Today’s News June 30, 2015

• The Emergence Of Orwellian Newspeak And The Death Of Free Speech

  Submitted by John Whitehead via The Rutherford Institute,

  “If you don’t want a man unhappy politically, don’t give him two sides to a question to worry him; give him one. Better yet, give him none. Let him forget there is such a thing as war. If the government is inefficient, top-heavy, and tax-mad, better it be all those than that people worry over it…. Give the people contests they win by remembering the words to more popular songs or the names of state capitals or how much corn Iowa grew last year. Cram them full of noncombustible data, chock them so damned full of ‘facts’ they feel stuffed, but absolutely ‘brilliant’ with information. Then they’ll feel they’re thinking, they’ll get a sense of motion without moving. And they’ll be happy, because facts of that sort don’t change.” ? Ray Bradbury, Fahrenheit 451

  How do you change the way people think? You start by changing the words they use.

  In totalitarian regimes—a.k.a. police states—where conformity and compliance are enforced at the end of a loaded gun, the government dictates what words can and cannot be used. In countries where the police state hides behind a benevolent mask and disguises itself as tolerance, the citizens censor themselves, policing their words and thoughts to conform to the dictates of the mass mind.

  Even when the motives behind this rigidly calibrated reorientation of societal language appear well-intentioned—discouraging racism, condemning violence, denouncing discrimination and hatred—inevitably, the end result is the same: intolerance, indoctrination and infantilism.

  It’s political correctness disguised as tolerance, civility and love, but what it really amounts to is the chilling of free speech and the demonizing of viewpoints that run counter to the cultural elite.

  As a society, we’ve become fearfully polite, careful to avoid offense, and largely unwilling to be labeled intolerant, hateful, closed-minded or any of the other toxic labels that carry a badge of shame today. The result is a nation where no one says what they really think anymore, at least if it runs counter to the prevailing views. Intolerance is the new scarlet letter of our day, a badge to be worn in shame and humiliation, deserving of society’s fear, loathing and utter banishment from society.

  For those “haters” who dare to voice a different opinion, retribution is swift: they will be shamed, shouted down, silenced, censored, fired, cast out and generally relegated to the dust heap of ignorant, mean-spirited bullies who are guilty of various “word crimes.”

  We have entered a new age where, as commentator Mark Steyn notes, “we have to tiptoe around on ever thinner eggshells” and “the forces of ‘tolerance’ are intolerant of anything less than full-blown celebratory approval.”

  In such a climate of intolerance, there can be no freedom speech, expression or thought.

  Yet what the forces of political correctness fail to realize is that they owe a debt to the so-called “haters” who have kept the First Amendment robust. From swastika-wearing Neo-Nazis marching through Skokie, Illinois, and underaged cross burners to “God hates fags” protesters assembled near military funerals, those who have inadvertently done the most to preserve the right to freedom of speech for all have espoused views that were downright unpopular, if not hateful.

  Until recently, the U.S. Supreme Court has reiterated that the First Amendment prevents the government from proscribing speech, or even expressive conduct, because it disapproves of the ideas expressed. However, that long-vaunted, Court-enforced tolerance for “intolerant” speech has now given way to a paradigm in which the government can discriminate freely against First Amendment activity that takes place within a government forum. Justifying such discrimination as “government speech,” the Court ruled that the Texas Dept. of Motor Vehicles could refuse to issue specialty license plate designs featuring a Confederate battle flag. Why? Because it was deemed offensive.

  The Court’s ruling came on the heels of a shooting in which a 21-year-old white gunman killed nine African-Americans during a Wednesday night Bible study at a church in Charleston, N.C. The two events, coupled with the fact that gunman Dylann Roof was reportedly pictured on several social media sites with a Confederate flag, have resulted in an emotionally charged stampede to sanitize the nation’s public places of anything that smacks of racism, starting with the Confederate flag and ballooning into a list that includes the removal of various Civil War monuments.

  These tactics are nothing new. This nation, birthed from puritanical roots, has always struggled to balance its love of liberty with its moralistic need to censor books, music, art, language, symbols etc. As author Ray Bradbury notes, “There is more than one way to burn a book. And the world is full of people running about with lit matches.”

  Indeed, thanks to the rise of political correctness, the population of book burners, censors, and judges has greatly expanded over the years so that they run the gamut from left-leaning to right-leaning and everything in between. By eliminating words, phrases and symbols from public discourse, the powers-that-be are sowing hate, distrust and paranoia. In this way, by bottling up dissent, they are creating a pressure cooker of stifled misery that will eventually blow.

  For instance, the word “Christmas” is now taboo in the public schools, as is the word “gun.” Even childish drawings of soldiers result in detention or suspension under rigid zero tolerance policies. On college campuses, trigger warnings are being used to alert students to any material they might read, see or hear that might upset them, while free speech zones restrict anyone wishing to communicate a particular viewpoint to a specially designated area on campus. Things have gotten so bad that comedians such as Chris Rock and Jerry Seinfeld refuse to perform stand-up routines to college crowds anymore.

  Clearly, the country is undergoing a nervous breakdown, and the news media is helping to push us to the brink of insanity by bombarding us with wall-to-wall news coverage and news cycles that change every few days.

  In this way, it’s difficult to think or debate, let alone stay focused on one thing—namely, holding the government accountable to abiding by the rule of law—and the powers-that-be understand this.

  As I document in my book Battlefield America: The War on the American People, regularly scheduled trivia and/or distractions keep the citizenry tuned into the various breaking news headlines and entertainment spectacles and tuned out to the government’s steady encroachments on our freedoms. These sleight-of-hand distractions and diversions are how you control a population, either inadvertently or intentionally, advancing a political agenda agenda without much opposition from the citizenry.

  Professor Jacques Ellul studied this phenomenon of overwhelming news, short memories and the use of propaganda to advance hidden agendas. “One thought drives away another; old facts are chased by new ones,” wrote Ellul.

  Under these conditions there can be no thought. And, in fact, modern man does not think about current problems; he feels them. He reacts, but he does not understand them any more than he takes responsibility for them. He is even less capable of spotting any inconsistency between successive facts; man’s capacity to forget is unlimited. This is one of the most important and useful points for the propagandists, who can always be sure that a particular propaganda theme, statement, or event will be forgotten within a few weeks.

  Already, the outrage over the Charleston shooting and racism are fading from the news headlines, yet the determination to censor the Confederate symbol remains. Before long, we will censor it from our thoughts, sanitize it from our history books, and eradicate it from our monuments without even recalling why. The question, of course, is what’s next on the list to be banned?

  It was for the sake of preserving individuality and independence that James Madison, the author of the Bill of Rights, fought for a First Amendment that protected the “minority” against the majority, ensuring that even in the face of overwhelming pressure, a minority of one—even one who espouses distasteful viewpoints—would still have the right to speak freely, pray freely, assemble freely, challenge the government freely, and broadcast his views in the press freely.

  This freedom for those in the unpopular minority constitutes the ultimate tolerance in a free society. Conversely, when we fail to abide by Madison’s dictates about greater tolerance for all viewpoints, no matter how distasteful, the end result is always the same: an indoctrinated, infantilized citizenry that marches in lockstep with the governmental regime.

  Some of this past century’s greatest dystopian literature shows what happens when the populace is transformed into mindless automatons.

  In Ray Bradbury’s Fahrenheit 451, reading is banned and books are burned in order to suppress dissenting ideas, while televised entertainment is used to anesthetize the populace and render them easily pacified, distracted and controlled.

   

  In Aldous Huxley’s Brave New World, serious literature, scientific thinking and experimentation are banned as subversive, while critical thinking is discouraged through the use of conditioning, social taboos and inferior education. Likewise, expressions of individuality, independence and morality are viewed as vulgar and abnormal.

   

  And in George Orwell’s 1984, Big Brother does away with all undesirable and unnecessary words and meanings, even going so far as to routinely rewrite history and punish “thoughtcrimes.” In this dystopian vision of the future, the Thought Police serve as the eyes and ears of Big Brother, while the Ministry of Peace deals with war and defense, the Ministry of Plenty deals with economic affairs (rationing and starvation), the Ministry of Love deals with law and order (torture and brainwashing), and the Ministry of Truth deals with news, entertainment, education and art (propaganda). The mottos of Oceania: WAR IS PEACE, FREEDOM IS SLAVERY, and IGNORANCE IS STRENGTH.

  All three—Bradbury, Huxley and Orwell—had an uncanny knack for realizing the future, yet it is Orwell who best understood the power of language to manipulate the masses. Orwell’s Big Brother relied on Newspeak to eliminate undesirable words, strip such words as remained of unorthodox meanings and make independent, non-government-approved thought altogether unnecessary. To give a single example, as psychologist Erich Fromm illustrates in his afterword to 1984:

  The word free still existed in Newspeak, but it could only be used in such statements as "This dog is free from lice" or "This field is free from weeds." It could not be used in its old sense of "politically free" or "intellectually free," since political and intellectual freedom no longer existed as concepts….

  Where we stand now is at the juncture of OldSpeak (where words have meanings, and ideas can be dangerous) and Newspeak (where only that which is “safe” and “accepted” by the majority is permitted). The power elite has made their intentions clear: they will pursue and prosecute any and all words, thoughts and expressions that challenge their authority.

  This is the final link in the police state chain.

  Having been reduced to a cowering citizenry—mute in the face of elected officials who refuse to represent us, helpless in the face of police brutality, powerless in the face of militarized tactics and technology that treat us like enemy combatants on a battlefield, and naked in the face of government surveillance that sees and hears all—we have nowhere left to go. Our backs are to the walls. From this point on, we have only two options: go down fighting, or capitulate and betray our loved ones, our friends and our selves by insisting that, as a brainwashed Winston Smith does at the end of Orwell’s 1984, yes, 2+2 does equal 5.

  

  

  

  

  

• The Mood On The Ground In Greece: "Some Have Raised The Prospect Of Civil War"

  Earlier today, John O’Connell, CEO of Davis Rea, spoke to Canada’s BNN from what may be Greece’s top tourist attraction, the island of Santorini, to give a sense of the “mood on the ground.” Not surprisingly, his feedback was that, at least as far as tourists are concerned, nobody is worried. After all, it is not their funds that are capital constrained plus should the Drachma return as the local currency, the purchasing power of foreigners will skyrocket.

