The Emperor has no cloths

With MSCI Taiwan Index futures , Hang Seng Futures closed for the lunar year, I remain cautious to increasing long open positions on the Equity front. The leitmotif sector of the financial world remains the Forex markets. The Greek tragedy has began with the first act. The participants are different but the underlying pattern remains the same.

Analogy to Asia /USA 1998

Back in 1998 Joseph Stigliz in his highly praised book “Globalization and its discontents” highlighted the asymmetry between what the western world preached and practiced. When Asian markets were dropping through the sky as the 1998 Asian flu spread, despite their massive economic weakness, the IMF and the USA advocated emerging countries raise interest rates, bank reserves, cut fiscal spending and proceed in a austere manner.  In effect highly tight monetary and fiscal policies. It was a text book theoretical recommendation. Naturally as these emerging countries followed through with the standard prescribed medicine, their economies moved to the precipice of a 1929 like scenario. A steep “J” curve recovery occurred with many taking years to recover. Malaysia was the bete noir refusing the prescribed generic medicine, advocating instead for capital controls, stimulating its economy fiscally and monetary. To the IMF’s shame, it was the first to emerge from the crisis, a year in advance of the others !

Stigliz then went on to compare how the Western world reacted after the endogenous 2001 crisis. Rather than practice what it preached, we went on a tangent. Massive stimulus, dollar depreciation, massive fiscal and monetary spending, rates slashed to zero. The famous Fed helicopter was used ! The hypocrisy was obvious. The IMF and the western financial institutions lost its credibility with the emerging markets. Most went on over the years to accumulate huge capital reserves as a buffer never to be experience that position of weakness.

Todays Greece / Europe

The acronym “PIGS” (Portugal, Italy, Greece, Spain) captures the mood. The rest of Europe is screaming. Greece should get its house in order. The theoretical text book medicine proposed. Austere methods. They should do away all together with Fiscal stimulus and actually contract it. Forget Monetary policy, Greece has no control over this. Meanwhile the rest of Europe continues to shout. That will still not be enough, taxes should be raised. It sounds all wonderful theoretically, but the causal effect would be a significant plunge in the Greek economy, more  bankcrupties and a public revolting. Politicians will be to their constituents what Ancient Greek is to modern Greek. Populist agendas will gain credence, and Greece leaving the Euro could be one of the unintended consequences.

Hence every time with all the hypocrisy Sarkozy, Trichet and the rest of Europe demand Austere measures in Greece, the people of Greece are simply asking the rest of Europe to look in the mirror and explain why they are doing the exact opposite, despite soaring deficits. Is it a demarcation similar to Emerging Markets /USA.

The Forex markets recognize this and continue to sell the Euro short. The Euro has dropped down to 1.36. Unlike Equities, Forex movements have the characteristics of being very dramatic.Technicals continue to point to a soaring dollar and a weak Euro. The verdict is however still out as to whether markets will hold current pivot points and rally, or if this is the beginning of a further correction. I consequently continue to hold large positions on the Dollar and little exposure on European Equity futures. Traders have seen the Euro Emperor. He appears for now to have no cloths    

By Andrew Shawn – Recursive Investments in Global Financial Markets