A Perfect Storm?

Submitted by Pater Tenebrarum  –  The Acting Man Blog

Greece is Still Lying in Wait …

We haven’t written much about Greece recently, but there have actually been a few developments worth paying attention to. Several easily foreseeable things have indeed happened in the meantime: Prime minister Tsipras felt forced to call a snap election after securing the first bailout tranche, the radical Marxist faction of Syriza led by Panaghiotis Lafazanis has split from the party, and so has its “youth wing”. In the meantime, the Greek economy has predictably nosedived as a result of the banking system freeze (Mish reports the grisly details here).

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The reason why we feel we should mention these developments at this juncture is an article that appeared at Zerohedge yesterday: Third Greek Bailout Suddenly In Jeopardy. Alexis Tsipras can no longer be certain that he will receive a majority of the vote. In fact, the decline in support for the Syriza rump he now leads has been quite significant, and as a result, the New Democracy party (sans Antonis Samaras these days) has been able to close the gap between itself and Syriza considerably. Here is a chart from the WSJ showing the most recent poll results, including the approval rating of Mr. Tsipras – as every incumbent in the middle of an economic crisis, he is losing support quite fast.

tablemodGreek snap election polls- the Syriza rump led by Alexis Tsipras still leads, but its lead is melting like butter in the sun – click to enlarge.

The upshot is that it is no longer certain that a government will come to power that will feel bound by the agreements Tsipras has struck – hence the EU is already back-pedaling with respect to the next bailout tranche, the disbursement of which will come into doubt if no stable government emerges in Greece after the election. In this case everything would essentially be back at square one.

tsipras_lafazanis-820x418Former allies, now rivals: Alexis Tsipras and Panaghiotis Lafazanis. The latter favors an exit from the euro and wants Greece to emulate Venezuela’s socialist model. He’s not worried by the fact that it won’t work – Marxists are never bothered by the unworkability of their system.

Photo via realpolitics.gr

The reason why all of this deserves attention is that the election is to be held in September – at a time when its outcome could well contribute to a “perfect storm” in global financial markets.

A Bear Market Rule

It is actually an old rule of thumb that everything that can go wrong, suddenly will go wrong when a bear market is underway. Of course, as the monthly chart of the S&P 500 below indicates, we cannot be sure yet that a bear market has actually begun. However, the recent volatility is unlikely to die down quickly, and September is traditionally a dangerous month for stocks. Renewed upheaval in Greece would go perfectly hand in hand with an emerging crash wave.

SPXSPX, monthly – it is too early to call it a bear market, but the recent action certainly looks and feels like the “kick-off” to a bear market – click to enlarge.

One thing we want to emphasize again is how odd the recent decline in the stock market has been in many respects. We believe that even prominent bears who have been harping for some time about the market’s deteriorating internals and overvaluation, as well as the extreme complacency of most market participants, were a bit surprised by the ferocity and suddenness of the decline. It happens rarely that a market nosedives this quickly from a recently clocked new all time high. This unique behavior makes us think that something really serious may be afoot here (of course we could be wrong, but this is our hunch at this point).

Conclusion

Many potential problems for the financial markets are still lingering out there – and the upcoming Greek election happens to be one of them. Normally the markets probably wouldn’t care much about it – after all, the EZ can be relied upon to bail out Greece forever and ever, right? However, never forget that in a beginning bear market, many things that didn’t matter before suddenly will matter. We could well see a so-called “perfect storm” developing this month. Caveat emptor.