By Barbara Cohen
Chief Information Officer, Shadowtraders
In 64 AD, Emperor Nero gave his Roman troops a draconian order to torch the city. For days the citizens of Rome watched their city burn while he stood on the summit of the Palatine playing his lyre, until an estimated half a million people were made homeless. In this way, Nero could then remake the city in his own image.
On Saturday, the citizens of Athens, besieged by riots, watched their own city burn, as Germany's Angela Merkel ordered her own draconian budget cuts, including 150,000 government jobs and a 22% cut in the private sector minimum wage (32 per cent for workers under 25), deregulation of the labor market to facilitate worker layoffs, and overall higher taxes, attempting to remake Greece in Germany's image.
In addition to the loss of jobs and pay cuts, Germany demanded that Greece agree that they would not renegotiate these terms, thereby forcing Greece to relinquish any claim to democracy. Greece already faces an unemployment rate of 19%, up from 12.5% in 2010. Given a workforce of under 5 million, adding another 150,000 to the unemployed could increase the rate by another 3%, a number too staggering to be sustainable.
49-year-old engineer Andreas Maragoudakis summed it up completely when he said, "By 2020 we will be the Germans' slaves."
Already 10 year Greek bonds yields are paying nearly 33%. With nearly 25% unemployment for workers under the age of 25 and reduced minimum wage, how can Greece possibly repay its debt?
For Greece as well as Portugal and Spain, the Euro is simply overvalued.
While it may work for German exports, such as high end BMWs, Porches, Mercedes and Audis, for countries like Greece and Portugal, an overvalued Euro makes their exports expensive and no longer competitive. Why would someone buy Feta cheese from Greece at $8/lb, when they can buy domestic at $4?
The reality of what was signed was ever so clear in the Futures market. On Sunday, after the announcement that a second round of austerity has been signed, the Euro ran up from a prior day close of around 1.3197 (against the US Dollar) to 1.3260, a run of over 60 ticks. But come Monday, the reality of what had been agreed set in, the Euro dropped from a high of 1.3260 to a low of 1.3197. All that was taken was given back.
Greece is not the only country to feel the wrath of Merkel's draconian ways. Portugal's 10 year bond yields are also elevated, trading at nearly 12%. To put this in perspective, German 10 year bond yields and the US 10 year notes are both tradign at roughly 2%. These elevated yields, 33%, 12%, are simply unmaintainable.
The premise on which Germany is basing its demand for reduced Greek labor costs is flawed at best...Greece will be able to attract investment dollars. Companies will move their manufacturing production to Greece to capitalize on lowered wages. But what is the reality? 2012 has seen Europe burdened with a long duration recession. Growth and exports have slowed throughout all of Europe. Add to that competition from China's low minimum wages, making it implausible at best that Greece could suddenly attract new industry to pay back the loans and get itself out from under a recession that has lasted for years.
Perhaps the Greek citizens who burned Athens understand their situation far more than they let on. While German mandates may delay soverign debt default, it is only a matter of time. The clock is running. Draconian austerity simply doesn't work.
On November 2nd, Citigroup released a note saying that "we believe the bear market rally is behind us and anticipate a move towards the 1,000-1,015 target over the weeks and months ahead." This was released just 1 day after the Market dropped 500+ points. Is Citigroup right or wrong...only time will tell.
There is one other consideration regarding this Market. Right now the Market is sitting on its daily 200 moving average. It has been unable to penetrate the 200 for 5 trading days. So it is not clear that the Market can make new highs. Bottom line, whether this is a Bear Market rally or the start of a Bullish trend, when the Market sits on its 200 moving average for days on end, it is best to sit on your hands and wait and see before you decide to participate.
Barbara Cohen CIO, Shadowtraders, and professional day trader, specializes in teaching students how they can be trading futures with their own trading system and trading strategies.