  What he did point out, however, that was quite notable is the diametrically opposing views between old and young Greeks when it comes to Grexit. According to O’Connell, “the old people want to vote for Europe cause they have a lot to lose, they have their pensions, but the younger population – they are already poor, they are already unemployed – and they don’t have much to lose. Their attitude is it’s going to be tough, it’s already tough, and so why not just move on go back to the Drachma, and they’re ok with that. Their attitude is in 5 to 10 years I’ll be better off. They believe there’s a lot of misinformation. They believe they’re being pressured by European countries particularly Germany that are holding them to very difficult terms.”

  He continues: “whatever the polls may way, the young population is going to vote to leave the Euro and deal with the problems long-term.”

  Finally, his take on capital controls and tourism: “You are going to see a big, big drop off in tourism because people are not going to want to come here. People are going to worry that if people do come here with a lot of Euro, are they going to be allowed to leave with those Euros. It’s going to have a dramatic impact on the Greek economy at some point, a lot of the people that live here are underestimating how bad it could get in the short term.”

  The punchline:

  There have been some people that worry that the military may actually get involved. It wouldn’t surprise me – there are some people in Greece that have raised the whole prospect of potential civil war.

  Who would benefit the most from a Greek civil war? Why the biggest exporter of weapons in the world, of course: the United States.

  So dear Greeks: please avoid Kiev-style, CIA-inspired “Maidan type” provocations. The US military industrial complex is wealthy enough without your help.

  Full video after the jump.

  

  

  

  

  

  

• Strap In! China Is Crashing Again

  In the last 2 days, PBOC has thrown everything at the ponzi-fest they call a rational market. An RRR cut, a Benchmark rate cut, a rev repo rate cut, a CNY50 Bn rev repo injection, a stamp duty cut, IPO halts (cut supply), and last but not least permission to speculate with a reassurance that shares on a solid foundation. The outcome of all this policy-panic – CHINEXT (China’s Nasdaq) is down another 6% today (down 25% in 3 days) and aside from CSI-300 futures, all other major Chinese indices are in free-fall. 

   

  The message from The PBOC:

  • Don’t believe or follow negative rumors against Chinese economic development
  • *LOOSE LIQUIDITY TO SUPPORT CHINA’S STOCK MARKET: SEC. JOURNAL
  • *IMPROVING ECONOMY TO SUPPORT CHINA’S STOCK MARKET: SEC. JOURNAL

  The result:

  

   

  Some context…

  

   

  So much for these flows:

  • *CHINA MAJOR BLUE-CHIP ETFS HAVE $1.5B NET PURCHASE MONDAY: NEWS

  Add to that the fact that industrial metals are collapsing with steel rebar limit down…

  

   

  …and it appears Central Bank Omnipotence is under threat.

  

  

  

  

  

• Is The American Youth Ready For Conscription?

  Authored by Jay Johnson, originally posted at SputnikNews.com,

  The shining future that America once had is all but a page note in the history books now. Record numbers not in the workforce, failed foreign policies and domestic strife is the new normal. And how is the brain trust in DC going to solve these problems? National service for all 18 – to 28-year-olds!

  All across the land, people were smiling and laughing. World War II had just ended and America suddenly found itself to be the manufacturing capital of the world. There were plenty of jobs for the average man and the future was bright, even if you didn't have a college degree. In fact, not many people had a degree, and yet, for those that didn’t, they were still able to buy a car, a house, take several weeks of vacation a year and still be able to have food on the table. Although this was the new normal at the time, today’s new normal is something quite different.

  In America today, there are close to 50 million people living in poverty and there are more than 100 million people that get money from the federal government every month. As the middle class continues to disintegrate, poverty is climbing to unprecedented levels. Even though the stock market has been setting record high after record high, the amount of anger and frustration boiling just under the surface in our nation grows with each passing day.

  As an example of just how bad off joe-sixpack is these days, the WSJ notes that — “Only 38% said they could cover a $500 repair bill or a $1,000 emergency room visit with funds from their bank accounts.” A person quoted in that article said — “A solid majority of Americans say they have a household budget, but too few have the ability to cover expenses outside their budget without going into debt or turning to family and friends for help.” Further on in that article a survey noted that — “… an unexpected bill would cause 26% to reduce spending elsewhere, while 16% would borrow from family or friends and 12% would put the expense on a credit card. The remainder didn’t know what they would do or would make other arrangements.” Basically, people don’t have any money. But how can that be? Hasn’t Obama saved the American economy? Isn’t the official unemployment rate near 5 1/2 %?

  To answer this question, Jim Clifton over at Gallup wrote — “if you, a family member or anyone is unemployed and has subsequently given up on finding a job — if you are so hopelessly out of work that you've stopped looking over the past four weeks — the Department of Labor doesn't count you as unemployed. That's right. While you are as unemployed as one can possibly be, and tragically may never find work again, you are not counted in the figure we see relentlessly in the news — currently 5.6%. Right now, as many as 30 million Americans are either out of work or severely underemployed. Trust me, the vast majority of them aren't throwing parties to toast "falling" unemployment.” He goes on to note another reason behind the misleading numbers — “Say you're an out-of-work engineer or healthcare worker or construction worker or retail manager: If you perform a minimum of one hour of work in a week and are paid at least $20 — maybe someone pays you to mow their lawn — you're not officially counted as unemployed in the much-reported 5.6%.” But, it doesn’t stop there. He lists the third reason — “….those working part time but wanting full-time work. If you have a degree in chemistry or math and are working 10 hours part time because it is all you can find — in other words, you are severely underemployed — the government doesn't count you in the 5.6%.” He sums up his article by saying — “The official unemployment rate, which cruelly overlooks the suffering of the long-term and often permanently unemployed as well as the depressingly underemployed, amounts to a Big Lie.”

  So, there you have it. The Obama recovery is a big scam. Propaganda, some might say. A facade hiding the festering sore below the surface of polite society. But actually, it is possible to see this by just looking at the headlines over the last few years — “Five teenagers were arrested when a 600-person brawl broke out in a Florida movie theater's parking lot on Christmas night” or — “Hundreds of teens trash mall in wild flash mob”. In fact, the list goes on and on. What at one time would have been a huge talking point in the media circuit has now just become back page article. So, with the sky-rocketing youth unemployment rate, many government officials are asking what can be done. Not necessarily to provide work- but to create a safety valve for society. And it appears that the answer to this question is — “National service for all 18- to 28-year-olds”.

  That’s right. It’s called national service. Not the draft, or conscription or any other word that would have negative connotations. National Service! For your patriotic duty! National Review addressed this issue when it wrote

  “ Require virtually every young American — the civic-minded millennial generation — to complete a year of service through programs such as Teach for America, AmeriCorps, the Peace Corps, or the U.S. military, and two things will happen:

   

  1. Virtually every American family will become intimately invested in the nation's biggest challenges, including poverty, education, income inequality, and America's place in a world afire.

   

  2. Military recruiting will rise to meet threats posed by ISIS and other terrorist networks, giving more people skin in a very dangerous game.”

   

  So, there you have it. Instead of creating real jobs and rebuilding America and by employing a clever use of language to not call it what it really is — forced slave labor, the brain trust in DC is going to wrap the flag around more failed foreign policies to make sure that everyone suffers. Just like Status Quo sang in that song —“A vacation in a foreign land, Uncle Sam does the best he can.You're in the army now, oh-oo-oh you're in the army now. Now you remember what the draft man said, nothing to do all day but stay in bed. You’re in the army now, oh-oo-oh you're in the army now.”

  So, what do you think, “Are the American youth ready for conscription?”

  

  

  

  

  

• French Economy In "Dire Straits", "Worse Than Anyone Can Imagine", Leaked NSA Cable Reveals

  Earlier today Wikileaks released a new batch of NSA intercepts among which one in particular stands out: an intercepted communication which reveals that then French Finance Minister Pierre Moscovici believes the French economic situation was far worse, as of mid-2012, than perceived.

  Specifically, Moscovici who served as French finance minister until 2014 and then became European commissioner for Economic and Financial Affairs, Taxation and Customs, used some very colorful language, i.e., the French economic situation was “worse than anyone [could] imagine and drastic measures [would] have to be taken in the next two years”. 

  Needless to say, no drastic measures were taken. In fact, no measures at all were taken because thanks to the ECB’s “whatever it takes” 2012 intervention and subsequent QE, pushed French yields to record low levels making the need for any reform moot (a la Greece, until the whole circus exploded).

  He remarks about that the situation with the automotive industry was more critical than a pre-retirement unemployment supplement known as AER, which he also thought wouldn’t have had a severe impact on elections (while senator Bourquin thought would have driven voters to right-wing National Front).

  Moscovici’s conclusion was that “the situation is dire” although the finance minister ignored warnings that without a “pre-retirement unemployment supplement known as the AER… the ruling Socialist Party will have a rough time in the industrial basin of the country, with voters turning to the rightwing National Front.”

  Moscovici disagreed. Fast forward 3 years, and not only did French unemployment just hit an all time high confirming that the economic situation has indeed never been more dire…

  

   

  … but the frontrunner for the next French president is none other than National Front’s Marine Le Pen, who will no doubt seize this memo as further proof of the terrible economic state of the country and leverage it even more to her benefit, and add even more fuel to the Frexit fire. As a reminder, Le Pen now prefers to be called Madame Frexit because as she warned last week, when she becomes president, unless the Eurozone yields to her demands, France will be the next country out of the monetary project effectively ending the Eurozone. For more read “Forget Grexit, “Madame Frexit” Says France Is Next: French Presidential Frontrunner Wants Out Of “Failed” Euro.”

  Here is the intercept (link):

  French Finance Minister Says Economy in Dire Straits, Predicts Two Atrocious Years Ahead (TS//SI//NF) (TS//SI//NF) The French economic situation is worse than anyone can imagine and drastic measures will have to be taken in the next 2 years, according to Finance, Economy, and Trade Minister Pierre Moscovici.

   

  On 19 July, Moscovici, under pressure to reestablish a preretirement unemployment supplement known as the AER, warned that the situation is dire. Upon learning that there are no funds available for the AER, French Senator Martial Bourquin warned Moscovici that without the AER program the ruling Socialist Party will have a rough time in the industrial basin of the country, with voters turning to the rightwing National Front. Moscovici disagreed, asserting that the inability to reinstitute the AER will have no impact in electoral terms, besides, the situation with faltering automaker PSA Peugeot Citroen is more important than the AER.

