Steen's Chronicle: China, the Silk Road and the 'slowdown'

 

Chief Economist & CIO / Saxo Bank

Denmark

• China deregulating markets at breakneck speed
• New Silk Road represent's Beijing's growth strategy
• RMB to supplant GDP as third-most-traded currency

 

Crowds on the Nanjing Road: Things move fast in China, and macro trends 

(and their underlying policy moves) are no exception. Photo: iStock

 

By Steen Jakobsen

 

Change is in the air in China, where there are now more than 5,000 hedge funds, the IPO market is red hot and the stock market has recently been up more than 100%... but that's not the full story.

 

Outsiders and pundits are busy foretelling the story of a China in slowdown mode, in financial trouble and with bubble-like equity markets. The main take-away from my trip to China, however, was the following...

 

Firstly, financial deregulation is happening faster than anyone ever thought and the internationalisation of the RMB is the real fuel for the Silk Road project.

 

The financial deregulation does not only take the form of things like the Shanghai-Hong Kong link, or Shenzhen-Hong Kong and the qualified investor programme. It also can be seen in the gradual easing of regulation, the Shanghai Financial Zone (or, more correctly, the Liujiazui financial and trade zone) and the firm belief in opening markets. 

 

Meeting officials in Shanghai, I got the sense that even they are surprised at how the "open market" evolves faster and faster, an observation confirmed by increased volumes not only in the stock market but in a bigger and deeper bond market, as well as the domestic FX market.

 

This brings me to the second major observation: the internationalisation of the RMB. When I first wrote about the Silk Road in March after my visit to Hong Kong, I didn't realise how important this is.

 

The internationalisation of the RMB will get a kick start in September/October when RMB is added to the basket of SDR. 

 

There is already great demand for RMB clearing, and several central banks and sovereign wealth funds are looking to increase their exposure, probably at the expense of the USD.

The fast-growing IPO market can also be seen as building a deeper capital market, with the raising of capital occurring away from the government-supported banks and the liberalisation of the financial markets.

 

Morning on the Shanghai Bund: Chinese capital markets are expanding 

as the country makes moves to liberalise its economy. Photo: iStock

 

The steep price of these IPOs, of course, doesn't make it a bad deal for either the government or for shareholders...Yes, the 100% rise reminds us old "gents of the market" of NASDAQ and the IT bubble in 1999/2000... Yes, I think the Shanghai Composite will sell off to 3.000 from the lofty 5.200-ish seen earlier this year...Finally, yes I do think China will have a hard time living up to the promise of 7%-ish growth this and maybe next year, but... China has a plan. 

 

You can agree or disagree with it, but they do have a plan and it's the Silk Road.

 

Making one trip per year on average to China doesn't make me an expert, but it does remind me that China and its interpretation can't be done traditionally, or from a chair in London, New York or Copenhagen.

 

China is likely to see some improvement over the balance of 2015. The aggressive monetary easing will act as the "bridge" to the time when the Silk Road is implemented and the flow of funds from China start coming in earnest.

 

What we need to learn as investors and as observers of macro trends is this:

 

It's far more important what China does with its foreign exchange reserves (USD 3 or 4 trillion) than when and if the Federal Reserve hikes rates. 

 

Both the monetary easing and the initiation of the Silk Road project means China needs to reduce its reserves. Each 100 basis point cut of the country's Reserve Requirement Ratio equals China selling $260 bn worth of bonds. 

 

(China is a closed economy, hence they need to unsterilize, or put money into the economy each time they reduce rates).

 

Similarly, when the Silk Road needs to be financed it will be from the same source – the selling of US bonds. Maybe that's why the cost of money, rates, has already risen this year... not because the Fed has moved, but because China has.

 

This new world order is something we need to get used to; in a world where everyone is over-leveraged and under-financed, the people and countries with excess savings dictate the terms.

 

In my view, the RMB will overtake the GBP as the number three currency (in FX volume) in less than three years. China will dictate the cost of money, but China will also be engineering a global restart of growth exactly as they did in 2008, but this time the plan is more grand and ambitious.

 

Yes, there is change in the air in China, but it will spread to the rest of the world over the next two years as China makes a move to create one big trading zone across Asia .

 

At least China has a plan.

