Thursday, July 30, 2015

Blackstone's Byron Wein On The Current Investment Climate: Dark Clouds Clearing

Despite this morning's feeble GDP report there are some underlying strengths, one of the reasons I figured I wouldn't look like a total idiot calling for market grey skies to clear up by August 10th or so:
July 8th
Chartology: "S&P 500 Suffers Technical Breakdown; Cash Is King"
Not a huge deal if you've been paying attention. We are allowing for another three to four weeks of downside before panicking, still sticking with the offhand comment that intro'd a June 25 Grantham post for the time frame, as to extent, who knows?:
S&P 500 2108.58; all time high 2134.72.
We would not be at all surprised by a decline into early August but, contra Carl Icahn, don't think we've seen the top yet....
You didn't come here to see me do my répétez, répétez schtick so here's Mr. Wein's Market Commentary blog:
At the beginning of the year I had a rosy view of how 2015 would play out:

1.  The United States economy would grow close to 3% and the unemployment rate would drop below 5%.
2.  The Standard & Poor’s 500 would rise more than 10% by Christmas.
3.  With some monetary and fiscal help, Europe and Japan would grow more than 1%.
4.  After turbulent negotiations, Greece would stay in the European Union and maintain the euro as its currency.
5.  There would be a deal with Iran on its nuclear development program that would be both credible and enforceable but nobody would like it.
6.  The Chinese economy would slow and the stock market there would be dangerously overvalued, but while China would not be the engine of growth it had been for the past decade, its reduced pace would not destabilize the world economies.

Then, as we entered the second half of the year, each aspect of this outlook began to run into trouble.
We are at a point when various macroeconomic events could have a significant impact on the financial markets.  Here are my thoughts on recent events in Greece, the Iran negotiations, China and the United States.

I have a somewhat different view of the Greek situation from the consensus.  Most observers believe Alexis Tsipras was forced to give in on all of the demands of the International Monetary Fund, the European Central Bank and the European Commission and that he is in serious political trouble as a result.  My assessment of the situation is that, in the eleventh hour, Tsipras correctly concluded that Europe would, for a number of reasons, do almost anything to keep Greece in the European Union.  The first is the fear that there would be contagion in the southern-tier countries like Spain and Portugal, who might believe their economies would improve if they had control of their own currencies, and the European “project” would die.  The second is that a Greek default would destabilize the financial health of Europe generally, and the fragile economic recovery taking place there would be aborted.  In that circumstance, Tsipras would be forced to face the domestic consequences of default and withdrawal from the European Union and the euro.  Greece itself would be in revolutionary turmoil.  The banks would remain closed; pension beneficiaries, the military and public employees would be paid in scrip or IOUs.  The country would not have the funds to pay for gasoline and other imported goods.  Greece’s borders would become porous and Middle East immigrants would flood in through Turkey and elsewhere.  In the event of a default, it could potentially be persuaded to look toward Russia for support, despite currently being a member of NATO.

While Tsipras would appear to have capitulated on his anti-austerity program, he did keep Greece in the European Union, kept the euro as its currency and secured a third bailout of over $96 billion (a huge amount; more than 50% more than what was being discussed a few weeks ago) to reopen the banks and keep the country operating.  About half of this money will be used to meet external financial obligations.  Greece will also sell $55 billion in assets to repay loans.  The “No” vote on the referendum, which Tsipras encouraged, solidified his political position, so he should be able to withstand some of the criticism he will get by agreeing to the reforms.  His political party may be forced into a coalition and cabinet ministers may resign in protest, but he has guided his country through a terrifying economic storm and some collateral damage was to be expected.  There are many Tsipras critics who believe he could have achieved a better deal earlier, but I question whether the Greek people were desperate enough until now to agree to the harsh terms of creditors.  He has obtained what the Greek people wanted: money to move forward and continuing membership in the European Union with the euro as Greece’s currency.  The story is not over.  The Greek economy is in shambles and the prospect of running a budget surplus is dim.  While the current deal buys some time, we may be wringing our hands about Greece six months from now.

I believe there will be a “best efforts” attempt to implement the reforms, but progress will be slow and the European review board will be tolerant because a crisis has been averted.  I doubt that Greece currently has the institutional structure to carry out all the required reforms, like tax collection and work rule changes.  Greece is not likely to be able to revise its pension program without provoking more public protests, and other austerity measures may hold back any recovery in the economy.  From an investment viewpoint, the temporary solution probably means that Europe will continue its modest recovery this year and that the dollar will strengthen.

In spite of the complexity of the issues, a deal with Greece resulted from two simple objectives: Europe’s intent to avoid a destabilizing default by a member of the Union and a desire by Greece to get a third bailout and keep the euro.  The Iran talks reached an agreement because of two similar controlling factors:...MUCH MORE
Markets and fundamentals don't always run together but for right now I expect they will.
Until they don't, of course.