The End of the Road for Greece?

After weeks of falling or stalling, the S&P500 finally managed to register a gain for the week, rising almost 0.8%. Volume was light, so once again, this means there was no stampede by new buyers jumping in to buy stocks. And volatility fell back, as would be expected in a week when prices rose.

The technical picture is still somewhat concerning.  The distribution pattern that began in early 2015 is still fully intact. When prices essentially go nowhere for six months, hovering near all-time highs, the most common explanation is that professionals are selling and retail investors are buying…..hence the term “distribution”. The problem with this, of course, is that the professionals are the “smart money” and retail investors are often the “dumb money”.  And most large corrections in stock market indices are preceded by this phenomenon. That said, of course, there is no guarantee that the much-delayed correction is imminent.

In US macro news, the week started off with a disappointing Empire State manufacturing survey report; instead of rising as expected, the survey fell, and recorded its lowest reading since January 2013, almost two and a half years ago. Industrial production also fell when it was supposed to rise; industrial production is now down year-over-year for six months in a row, the worst stretch since January 2010! Consumer prices, at the more important core level, rose less than expected; so the Fed is not threatened with even the hint of a rise in inflation. Initial jobless claims continue to creep downward, registering their lowest level in many years. The Philly Fed survey beat expectations, as did leading indicators. All in all, the picture hasn’t changed—the US economy is only limping along, growing (when not shrinking as it just did over the winter) at a very tepid pace.

Finally, the big story of the week was Greece, again.  This time, however, it looks like the almost broken state is finally reaching the end of the road, in terms of getting additional funding from its creditors. Banks throughout the nation, especially over the last few weeks, have witnessed a massive removal of deposits, leaving these banks short of funding. Up until now, the European Central Bank has been financing this run on deposits with emergency loan funding arrangements. But since the newly elected government of Greece is refusing to bend to the Troika’s demands for further austerity measures, the release of additional funds from the Troika of creditors may not be forthcoming. And if this happens, then the ECB will soon be forced to stop throwing good money after bad and it will cut off emergency bank funding.

If this happens, then all hell may break loose. Capital controls will probably be needed in Greece. A parallel currency may emerge; and if that doesn’t work, then an official new currency will likely need to be created….something akin to the old Drachma. Inflation may skyrocket. Financial transactions may freeze for a while. And the overall economy may fall even more than it already has.

But while most experts can safely predict what would happen inside the country, very few can confidently predict what would happen outside the country. And the big question is this—will there be contagion, in the financial markets, in the real economies of surrounding states and regions? Very soon, we will find out.

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