The stock market rallied last week on news that the European Union has agreed to put together a plan that would provide Greece some debt forgiveness, 50% of the outstanding total, plus a plan to recapitalize the European banking system.
As traders, we like the rally. We made it clear here that we thought that the October 4 bottom was a panic bottom. And on many occassions, we've noted here that this may be one of those rare "blood in the streets" buying opportunities.
Yet, somewhere in the back of our mind, we have this little voice that won't be quiet. It keeps telling us "this is too good to be true." It whines constantly "don't believe it." It gratingly laughs and says "fool, you'll be sorry."
We've heard this little voice many times. And every time we've ignored it, we're pretty sorry. In comes the latest book by Michael Lewis, titled "Boomerang." As we drove accross the state of Texas to, of all places, Midland, the home town of President George W. Bush, we threw in "Boomerang" into the CD player. And what came out of those speakers gave that little voice a bit more emphasis. Except, inside this scribe's often disturbed head, the silence was grand. The little voice was gone. Not even a chuckle could be heard. That, to us was chilling. Indeed, the little voice and its stark warnings were replaced by something more tangible, a story of a fraud so large that it fundamentally dwarfed the deeds of Wall Street in the subprime mortgage crisis.
We should note that the drive from Dallas to Midland winds through the desolate transitional area between East Texas and the start of the plains. Thus, to put it kindly, there just ain't a whole lot of stuff to look at except asphalt, bushes, sand, dirt, oil derricks, wind turbines and more of the same stuff. It's both mind numbing and mind expanding. And under the right circumstances a person can actually acquire a sense of perspective about events, situations, and life in general.
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What came out of the car sound system was a tale of a nation, that in Mr. Lewis's words, was in a state of "moral collapse," where cheating was so widespread that in a sense, it became, not just a national sport, but a national trait.
In a spellbinding account, Mr. Lewis details research and interviews that led him to conclude that the entire nation of Greece, in a sense, committed a fraudulent scheme on the European Union that may not be repairable. We want to be clear on this. This is what Lewis concludes and reports. In fact, much of what Lewis does is fill in the details missing from the mainstream reporting from the likes of CNBC, The Wall Street Journal, and Reuters. These services provide news. But they don't dig enough. They don't tell the whole story.
Lewis tells a story in two parts. In the first part, he details how Greeks didn't pay income taxes, and how many in the government took bribes in order to cover the lack of revenue. In a fashion similar to Enron, the Greek government formed "off the books" entities that absorbed the red ink, leaving the government ledgers looking good enough to meet the criteria that allowed Greece to join the European Union.
When a government scandal broke, the new government that took over audited the books and found that Greeces budget deficits were not 3% of GDP as the joining of the EU had stipulated, but five times that. In other words, Greece was not just lying but so broke that their borrowing costs had nowhere to go but rise, given the state of their national treasury.
In essence, Greece lied, cheated, and cooked the books in order to join the E.U. And when someone figured it out, the markets responded violently. Over time, Greece has taken its fair share of medicine. But one thing remains to be worked out. Have the Greeks started paying taxes? Is all the largesse of the IMF, the EU, and now the Chinese, if they join the parade of funders for the de facto bailout of the EU going to actually help anyone who still won't pay their fair share?
We think that the markets have yet to work this out. Much like it took time for Lewis' book "The Big Short" to become required reading, it will take some time for "Boomerang" to wind its way through the collective consciousness of the markets.
We think that if that happens, and if there is no way to prove with some sense of reality that Greece has actually begun to pay taxes, this rally will likely evaporate. That day could be tomorrow, next week, or several weeks to months away.
Unless there is some tangible proof that something has really changed in Greece, and in other EU countries with credit and deficit problems, there will indeed be another day of reckoning for the markets.
In "Boomerang," Michael Lewis writes about a lie that was so large that it engulfed a whole nation of tax evaders and a government that both sanctioned and enabled the tax evaders then lied to the European Union and the world about its financial status.
By doing so, Greece, for a while enjoyed the status of a "functioning Northern European nation," including the ability to tap the credit markets at rates reserved for Germany, the true engine of the EU.
The wheels eventually came off, as they always do in situations when lies are the only thread holding a story together. Now, a new plan is being put together, which involves many complex parts. It involves foreign countries, and it involves leverage.
But, as far as we know, there is no way to hold Greece accountable. The EU was easy to fool once. It can be fooled again, especially since the powers that be don't want it to fail.
What's our point? The odds of failure here are higher than most people want to think about. It smells bad. And to us that means that at some point, when everyone figures out that they've been fooled again, things could unravel.
More important is the notion that the U.S. is heading for its own critical period of seeking redemption. The EU is trying everything that it can to paper over the fact that it got duped. But the U.S. and the subprime mortgage crisis played a role in the circumstances that led to the unraveling of the global credit crisis.
Viewed in that light, the real question is why anyone should bother to bail out Greece, Ireland, Portugal, Spain, or the U.S. The whole thing is connected, as are the global markets. In other words, this is a very risky time.
Will the markets let themselves be fooled again? Perhaps the real question is whether being fooled is the better alternative, given that the only other option is to pay the piper, erase everything, and start society all over from scratch.
Heavy stuff to ponder. But that's what can happen when you drive hundreds of miles in the middle of nowhere with the only voices you hear are those inside your head and those of the narrator who is spinning a yarn made up of pure terror.
When you understand the big picture, the next step is how to survive and profit from what lies ahead. That's why we recommend: "Market Timing For Dummies." and "Trading Futures For Dummies." The Trading Manuals for All Seasons. Also Available As Kindle Books.