   

  (COMMENT: PSA has announced plans to close assembly plants  and lay off some 8,000 workers.)

   

  Moscovici warned that the 2013 budget is not going to be a “good news budget,” with the government needing to find at least an additional 33 billion euros ($39.9 billion). Nor will 2014 be a good year. Bourquin persisted, warning that the Socialist Party will find itself in a situation similar to that of Socialist former Spanish President Zapatero, who was widely criticized for his handling of his country’s debt situation. Moscovici countered that it was not Zapatero whose behavior the French government would emulate, but rather Social Democrat former German Chancellor Gerhard Schroeder.

   

  (COMMENT: Schroeder, chancellor from 1998 to 2005, was widely credited with helping to restore German competitiveness. He favored shifting from pure austerity measures to measures that encourage economic growth and advocated a common EU financial policy.)

   

  Unconventional

   

  French diplomatic

  And the pdf

  

  

  

  

  

• Beggar Thy Neighbor? Greece's Battered Banks Beget Balkan Jitters

  Back in April, we noted that central banks in Bulgaria, Cyprus, Albania, Romania, Serbia, Turkey and the Former Yugoslav Republic of Macedonia had all effectively moved to quarantine Greece, as it became increasingly apparent that negotiations between Athens and the troika were set to deteriorate ahead of a €750 million payment due to the IMF on May 12. 

  As Kathimerini reported at the time, subsidiaries of Greek banks in Eastern Europe were told to cut exposure to “Greek bonds, T-bills, deposits in Greek banks and/or interbank funding,” in an effort to assuage concerns that any contagion from a collapse of the Greek banking sector could imperil local lenders. 

  A little over two months later, Greek banks are paralyzed, having lost access to emergency central bank liquidity on the heels of PM Alexis Tsipras’ decision to put euro membership to a popular vote.

  Now, bond yields indicate investors are getting nervous about the possibility that the drama in Greece could spill over into the banking sectors of Bulgaria, Romania, and Serbia where Greek banks control a substantial percentage of total banking assets:

  

  

   

  Despite what certainly appears to be souring investor sentiment, depositors seem to be safe — for now. Reuters has more:

  Petar Bakhchevanov withdrew some cash from an ATM in Bulgaria’s capital on Monday as a test to make sure the deepening debt crisis in neighboring Greece had not spread to the Greek-owned bank where he keeps his savings.

   

  Millions of people in ex-Communist Bulgaria, Macedonia, Albania, Serbia and Romania have deposits in banks owned by Greek lenders, putting this corner of south-eastern Europe in the frontline if there is contagion from the Greek crisis.

   

  Central banks in Macedonia and Serbia introduced extra restrictions on the movement of capital between local subsidiaries and their Greek parents, saying the were taking precautions against any spillover from Athens.

   

  “After watching the news on TV, I just wanted to check if everything is okay and I can withdraw money from my account,” said Bakhchevanov, outside a branch of Piraeus Bank Bulgaria, a subsidiary of Greece’s Piraeus bank (BOPr.AT).

   

  Bakchevanov was able to get at his money. He took out 100 Bulgarian levs, or around $50, from the ATM, and went inside the branch where he said bank staff had reassured him he did not need to worry about his deposit.

  However, as Reuters goes on to note, there are reasons to be concerned, because with “Greek banks owning 20 percent of the banking sector in some countries the exposure is real, and the region’s economies have historically been fragile, so it would not take a lot to push them into crisis too.”

  Here’s what Morgan Stanley had to say last month about possible contagion:

  The risk is that depositors who have their money in Greek subsidiaries in Bulgaria, Romania and Serbia could suffer a confidence crisis and seek to withdraw their deposits. Although well capitalised and liquid (as highlighted for Romania by the NBR’s Financial Stability Report (2013)), Greek subsidiaries in the SEE region may see difficulties providing enough cash if withdrawals are intense and become problematic. In case of a liquidity shortage, Greek subsidiaries in Bulgaria, Romania and Serbia would probably create the need for local authorities to step in. Local central banks and governments would most probably provide additional liquidity, but if panic behaviour develops it would mean that certain banks would either have to find a buyer or be nationalised. In this case, the national deposit guarantee schemes will have to repay guaranteed deposits and, in case of insufficient funds, the government will have to provide them. 

   

  
  

   

  Deposits in Greek subsidiaries which would be at risk of being withdrawn in Bulgaria, Romania and Serbia amount to 14.8%, 4.1% and 6.8% of GDP, respectively. Even if we take into account that not all of them are covered by the local guarantee schemes as the individual amounts could exceed the legal limit of €100,000, the deposits at risk remain significant. Thus, a potential bank run on Greek banks in the region would have a significant negative impact on local governments’ fiscal deficit and their debt. Moreover, potential losses incurred from depositors would have a negative impact on consumption and growth in the region.

   

  Deposit run: Most immediate of the bear case risks for Greek bank subsidiaries in the SEE region is the potential for sizeable deposit outflows, and we can look to Greece’s own precedent, where c.€35 billion deposits are reported to have left the system (c.21% of the total). In Bulgaria, Romania and Serbia, this risk is particularly relevant, given that the existing funding gap is already high. On average, loan/deposit ratios at Greek banks are 107% in Bulgaria, 154% in Romania and 121% in Serbia. Should deposit outflows materialise in these countries, ultimately we are looking at a combined €15 billion of funding that could be withdrawn. Yet, a potential mitigation of risk is that a large proportion of deposits are protected by guarantee funds, and we can look to the example of Bulgaria, where 72% of deposits are insured.

   

  
  

  And while it seems, based on what Mr. Petar Bakhchevanov told Reuters (see above), that all is currently quiet on the Eastern front (at least as it relates to Grexit-induced bank runs), nobody is out of the woods yet, as it is still far from clear what happens next, especially now that the ECB is set to review “all legal aspects” of ELA following the Greek default which will occur at midnight on Tuesday. And with that, we’ll close with the following quote from Peter Andronov, the chairman of the Association of Bulgarian Banks:

   “If everything is messed up in Greece, you never know what madness this could create.”

  *  *  *

  Here’s a summary from Reuters regarding each country’s proported exposure/contagion risk:

  BULGARIA

  * Greek-owned banks make up a fifth of the Bulgarian banking system. These include Bulgaria’s fourth largest lender United Bulgarian Bank, owned by National Bank of Greece, and Postbank, Bulgaria’s fifth largest lender, controlled by Greek Eurobank. Number 9 bank Piraeus Bank Bulgaria is controlled by Piraeus Bank of Greece and Alpha Bank is a direct bank unit of Greece’s Alpha Bank.

  * Bulgaria’s central bank, in a statement issued on Monday, said it had measures in place to insulate Greek-owned banks from contagion. It said they are financially independent from their parents, they hold no Greek government securities, and have a capital adequacy and liquidity level higher than the average for banks in Bulgaria. “Any action by the Greek government and the central bank to impose measures in the Greek financial system have no legal force in Bulgaria and can in no way affect the smooth functioning and stability of the Bulgarian banking system,” the central bank said.

  * A spokeswoman for United Bulgarian Bank said on Monday: “We are doing business as usual … We reconfirm and fully agree with the central bank statement from this morning.”

  * In a statement, Piraeus Bank Bulgaria said the capital controls in Greece are not affecting its operations, outlining that such restrictions do not have legal force in Bulgaria and pointing out that the bank has no exposure to the Greek banking system or Greek treasuries and bonds. “For us, this Monday is a normal working day,” the bank said in the statement. “Piraeus Bank Bulgaria continues with its usual work on extending loans, raising deposits.and other banking activities as it has done since it stepped on the local market,” the statement said.

  ROMANIA

  * There are four banks with Greek majority capital operating in Romania: Alpha Bank Romania, Piraeus Bank, Bancpost, controlled by Eurobank Ergasias, and Banca Romaneasca, controlled by National Bank of Greece. Together they account for 12 percent of total banking assets in Romania.

  * The central bank has said the Greek subsidiaries in Romania are well capitalised and latest data showed their average capital ratio is slightly above 17 percent – in excess of the 10 percent capital ratio requirement set by the regulator. They also have amassed robust portfolios of state securities which entitles them to resort to funding from the central bank if needed.

  * Piraeus Bank Romania said in a statement on Monday: “Piraeus Bank Romania is a local subsidiary, a Romanian bank with Greek capital. All operations are localized and integrated into the Romanian banking market policies, regulated by the Romanian central bank…There are no capital control policies enforced, banks are not closed, nor are operations limited.”

  ALBANIA

  * There are three Greek-owned banks in Albania: subsidiaries of National Bank of Greece, Piraeus Tirana Bank, and Alpha Bank. Their share of the total assets of the banking sector in Albania is 15.9 percent, down from 20 percent in 2010, Klodi Shehu, director of the financial stability department at the Albanian central bank, told Reuters.

  * Shehu said the central bank imposed minimum capital adequacy ratios for Greek-owned banks of 14 percent, above the 12 percent required for other banks. The three Greek-owned banks have a capital adequacy ratio of more than 17 percent.

  * “These banks are well-capitalized, liquid and capable of timely payments irrespective of what happens in Greece,” Shehu told Reuters.

  MACEDONIA

  * Macedonia has two Greek-owned banks which together hold more than 20 percent of total banking sector assets. They are Alpha Bank AD Skopje, a subsidiary of Alpha Bank, and Stopanska Banka AD Skopje, owned by National Bank of Greece.

  * On Sunday, the Macedonian central bank ordered its lenders to pull their deposits from Greek banks and it imposed temporary preventive measures to stop an outflow of capital from Macedonian subsidiaries to parent banks in Greece. It said the capital limits apply to future transactions, not to arrangements already in place.

  * Under Macedonian law, the Greek parents have no way to withdraw their founding capital beyond 10 percent, unless they sell their holding to another investor.

  * An official at the Macedonian central bank, who declined to be named, told Reuters that several months ago the bank instructed Greek-owned banks to provide daily reports on transactions with their parent banks as a precaution.

  * In an analysis of the possible worst-case scenario, with Greek-owned banks collapsing under the weight of deposit withdrawals, Standard Bank estimated that the Macedonian government would have to come up with 250 million euros, or around three percent of gross domestic product, to fully recapitalize the banks, “something that the sovereign can live with.”

