model was missing some shock dynamics and feedback loops.”

  The same questioner put his hand up and asked, “Does this mean the original model and its predictions are flawed?”

  “I would say the model was largely correct,” said Jones. “It was right enough to give a fairly accurate picture of future limits to growth. But there are some incorrect parameters and gaps.”

  The System Dynamics Model, Jones explained, is designed to overcome the limitations of World3 by recalibrating the incorrect parameters, adding new parameters where necessary, and inputting fresh data. There are now roughly 2,000 parameters in the model, drawing on a database of key indicators on resources and social measures for 212 countries, from 1995 until today.

  Jones’ affirmation of the general accuracy of the limits to growth model was an obvious surprise to some in the room.

  The original model forecasted global ecological and economic collapse by around the middle of the 21st century, due to the convergence of climate change, food and water scarcity, and the depletion of cheap fossil fuels?—?which chimes with both the GRO’s models.

  Last year, Dr. Graham Turner updated his CSIRO research at the University of Melbourne, concluding that:

  “… the general onset of collapse first appears at about 2015 when per capita industrial output begins a sharp decline. Given this imminent timing, a further issue this paper raises is whether the current economic difficulties of the global financial crisis are potentially related to mechanisms of breakdown in the Limits to Growth BAU [business-as-usual] scenario.”

  For the first time, then, we know that in private, British and US government agencies are taking seriously longstanding scientific data showing that a business-as-usual trajectory will likely lead to civilisational collapse within a few decades?—?generating multiple near-term global disruptions along the way.

  The question that remains is: what we are going to do about it?

   

  

  

  
  
  

  

• Greek GDP: The Shocking Reality Vs IMF Forecasts; And Who Is To Blame For The Greek Implosion

  With a Greek default, shortly followed by a Grexit, a collapse of the “irreversible union” (but… but… “political capital“), and ultimately the end of the latest European monetary union experiment (the latest in a long and illustrious series of prior failures) now seemingly imminent, the blame game has begun. As the NYT noted overnight “the recriminations that would then fly would be so bitter that they would inflict a second round of damage.”

  But who is really to blame?

  Simple: anyone and everyone who willingly and voluntarily was complicit with the great “can kicking” bailout fiction of the past 5 years, and decided to stick their head in the sand when during the first bailout of Greece, followed promptly by the second bailout (and default to private creditors) when despite our (among many others) outcries that these piecemeal rescues do nothing to fix the underlying insolvency of Greece which requires a grand balance sheet reset, one where the Greece revenues and outlays are sustainable in the long-run and not just until the next all time high of the S&P500, everyone – from the top unelected European technocrat to the lowliest IMF and Deutsche Bank analyst peddled a lie that “Greece (and by extension Europe) was fixed.“

  For those still unconvinced that it was an absolutely epic lie, because while stocks were soaring as the lies piled up higher and higher, this is what happened. From Bruegel which is shocked, shocked to find that Greek GDP fell “much more than was foreseen in the adjustment programmes“:

  After 2010 the collapse of the Greek economy accelerated. GDP fell much more than was foreseen in the adjustment programmes. The big question is whether all of this collapse was inevitable given the unsustainable character of the pre-crisis growth model of Greece, or if the two Troika programmes exacerbated the output fall. 

  Yes, it was inevitable, because just like the Troika pretended to reform the insolvent Greek balance sheet, so Greece pretended to implement structural reforms. Visually:

  

   

  That this would happen was obvious to all but the most pathological Eurofanatics. They can be excused: they were ideologues and demagogues, whose failed vision will lead to at least one lost Greek generation.

  It is all those others, who knew that what was shown above was coming and still pushed for every deal that would delay the inevitable and only benefit Europe’s banks and lead to massive shareholders gains at the expense of one European nation’s terminal collapse, who are truly at fault.

  It is those people from whom the Greek population, which now truly has nothing left to lose, should demand an “explanation” if nothing more.

  

  

  
  
  

  

• "Investing" Simplified

  Where do you think we are?

