Traders piled into stocks last Thursday when the news of a Greek bailout hit the wires. Stocks soared back to near highs as euphoria swept the markets and investors celebrated the austerity based recession that is now a near guarantee in parts of Europe. The news became official this morning with a fresh bailout of Greece (which seems to be the market moving news just about each Sunday these days). Greece will receive $145B in what can only be described as a Scott Norwood-like kick of the can down the road – hard but “wide right!”. Traders love the news, of course, just as they have every Sunday night that such reports have been released:
The politicians across Europe are playing this bailout as if it is a bailout of the people of Greece and Europe itself. The truth is, these measures will force Greece into a near guaranteed recession for several more years and possibly to the brink of depression as savage austerity measures are imposed. The likelihood of further austerity measures in surrounding nations is almost guaranteed as well. Meanwhile, this bailout will be funneled through Greece and directly into the coffers of the foolish buyers of Greek bonds – primarily the large European banks. Once again, these foolish politicians bailout Wall Street in favor of Main Street and sell it as a bailout of Main Street. Hopefully the entire continent of Europe will remember this when they enter the voting booth.
It will be interesting to see how this evolves in the coming months. My guess is that Greece is not the last domino in this row. The problems in Italy, Portugal and Spain will continue to build as the Euro economy remains fragile. Should these countries impose painful austerity measures in an attempt to get ahead of potential Greek-like problems they could actually drive their own economies closer to the brink. The Euro has been exposed as a fatally flawed currency in its current format. These measures have done nothing to solve the actual problem in the Euro, but have nearly guaranteed a much weaker economy than most Europeans deserve.
Despite the fact that nothing has actually been resolved here, traders are piling into equity futures overnight in anticipation of a Thursday-like celebration. I think the following saying is appropriate:
“Fool me once, shame on you. Fool me twice, shame on me.”
Despite the soaring U.S. equity futures market, the actual Euro has actually sold off from its recent highs and it now up just slightly on the news. Forex traders clearly don’t agree with the euphoria expressed in equity futures. Aside from the fact that this is almost certainly not a buying opportunity, let’s just hope that we don’t confront similar Euro problems down the road. I think that is 100% impossible as the problems here cannot be resolved with bailouts, but only by a restructuring of the European Monetary Union. Unfortunately, the Greek bailout now guarantees that it will take a much larger and far more damaging event to wake the EMU up to the true flaws that are at hand here….
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.