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Editorial: Greece (and the rest of the free world) is Falling

February 9, 2010

The fears about Greece and their potentially imminent insolvency are well-documented so I won’t attempt to rehash the facts. Part of the story is about the classic battle between the “working man” and the government over pension issues, as well as the tremendous cost of high unemployment. It is also a story about the insidious rise of socialism (big government) that often follows fiscal irresponsibility. The fall of Greece is a sad saga of a country that went overboard with debt financing and in many ways is emblematic of what is happening in the United States and all over the world.

Capitalism always takes the rap when things go south in the economy. Unfortunately the real issue is that most of the poor decisions that lead to economic problems are the result of the flawed and socially-permitted incentive structures within the government that influence policy and regulation. You see, in the good times, the government caters to big business to ensure healthy campaign financing. Meanwhile the two conspire to quietly and mercilessly screw the middle and lower class –who tend not to notice since their paychecks keep coming in and credit is freely available. In this case the government told the bankers: “Hey, I got an idea! Everybody wants to own a home, so lets make them happy by making it easy for them to buy so they won’t notice that we are taking their money!” The bankers said: “Hey great idea, we can lure them in for cheap and raise our rates later to get our money back!” In bad times (such as now), the government is on the ropes, and policy is quickly shifted to appeal to the “working man” and the middle class to secure enough votes to get re-elected. In the wake of high unemployment and unacceptable conditions, the public relations braintrust at the White House work feverishly to stir up blame revolving around the evils of capitalism, and greedy bankers. “We the government will protect you and save the day with new regulations to keep these criminals in check!”—no need to mention that the “eye in the sky” in this great casino we call the US economy was watching them burglarize the common man with no intervention the whole time.

So what about Greece? Here again it almost sounds like what happened at GM a short while ago. Blue-collar retired workers holding a whole country hostage. It always bothers me that those with theoretically the lowest human capital value and level of education are permitted to form politically powerful unions. They abuse these rights to procure unfairly high wages, and also to ensure that their worlds exist in some protected bubble–devoid of the standard laws of economics where everything is always absolutely guaranteed– such as pensions and benefits. In contrast the rest of the world and the educated youth these days who face guaranteed unemployment (the highest rate for educated youth in 50 years) are expected to live in an uncertain world–in this case they are beholden to the rights and future excess tax burden of someone who drove a tractor in Greece for 30 years and now demands a 28,000 Euro pension. These same people who have the power to make a difference–in the face of the possible bankruptcy of their own country–claim that these issues are “not their problem” and wish to get paid regardless of the consequences. These are the very same people in America who in the pinnacle of hypocrisy, are the first to complain that executive compensation at banks following the credit crisis as being immoral and outrageous (which it is-no dispute there). Suffice to say we live in a dangerous world populated by idiots, that are now being baited by even dumber politicians. Watch out for the pitchforks!

On the practical versus rhetorical side, traders can get a sense of the rapid acceleration of fear by watching ticker NBG which is the “National Bank of Greece.” This low-priced dog fell a hefty 13.2% yesterday, and it looks to be threatening to match previous lows during the credit crisis. Personally i think using a multi-day back-ended scaling strategy here after another big down day (perhaps 15-20%) could lead to a quick but highly speculative 50%+ gain. In this case a back-end scale would start by building up to a full position starting with 5%, then 10%, 20% 30%, and finally 35% of the desired bet size (ie if you wanted to risk $10,000, you would start with $500, $1000 etc). The general idea is that prices will probably fall after purchase, but if you scale in without risking too much up front you will come close to the short-term bottom. Even if NBG goes bankrupt eventually it won’t happen overnight—thus a short-covering spike is a good bet that even Bear Stearns experienced. Hedging this position with SKF is also useful, as it will protect you from a protracted fall, and SKF will not likely fall 50% when the rebound day for NBG finally occurs. The good old days of fear and volatility are back, and if you are quick and contrarian you can profit from it. Thankfully the stock market is our last bastion of capitalism—use while you still can!

