What a week! It had everything. The Greek bond offering was oversubscribed four times while the Chinese bond auction failed! This is great, isn’t it? Greece is the new China. The problem is that China is a bubble, and we all know that sooner or later bubbles burst. The equity markets (especially the technology and biotechnology sectors) suffered significant losses with the Nasdaq having lost 8% in the last three weeks. In the meantime my Russian taxi driver Mr. Nitup keeps telling me that they stand ready for another show in Eastern Ukraine, thus I suggested that they should hire Mr. Spielberg for the special effects.

Let’s take those things in the order presented above, and hence start with the “successful” Greek bond offering. Where is the success?

  • In the lowering of the unemployment numbers?
  • In the number of poor folks who skip meals and medication?
  • In the cooked numbers that show a primary surplus?
  • In the absence of any liquidity?
  • In the lowering of unaffordable taxes?
  • In higher incomes?
  • In higher GDP?
  • In the lost national sovereignty?
  • In the overblown public sector with its special political clientele?
  • In punishing the perpetrators that drove the country bankrupt in the last 30 years?
  • In the number of insolvent businesses or non-performing loans?
  • In the creation of real wealth?
  • In the reduction of the unaffordable and unsustainable debt?

Needless to say that I could go on and on, but there is no need, because it’s about a show and realists do not care about shows but about real things. It seems that we have forgotten that real things such as productivity, capital investments and the like, affect real things such as income and employment levels. Manipulated things such as interest rates, money illusion (especially fiat money illusion), accumulation of debt and the like, can only affect manipulated things such as public opinion polls, bond prices, and statistical scores.

How in the world a country that experiences negative growth borrows at a rate that far exceeds its growth prospects for the next two years? We teach this principle to second-year college students. If things are truly turning around why the rush to borrow more now, rather than wait until rates drop more? Wasn’t it debt that drove the country bankrupt? Is the solution more debt?

How in the world Greece borrows more now, and then in October plans to demand debt restructuring of its existing debt? And how in the world investors fall for that, unless it’s about a show orchestrated by manipulation? Cui bono?

Really, who benefited from the Greek bailout and the “successful” recapitalization of Greek banks? Was it maybe EU banks, EU politicians, Brussels (the epitome of inefficiency and bureaucracy), and especially some Northern EU banks whose stake in the Target2 program is in the hundreds of billions of dollars?

Isn’t it a fact that if true market forces had prevailed in Greece, major EU banks would have gone bankrupt and the dysfunctional currency a.k.a. Euro would have ceased to exist?

Could it be the case that the “successful” Greek bond offering was done for the sake of politics? Could it have been driven by fear that a major upset in Euro-elections in Greece and elsewhere would shake up the political landscape of those who designed and executed a manipulative economic and monetary system that suffers from the complete absence of economic and monetary anchors?

Why so much concern for ephemeral shows of monetary manipulations (a.k.a. building on sinking sand)and no concern for real things? For how long could the people take placebo treatments? Are the major beneficiaries then of the Greek bond offering the political status quo in the EU? If it is, it might be time the shake up and rock the Casbah (the old citadel that protected the privileged ones).

Now, let’s see what is happening in China. If I could review the Chinese developments over the course of the last year, I would say that five things have emerged:

  • First, a very powerful leadership – most probably the most powerful since the Deng Xiaoping days – determined to change things
  • Second, a crusade against corruption never seen before in China (old party bosses are imprisoned and their assets in the billions of dollars are confiscated)
  • Third, an era of economic reforms has been unleashed which might be the only hope that China has in avoiding a very harsh landing given the unaffordable debt that has been issued and the many bubbles in the real estate, financial, and municipal sectors
  • Fourth, economic slowdown has arrived along with the first write downs and bankruptcies. The concern is what to do with the Chinese shadow banking system that may be in the trillions of dollars, the potential liquidity squeezes – a prelude of which we have seen in the last 12 months with intrabank rates skyrocketing – that will slow down growth even more than anticipated, and the millions of Chinese who may lose their savings in “wealth management products” that resemble the western toxic assets whose value was determined not by market forces but by manipulated algorithms
  • Finally, a wakeup call about pollution has been received by the new leadership, which seems determined to spend up to 8% of its GDP in order to fight pollution

In the midst of these all, China failed last Thursday to raise $28 billion in new debt issuance facing a market demanding higher yield. That Casbah has started been shaking.

Now, as far as the trajectory of the markets is concerned I would note the following:

  • Liquidity and lending activity is increasing (partially in a justifiable way given the higher productivity and employment figures in the US) which will boost capital investments
  • At least in the US the economic and financial house is getting into shape and some order, thus profit margins are getting healthier
  • The market consolidation in the last several days is being shaped as an opportunity to shake up opportunistic investment schemes, which in turn will allow good equity purchases at decent multiples
  • Consumer confidence is rising while the real estate market (residential and commercial), shows clear signs of an upward trend
  • While some additional consolidation may still take place, we are of the opinion that a market upswing is in the works

Having said the above, we do not deviate from our long-standing position that unless fundamental changes take place in the next two-three years, the forces of global debt, global unfunded liabilities, global derivatives schemes and structures, and the absence of anchors in the system will align themselves in a crisis that could become the mother of all crises.

Let’s close with our friend Mr. Nitup (See “A Discussion about Crimea and Russia in St. Petersburg“). Mr. Nitup seems that did not appreciate the Eagles lyrics (hint: get over it, the Eurasia dream is dead) and in his utopian fantasy-world asked for another song. Bob Dylan’s Senor lyrics came to mind, dedicated to bonehead mentality:

Senor, senor, can you tell me where we’re heading?
Lincoln County Road or Armageddon ?
Seems like I been down this way before
Is there any truth in that, senor ?

Is it proper to close by making a request?

Mr. Nitup, could you please turn off that pipeline that goes to Ukraine? It could be the dream that comes true! It could truly mark the beginning of a New Day!