This Sunday, June 17th, Greece is holding elections. The elections will determine how the country chooses to relate to the European Union. In this post I'll provide a brief overview of the situation as well as share my opinion on how it all ends -- and the opportunities it presents for investors.
First, it should be noted that the markets may be especially volatile. Some large forex brokers are even stating that they will halt trading. As such, if you have trading positions open and are trading on margin, be very careful. The market could gap significantly this weekend and put you in some trouble.
Now, here's what's going on in Greece:
1. There are a number of parties competing in the election, but the battle is expected to boil down to two of them: Syriza and New Democracy. Syriza is the "no austerity" party; here is a rundown of what their platform is. Syriza wants to stay in the European Union, but does not want to accept the austerity measures Germany and other heads of the EU seek to impose.
2. New Democracy is the "let's play it safe and accept austerity" party. They argue that if austerity is not accepted, Greece will be kicked out of the Eurozone -- an alternative that is far worse.
If New Democracy wins, then Greece will undergo more austerity. I would expect political unrest and rioting to increase. I would also expect Germany to have even greater control of Greece's economy, and the march towards greater fiscal unity in the European Union to continue.
If Syriza wins -- an outcome I personally regard as more likely -- I think it comes time for more negotiations between Greece and the EU, and a political restructuring of sorts. The one thing Syriza and the powers behind the EU agree upon is that neither wants Greece to leave the EU; Syriza threatens that a contagion will emerge if they leave, and the EU will be left with nothing, while the EU threatens that Greece outside of the European trade relationships and left to convince the market to accept a new Greek currency doesn't stand a chance. Both sides are correct, and I believe politicians will come to the solution they always do: when in doubt, print money! Indeed, the ECB has already stated they are ready to provide liquidity (aka print money). And so, I believe the solution will be to give Syriza the bailout it wants, on the condition that Greece concede greater fiscal unity to the Eurozone. The ECB will then print as much money as it needs to to make the debt problem go away. The details of how this will go down will depend on a number of factors, although I think discussions surrounding the European Redemption Pact are worth watching. The ERP basically calls for the excess debt of member countries in the Eurozone could get rolled up and packaged into Eurobonds, and these bonds would be partially backed by gold.
So, what's all this mean for you, the investor?
1. At first thought printing money could mean currency debasement and an opportunity to short the Euro (FXE) -- although I do not favor this trade. The US, with $15.7 trillion USD in national debt and larger deficits, has a larger debt problem and spending problem than the countries in the Eurozone added up. Put another way, while the problem in the Eurozone is bad, I think the underlying fundamentals of the US dollar are even worse. If one wants to short the Euro, I would recommend coupling it with a long position in the Canadian dollar (FXC), so that one is speculating upon a decline in the Euro relative to the Canadian dollar.
2. If the end result is global money printing, that means inflation and higher stock prices for everyone; as such broad indices like SPY should have no trouble rising. That is why I have repeatedly argued that while the underlying US economy remains weak and is not experiencing any type of real, self-sustaining recovery, stocks will march on higher because central banks will expand the money supply to avoid austerity and panic runs out of financial assets. Of course, this will likely spark panic runs into financial assets -- even more commonly referred to as a bubble. See my previous post on where the next bubble might be.
3. If the European Redemption Pact is part of the plan to reconcile the conflict between Greece and the Eurozone, and if gold (GLD) is part of what is used to back forthcoming Eurobonds, then we may be headed to a world where the Euro is somewhat relational to gold and is appointed the new reserve currency in a new international monetary agreement. This idea seems laughable now, but the idea of a gold-backed Eurobond has already been proposed. Whoever makes their currency relational to gold will immediately become a safe haven asset, and if it is a supranational entity like the Eurozone doing it, they could have the political strength to become a new reserve currency of the world. Ultimately, though, China and the SDR from the IMF also need to be watched carefully.
Additional disclosure: I am long the Canadian dollar in the spot forex market and physical gold.