7 Comments leave one →
  1. Alex permalink
    February 9, 2010 10:46 am

    your analysis of greece and the unchecked progression of capitalism and democracy is right on the money. it merely delays the inevitable. The problem with all relationships and systems (political, economic, personal etc…) is that it almost doesn’t matter what the system is as much as WHO is making the final decision. Misaligned incentives and wishful thinking eventually lead to unfairness and instability.

    Democracy is an algorithm. So is google and so is wikipedia. it’s a way to harness collective intelligence of the crowd. We need to realize that human decision makers, politicians, and alpha tribe leaders are OBSOLETE and deadly. Democracy may be the best system we’ve tried, but we need to invest in more sophisticated collective intelligence algorithms.

    Don’t mean to hijack your readers, but i think you may find these interesting:
    1. Bayesian Truth Serum – http://emergentfool.com/2009/11/18/truthocracy-part-ii-discovering-truth-and-experts/
    2. Limiting the influence of the past – http://emergentfool.com/2010/01/09/balance-the-past-with-zeitgeist/
    3. Copyright vs artificial scarcity – http://emergentfool.com/2010/01/20/peanut-butter-and-culture-jamming-sandwich/

    • david varadi permalink*
      February 9, 2010 2:51 pm

      thanks alex, your eloquence is also noted. i would agree with many of these points. we live in strange times indeed!
      best
      david

  2. ATrain permalink
    February 9, 2010 2:26 pm

    Nice call on NBG

    • david varadi permalink*
      February 9, 2010 2:55 pm

      thanks atrain, always fun for a quant to make the odd discretionary call and get lucky. it almost tempts me to try it again :o)

      best
      david

  3. heywally permalink
    February 15, 2010 8:03 am

    Nicely written article … I am a ‘social liberal’ in many respects and anti-Iraq stupidity but have become a fiscal conservative/moderate over the last two years, as I watch — apparently — the financial system break down. I’m thinking maybe a world economic summit and ‘do over’ on National debts might be in order. 🙂 Don’t know if it will make a difference but I am looking for non-Neo Con Republican candidates to vote for in the future, because I think that economics is the single biggest issue, as it is the foundation for all. I hope that the Republicans can distance themselves from the Palin circus.

    I believe that Unions were a valuable thing in the early days, to minimize corporate abuses and improve worker pay/conditions but in the long run, evolved to eventually being a big burden on society overall. Then again, their power has been on the decline for years in the US, it’s just that the remnants are pretty big. A different story in the Euro countries …

    In spite of an apparent dire future in the financial system/society now, I am totally focused on trading systems that ‘follow price’, trying to minimize my opinion of the big picture in influencing my trading decisions. Things often don’t turn out as badly as we think they will – I have my fingers crossed.

    • david varadi permalink*
      February 16, 2010 2:47 am

      heywally, i agree with you on both points–unions were useful once and now have become a burden, and i agree that you should focus you efforts on price because fundamentals decisions are not consistently objective or correct, and it is difficult for people to invalidate their own strongly held opinions without losing a lot of money first.

      best
      dv

    • ARealist permalink
      March 4, 2010 9:03 am

      @ HEYWALLY;

      You are partly correct.
      Public union membership has grown at all levels of government. It is the growth of these public unions – and the outrageous benefits they receive – that is driving many cities towards bankruptcy.
      My brother in law – a big city employee – can retire at age 48 and his pension will be INFLATION ADJUSTED forever, and his annual pension will be the average salary over his last three years of service. Yes, he has been working enough overtime over the last few years to earn well over 100K per year. His pension will be about 60K per year, INFLATION ADJUSTED forever, plus, he gets paid medical insurance forever – for him and his family.

      By the way, in the mid to late 1800s, as the world industrialized, why did workers leave farming, fishing and the crafts, to work in sweatshops ?? If conditions were that bad in the mines and factories, how was it they were able to attract any workers at all ??

      My guess is that as bad as the working conditions were, it must have been better than what they were doing before. As hard as it is to imagine, I guess working in a sweatshop – 12 hrs/day, 6 days/week – was “easier,” or at least, less unpleasant than being a farmer, fisherman, craftsman, trader, etcf.

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