 

China's New Silk Road will revolutionise global trade. Photo: iStock 

 

— Edited by Michael McKenna

 

Steen Jakobsen is chief economist at Saxo Bank

 

 

Med venlig hilsen  |  Best regards
Steen Jakobsen  |  Chief Investment Officer

 

Saxo Bank A/S  |  Philip Heymans Allé 15  |  DK-2900 Hellerup
Phone: +45 39 77 40 00  |  Direct: +45 39 77 62 23  |  Mobile: +45 51 54 50 00

 

Research: http://www.tradingfloor.com/traders/steen-jakobsen

Please visit our website at www.saxobank.com

 

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Circus Greece - Another victory for pretend-and-extend and loss for European growth and discipline

Just when even the politicians were willing to give up came the breakthrough in talks with Greece. What made the "difference" is hard to say or interpret but crisis fatigue could have been one of the main reasons.

 

Personally, I had promised myself to stop commenting on Greece as there is little to add to a confusing, mainly emotional blame game, where no one talks about the future of Greece, Europe or the mandate needed for securing a real forward looking and functioning Europe.

 

The deal is of course is another pretend-and-extend master piece, but we gained two major insights:

 

1.)    A Grexit will only happen if Greece initiate it – The politicians stipulated conditions which is so tough that Greece is almost obliged to not implement them. The deal is a carbon copy of the 2012 MOU including privatizations which have failed to deliver twice before 2011/2014

2.)    The pretend-and-extend is more important than Europe's future but also domestic politics. Both Netherland and Finland came to Brussels with no mandate to give more money to Greece, promises to their voters in the case of Netherland and in Finland a parliamentarian majority against it, and still the "caved in".

 

This willingness to go back on the voters will be costly for politicians and that's maybe why this could be the last such deal where we 'socialize the risk of taking the loss' we need to take on Greece. It also makes for an interesting drama when Germany, Netherland, Slovakia, the Baltic nations and Finland's needs to ratify the deal later this week. I, personally, believe many politicians secretly hope Greece fails to go through saving them from facing the domestic protest of extending more debt to someone who has been financially bankrupt for more than five years.

 

 

 

 

The privatization fund will also be used to recapitalize the banks to the tune of 25 bln. EUR. Let me make this easy for you: The Greek banks is going to get 25 bln. EUR from a fund which since 2011 have only been able to sell less than 2 bln. EUR worth of assets.

 

Furthermore carefully reading Prime Minister Tsipras statement after the deal was announced this morning I have a hard time seeing him leading this reform process.

 

http://tinyurl.com/ppgo35v

 

 

The time line in place looks like this:

 

 

The market is slowly digesting the result. The "relieve rally" is fading towards the end of today, and bonds spreads has been stubbornly bid all day, despite the risk of "Grexit totally of the table" according to Juncker. Mind you Juncker is hardly the analyst you want considering his past luck with similar comments.

 

Conclusion:

 

Tsipras capitulated fully. He got nothing, or worse, he got less than he has. A total disaster for him and Greece.

This deal is copy of MOU from 2012 which didn't work.

Any REAL solution on Greece must be based on two things: 1.) Debt forgiveness for Greece 2.) A TRUE willingness for Greece to change and create its own future.

There is the widest accountability gap ever in EU history. No one wants to deal with the result of five years of pretend-and-extend. Politicians never been further away on EU from their voters than today.

The market will trade sideways up-and-down until this week is finished.

Europe is now negatively impacted in GDP terms by 0.25/0.30% from Greeks uncertainty. Another lost year from Europe.

 

If must again quote Churchill: If you are going through hell, continue walking"

 

Finally,

 

I think this is the proper closing: This is George Constanza doing a Greek negosiation – enjoy it may be the only laugh we get this week:

 

https://www.youtube.com/watch?v=nLLxXr4U7Gg

 

 

Med venlig hilsen  |  Best regards
Steen Jakobsen  |  Chief Investment Officer

 

Saxo Bank A/S  |  Philip Heymans Allé 15  |  DK-2900 Hellerup
Phone: +45 39 77 40 00  |  Direct: +45 39 77 62 23  |  Mobile: +45 51 54 50 00

 

Research: http://www.tradingfloor.com/traders/steen-jakobsen

Please visit our website at www.saxobank.com

 

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Steen's Chronicle: Important guest blog by: Dmitri Masselos, a London-based fund manager and a native of Greece. EU — such a good concept, such bad execution

Steen's Chronicle today is written by Dimitri Masselos, Shard Capital. Dimitri is a good friend, a scholar and an amazing trader, but his relevance for this Chronicle comes from his heritage. Born in Greece, living in London, and with a perspective on Greece which is forward looking with a critical look at the past. Enjoy Dimitri's piece as its one of the best in this nightmare called Circus Greece.

