MorningWord 6/29/15: Too big to fail vs. Who cares

by Dan June 29, 2015 9:41 am • Commentary

This morning is one of those days where everyone with a Twitter or Facebook login gets to offer an opinion on Greece. The financial news sharing economy is full tilt and it’s dizzying. I would guess that most of what you have read this weekend is not likely to help you make money (or lose less). So my advice is to stick to the stalwarts like @elerianm and @NYTimeskrugman. And while you don’t have to agree with his politics, Paul Krugman has a very good track record on these specific macro issues. (his Japan-like liquidity trap/deflation predictions after the financial crisis were spot on compared to most of the bond vigilante/inflation scare mongering that dominated financial media) One quote on his blog is at the heart of what we’re seeing this morning:

The troika clearly did a reverse Corleone — they made Tsipras an offer he can’t accept

I wonder if a week from now the Troika is doing a sort of end around Corleone:

Brian Kelly made this same point last night on our sister site The Ticker District.

Who knows what’s gonna happen, and frankly it seems that few investors here in the U.S. were positioning for unexpected adverse effects of a messy Greek default as the S&P 500 was within 2% of its recent all time highs, the VIX within a few handles of its all time lows, and Treasury yields levitating near 2015 highs as if they hadn’t had a care in the world.  I suspect the off-footing pushes out the anticipated and eventual V reversal from what ever damage is caused. But make no mistake, what’s different this time is investor complacency.

I would also add that since I have been in the business there have been two massive stock market crashes, the dot com bubble burst in 2000 and the financial crisis in 2008, both of which caused peak to trough declines in the S&P500.  It strikes me as odd that this week we have smatterings of both in the global markets, with fear of some sort of credit contagion in Europe and the cooling of an obvious over exuberant equity bubble in the worlds second largest stock market, China.

Brian Kelly has a great post this morning at The Ticker District wondering if the Puerto Rico news dump last night is the sign of things to come as countries see their potential window to negotiating a decent deal to get out of their debt problems as fleetingly short:

Puerto Rico executed the mother of all news dumps on Sunday night. For GRisk/PRisk Off to become systematic the market must decide whether or not this is the beginning of a larger breakdown of the global Prisoner’s Dilemma. In this case the Prisoner’s Dilemma is if they all keep their mouth shut, investors keep buying their debt. On the other hand, the first few to confess may be able to negotiate a deal.

If Steven King was sitting down to pen a financial horror show, the situation in Greece, the more than 20% decline from the highs in Shanghai, the widespread economic malaise in other emerging markets like Brazil and Russia, a U.S. Fed ready to end a 7 year ZIRP and the obvious complacency of Western investors has all the trappings of a masterpiece.

Over the past few years, in situations like this, we’ve seen the buy the dip crowd step in and be right. The reason they’ve been right is that there’s been so much at stake (everything is too big to fail) it made sense to bet on a deal happening or a central bank stepping in each time. (think of U.S. debt ceiling deals, any big moment for the ECB, the Fed keeping ZIRP at the slightest sign of a weak recovery, Japan, China, you get the point).

And recently we’ve even seen a second excuse for complacency and that’s “Greece is small, it doesn’t matter.” But those two sentiments are actually in conflict with eachother. The “it’s too big a deal will get done” and “it’s so small who cares” can’t both be right.

This weekend brought one of the more interesting plot twists we’ve seen in some time.