As we start on what I notice some are calling Christmas Eve Eve I thought that today I would present you with something expected but also something that is very much unexpected. The something expected is what has become called the Santa Rally where share prices rise towards the end of the year. One could easily argue that there were few cases for one this year but nonetheless it seems to have put in an appearance.
If we look at the US Dow Jones Industrial Average it has risen from a recent low of 11,735 on the 19th of this month to close at 12,169 last night. If we look back to 2011 overall it was only a month ago we dipped back to 11,257. So we have seen a Santa Rally and it means that we are also higher than the 11,573 of a year ago. In a year of so much worry and concern? In there I think that we find the rub which is that markets are prone to excessive short-term optimism and pessimism in these times and we do tend to swing from one to the other but as I have pointed out before we are somewhat rangebound if you look on a longer-term perspective.
Some hope for more than a Santa Rally
In essence for the United States it come here in these numbers.
In the week ending December 17, the advance figure for seasonally adjusted initial claims was 364,000, a decrease of 4,000 from the previous week’s revised figure of 368,000. The 4-week moving average was 380,250, a decrease of 8,000 from the previous week’s revised average of 388,250.
If we look back over 2011 we were at times discussing numbers considerably over 400,000 and then using 400,000 as a threshold itself. Now we can see that there has been a sustained break below it if one uses the 4 week average and everyone who wishes for the best should hope that this trend continues.
Care is needed with this on two counts however as whilst this is better it does not resolve the US unemployment/employment issue. Whilst things have stopped getting worse we are a long way from them getting better and then moving forwards and dealing with the amount of long-term employment. I notice also that those who told us ( there was a considerable number) that the US economy would grow by 3.5/4% in 2011 seem to be back and are telling us it is growing at that rate right now. Perhaps they have been on a course at the Bank of England.
So as I discuss one expected issue I have provided another the extraordinary optimism which is on a Dr.Pangloss level of some commentators where reality never seems to intervene. Look at US third quarter economic growth which has gone 2.5%, 2% and now 1.8% as it has been successively revised ( care is needed as these numbers are annualised). It must have come as a shock to even them when the first quarter of 2011 was revised down from 1.9% to 0.4%!
The Unexpected: A Greek default over Christmas?
Over the past week or two I have considered the possibility of this. Why? If you consider the implications of a default and a devaluation then a lot of organisation and actual work is required. At the simplest level you need to have printed a new currency and there are many other changes that would be required. So if you consider the many issues involved in a default and devaluation you need as long as possible to make these changes and the longest period around is a Christmas break that comes with a weekend so that you get four successive days of closed markets. The same Christmas break that starts at the close of business tonight. If you needed more time then taking an extra three days at a quiet time of year would also give you an extra weekend and New Years Day.
Why would I even think this?
As I have been writing for some time on this blog Greece has moved from recession to depression under the Euro zone/IMF austerity mantra. Unfortunately there is little sign of the supply side reforms that I feel would help to give some hope for an improvement. If one looks at two pieces of news from today the picture is clear. From Kathimerini
According to an estimate by the National Confederation of Hellenic Commerce (ESEE), turnover from retail this festive season will only amount to 9 billion euros, down from 13 billion last Christmas. This constitutes a 30 percent decline.
A massive 99 percent of Greeks say the country’s economic situation is bad, while 76 percent believe that the worst is still to come, according to a Eurobarometer survey published in Brussels Thursday.
The private sector involvement talks have according to the Greek Finance Minister “great difficulties” so the debt haircut move is in serious trouble. The new technocratic government is in trouble too as it has failed to get a deal on auxiliary pensions this week and speculation is growing about early elections.
Financial Markets tell an interesting story too
It is little publicised these days as much of the media has moved on but if we take the (Bloomberg) Greek one-year government bond yield we see that it has risen to 379%! The 2 year is 152% and the 10 year is at 35.1%. As the one-year yield started the week at 330% one can see that those who back their actions with money rather then rhetoric are worried too.
I think that these moves are especially significant if you consider how much effort (489 billion Euros) that the European Central Bank has made this week to shore up the system. for those who have not followed this matter as banks and countries have become so entwined we have a situation where supporting the banks also supports the countries. Those doing it hope that you do not notice that it is the taxpayers bankrolling all this in a rather circular game which in many respects is similar to the children’s game of pass the parcel. The only real difference is that this game is played with instructions that the music must never stop.
I do not recommend this lighly as there are many costs and risks in such a move and I realise that there are hundreds if not thousands of commentators who reject the very idea. However if we move from rhetoric to reality we see in my opinion a situation that is so desperate that we may already be seeing a nation in a 1930s type depression. Accordingly if I was involved I would put it on the agenda for tonights meetings and I would vote yes.
I have no inside knowledge and I do not expect this to happen but if you look at the logic it should happen in my opinion. In other words it is time in my view for Greece to find out if the lyrics in the song Hotel California were correct about the Euro.
We are programmed to receive.
You can checkout any time you like,
But you can never leave!
What Greece needs to do is follow this part of the song.
Last thing I remember, I was
Running for the door
I had to find the passage back
To the place I was before
To all my readers may I wish you a Merry Christmas and for those of you closing up shop a Happy New Year. I will be unlikely to post on Monday or Tuesday next week but do plan at least one post over the other days so will wish those of you who are around a Happy New Year then.