  SERBIA

  * In Serbia, four Greek-owned banks hold around $4 billion worth of assets, or 14 percent of total banking assets. They are Alpha Bank, EUROBANK EFG, Piraeus Bank and Vojvodjanska Banka, part of the National Bank of Greece group.

  * In a written answer to Reuters questions, Serbia’s central bank said it had in place “an elevated level of monitoring of businesses of four Greek-owned banks, especially their liquidity, their relations with parents groups and events in international markets related to Greek banks and their subsidiaries.”

  * The bank said that “daily reports” provided by the Greek-owned banks showed no increased outflow of funds to mother banks nor a significant outflow of savings. The bank said Greek subsidiaries are not branch offices but separate legal entities, and that there were strict limits on shareholders repatriating capital assets of the subsidiaries.

  * “The central bank will continue to monitor banks in Greek ownership and if necessary will undertake other measures under its mandate to prevent a potential negative influence on Serbia’s banking sector,” the bank said.

  * “We have to wait and see what will happen in the next seven days. One thing is sure, banks in Greece will be in some kind of hibernation in the next 10 days given that Greece introduced capital controls. Most Greek banks that operate in Serbia are self-funded and well capitalised, so I don’t expect to see any problems in the short run,” said Branko Srdanovic of the Belgrade-based consultancy Associates Treasury Solutions.

  

  

  

  

  

• Greece Will Default To IMF Tomorrow, Government Official Says

  Earlier today, as the exchange between Greece and its creditors got increasingly belligerent, Estonian Prime Minister Taavi Roivas told public broadcaster Eesti Rahvusringhaaling in interview that a possible Greek decision to leave euro area wouldn’t soften stance of other EU countries and that Greece’s debt would still remain outstanding and creditors would expect this money back.”

  “If Greece leaves, the value of their new national currency would decline very fast, so their solvency would still worsen further. They will either have to cut spending or improve their tax revenues. There are no other options.”

  So did this latest antagonism change the Greek mind? According to a flash headline by the WSJ released moments ago, not all. In fact, Greece just made it official that it would default to the IMF in just over 24 hours.

  Greece won’t pay IMF tranche due Tuesday, government official says http://t.co/xnCG6c6baX

  — WSJ Breaking News (@WSJbreakingnews) June 29, 2015

  More:

  Greece won’t make a debt repayment to the International Monetary Fund due Tuesday, a senior Greek government official said Monday.

   

  Earlier this month, Greece had notified the IMF it plans to bundle its loan repayments falling due this month into one payment of around 1.6 billion euros ($1.7 billion), which is due Tuesday.

   

  The IMF has said that Greece will immediately be in arrears if it fails to make the debt repayment.

  So, as per game theory, the Greek plan – at least until the social mood turns very ugly – remains just one:

  

   

  The problem is what happens then…

  Greek bank chief: “Few billions left, so we are OK until next Mo or Tue BUT if no deal, there will be no money left” http://t.co/2ZyO2Bcd6l

  — Pieter Cleppe (@pietercleppe) June 29, 2015

  

  

  

  

  

• JPMorgan Just Cornered The Commodity Derivative Market, And This Time There Is Proof

  For years there had been speculation, rumor and hearsay that JPM had cornered the US commodities market. Now, finally, we have documented proof.

  * * *

  Traditionally, we look at the OCC’s Quarterly Bank Report on derivatives activities to see which was the largest bank in the US in terms of total notional derivative holdings. The reason being that like on frequent occasions in the past, we find some stunning  results, such as most recently in January when we wrote that, for the first time, Citigroup had eclipsed JPM as the largest US bank in total derivatives, with just over $70 trillion compared to perennial megabank JPM’s $65.3 trillion as of the third quarter of 2014, explaining also why Citigroup had drafted the Swaps push out language in the Omnibus Bill.

  

   

  And while this time there was little exciting to report at the consolidated level (JPM overtook Citi in Q4 only for Citi to once again become the world’s largest bank in total derivatives with $56.6 trillion compared to $56.2 trillion for JPM and $52 trillion for Goldman as Bloomberg reported earlier), and in fact total notional derivatives tumbled from $220.4 trillion in Q4 to $203.1 trillion in Q1 the lowest level since 2008… 

  

  … an absolutely shocking blockbuster emerges when looking at the underlying component data.

  Presenting Exhibit 12: Notional Amounts of Commodity Contracts by Maturity: even a CFTC regulator would be able to spot the outlier charted below.

  

   

  What the chart above shows is that after fluctuating around the low to mid $200 billion range for the past 5 years, in Q1 the amount of Commodities with a maturity of under 1 year exploded to a record $3.9 trillion!

  Sadly, the OCC provides no actual explanation for why there was such an epic surge in commodity derivatives within the US banking system in the first quarter, so we decided to explore.

  What we found is what those who have for years accused JPM of cornering the commodity markets, have known: because it is none other than JPMorgan’s Commodity derivative book primarily in the <1 maturity bucket, which exploded from just $131 billion to a gargantuan and never before seen $3.8 trillion!

  In fact as the chart below shows, while historically JPM has accounted for just over 50% of total commodity holdings among all US commercial banks, in the Q1 this number soared to a stratospheric 96% which by anybody’s standards is the very definition of cornering the market!

  

   

  We don’t know what prompted JPM’s derivative book to soar to such a never before seen amount, but the number most certainly looks abnormal on both an absolute and a relative basis, especially considering that no other banks boosted their particular derivative book with the same vigor.

  So what is going on here?

  We decided to dig down some more when we encountered something even more perplexing. Because whereas in previous quarterly updates, the OCC broke out the FX and Gold categories as separate derivative items as seen in this most recent chart from the Q4 update…

  

  … in Q1, once again quite inexplicably, the OCC decided to lump these two products together, thus making any credible observation about the total notional outstanding of just gold derivatives, impossible! But wait, we thought that according to former Chairman Bernanke, gold anything but currency: is the OCC suddenly disagreeing with that assessment?

  

   

  Furthermore, while in all previous iterations of the OCC’s Table 9, gold derivative notionals by maturity were explicitly broken out as can be seen in this Q4, 2014 table below:

  

   

  Starting in Q1, 2015 the “gold” section in Table 9 no longer exists (although we can see that while JPM cornered “commodities”, it was Citi that had its total derivative notional of “precious metals” undergo a massive jump, also for reasons unknown).
  

  

  One would almost think the OCC is hiding something as the demand of US commercial banks. So while we no longer know what just total gold derivatives outstanding is, for some unexplained, reason, we do know that the combined total of FX and gold just hit an all time high.

  * * *

  And while the OCC did all it could to mask the “gold” line item by lumping it with FX, it still kept “Precious Metals” as is, although we assume that this too will be lumped with FX and gold shortly.

  It is this chart that shows something is truly odd when it comes to the US commercial bank industry’s activity in the precious metals space.

  

   

  So in summary, this is what we do know:

  • in Q1, JPM cornered the commodity derivative market, with a total derivative exposure of just over of $4 trillion, an increase ot 1,691% from just $226 billion in one quarter!

  What we don’t know is:

  • why did the OCC decide to effectively eliminate its gold derivative breakdown by lumping it with FX,
  • why there was a 237% increase in the total amount of precious metals (which include gold) contracts in the quarter, from $22.4 billion to $75.6 billion

  We have sent an email requesting much needed clarification from the Office of the Currency Comptroller, although we are not holding our breath.

  Source: OCC’s Quarterly Report on Bank Trading and Derivatives Activities  First Quarter 2015

  

  

  

  

  

• Good On You, Alexis Tsipras (Part 1)

  Submitted by David Stockman via Contra Corner blog,

  Late Friday night a solid blow was struck for sound money, free markets and limited government by a most unlikely force. Namely, the hard core statist and crypto-Marxist prime minister of Greece, Alexis Tsipras. He has now set in motion a cascade of disruption that will shake the corrupt status quo to its very foundations.

  And just in the nick of time, too. After 15 years of rampant money printing, falsification of financial market prices and usurpation of democratic rule, his antagonists—–the ECB, the EU superstate and the IMF—-have become a terminal threat to the very survival of the kind of liberal society of which these values are part and parcel.

  In fact, the Keynesian central banking and the Brussels and IMF style bailout regime—which has become nearly universal—-eventually fosters a form of soft-core economic totalitarianism. That’s because the former first destroys honest financial markets by falsifying the price of debt. So doing, Keynesian central bankers enable governments to issue far more debt than their taxpayers and national economies can shoulder; and, at the same time, force investors and savers to desperately chase yield in a marketplace where the so-called risk free interest rate has been pegged at ridiculously low levels.

  That means, in turn, that banks, bond funds and fast money traders alike take on increasing levels of unacknowledged and uncompensated risk, and that the natural checks and balances of honest financial markets are stymied and disabled. Short sellers are soon destroyed because the purpose of Keynesian central banking is to drive the price of securities to artificially high and unnatural levels. At the same time, hedge fund gamblers are able to engage in highly leveraged carry trades based on state subsidized (free) overnight money, and to purchase downside market risk insurance (“puts”) for a pittance.

  Eventually bond and stock “markets” become central bank enabled casinos—-riven with mispriced securities, dangerous carry trades, massive unearned windfall profits and endemic instability. When an unexpected shock or “black swan” event threatens to shatter confidence and trigger a sell-off of these drastically over-priced securities, the bailout state swings into action indiscriminately propping up the gamblers.

  That’s what the Fed and TARP did in behalf of Morgan Stanley and Goldman back in September 2008. And it’s what the troika did in behalf of the French, German, Dutch, Italian and other European banks, which were stuffed with unpayable Greek and PIIGS debt, beginning in 2010.

  Needless to say, repeated and predictable bailouts create enormous moral hazard and extirpate all remnants of financial discipline in financial markets and legislative chambers alike. Since 2010, the Greeks have done little more than pretend to restructure their state finances and private economy, and the Italians, Portuguese, Spanish and Irish have done virtually nothing at all. The modest uptick in the reported GDP of the latter two hopeless debt serfs are just unsustainable rounding errors—–flattered by the phony speculative boom in their debt securities that was temporarily fueled by Draghi’s money printing ukase that is presently in drastic retreat.

  So this Monday morning push has come to shove; Angela Merkel and her posse of politicians and policy apparatchiks were not able to kick the can one more time after all.