  Pin the “You Are Here” tail on the “market” donkey…

  

   

  Source: KennyGee

  

  

  
  
  

  

• Jim Rogers: Turmoil Is Coming

  Submitted by Adam Taggart via Peak Prosperity,

  Two years since his last interview with us, investor Jim Rogers returns and notes that the risks he warned of last time have only gotten worse. In this week's podcast, Jim shares his rational for predicting:

  • increased wealth confiscation by the central planners
  • a pending major financial market collapse
  • gold's return as the preferred safe haven investment
  • more oil price weakness, followed by a trend reversal
  • Russia's rebound
  • a China bubble reckoning
  • agriculture's long-term value

  I suspect in the next year or two we will see some kind of major, major problems in the world financial markets.

   

  I would suspect when we have this correction, it's going to cause central banks to panic. There's going to come a time when there is not much the central banks can do when they have lost all credibility. When governments have lost all credibility. They will print and spend and borrow, but there comes a time when people are just going to say We don’t want to play this game anymore. And at that point, the world has serious, serious problems because there's nothing to rescue us.

   

  I suspect the next economic/financial collapse will be the one they can't deal with. But, if somehow they are miracle workers, be very, very careful. I would be worried about 2022 – 2023 then. The game will definitely be up if it's not up this time around.

   

  My US Dollar holding is my largest position. Not because I have any confidence in the US Dollar; it's a terribly, terribly flawed currency. We are the largest debtor nation in the world’s history. And the debt is going higher and higher and higher. But there is going to be more turmoil coming. And during periods of turmoil people flee to a safe haven. The US Dollar is not a safe haven, but many people think it is, and they don’t know what else to do. So they will go to the US Dollar. They are not going to go to the yen. They are not going to go to the Euro.

   

  We may even see the US dollar, for a variety of reasons, turn into a bubble. That of course is not good for gold. Gold may drop a lot, at which point I would have to sell my US Dollars and hopefully be smart enough to buy gold. 

  Click the play button below to listen to Chris' interview with Jim Rogers (26m:16s)

   

  *  *  *

  But that's not all Rogers has said recently (as Sputnik reports)…

  Despite the Western efforts to discourage investors from participating in the St. Petersburg Economic Forum, the affair is in full swing. Jim Rogers, legendary investor and chairman of Beeland Interests, is in attendance, and he told Radio Sputnik that the Russian economy may be the most promising market for fellow investors.

   

  "Well, it’s gonna change the world," Rogers says when asked about the role of the BRICS Bank. "You know, the world has been dominated by IMF, World Bank, and other American-controlled institutions, and that’s never good, that only one players in charge of everything. So now we’re going to have competition…

   

  "This will be very good for the world," he adds.

  Speaking with Radio Sputnik, Rogers notes how the United States economic actions are driving other together, in particular Russia and China. In the long-term, that new economic alliance can only hurt the US, as it continues to impose unfair sanctions.

  "I suspect even Japan, eventually, will be closer and closer to Russia, just because they need to. That’s where the transportation will be, that’s where the natural resources are," he says. "Go east, don’t go west."

  When asked specifically about what investments to watch for in the future, Rogers offered sage advice.

  "I was bearish on Russia for forty-seven years, and the last couple of years Russia has changed, so I’m changing," he said.

   

  "If you can invest in change, and you buy it at a good price, you’re probably going to make a lot of money."

  *  *  *

  

  

  

  
  
  

  

• The Euro Does Not Have A Problem… It Is The Problem

  By Liam Fox MP, Conservative MP for North Somerset and former Defence Secretary, originally published in the Telegraph

  The Euro Does Not Have A Problem… It Is The Problem

  There will be a temptation to gloat over the Greek crisis over the next week and a queue of people waiting to say “I told you so”. Both would be unwise.

  Whether Greece exits the eurozone or not (and it is an increasingly absurd charade), there remain a number of uncomfortable truths that the rest of the countries of Europe, whether in the eurozone, the EU or neither will have to confront. The first is that Greece is a failing state, something that will have implications far beyond the merely financial. Long before the financial crisis hits the global economy in 2008-09, Greece was in trouble.

  The combination of structural economic weakness and high structural deficits were compounded by a culture where tax evasion and corruption are both widespread and, to a large extent, acceptable.

  In the six years from 2004, Greek output increased in nominal terms by 40 per cent, while government spending rose by 87 per cent and tax revenues rose by a mere 31 per cent.