• European Union is a good concept but badly executed
• System creates internecine warfare of 'last-man-standing' variety
• 'Lend' rather than 'allocate' model creates inevitable debt in vicious circle
• Europe should draw inspiration from US one government model
• Waste of resources and artificially-maintained prices characterises EU
• System of 'small' government is the answer to EU's unwieldy mass

Frankfurt residents enjoy a lovely summer's afternoon, but is the EU set up
just to make the strong, stronger and the weak, weaker? Photo: iStock

By Dmitri Masselos

The European Union is a good concept but wrongly structured.

The union was created as a "supranational foundation to make war unthinkable and materially impossible and reinforce democracy". A good definition of a nation is "borders, language, culture".

Today, the EU has 28 members and a single currency. Each of the 28 members by nature add different positive contributions to the union. Each member still retains its local parliament.

Nature makes people different from their genotype to their phenotype. If people would like to embrace those differences, take the best of each and make a super country, namely the EU, the best way to do so would be a single government with a single currency.

The importance of single government became apparent with the case study of Greece which is a dry run for the future and potential demands from other southern states of the EU.

Brussels collects taxes in its member states which pretty much act autonomously to better themselves and a portion of those taxes arrives centrally to the European Central Bank.

The ECB then lends those funds according to need and politics.

The EU is one country, one culture with all the colours coming from cultures within its body, one primary language, one currency, one government and one economy. The result is the EU nation.

Imagine all the people of the EU as one

But imagine if the EU — democratically elected with equal representation from each country directly accountable to the people — has a central and small-sized government that would decide on the budget and allocate that budget fairly and according to direction and vision for the future for all of the EU. Allocate, I stress, not lend.

Something similar happens today in the US where the Federal Government allocates to less productive states. That sees states that produce less such as Mississippi and Alabama are subsidized by more productive states such as New York and California.

Yet, it is one country, one people, one currency and such allocations from the government are done with a vision for the future and for the betterment of all the people of that one country.

Currently, in the EU, when a country underperforms in its productivity (usually as the result of too much government and government dependent entities proliferated to those large numbers to purchase votes and retain a government into power usually by sheer numbers not by meritocracy), the EU lends it money to overcome any underperformance based on promises and projections with assumptions from current underperforming government. 

In the past, when a country underperformed or had too much unemployment, the country would print some of its own currency to jumpstart the economy and reduce unemployment.

Today, those underperforming EU countries that are less productive cannot print as the currency is centrally controlled. So, they are handicapped on receiving funds from central control.

However, instead of receiving funds as an allocation (like US does), they receive such funds as a loan. Those underperforming countries would then have to pay back the loans with new loans on which interest from the old loans is capitalized and so on and the debt propagates exponentially until one day, the central control  says "we do not lend you more or you have to become poorer and cut things (austerity) to pay us back".

So, this is a self-feeding spiral whereby in order to pay, you have to get a new loan to pay the old.

One day, when there is nothing else to pledge, the underperforming country defaults. Then the creditors discredit the country and demand their money back by converting it to equity, foreclosing/repossessing any and all property securing their loans. So, you have a loan-to-own scenario in the EU that eventually one country from the EU would have all the money and own all the other countries.

This is not a union but an acquisition, an economic invasion, a war that happens with finance and not with weapons.

When nations start waging economic warfare, people inevitably suffer. Photo: iStock

If on the other hand there was one small central government how might it approach this? It could ask a key question first: "How can we use the real estate of Greece for the maximum benefit of all EU?" "What does Greece offer?"

1.      Sunshine: How about photovoltaic plants to feed electricity to the rest of the EU?

2.      Wind: Some of the most windy parts of Europe are in Greece at 7-11+ metres/second which cannot be found in continental Europe to install wind turbines for electricity.

3.      Sunshine produces excellent natural fruits and vegetables with outstanding aroma. Farm the land. Not have Greeks receive the EU subsidies to bury the fruit so that the rest of EU can keep prices artificially high (and at night poor minorities go unearth those and sell them in the green markets locally for half price; that is an insult to nature to have to bury fruit and vegetables).