  Instead, the troika’s authoritarian bailout regime has stimulated political revolt throughout the continent. Tsipras’ defiance is only the leading indicator and initial actualization–the match that is lighting the fire of revolt..

  But what it means is that there is now doubt, confusion and fear in the gambling halls. The punters who have grown rich on the one-way trades enabled by the money printing central banks and their fiscal bailout adjutants are being suddenly struck by the realization that the game might not be rigged after all.

  So let the price discovery begin. In the days ahead, we will catalogue the desperate efforts of the regime to reassert its authority and control and to stabilize the suddenly turbulent casino.

  In riding the central bank bubbles to unconscionable riches the big axes in the casino have falsely claimed to be doing “gods work”.

  As they are now being forced to liquidate these inflated assets, they actually are.

  Last fall one of the most detestable members of the regime, Jean-Claude Juncker, arrogantly issued the following boast.

  “I say to all those who bet against Greece and against Europe: You lost and Greece won. You lost and Europe won.”

  This morning that smug proclamation is in complete tatters. Good on you, Alexis Tsipras.

  

  

  

  

  

• China Makes It Official, Launches The Bank That Humiliated Washington

  In March, China was “handed a propaganda coup” (to use WSJ’s words), when the UK decided, in the face of loud protestations from Washington, to support Beijing’s efforts to launch a new development bank aimed at filling the gaps left by traditional post-war multilateral institutions such as the IMF and the ADB.

  The US claims it has concerns about governance and adherence to international norms around corruption and environmental protocol, but as even the most casual observers are well aware, the real concern in Washington (and in Tokyo) is that China will use the bank as an instrument of foreign policy and as a means of embedding the yuan in global investment and trade.

  Here’s a helpful recap, excerpted from “China’s Global Ambitions Take Shape As AIIB Structure Revealed“:

  The AIIB is funded by 57 founding member countries (the US and Japan have not joined) and will serve to upend traditionally dominant multilateral institutions which have failed to respond to the rising influence and economic clout of their EM membership. This failure has been exemplified of late by Washington’s steadfast refusal to reform the IMF in order to ensure the Fund reflects the economic clout of its members. Although the failure falls largely at the feet of Congress — US lawmakers’ utter inability to legislate has left reform measures stalled — it recently manifested itself at the Presidential level when President Obama had an opportunity to change the structure of the IMF (for the better) without congressional approval but chose not to do so. Importantly, Obama’s decision not to act was not made out of reverence for Congress. Rather, The White House believed that supporting the reform agenda would have jeopardized the US veto, which US officials at all levels view as sacrosanct. 

   

  As China builds its own multilateral institutions, Beijing has been keen to dispel the notion that it seeks to supplant the Bretton Woods order with its own brand of Eastern hegemony and although one can certainly question the degree to which China’s aims are rooted purely in an inclination to be benevolent towards nations in need of fixed asset investment, Beijing is making an effort to distance itself from the way the US governs the institutions under its control.

   

  
  

  Despite the best efforts of The White House, US ally after US ally pledged their support for the China-led effort and four months after the UK opened the flood gates, the new bank has become a reality. WSJ has more:

  On Monday, the Asian Infrastructure Investment Bank was launched with representatives from 57 countries gathered in Beijing. The bank came together in less than two years amid strong global interest. 

   

  Lou Jiwei, China’s minister of finance, called the launch of the China-backed bank a “win-win for Asia” at the bank’s signing ceremony at Beijing’s Great Hall of the People. Mr. Lou said he thought the bank would start operating toward the end of the year. Of the 57 nations present, 50 signed the agreement

  Monday with another seven holding out for potential signing later in the year.

   

  Beijing has effective veto power over major decisions via a more than 25% voting share, and some are concerned about how the organization will be managed.

   

  In the lead-up to the launch, China has pledged to operate a transparent, socially conscious development bank that helps meet the shortfall in Asian infrastructure funding and works with existing multilateral organizations.

   

  China has vowed to bring to the bank some of the speed with which it has gotten work off the ground at home. It has also pledged to decrease the bureaucracy that slows projects at existing multilateral lenders such as the World Bank and the Asian Development Bank.

   

  To cut costs and minimize political jockeying, the AIIB will have a nonresident board and focus on technical decision-making, according to founding documents and people close to the bank.

  And here’s a bit more color from The Washington Post on the signing ceremony:

  Underscoring its growing global heft, China launched an infrastructure bank for Asia on Monday, receiving the backing of 50 countries for an initiative that seeks to boost the region’s economy but also put Beijing at the center of its development.

   

  Representatives from Britain, Germany, South Korea and Australia were among those who took part in a ceremony to sign the articles of association in the Great Hall of the People, with the United States and Japan the most notable absentees.

   

  Many U.S. allies joined the Asian Infrastructure Investment Bank (AIIB) on Monday — despite Washington’s initial objections — in what was seen as a major diplomatic victory for President Xi Jinping.

   

  Finance Minister Lou Jiwei said Monday’s ceremony was a milestone and “a first step in an ‘epic journey,’ ” meant to deepen regional cooperation, boost Asia’s infrastructure and support the global economic recovery.

   

  Among the other big investors are India, which has a 7.5 percent vote share, and Russia with 5.9 percent, followed by Germany and South Korea. Major decisions require 75 percent agreement, giving China veto power, but this may change if shares are diluted as more countries join.

   

  

  (the Russian delegate signs on the dotted line)

  And so, it is now official. China has created and launched a supranational lender aimed directly at supplanting the US-dominated institutions that have defined the global economic order for more than a half century. Despite criticism at home and abroad, the US has largely clung to a strategy that aims to undercut the bank by casting aspersions and claiming the institution has little relevance beyond what is says about Chinese ambition.

  As we said earlier this month, “in the AIIB, the US faces a far greater threat to its position in the global economic order than anyone in Washington dares to admit. The smear campaign (that’s really the only way to cast it) aimed at painting the new bank as relatively small and meaningful only to the degree that it symbolizes China’s global and regional ambitions is profoundly misleading. This is not a pet project for Beijing and the founding members are not pledging hundreds of millions so they can play a part in petty Chinese theatrics. The bank is real. The sooner Washington recognizes and accepts this, the better off it will be in terms of helping to repair the reputational damage the IMF and ADB have suffered as a result of American and Japanese belligerence.” 

  Aii b Articles of Agreement

  

  

  

  

  

• Greek Supermarkets Begin To Resemble Those Of Venezuela

  For years we have mocked Venezuela’s economy (if not its long-suffering population): it got so bad, we even did a visual summary of selected Venezuela headline posts we wrote over the years.

  

  Most of these were expected, and in line with the transformation of any normal nation to a socialist utopia. None were more poignant than the images of supermarkets and grocery stores that have been ransacked empty as a result of the collapsing currency, devastated supply chains and soaring inflation (supermarkets which have since imposed fingerprint scanners in what is no longer capital but food controls).

  We are sad to announce that what was once a Venezuela trademark has now transitioned to a country that until recently was among the most developed nations in the west: Greece.

  As we noted yesterday, in clear rejection of Tsipras’ plea for calm, the Greek population stormed (now empty) ATMs, grocery stores and gas stations as they scrambled to obtain, or convert, paper currency into tangible products.

  This morning, the NYT picked up on the realization that for Greece ATM runs were last week’s story. Now, it’s all about the “Supermarket Sweep”… and hoarding. To wit:

  Beside the lines at A.T.M.s, people were also lining up at gas stations and in grocery stories. In the small town of Spata, outside Athens, residents had stripped grocery shelves bare by Saturday night. The local Shell station had run out of regular unleaded and had only premium gasoline to sell. “Doom,” the gas attendant responded, when asked to describe the mood.

   

  The frenzy at gas stations across the country prompted Greece’s largest refiner to issue a statement assuring that there would be enough supply…

  And this is how Athens is slowly starting to look like Caracas.

  On Monday supermarket shelves in #Athens emptying as Greeks stock up for coming days #Greece #Grexit #Greferendum pic.twitter.com/q61PVM17d9

  — Julia Damianova (@JuDamianova) June 29, 2015

  

  

  

  

  

  

  

• 1914 Deja Vu: Draghi's Cap On ELA Is Today's Czar Nicholas Troop Mobilization

  Submitted by Ben Hunt via Salient Partners' Epsilon Theory blog,

  

   

  If you don't like how the table is set, turn over the table.

  – Frank Underwood, “House of Cards” (2013)

   Nothing like a good Friday-after-the-close blockbuster to set the stage for an interesting week.

  At 1am Saturday morning Athens time, the Greek government called for a nationwide referendum to vote the Eurogroup's reform + bailout proposal up or down. The vote will happen on Sunday, July 5th, but Greece will default on its IMF debt this Wednesday, and as a result the slow motion run on Greek banks is about to get a lot more fast motion unless capital controls are imposed. If you want to get into the weeds, Deutsche Bank put out a note, available here, that I think is both a well-written and comprehensive take on the facts at hand. As for the big picture, I've attached last week’s Epsilon Theory note ("Inherent Vice"), as this referendum is EXACTLY the sort of self-binding, "rip your brakes and steering wheel out of the car" strategy I wrote about as a highly effective way to play the game of Chicken.

  Look, I have no idea whether or not Tsipras will be successful with this gambit. But I admire it. It’s a really smart move. It’s a wonderful display of what de Tocqueville praised as the “condition of semi-madness” that was so politically effective in 1848, and I suspect will be today. Plus, you can’t deny the sheer entertainment value of hearing Dijsselbloem splutter about how he was open to a revised, revised, Plan X from Greece all along, if only Tsipras would continue with this interminable charade. “The door was still open, in my mind.” Priceless.

  So long as Tsipras can avoid market anarchy and TV coverage of violent ATM mobs this week, I think the NO vote is likely to win. The referendum is worded and timed in a way that allows very little room for Antonio Samaras and other Syriza opponents to turn the vote into a referendum on the Euro itself, which has proven to be a successful approach in the past. Particularly as the Eurogroup rather ham-handedly denied the request for a one-week extension in the default deadline, the referendum is being framed by Syriza as what Cormac McCarthy called a “condition of war”, an over-arching game where “that which is wagered swallows up game, player, all.” It may well be a close vote, but it’s hard to vote YES for a public humiliation of your own country under any circumstances, much less when that YES vote is being portrayed as giving aid and comfort to the enemy.

