Roadmaps: Grexit And A Crash This Fall

Includes: GREK
by: Enzio von Pfeil

Here is how much Greece must pay whom and by when, followed by an overall roadmap for that market tumble this Fall.

  1. Greece's payment deadlines this May. We have suggested that an "and-and" hell is in the offing: default AND no Grexit - aka the recalcitrant child stays in the Euro. Keep the following goal posts in mind: on 1st May, she must pay the IMF €200 mn. On 8th May, she must repay €1.4 bn in Treasury Bills, and on 12th May, she owes the IMF a further €776 mn. According to today's Financial Times (NYSE:FT), Greece "...faces even bigger bills in June."
  2. The crunch cometh this Fall. Back in my broking days, I was known to forecast big events (rightly and wrongly, of course) about six months ahead of the curve. On 11th March, we re-iterated to expect a market crash this Fall, say around September/October. It will stem from the non-Asian emerging markets which have currency mis-matched their liabilities, i.e. borrowed in "cheap" (!) dollars, only to service these debts out of their weakening domestic currencies. A lethal cocktail, one which I warned about in my elderly tome, Effective Control of Currency Risks.
  3. Worsening Economic Time® for Emerging Markets. On 9th December 2014, we cued-off the BIS Quarterly, suggesting that the stronger dollar would exacerbate this currency mis-match. The result: the Economic Time® worsens on account of Emerging Markets (EMs) that are affected having to stump-up more local currency in order to service their by now expensive dollar debt. Alternately, and this is the new insight, once the Fed starts hiking rates, affected EMs' Central Banks will have to raise rates to protect their currencies - probably by creating an excess demand for money (i.e. by reducing the supplies of local currency, thereby increasing their prices on forex markets.) Whichever way you slice it, EMs' Economic Clocks® are going to start ticking noisily.
  4. So who gets hurt the most? Those countries with significant current account deficits, i.e. those who have to fund themselves the most in foreign markets: Turkey, South Africa and Latin America. In addition, vulnerable are those countries with pronounced dollar-denominated debt: Russia and Ukraine.
  5. Investment implications. Buy into the weakness of Greek stocks and bonds: the Troika will bail the recalcitrant child out. Totally avoid/short EMs like the ones just mentioned.