4.      Islands and tourism.

You cannot have 28 governments. Some are more efficient and effective than others. So the less efficient will lose and the more efficient will win. Then there is dispute and conflict as to what government style, genotype and phenotype is better etc and that leads to a fallout eventually. That does not unite. That puts a group of countries into an illusion of unity where they start competing internally until it is the last man standing.

The US model is better with a central government.

Embracing small government

On the other hand it is important to have a small government that will embrace business initiatives not via subsidies but by charging less taxes (it will have to feed a much smaller government "monster") and it will embrace entrepreneurs. A flat consumption tax of about 15% (similar to the fair tax proposed in the US) in place of income tax, inheritance tax, VAT and all other kinds of tax inventions and constructs would promote transparency and private sector spirit and productivity will blossom and EU will shine in the world.

However, the 28 families of politicians do not want to let their comfortable armchairs go and let power slip through their hands. The one smaller government would be meritocratic as every one of them would be personally accountable to the people and very substitutable if they are not delivering results in their job. Meritocracy would be watched by all people. Today, media is owned and controlled by the governments.

The Yes or No to austerity was twisted by the government-influenced media to read as Yes or No to the euro which was never the question of the euro in the Greek referendum.

In the past in Greece you had tomatoes red and sweet like honey. Today you import from northern countries and they taste like red cucumber. However, northern countries are superior in engineering and machinery. We could embrace those differences.

In the 1970s, Greece was almost self-sufficient in its meat production, today, most of the meat is imported. If you drive on the mainland, you will see so much land which in old times was cultivated but now lies abandoned as nobody wants to go and work the land as "easier ways" exist to make money via subsidies.

In the past an underperforming country could print its own currency to compensate for exporting deficiencies compared to its amount of imports. As such, there would be a balance with the foreign countries.

If said country would like to have a product or service imported, then it would have to be more productive, reduce its unemployment and increase its exports to counteract and balance with such imports and that could be facilitated by printing money (which would also reduce purchasing power and create inflation).

Solution for the EU nation

One small government:
Have a small meritocratic central government with equal representation from each country directly accountable to people. Like in old Greece, whoever would like to serve (civil servant and NOT "civil King") in such a government should donate all their property to the people/public for as long as they serve, and once they successfully fulfill their term without scandals etc, then they can reclaim their property back. If they were found guilty of any material wrongdoing while in power to serve their property will be retained by the public.

One currency: euro
One budget allocated, not lent to the countries in line with the route and vision for the future and the strategic needs of each country state and for the betterment of the one people of the EU nation.

Will the 28 CEOs, CFOs, controllers, etc., those 28 governments leave their chairs behind for a new central government in their place?

If not, potentially there is the issue of nature and entropy. Perhaps it is an entropic response that is well past due. I only do hope that the people of the EU will rise above and evolve into this one EU nation, and we will not have history repeat itself in the EU as happened in US about 200 years ago with a conflict between the North and South. At the end of the day, are these the growing pains of evolution? Can't we see beyond that and learn from the past and achieve the end result without the growing pains?

No-one wants a reenactment of the American Civil War
pitching south against north on European soil. Photo: iStock

— Edited by Martin O'Rourke

Dmitri Masselos is a London-based fund manager and a native of Greece

Disclaimer: This article herein represents the personal views of Dimitri Masselos and does not necessarily represent the views of Shard Capital or any entities he is affiliated with. It is intended only as thought provoking for potential permanent solutions within EU that would strengthen EU and its vision.

 

 

Med venlig hilsen  |  Best regards
Steen Jakobsen  |  Chief Investment Officer

 

Saxo Bank A/S  |  Philip Heymans Allé 15  |  DK-2900 Hellerup
Phone: +45 39 77 40 00  |  Direct: +45 39 77 62 23  |  Mobile: +45 51 54 50 00

 

Research: http://www.tradingfloor.com/traders/steen-jakobsen

Please visit our website at www.saxobank.com

 

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Macro Digest: "Circus Greece" continues, pretend-and-extend version 5.0

The "pretend-and-extend" continues.... Now we will have details "next" week..... but Greece shouldn't even be able to borrow from ESM.... please see my Tweet from yday:

 

My Twitter feed link: https://twitter.com/Steen_Jakobsen

 

 

 

Bloomberg reports:

 

(BFW) *GREECE REQUESTS LOAN FOR DEBT OBLIGATIONS, FINANCIAL STAB ILITY

 

+------------------------------------------------------------------------------+

 

BN 07/08 11:07 *GREECE WANTS TO EXPLORE STEPS TO ENSURE DEBT SUSTAINABILITY  BN 07/08 11:06 *GREECE REITERATES COMMITMENT TO REMAIN EUROZONE MEMBER: DOC.