  Here’s how I see the game playing out after the vote.

  If Greece votes to accept the Eurogroup reform proposal after all, then the game of Chicken resolves itself within the stable Nash equilibrium of a shamed Greece and a triumphant Euro status quo. I would expect an enormous risk-on rally in equities and credit, particularly in Euro-area financials. Hard to say about rates … peripheral Euro debt (Italy, Spain) should rally, and German Bunds might, too, as the Narrative will be that Germany "won". But reduction of systemic risk is a negative for any flight-to-safety trade, so this outcome is probably not good for Bunds in the long term, or US Treasuries over any term.

  If Greece votes to reject the proposal, then either the game resolves itself within the stable Nash equilibrium of a shamed Euro status quo and a triumphant Greece (if the ECB and EU decide to cave to some form of the original Greek proposal), or we enter the death spiral phase of a game of Chicken, as all parties start to talk about how they “have no choice” but to crash their cars. That latter course is the far more likely path, I think, given how the various Euro Powers That Be are already positioning themselves. It’s all so very 1914-ish. Draghi’s cap on bank-supporting Emergency Liquidity Assistance (ELA) is the modern day equivalent of Czar Nicholas II’s troop mobilization. Good luck walking that back.

  If we go down the death spiral path and some form of Greek exit from the Euro-system, I expect the dominant market Narrative to be that Greece committed economic suicide and that the rest of Europe will be just fine, thank you very much. That should prevent a big risk-off market move down, or at least keep it short-lived (although you should expect Bunds and USTs to do their risk-off thing here). Unless you’re a hedge fund trying to make a killing on those really cheap Greek bonds you bought two years ago, there’s no reason to panic even if we’re on the death spiral.

  Over time, however, I expect that dominant Narrative to be flipped on its head. Greece will quickly do some sort of deal with Russia (hard currency for port access?), and then the IMF will strike a deal because that's what the IMF does. More and more people will start to say, "Hey, this isn't so bad", which is actually the worst possible outcome for Draghi and Merkel. At that point, you’ll start to see the Narrative focus on the ECB balance sheet and credibility, and as Italian and Spanish rates start to creep up and as the spread to Bunds starts to widen, people will recall that ECB QE only has national banks buying their own debt … the Bundesbank ain't propping up Italian sovereign debt. I suspect it will be a slow motion contagion, all taking place in the Narrative and expressed in Italian, Spanish, and French politics over the next 12 months or so. The Red King will start to wake.

  One last point on how the market Narrative will shift if we go down the death spiral path, and that’s the dog that will stop barking. The incessant and often silly focus on Fed “lift-off” is about to go on summer hiatus, which can’t happen soon enough for me.

  

  

  

  

  

• Puerto Rico Announces Bond Payment "Moratorium"

  Having concluded last night that Puerto Rico debt is "unpayable," and that his government could not continue to borrow money to address budget deficits while asking its residents, already struggling with high rates of poverty and crime, to shoulder most of the burden through tax increases and pension cuts, Padilla confirmed tonight that (from Bloomberg):

  • *PUERTO RICO TO SEEK "NEGOTIATED MORATORIUM", 'YEARS' OF POSTPONEMENT IN DEBT PAYMENTS

  Likening his state's situation to that of Detroit and New York City (though not Greece), Padilla concluded, the economic situation is "extremely difficult," which is odd because just a few years ago when they issued that bond – everything was awesome?

  When will PR overtake Greece again?

  

   

  Puerto Rico's Governor is speaking on national TV:

  • *PUERTO RICO DEBT IS UNPAYABLE, GOVERNOR SAYS
  • *PUERTO RICO DEBT LOAD WON'T LET ISLAND OVERCOME RECESSION: GOV.
  • *PUERTO RICO GOV. SAYS HE DOESN'T AGREE W/ ALL OF KRUEGER REPORT
  • *PUERTO RICO GOVERNOR SEEKS CREATION OF FISCAL BOARD
  • *PUERTO RICO NEEDS COMPLETE RESTRUCTURING PLAN: GOVERNOR
  • *PUERTO RICO TO SEEK `NEGOTIATED MORATORIUM' W/ BOND HOLDERS
  • *PUERTO RICO MUST HAVE BETTER TERMS TO PAY DEBT: GOVERNOR
  • *PUERTO RICO SEEKS ACCORD ON FISCAL REFORMS BY AUG. 30

  And the punchline:

  • *BONDHOLDERS SHARE RESPONSIBILITY FOR PUERTO RICO'S DEBT: GOV.
  • *PUERTO RICO TO SEEK `NEGOTIATED MORATORIUM' W/ BOND HOLDERS
  • *PUERTO RICO BONDHOLDERS MUST MAKE SACRIFICES TOO: GOVERNOR
  • *PUERTO RICO TO SEEK `YEARS' OF POSTPONEMENT IN DEBT PAYMENTS

  We suspect the 70 handle will quickly become a 50 handle or less…

  

  As AP reports,

  Puerto Rico's governor says he will create a financial team that will meet with bondholders and seek a moratorium on debt payments.

   

  Gov. Alejandro Garcia Padilla made the announcement Monday night after saying that the U.S. territory's $72 billion public debt is unpayable. He said he would seek a moratorium of several years but did not provide specifics.

   

  Garcia's comments come just hours after international economists released a gloomy report on Puerto Rico's economy.

   

  Legislators are still debating a $9.8 billion budget that calls for $674 million in cuts and sets aside $1.5 billion to help pay off the debt. The budget has to be approved by Tuesday.

  As we explained previously,

  What happens next is unclear: "Puerto Rico, as a commonwealth, does not have the option of bankruptcy. A default on its debts would most likely leave the island, its creditors and its residents in a legal and financial limbo that, like the debt crisis in Greece, could take years to sort out."

  So without the "luxury" of default, what is PR to do? Why petition to be allowed to file Chapter 9 naturally: after all everyone is doing it.

  In Washington, the García Padilla administration has been pushing for a bill that would allow the island’s public corporations, like its electrical power authority and water agency, to declare bankruptcy. Of Puerto Rico’s $72 billion in bonds, roughly $25 billion were issued by the public corporations.

   

  Some officials and advisers say Congress needs to go further and permit Puerto Rico’s central government to file for bankruptcy — or risk chaos.

   

  “There are way too many creditors and way too many kinds of debt,” Mr. Rhodes said in an interview. “They need Chapter 9 for the whole commonwealth.”

  García Padilla said that his government could not continue to borrow money to address budget deficits while asking its residents, already struggling with high rates of poverty and crime, to shoulder most of the burden through tax increases and pension cuts. Where have we heard that before…

  He said creditors must now “share the sacrifices” that he has imposed on the island’s residents.

   

  “If they don’t come to the table, it will be bad for them,” said Mr. García Padilla, who plans to speak about the fiscal crisis in a televised address to Puerto Rico residents on Monday evening. “What will happen is that our economy will get into a worse situation and we’ll have less money to pay them. They will be shooting themselves in the foot.”

  And the punchline:

  “My administration is doing everything not to default,” Mr. García Padilla said. “But we have to make the economy grow,” he added. “If not, we will be in a death spiral.”

  And this one: any deal with hedge funds, who are desperate to inject more capital in PR so they can avoid writing down their bond exposure in case of a default, "would only postpone Puerto Rico’s inevitable reckoning. “It will kick the can,” Mr. García Padilla said. “I am not kicking the can.”

  We wonder how long before Tsipras, who earlier was quoting FDR, steals this line too.

  And speaking of Prexit, how long before Puerto Rico exits the Dollarzone… and will there be a Preferendum first or will the governor, in his can kick-less stampede, just make a unilateral decision to join Greece, Ukraine, Venezuela and countless other soon to be broke countries in the twilight zone of Keynesian sovereign failures?

  *  *  *

  But Puerto Rico is not Detroit… well actually it is… worse:

  • *PUERTO RICO FACES SIMILIAR SITUATION AS DETROIT, NYC: GOVERNOR

  Puerto Rico's debt is nearly half that of California for a population one-tenth the size… (via WSJ)

  

   

  

  

  

  

  

• Greece Threatens 'Unprecedented' Injunction Against EU To Block Grexit

  Having told the citizens of Greece that the European leaders will not kick them out of Europe because "the cost of throwing them out is too high, enormous," it appears Greek PM Tspiras has another plan to ensure – no matter what the outcome of the forthcoming referendum – that there is no actual Grexit. As The Telegraph reports, Greece has threatened to seek a court injunction against the EU institutions, saying "we are taking advice and will certainly consider an injunction at the European Court of Justice. The EU treaties make no provision for euro exit and we refuse to accept it. Our membership is not negotiable."

   

  Speaking earlier Tsipras stated:

  • *TSIPRAS: REFERENDUM PROVIDES STRONGER NEGOTIATING POSITION
  • *TSIPRAS: CREDITORS’ PLAN IS NOT TO THROW COUNTRY OUT OF EURO
  • *TSIPRAS: COST OF THROWING COUNTRY OUT OF EURO AREA IS ENORMOUS
  • *TSIPRAS: GREECE WILL NOT BE THROWN OUT OF EURO, COST TOO GREAT

  And now, as The Telegraph reports, Plan B is in place…

  Greece has threatened to seek a court injunction against the EU institutions, both to block the country's expulsion from the euro and to halt asphyxiation of the banking system.

   

  “The Greek government will make use of all our legal rights,” said the finance minister, Yanis Varoufakis.

   

  “We are taking advice and will certainly consider an injunction at the European Court of Justice. The EU treaties make no provision for euro exit and we refuse to accept it. Our membership is not negotiable,“ he told the Telegraph.

   

  The defiant stand came as Europe’s major powers warned in the bluntest terms that Greece will be forced out of monetary union if voters reject austerity demands in a shock referendum on Sunday.

   

  Any request for an injunction against EU bodies at the European Court would be an unprecedented development, further complicating the crisis.

  *  *  *

  With JC Juncker lies and propaganda this morning, Tsipras main goal now is to keep anarchy from breaking out before the potential vote on Sunday.

