Ad Hoc Commentary – Greece will likely exit Europe

“…Domains under heaven, after a long period of division, tends to unite; after a long period of union, tends to divide. This has been so since antiquity…”
Chapter 1, Romance of Three Kingdoms.

“…There is a time for everything, and a season for every activity under the heavens…”
Chapter 3, Ecclesiastes

“…Since the election of Greece’s Syriza-led government, negotiations over its place in Europe have gone terribly, with posturing on one side and annoyance on the other. An accidental exit from the eurozone has become quite likely. This is not because Greece wants it nor because its partners are set upon it. It is because Greece is running out of hope, its partners are running out of patience and the negotiations are running out of time. A fork in the road does indeed lie ahead. But the choice of direction has to be deliberate, not accidental…”
A Mishap Should not Seal Greece’s fate, Martin Wolf,

From looking at the winds of political change, yours truly believe that Greece’s exit from the European Union will likely be measured in weeks rather than months. We remember that Greece is similar to North Korea:
“…Perhaps, ten years later, Moscow and Beijing would not agree on which side had actually given Greece the assurances to launch a Grexit. A future leader from Russia would probably say that Putin would not done what he did. And a future leader of China would probably retort and say that Xi was totally against a Grexit…”

For those who had read JD Salinger’s classic entitled Catcher in the Rye, Greece reminds yours truly of the young and rebellious Holden Caulfield who was being kicked out of school because he was flunking four subjects and not applying himself. Young Holden left Mr Spencer, his history teacher this note on his exam paper:
“…DEAR MR. SPENCER, That is all I know about the Egyptians. I can’t seem to get very interested in them although your lectures are very interesting. It is all right with me if you flunk me though as I am flunking everything else except English anyway. Respectfully yours, HOLDEN CAULFIELD…”
Chapter 2, Catcher in the Rye, JD Salinger

Young Holden even assured his understandably worried history teacher:
“…’Look, sir. Don’t worry about me,’ I said. ‘I mean it. I’ll be all right. I’m just going through a phase right now. Everybody goes through phases and all, don’t they?’
‘I don’t know, boy. I don’t know.’
I hate it when somebody answers that way. ‘Sure. Sure, they do,’ I said. ‘I mean it, sir. Please don’t worry about me.’ I sort of put my hand on his shoulder. ‘Okay?’ I said.”
Chapter 2, Catcher in the Rye, JD Salinger

Just like the teacher in JD Salinger’s classic, Ms Merkel is doing her best to help Greece. But there are limits to her authority. Like Mr Wolf, yours truly believes that an accidental Grexit had become likely. Greece is emboldened by Russia just like North Korea was emboldened by Russia in the 1950s. It is very concerning for Greece. However, just as there are limits to what a history teacher can do for his student; there are limits too to what a German Chancellor can do for Greece before alienating her own:
“…Deputy leader of Angela Merkel’s sister party steps down over financial aid for Greece…”

What matters is that we do not get an accidental Grexit. The world had financial accidents before. The collapse of Bretton Woods monetary system is a case in point that gave us the floating rate exchange rate regime. Even though the floating rate exchange rate regime that accidentally replaced Bretton Woods worked well since 1971, its survival is more due to good fortune than anything else. We should not count on just good fortune. European leaders should not throw caution in the air. Brussels should plan for a managed Grexit.

Perhaps it helps if Brussels remembers that a managed Grexit is in EU’s self-interest. What Europe needs is a middle-of-road managed Grexit that will not lead to EU disintegration: “…If Grexit is good for the Greeks, then the European Union (EU) will disintegrate as the other PIIGS follow Greece’s lead. If Grexit relegates Greece into a serial defaulter (this is a very likely scenario) then the other PIIGS will fear becoming the next Greece. This will ensure more austerity and will likely lead to the disintegration of the EU from within. In both scenarios, Grexit leads to the disintegration of the EU project…”

This is probably not the month to be doing much trading. Yours truly is still tactically bearish equities since our end of February call:

Good luck in the markets.