BN 07/08 11:05 *GREECE SAYS IT WANTS TO CLEAR ARREARS TO IMF, BANK OF GREECE BFW 07/08 11:04 *GREECE COMMITS TO HONOR ALL OF ITS FINANCIAL OBLIGATIONS: DOC.

BN 07/08 10:53 *GREEK GOVT SAYS WILL SET OUT DETAILS OF PROPOSALS BY JULY 9  BN 07/08 10:52 *GREECE COMMITS TO TAX, PENSION REFORM MEASURES FROM NEXT WEEK  BN 07/08 10:52 *GREECE PROPOSES TO IMPLEMENT REFORM MEASURES FROM NEXT WEEK  BN 07/08 10:51 *GREEK LOAN REQUEST TO ESM DOCUMENT OBTAINED BY BLOOMBERG NEWS BFW 07/08 10:51 *GREECE REQUESTS LOAN FOR DEBT OBLIGATIONS, FINANCIAL STABILITY BFW 07/08 10:50 *GREECE REQUESTS 3-YR LOAN FACILITY FROM ESM, DOCUMENT SHOWS

 

 

+------------------------------------------------------------------------------+

 

Greece Requests 3-Year Loan Facility From ESM, Document Shows

2015-07-08 10:54:53.744 GMT

 

 

By Eleni Chrepa and Nikos Chrysoloras

     (Bloomberg) -- Greece submits request for 3-yr loan facility from the European Stability Mechanism, according to document obtained by Bloomberg News.

 

  * Loan will be used to meet Greece's debt obligations, to

    ensure financial system stability: document

  * Greece proposed immediate implementation of measures,

    including tax, pension reforms as early as next week:

    document

  * Govt to detail its proposals for specific reform agenda on

    July 9 at latest: document

  * NOTE: Earlier, ESM Has Received Request From Greece for New

    Program Link

 

 

The feeling I get is that Merkel is about to do a "Kohl" – leading up to the introduction of the EURO in 1999, the Kohl and Mitterand agreed not to enforce the "stability and growth pact" from day one. (Mitterand: It can be done when needed)… that's the flaw of the EURO, a flaw which gets bigger and bigger every day, Kohl/Mitterand pro-actively decided to violate their own advisory board: The Delors Committee in doing so. The Delor report stated clearly that S&G was central to the survival of the EURO.

 

Now Merkel may, or may not, sign temporary deals Sunday for the "greater goods of Europe" – if so, she will have started the end of the EUR.  ESM stipulates clearly Greece shouldn't be able to access capital from it (although they did so earlier), the QE is at least in spirit against the EU Treaty and every pretend-and-extend deal ever done has weakened not only the believe in the EUR but also its integrity.

 

Doing a "Kohl" will be full circle to the "Socialist Union of Europe" – where politicians only consideration is keeping their powers by spending other people money without accountability to themselves, under a regime of no rules, no obligations and no accountability.

 

However doing a Grexit will give Greece, and Europe a chance to engage  normal business cycle. Yes, I fear a new "Kohl" more than a Grexit. The Grexit will do some damage but a "Kohl" will be the beginning of the end for EUR and EU.

 

 

 

Finally,

 

China!!!  The musical chair game have started – as in 1987 Asia is always more vulnerable than US and Europe.

 

 

 

I will not comment more on Greece this week. I will be flowing up and down relative to the noise from EU and Greece.

 

Safe travels,

 

Steen

 

 

Med venlig hilsen  |  Best regards
Steen Jakobsen  |  Chief Investment Officer

 

Saxo Bank A/S  |  Philip Heymans Allé 15  |  DK-2900 Hellerup
Phone: +45 39 77 40 00  |  Direct: +45 39 77 62 23  |  Mobile: +45 51 54 50 00

 

Research: http://www.tradingfloor.com/traders/steen-jakobsen

Please visit our website at www.saxobank.com

 

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If you are not the intended recipient (or have received this email
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Brussels Playbook — New Grexit ultimatum — Tsipras Euro Parliament test — Trouble in China

 

Excellent summary and run-down on meeting yday and coming week from Politico's Ryan Heath…

 

 

 

 

Subject: POLITICO Brussels Playbook — New Grexit ultimatum — Tsipras Euro Parliament test — Trouble in China