  

  A man walks past graffiti reading “Free Greece from the European prison” written on the wall of an abandoned house in Athens

  The European authorities charged with overseeing the single currency should have acted then. Their failure to do so has been partly to blame for today’s crisis.

  It does not matter how much money is now thrown at Greece, Thessalonica will not be Düsseldorf any time soon. The cultural gap between the hard-working and profit focused north of Europe could not be more different from this southerly neighbour where masseurs can retire early on a state pension because it is regarded as hard and damaging physical labour.

  A Grexit will be no panacea, and might even create its own array of difficulties. Even if Greece leaves the single currency, it will still have phenomenal financial problems, at least in the short and medium term, which need to be addressed and the danger is that it will suck in both Chinese and Russian money, becoming a strategic liability for the rest of Europe and the Nato alliance more widely. Russia is, for example, keen to have allies who will block the renewal of EU sanctions over Ukraine.

  But the Greek euro-tragedy is part of a wider problem. Last week, on a visit to Macedonia, I saw African and Middle Eastern migrants walking through the country to try to get to an EU state. The fact that they hadn’t even bothered to stop in Greece spoke volumes about how it is viewed internationally.

  The second uncomfortable truth to be faced is that the euro is a fundamentally flawed project. This, of course, comes as no surprise to those of us who have been predicting from its very inception that it spells trouble. The haste in which it was created and the fact that it was always more a political project than an economic one, has built chronic instability into its architecture.

  We have now reached the point where the euro does not have a problem – the euro is the problem. De-risking it should be a priority for European leaders, as it now poses a chronic risk to global financial stability. Either the outliers need to leave or the countries inside the eurozone needs to move down the pathway to full political, economic and monetary union.

   

  

  A woman walks past a graffiti called ‘Death of Euro’ by French street artist Goin in central Athens (AFP)

  The first option is unpopular because to see the riskier southern European economies leave would be a huge setback to those who hold the concept of ever closer union as an almost religious concept.

  For the other outlier, Germany, to leave (a logical if politically unrealistic option) would deprive it of the use of a currency hugely undervalued for its own economic strength.

  It is one of the unspoken truths of the euro project that while German politicians and tax payers complain about the cost of maintaining some of their weaker economic partners, it is Germany itself, which has benefited enormously from the value of the euro in terms of its international trade.

  As for closer union, this would first involve persuading the peoples of Europe that it was a good idea, which would be no mean feat, followed by the treaty change to which European leaders are so averse, as our own government is discovering.

   

  

  Alexis Tsipras speaks to Russian President Vladimir Putin at an economic forum in St Petersburg (AP)

  The lack of appetite for either solution in European capitals is testament to the failure of real leadership at a time when it is much needed. Instead, they are content to play a game of explosive pass the parcel, hoping that they will not be there when it finally goes off.

  This fundamental threat to financial stability will not be cured by a Greek exit – it is ticking time bomb that no one is willing to defuse. One day it will go bang.

  The third uncomfortable truth is that the Greek crisis has profound implications for the EU itself and for its democratic structures. Indeed, it had become a political catch 22. If Greece were to be allowed to continue to spend vast amounts of money that it does not possess, then others would quickly be in the queue, including Spain, Portugal and Italy. Clearly, this would have a profoundly destabilising effect because neither the European institutions (nor more importantly, German taxpayers) could contemplate such an outcome. Equally, it has given proof to Eurosceptic voices across Europe that their fears were correct.

  To a large extent, it no longer matters what voters want or how they cast their ballots in national elections. As long as they are members of the eurozone, they will be forced to accept the economic orthodoxy emanating from Berlin. This is not to say that such an orthodoxy is in any way wrong in itself, but it is becoming increasingly clear that the current model risks creating the very forces of nationalism and resentment that the EU was set up to diminish in the first place.

  Those obsessed with the ever closer union project have brought economic risk and political instability to the European continent. If they break, it is because they will not bend. The skies are darkening over the continent with euro-chickens coming home to roost.

  Liam Fox is the Conservative MP for North Somerset and former Defence Secretary

  

  

  
  
  

  

• CoNTaGioN…

  

  
  
  

  

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