  

  

  

  

  

• A Wall Street Crash Course: How To Sell $1 For $100

  Submitted by Daniel Drew via Dark-Bid.com,

  

  On Wall Street, a vital skill is the ability to sell something that you know is completely worthless. Goldman Sachs did it when it sold ABACUS 2007-AC1 to investors while hedge fund manager John Paulson was betting against it. Paulson paid Goldman $15 million to peddle this junk, which was a collateralized debt obligation that would make money when millions of people lost their homes. The SEC charged Goldman with fraud, and they eventually settled for $550 million. If you're an enterprising Wall Streeter who wants to make a name for himself without breaking the rules, you can operate a tantalizing scheme that investors can't resist. It's called Shubik's Dollar Auction.

  The Dollar Auction was created in 1971 by Martin Shubik, a professor at Yale. Shubik was friends with the late game theorist John Nash, and in their spare time, they amused themselves by creating parlor games that were nothing less than diabolical. Wall Streeters are usually familiar with traditional risky games like No Limit Texas Hold'em and Liar's Poker. However, the Dollar Auction trumps all of those games by taking loss aversion to the next level.

  The Dollar Auction works like any other auction except for one key rule: the second-highest bidder has to pay his bid in full and gets nothing in return. Experienced traders will immediately foresee how this will play out. Gather a large group of people in a room and start the bidding. Initially excited by the prospect of getting a dollar for pennies, people will start bidding. Even at 50 cents, they are still getting a bargain. No one worries about being the second-highest bidder because there are so many other people in the room.

  As the bidding gets closer to $1, bids will start dying out. Eventually, someone will bid $1. At that point, there will be no new bidders, but someone is still stuck at 99 cents. That person is facing a guaranteed loss of 99 cents. If they bid $1.01 and win, they can get the dollar and only take a 1 cent loss. So they figure a 1 cent potential loss is better than a 99 cent guaranteed loss. However, the other remaining bidder is thinking the same thing. These two bidders will run up the price as high as necessary until one of them eventually decides he can't take it any longer. There is no limit to how high the insanity can go. Meanwhile, the auctioneer keeps both bids and only gives up one dollar. The Dollar Auction is the perfect metaphor for Wall Street. Both involve setting the clients against each other and taking fees for yourself.

  The Dollar Auction mindset can also be seen in the post-crash bizarro bond markets. As a response to what seems like unlimited quantitative easing, bond investors have bid up the price of bonds to the point where they are actually locking in a loss on their investment right from the beginning. As Zero Hedge reported earlier this year, 16% of global government bonds have a negative yield; that's $3.6 trillion.

  

  The logic behind this behavior is that yields will become even more negative or deflation will occur. Bond investors are scrambling to avoid becoming the second-highest bidder in the global bond market frenzy. However, with QE failing in Sweden, and with the CDS market collapsing, this will not end well.

  When Shubik created the Dollar Auction over 40 years ago, I doubt he could have imagined that the madness of his diabolical parlor game would be playing out in the global bond markets.

  

  

  

  

  

• "Retired" Dallas Fed Chief Joins Barclays As "Senior Advisor"

  Spin revolving door, spin. 

  Recently “retired” Dallas Fed chief Richard Fisher — who really, really believed that talk of falling oil prices negatively affecting the Texas economy amounted to “bull droppings” until a JP Morgan analyst reminded him that the “only thing dropping in the Texas economy [was] jobs” — is following proudly in the footsteps of Ben Bernanke, Jeremy Stein, and Janet Yellen (if you count unofficial, off-the-record ‘consultations’) by becoming the latest Fed policymaker to ink a lucrative deal ‘advising’ the private sector.

  As WSJ reports, Fisher will become a “senior advisor” to Barclays starting on July 1:

  Barclays PLC on Monday named Richard Fisher, who recently retired from his post as head of the Federal Reserve Bank of Dallas, as senior adviser at the bank.

   

  
  

   

  “His exceptional knowledge and extensive experience in monetary policy, financial markets and services, global trade negotiations and regulatory matters will be of tremendous value to Barclays and to our clients,” said Tom King, who is chief executive of the investment bank at Barclays.

  Yes, we imagine it will.

  Also of “tremendous value” to the bank (which, you’re reminded, somehow managed to get itself involved in each and every financial scandal that’s come to light over the past half decade or so) will be Fisher’s connections and pull, because as we’ve seen time and again with Deutsche Bank and the SEC, the next best thing to installing former employees in key regulatory and policymaking roles is having former regulators and policymakers on the payroll. And he’ll be a particularly handy guy to bounce ideas off of for anyone at the bank who covers AT&T or Pepsi. 

  This would be appalling if it weren’t so commonplace.

  About the only thing worse would be if a former Fed Chair joined the world’s most influential, highly leveraged HFT hedge fund. Oh, wait…

  

  

  

  

  

• Technically Speaking – Bears Are Winning

  Submitted by Lance Roberts via STA Wealth Management,

  Over the last several months, I have been discussing the "consolidation" of the markets and the various support and resistance levels that have contained generally contained the markets since the beginning of this year. To wit:

  "While the rally this week was nice, it failed to break back above resistance which it needs to do to reestablish the bullish trend. Currently, the markets have held the long-term bullish trend line that has remained intact since December of 2012 with two successful tests over the past month. That is bullish for now and indicates buyers are still in the market. However, there is a BATTLE being waged between the bulls and the bears as prices have continued to deteriorate from early-year highs. That battle should be resolved soon, and for now the bears have the advantage."

  

  "Importantly, notice that the previous OVERSOLD condition in the lower panel is now back to OVERBOUGHT. This suggests that the current rally is likely near completion. This does not mean that the markets can't rally to new highs, they certainly could. However, the risk, for the moment is to the downside. As stated above, the BULLISH TREND remains intact which keeps portfolios allocated towards equities."

  With that analysis, we can now update that chart to see how things have developed over the last week.

  

  As you can see, the market is once again retesting that long-running 150-day moving average that has defined the "bullish trend" of the market since December of 2012. Of course, that month marked then Fed Chairman Ben Bernanke's announcement of the launch of QE3.

  The Current Scorecard

  This brings me to the ongoing conversation that I have been having with one of my favorite reporters over the last several weeks.

  Q: Have we reached the trigger for a pullback here in the US? How concerned should investors be about the fallout from Greece?

  The following answer refers to the updated chart above.

  • The market held its primary bullish support trend line after breaking below the price consolidation that we have been discussing over the last several weeks. Bears score +1
  • However, the market did hold its long-term uptrend at the 150-dma which has acted as important support for the market since late 2012. Bulls score +1
  • The market then rallied and failed at the previous bullish consolidation support trend and turned lower last week. Bears score +1
  • As shown in the lower part of the chart – the rally from the OVERSOLD condition at the 150-dma moved back into an OVER BOUGHT condition WITHOUT the market making a new high. Bears score +1
  • Relative Strength (RSI) has been on the decline since last year as momentum has turned decidedly negative. This has been a non-confirmation of the bullish advance that historically has not ended positively. Bears score +1

  At the open this morning, the market has once again test the 150-dma. If the market fails to hold that level by the end of the day, it is quite possible, given that the market is not OVERSOLD as of yet, that there could be further deterioration this week.

  HOWEVER, as I have discussed many times in the past, for INVESTORS it is really only important where the markets close at the END OF THE WEEK. This is because for longer term investors it is the overall TREND of the market that we are ultimately concerned with.

  Despite short-term volatility, which can be quite unnerving at times, portfolios must be allocated towards equity risk exposure as long as the overall market is still trending positively. When that positively biased trend changes to the negative, it is then that investors will want to become much more conservatively allocated. This is NOT MARKET TIMING. This is portfolio RISK MANAGEMENT. There is a massive difference between the two.

  Therefore, even if the market breaks below 2080 today, as long as it closes above that level by the end of the week, then nothing has changed. A close BELOW that level will suggest that we are beginning a more significant correction toward the January lows of 2000. 

  Q. According to the "score card," the bears are winning. So, shouldn't investors be doing something now?

  BEARS 4, BULLS 1

  If this were a soccer game, we could most likely predict the winner. So, technically, yes, I could make the case for gathering up your belongings and leaving the stadium early to beat the traffic.

  However, if you do leave the game early, i.e. SELL, you might be disappointed to find out on your ride home that the Bulls rallied back and scored 5 points in the last few minutes. It is not likely, but it is possible.

  This is why we wait for the evidence to be presented before acting. The job of any investor is to make investment into one or more assets, and then manage the "risk" of owning that asset to create either:

  • a "positive outcome" by garnering a "realized gain," or;
  • to minimize the impact of a "negative outcome" by limiting "realized losses."

  Currently, the technical deterioration in momentum and relative strength are suggesting that the market dynamics are far weaker than what the current price of the index suggests. As noted by GaveKal Research today:

  "A correction is generally defined as any stock that is at least 10% off a recent high. If we look at a price performance over the past 200-days, 42% of all the stocks in the MSCI World Index are in a correction. Higher than you might have thought, right?"

  

  There is sufficient cause for concern currently as the underlying weakness in the overall market is becoming much more pervasive. However, "guessing" at the outcome may leave you wishing you had stayed to see the "end of the game."

  Is Greece The Thing?

  Whether, or not, a Greek exit from the Eurozone or a potential debt default is "the thing" that sparks the next major correction in the markets is unknown. Historically, such a widely "known" event is generally already factored into the markets and has much less of an impact when that event eventually comes to fruition. As Art Cashin suggested this morning:

  "I think China may be more important than Greece. Stick with the drill – stay wary, alert and very, very nimble."

  That is exactly the right advice for both traders and longer term investors. For longer term investors, I have always suggested using weekly and monthly charts to more clearly define the current trend of the market. However, this also means these charts are only updated at the end of each week or month, so what happens TODAY is far less important that where the market closes at the end of the relevant period. The final chart below is the weekly chart of the market.

  

  There are several important points in the chart above. First, since the implementation of QE3 the bulls have clearly been in charge maintaining the bullish trend line since the June, 2012 lows. Secondly, there have been numerous sell-offs along the way, none of which have resulted in the need to grossly reduce equity exposure from fully allocated levels as of yet. "Yet" being the "key word."

  Finally, the bullish moving averages, which have acted as primary support along this entire advance currently remain intact. This suggests that currently, outside of normal portfolio management processes, portfolios should be maintained near target equity allocation levels.

  However, it is worth noting that the longer term MACD sell signal is becoming more pronounced which suggests that the "bull case" is weakening markedly. Where this chart finishes the week will provide a clearer picture of whether it is time to "leave the stadium" or "hang around for a terrific comeback."

  One thing is for sure…things are about to become much more interesting.