 

by Ryan Heath | @PoliticoRyan and rheath@politico.eu | Subscribe: http://politico.eu/registration/

NO WORDS — GREEK GOVERNMENT TURNS UP AGAIN WITH NO NEW PROPOSAL: They have no words, and neither do I. Here are some from others. Donald Tusk called it "the most critical moment in the history of the eurozone." Greece's most international-oriented newspaper eKathimerini is worried: "We are dangerously close to a huge disaster and yet we still appear oblivious to what is happening, living on an entirely different planet to the rest of Europe." http://bit.ly/1eDJOja Meanwhile the new Greek finance minister was photographed with the notes he made on paper from his Brussels hotel — including a reminder to "avoid triumphalism." http://bit.ly/1HdDl8N

EURO SUMMIT BREAKS WITH NO PLAN EXCEPT TO MEET AGAIN: http://bit.ly/1CoyMd3

TSIPRAS AGREES... TO FACE EUROPEAN PARLIAMENT: After calculated words from Jean-Claude Juncker yesterday about his respect for European democracy, and outcries led by Liberal leader Guy Verhofstadt, Greek Prime Minister Alexis Tsipras is coming to Strasbourg to face the music, AND ask for cash. WATCH from 9:30 am CET http://bit.ly/1HdhcEn

GREEK GOVERNMENT TO ASK FOR MEDIUM-TERM LOAN: Tsipras wants a loan. German Chancellor Angela Merkel says there's no basis for it (and that a further debt haircut would be illegal). Eurogroup chief Jeroen Dijsselbloem says any loan would have to be a medium-term one. Greece has already received €130 billion from the European Stability Mechanism. Ireland (€17.7 billion) and Portugal (€26 billion) are the other beneficiaries.

WHAT IS THE ESM? The euro area's permanent crisis resolution mechanism: http://bit.ly/1HepSh1

DEADLINE FARCE FOLLOWED BY SUNDAY GAUNTLET: The leaders can't agree on what they agreed, or didn't agree, as to the final deadline for a Greek deal. It could be anything from Wednesday to Sunday, as James Kanter notes: http://bit.ly/1NMi2wD. Donald Tusk has thrown down the gauntlet, however: "The stark reality is that we have only five days left to find the ultimate agreement... I have to say loud and clear that the final deadline ends this week."

JUNCKER ADMITS DETAILED GREXIT PLANS ARE READY: "We have a Grexit scenario prepared in detail. We have a scenario as far as humanitarian aid is concerned." POLITICO's summit wrap is here: http://politi.co/1dKG7aN

YOUR MOVE, GREECE — 90 SECOND VIDEO WRAP: http://bloom.bg/1J3eYbL

QUOTES OF NOTE AROUND THE LEADERS TABLE: I've never seen such an uncensored array of contempt and frustration from a set of leaders towards another leader who is their ally, colleague and "member of the family." A couple of exceptions: François Hollande says he'll "spare no effort to find agreement"; Matteo Renzi also thinks it could be "fairly easy" to find a solution (really!). All the rest make sobering reading for Greece this morning:

Alexander Stubb (Finnish finance minister): "No, we are not ready to ease Greece's debt burden. We have already done that."

Joseph Daul (European Parliament): "Coming with empty hands to Eurogroup shows again their incompetence & recklessness."

Werner Faymann (Austrian chancellor): "Not a single person today said that the Greferendum made the situation easier."

Dalia Grybauskaitė (Lithuanian president): "For the Greek government it is every time 'mañana'…"

Taavi Rõivas (Estonian prime minister): the "message to Tsipras could not have been more clear" and "this is the last straw. Estonia, like many other European countries, does not accept a debt write-off."

Enda Kenny (Irish prime minister): "Situation now more complex and difficult than before the referendum."

Mark Rutte (Netherlands prime minister): "We still hope for miracle."

Louis Michel (Belgian prime minister): "He hasn't made concrete proposals, even after the referendum. There was no concrete proposal, there were [only] short-term requests for finance."

Toomas Ilves (Estonian president): "Greeks reaffirmed their democracy; but they also asserted the priority of their democracy over other countries."

