Greece, China Update
Whacky 12-hour period for the markets, likely more to come as New York opens. Stay tuned.
Surprise. Varoufakis quits. Greece to submit new bailout proposal to EU leaders. Someone must not have liked Varoufakis’ position post referendum as quoted in a previous post. This is looking more and more like “the same old, same old.” Tsirpas is holding out for a better deal for Greece, but one wonders if that is possible under the circumstances and all of this was a sound and fury signifying nothing.
Yet, hope springs eternal. The markets reacted across the boards, but not violently. Gold initially ran higher then almost immediately moved back down based on dollar perceptions. We should all remember that gold doesn’t always react to these kinds of situations as one might think it should. After the Lehman Brothers collapse in September, 2008 gold tracked sideways to down. It was not until after the full effects of the 2008 crisis were fully digested – in 2009 through 2012 – that gold began to move higher. Gold demand, on the other hand, was another story entirely. It ran strong from the very start of the crisis in September, 2008 as investors correctly perceived the need for a safe haven under severe disinflationary circumstances and the threat of further systemic contagion.
Separate from the mess in Europe, the situation in China also warrants attention. Chinese authorities overnight threw everything but the monetary kitchen sink at the runaway Shanghai stock market crash (down 30% since mid-June) largely to no avail. For those of us who still champion free markets, the actions of the Chinese government and central bank, in stepping in to save the Chinese stock market, were the antithesis of how markets should operate in order to remain healthy. The Peoples’ Bank of China will cover stock sales with printing press money in the hopes of propping up that market. Another way to put it is that the PBoC is offering liquidity to anybody who wants out. Judging from the Exchange’s price performance, a good many are taking up the PBoC on its offer. Intraday, the Shanghai Exchange’s strong rise and almost immediate collapse tells you that there is more water yet to run under the bridge. We will be monitoring the situation in China closely in the days ahead. (Please see previous post below on China situation).
Meanwhile, in little Puerto Rico another black swan can be seen paddling around the financial markets’ pond. It has already defaulted on its debts, but something tells us, that we haven’t heard the end of that particular story. One wonders, with all of this happening at zero percent interest rates and massive central bank liquidity flooding markets everywhere, what might happen if interest rates were suddenly to begin rising.