  

  

  

  

  

• ECB Says "Grexit Can No Longer Be Excluded", Hints At More QE

  It seems Goldman Sachs' conspiracy theory was right all along…

  • ECB'S COEURE SAYS ECB IS EVEN READY TO USE NEW INSTRUMENTS, WITHIN ITS MANDATE
  • GREECE COULD EXIT EURO, COEURE SAYS IN LES ECHOS INTERVIEW

  This is exactly what The ECB wanted all along (and their leaders overlords) – all they needed was an 'excuse'.

  *  *  *

  As we noted previously, from Goldman:

  As tensions around Greece have mounted, it is something of a puzzle that EUR/$ has shown little reaction. Our explanation, laid out in our last FX Views, is that much of this price action stems from the Bundesbank, which has reduced the maturity of its QE buying, enabling the Bund sell-off and moving longer-dated rate differentials in favor of the Euro. EUR/$ thus hasn’t traded Greece, but instead growing question marks over ECB QE.

  Here is Goldman's full take:

  From an economic perspective, Greece shows that “internal devaluation” – whereby structural reforms are meant to restore competitiveness and growth –is difficult politically and a poor substitute for outright devaluation. Emerging markets that devalue during crises quickly return to growth, powered by exports, while Greek GDP continues to languish. We emphasize this because – even if a compromise involving a debt haircut is found – this will not do much to return Greece to growth. Only a managed devaluation, with the help of the creditors, can do that. With respect to EUR/$, we think the Bund sell-off increases EUR/$ downside if tensions over Greece escalate further. This is because the ECB, including via the Bundesbank, would almost surely step up QE to prevent contagion. We estimate that the immediate aftermath of a default could see EUR/$ fall three big figures. The ensuing acceleration in QE would then take EUR/$ down another seven big figures in subsequent weeks. We thus see Greece as a catalyst for EUR/$ to go near parity, via stepped up QE that moves rate differentials against the single currency.

   

  

  Incidentally, "internal devaluation" is a very polite way of saying plunging wages, labor costs, and generally benefits, including pensions.

  But if this is correct, Goldman essentially says that it is in the ECB's, and Europe's, best interest to have a Greek default – and with limited contagion at that – one which finally does impact the EUR lower, and resumes the "benign" glideslope of the EURUSD exchange rate toward parity, a rate which recall reached as low as 1.05 several months ago before rebounding to its current level of 1.14.  Needless to say, that is a "conspiracy theory" that could make even the biggest "tin foil" blogs blush.

  A different way of saying what Goldman just hinted at: "Greece must be destroyed, so it (and the Eurozone) can be saved (with even more QE)."

  Or, in the parlance of Rahm Emanuel's times, "Let no Greek default crisis go to QE wastel."

  Goldman continues:

  Greece, like many emerging markets before it, is suffering a balance of payments crisis, whereby a “sudden stop” in foreign capital inflows caused GDP to fall sharply. In emerging markets, this comes with a large upfront currency devaluation – on average around 30 percent across nine key episodes (Exhibit 1) – that lasts for over four years. This devaluation boosts exports, so that – as unpleasant as this phase of the crisis is – activity rebounds quickly and GDP is significantly above pre-crisis levels five years on (Exhibit 2). In Greece, although unit labor costs have fallen significantly, price competitiveness has improved much less, with the real effective exchange rate down only ten percent (with much of that drop only coming recently). This shows that the process of “internal devaluation” is difficult and, unfortunately, a poor substitute for outright devaluation. The reason we emphasize this is because, even if a compromise is found that includes a debt write-down (as the Greek government is pushing for), this will do little to return Greece to growth. Only a managed devaluation can do that, one where the creditors continue to lend and help manage the transition.

  Here, Goldman does something shocking – it tells the truth! "As such, the current stand-off is about something much deeper than the next disbursement. It signals that the concept of “internal devaluation” is deeply troubled."

  Bingo – because what Goldman just said in a very polite way, is that a monetary union in which one of the nations is as far behind as Greece is, and recall just how far behind Greece is relative to IMF GDP estimates imposed during the prior two bailouts…

  

  … simply does not work, and for the union to be viable, a stressor needs to emerge so that broad currency devaluation benefits not only the peak performers, i.e., the northern European states, but the weakest links such as Greece.

  Incidentally, all of this was previewed long ago in, in December 2012 when we wrote "Next Up For A "Recovering" Europe: A 30-50% Collapse In Wages In Spain, Italy And… France." To Greece's great chagrin, all of this internal devaluation has mostly impacted the impoverished country, which continues to be a shock absorber to broader internal devaluation across the entire Eurozone.

  Which brings us back to Goldman's assessment of the current Greek state, and the suggestion that all the smoke and mirrors flooding the headline-scanning algos is nothing but noise, and that in reality the forces are alligned to "push the EUR near parity in fairly short order."

  

   

  Paradoxically, Goldman keeps pushing for a worst-case outcome, and one where the market finally reprices all the risk it has ignored for months:

  Even if Greece ultimately stays in the Euro (our base case), the immediate aftermath of such a non-payment will be to push bond yields up across the periphery. This rise in the fiscal risk premium (Exhibit 3) will of course be limited, because the ECB will likely accelerate QE, including via the Bundesbank. That will push rate differentials, especially longer-dated ones (Exhibit 4), against EUR/$. We estimate that the initial fiscal risk premium effect could be three big figures, while the subsequent QE effect could be worth around seven big figures.

  The conclusion:

  In short, we see mounting tensions over Greece as a catalyst for EUR/$ to move near parity in fairly short order, with much of that move driven by rate differentials. If, instead, a compromise solution is found (including possible debt haircuts), we see the upside to EUR/$ as very limited, i.e. on the order of one big figure at most. The reason for this is that the market is broadly expecting an agreement to be found, even with the possibility of a default in the near term on debt repayments coming due.

  And of course, going back to the start of the note, a "favorable" outcome pushing EUR higher will be one that "will do little to return Greece to growth" and as a result will force the insolvent nation back to the negotiating table until such time as the Eurozone finally realizes that it desperately needs EUR much lower, not higher, and will do everything it can to achieve that, even if it means "siloing" Greece in a state of suspended default indefinitely if only to eliminate the "risk on" euphoria in the currency pair.

  Indeed, as we said last year, the entire escalation over the Ukraine conflict was merely to push Europe to the verge of a triple-dip recession, which in turn was the catalyst that finally greenlighted the ECB's first episode of QE with Buba's blessing (after all Germany's economy was finally on the brink as well and it had little to lose). Well, the next such "catalyst" will come from none other than Greece as per Goldman's punchline:

  We encounter many who argue that mounting tensions over Greece could be Euro positive. The short term angle is that risk reduction will lead to a squeeze of Euro shorts, so that EUR/$ could squeeze higher. The reason we don’t believe this is because we think stepped up ECB QE will dominate any risk-off response. Or, to put this in another way, the ECB will not allow the fiscal risk premium to go all that much higher. The medium-term angle is that the Euro zone might be more cohesive without Greece. That rationale assumes that Greece is a case apart, when of course it isn’t. After all, the Spanish unemployment rate is not far behind that of Greece and populist political pressure is also building. The underlying commonality, in our minds, is that “internal devaluation” is very difficult. As a result, we think mounting tensions around Greece could just as well focus market attention on the sustainability of the adjustment program on the Euro periphery.

  Whoever would have thought that none other than Goldman would serve as the source of what may be the biggest "conspiracy theory" gambit of 2015…

  One final thought: what Goldman wants, its former employee at the ECB tends to deliver.

  

  

  

  

  

• Greece… Mattered: Surveying The Carnage

  Greece… mattered!!

  

   

  The market be like…

  *  *  *

  It began as FX markets opened ugly in early Asian trading, but once stock markets started to open, the focus shifted there…

  Japan spanked… Nikkei 225 down 730 points from Friday's close…

  

   

  China collapsed…

  

   

  When Europe opened it was ugly in stocks…

  

   

  And bonds… European spreads exploded – biggest risk increase in 7 years…

  

   

  But The Swiss National Bank did its best to sell Francs and buy EURs to make it all appear "contained"… Which squeezed EURUSD all the way into the green… a 325 pip ramp!!!

  

   

  And the Sudden "hand of God" move in EUR around 1340ET

  Chart showing sudden jolt in currency futures pic.twitter.com/vFiMM8u7CX

  — Eric Scott Hunsader (@nanexllc) June 29, 2015

   

  While Greek stock markets were closed, their bonds were not.. .and carnaged 420bps higher to 15.10%…

  

   

  And stock ADRs and ETFs traded in the US:

  • EUFN – European Financials, down 4% – broke below its 200DMA
  • NBG – Nation Bank of Greece, down 26% on record volume
  • GREK – Greek Stocks, down 18% on record volume

  

   

  *  *  *

  In The US, the initial carnage dip was bought with gusto but that ramp failed and by the close we were testing new lows…

  

   

  Trannies managed to get back to unchanged before plunging…

  

   

  Cash markets were a one-way street from just after the open…

  

   

  Financials hammered!!

  

   

  Post-FOMC: Bonds best, Gold glitters, but Stocks stink…

  

   

  Leaving The Dow red and S&P unch for the year…

  

   

  All major indices broke significant technical levels today…

  

   

  VIX surged to 19.00… (from 11 handle last Tuesday)

  

   

  As the 50.98 million share short of the 63.9 million outstanding in VXX suffered greatly… above 20 to 7-week highs on massive volume

  

   

  The last time VXX rose more than 14% in a day was 913 trading days ago (more than 3 years ago on November 9, 2011) and Bernanke bailed out Europe

  

   

  VIX term structure inverted once again…

  

   

  Treasury yields plunged as a near-record short position felt the squeeze… this was the best day for 10Y yields since January

  

   

  The dollar tumbled as the manipulated EUR surge "proved" there was nothing to fear… USDJPY did not play along wioth the manipulation.

  

   

  Gold held onto gains but copper, silver and worse Crude (down 2.4%) all slide despite the USD weakness…

  

   

  *  *  *

  Oh and then there is Puerto Rico collapsing…

  

   

  And Bitcoin is surging…

  

  *  *  *

  Amid all this with stocks down just 3% from their highs… The Fear & Greed Index collapsed to just 12!!!!

   

  

   

  But apart from that…

  Charts: Bloomberg

  

  

  

  

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