TSIPRAS' TAKEAWAY: "Leaving the summit, a grinning Tsipras said Greece would respect the time frame given by its creditors and promised an agreement by the end of the week 'at the latest,' according to the Proto Thema newspaper. He said there was a 'positive climate' in the room and that the other leaders understood that this was not just 'a Greek problem but a European one.'" http://politi.co/1dKG7aN

THE OBAMA CURVEBALL: Tsipras spoke with U.S. President Barack Obama, who predictably wants to see a quick and fair resolution. Which could mean anything. Don't read into it — unless Obama is offering to print U.S. dollars and parachute them into Greek central bank, he's a "helpless bystander," as Edward Luce explored on Monday: http://on.ft.com/1flEQsD

ONE TEST FOR THE EUROPEAN PARLIAMENT THIS MORNING: Can MEPs use the sunlight of Parliament to force all 28 EU leaders to get real? National leaders have failed; unelected leaders have failed. The Parliament today can either join the navel-gazing or it can use its cross-examination of Tsipras to get beyond numbers and connect ordinary Europeans into the debate, while holding all European leaders to account. It will be a sight to behold.

EIGHT TESTS FOR TSIPRAS IN PARLIAMENT: One advantage of a closed-door EU summit is you are free to spin your version of events once you leave the meeting. Your national press pack will probably believe most of what you say. That luxury doesn't exist in the bright lights of Parliament. And that's before Marine Le Pen and Nigel Farage get their Euroskeptic teeth stuck into you.

Here are some questions Tsipras needs to answer in his speech this morning, alongside showing due deference to the Parliament (MEPs hate nothing more than a condescending visitor). Whether Tsipras hits these notes or not will affect his emergence as either Midas with the golden touch, or as Sisyphus the eternal trickster. I group them into Fairness, Sustainability and Practical issues.

FAIRNESS
1) Why should countries poorer than Greece, that reformed without bailouts, give Greece money for a third one?

2) Why should other bailout countries be the ones who stick by their word, while Greece gets a free pass?

3) Why must the EU break and twist rules so that, for example, Greece can continue to offer well-off tourists a tax discount when visiting Greek islands?

SUSTAINABILITY
4)  Why will this time be different? (Structural reforms like digitization of public services and service sector liberalization, rather than bold cuts, have been mostly deferred and ignored until now)

5) What will the creditors get in return for the €30 billion or so Greece wants to borrow?

PRACTICALITY
6) What are the true red lines for Greece, and what are the nice-to-have/let's-talk issues?

7) What is the timeline and plan for re-introduction of the drachma if an agreement cannot be reached?

8) How much humanitarian aid would be required to ensure social stability?

BY THE NUMBERS: €12,000 — the saving on the most expensive bottle of champagne on the Greek island of Mykonos (Armand De Brignac Methouselah Midas Champagne), thanks to the VAT discount the Greek government wants the islands to keep (13 percent compared to standard 23 percent). http://bit.ly/1IHQSI1

IMF — WAS NEVER COMFORTABLE LENDING TO GREECE: Newly and quietly released minutes from the 2010 International Monetary Fund meeting that agreed to make loans to Greece show the IMF always had strong doubts it would be repaid. Great work by Paul Blustein here: http://bit.ly/1KQJvhs

CHINA — STOCKMARKETS IN TROUBLE; GLOBAL DANGER AHEAD: Greece is a small economy that's nearly always been in one kind of economic drama or another over the last 200 years. China is now the world's biggest by purchasing power, and second biggest in brute terms, and it's having the wildest stock-market ride. "Over 700 Chinese companies have halted trading to 'self preserve,' according to the state media. That means about a quarter of the companies listed on China's two big exchanges — the Shanghai and Shenzhen — are no longer trading." http://cnnmon.ie/1dKE7zr. 

CHINA — WILL GOVERNMENT INTERVENE TO PROP UP MARKET? Gavyn Davies for the FT foreshadows this scenario: "It seems unlikely that the authorities will allow the market to drop much further. They are concerned that a stock market crash could take consumer confidence down with it, and that would be fatal for their economic strategy. They have therefore set a target of 4500 on the Shanghai Composite index, 20 percent up from here. Unlike many western nations, they will not be too squeamish about what they have to do to prop up the market." http://on.ft.com/1HKfroz. Alen Mattich at Wall Street Journal says "Investors' heavy use of margin debt to buy shares is a particular worry given the Chinese economy's large shadow banking sector. It's hard to know how far the fallout of a market crash might reach. And China's policy makers don't want to find out." http://on.wsj.com/1S67s4K

IRAN — TALKS ARE CONTINUING: It's not only Greece that can't meet a deadline. http://on.wsj.com/1LUEl5T

RUSSIA — 50 "ONLY IN RUSSIA" MOMENTS TO MAKE YOU LAUGH: published by Moscow Times: http://bit.ly/1MbvXvD

RUSSIA — FOREIGN AFFAIRS MAGAZINE: Two articles published today (partial paywall). One on Russia's Far East under pressure: http://fam.ag/1Cizw31; the other on Baltic states: http://fam.ag/1R7gljw.

PRIVACY — ESTONIAN PRESIDENT LASHES OUT AT U.N. POLITICKING: "The U.N. now has a digital privacy investigator. The best candidate didn't get the gig," wrote Toomas Ilves on Twitter after Germany moved to install its preferred and more privacy fundamentalist candidate: http://slate.me/1JM0McQ

DIGITAL MAFIA — HOW HACKERS GOT DRUGS INTO ANTWERP PORT: The "mob's IT Department" relied on two tech consultants to hack the port authority in order to smuggle heroin and cocaine to the continent. Jordan Robertson and Michael tell the tale: http://bloom.bg/1RjaTdg

WORTH A LOOK — A MAP OF EUROPE'S DECLINING POPULATIONS: Lithuania and Latvia are shrinking fastest. http://bit.ly/1RiCHyt

LONDON — UNDERGROUND STRIKE TODAY: http://bit.ly/1flIZNa

ÜBER-ORGANIZED: Erste Lesung (meaning: First Reading), a German public affairs firm, has published a new edition of Übersicht, a one-page overview of institutional events, party conventions and elections). http://bit.ly/1Tj6kxn

BANKERS ROCK: If you want proof that the Masters of the Universe are mere mortal after all, look no further than the European Banking Federation (EBF) CEO Wim Mijs, rocking it out on-stage at the EBF summer party. https://vimeo.com/131919219

REMEMBERING 10 YEARS SINCE LONDON'S 7/7 BOMBINGS: Millions remembered yesterday where they were when terror took over London, at memorial services across Britain. The selflessness of strangers, and the sense of unity in London's diversity, are themes in the coverage. By pure chance, I turned away at the last minute from the train carrying the first bomb, to continue a conversation with a friend. 52 others didn't share that luck. Here are stories from the heroes that day: http://politi.co/1Henabj

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Macro Digest: Can you spell "c-o-n-t-a-g-i-o-n" ? Weekly macro chart

I can't be the only one fed up with Greek timelines, potential outcomes, worst case scenario's and a Europe entirely driven by politics and not business or people.

 

The good news is that "pretend-and-extend" has died, the bad news that finding the 'exit' will be difficult and volatile. My favorite analogy is that of the game of musical chairs:

 

 

In the classic game one chair is missing when the music stops – in the present Greek/Pretend-and-extend game there could be three, even four chair missing.

 

Don't let anyone tell you there are not any "contagion" of risk, or better look over this week selected chart from Steen's Stress Indicators, but the bottom line advice from me remains: Let the market take your investment decisions! Prices and markets will find the path of least resistance not Merkel, Hollande or God forbid Tsipras. They are all utterly lost thinking they have the solution or that in the lack of clarity the only game in town is buying more time.

 

Here is the vote of the Danish jury on contagion:

 

The non-containment looks infected – Germany vs. Italy 10 yr tenor:

 

 

 

DAX is hard up against the its floor with three test – traditionally when range bound the fourth test is the important one:

 

 

The containment is looking unhinged in the land of unintended consequences: Bulgaria (weak financing) vs. Germany:

 

 

 

And now on to our regular broadcast:

 

Someone told me sell off not too bad – did I miss something (4 trillion US dollar is gone)  – global valuations of stock markets:

 

The surprise this week and the explanation for EURUSD "strength" – the risk reversal is turning up! Not down (the extra price paid for buying put over call is falling)

 

 

 

Old fashioned predictor like High Yield all of the sudden again explaining sell in stocks!

 

 

 

Marginal cost of capital remains elevated……

Bond volatility keeps rising:

 

 

 

Banking CDS's don't like the smell….

 

Remember the biggest risk remains the "musical chair" game – il-liquidity is the real risk as bloated VaR books will force liquidation of positions into a market with no bids only offers.

 

The Grexit odds remains at 75%

 

Be safe,

 

 

Steen

 

 

Med venlig hilsen  |  Best regards
Steen Jakobsen  |  Chief Investment Officer

 

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