Capital Flight Out of Greece

Yesterday we watched the market open up 41 points on the back of a positive lead from the US markets. By 10:30am the high was in and the ASX200 turned down and sold off in a straight line for 100 points closing down 58 points at 4594.

Asian markets also came in for a belting with Japan down 2.4% and Hong Kong down 1.5% over the day and the release of Toll Holdings results at Midday only saw an acceleration of the selling pressure with Toll closing the day down 18% after missing earnings expectations by a long shot.

An article in the UK Telegraph stated that Greece’s Deputy PM had lashed out at Germany over war-time atrocities and accused Italy of cooking its books. This seems like a fairly dumb thing to do when you are hoping that Germany might hand over some cash to help you out of the hole you’ve dug yourself.

But no, instead of grovelling the deputy PM said “They (the Nazis) took away the gold that was in the bank of Greece, and they never gave it back. They shouldn’t complain so much about stealing and not being very specific about economic dealings”. Nice one.

I’m guessing the Germans aren’t going to be too impressed by the ‘Nazi’ reference.

The Australian Dollar also came under pressure which points to offshore funds possibly unwinding the carry trade which would have added to the selling pressure here.

The most interesting thing I read this week was about the beginnings of capital flight out of Greece. According to the Wall Street Journal, wealthy Greeks are moving their cash out of Greece and sending it offshore due to their fear of increased government scrutiny on assets and the possibility of a run on the banks should Greece be forced to go cap-in-hand to the IMF.

$8 Billion Euro has moved out of Greece to accounts abroad since December, which is a substantial chunk of the $30 Billion Euro under management in Greeks private banks.

I’m thinking this is probably not a good sign…

Also in Greece the general strike has spilled over into violence, with clashes between hooded youths and riot police in Athens. Chants of “burn the banks” were heard. All of this before Greece has even started tightening their belt.

In other news during the week we have seen American consumer confidence fall off a cliff and new home sales plummet 11% on the month in the U.S. This fall is due to the end of the $8,000 credit given to home buyers. Sound familiar?

This news is not the sign of an economy on the mend. The US markets were hit by this news but recovered later in the week unlike our market which has continued to sell off.

Technically, In the ASX200 The downtrend from January appears to be reasserting itself after retracing 50% of the sell-off in the last couple of weeks and this makes the next few weeks price action very important.

ASX200 daily chart

If you look at the chart you can see our market has been in a long sideways consolidation for the past 5 months. We have had 2 false breaks of either edge of the range; with the most recent being the false break of the 4500 low from early November. This false break has seen a rally back to the midpoint of the range which I call the Point of control of the whole structure at 4700. This is a very important point and is often resistance or support before an attempt to break out of the range.

If the market were to turn back up and take out this 4700 area on good volume, you could be confident that the uptrend of the past year had reasserted itself and you could expect a move to the high of the distribution at 4950 and from there potentially a rally to new highs for this uptrend.

Conversely, if the market were to continue to sell-off over the next few weeks and then bust through the recent lows around 4464, there is the potential that this could signal the failure of the last 5 months range and also the end of the uptrend that has been in place for the past year.

The 10 day/35 day moving average is showing an intermediate downtrend for only the second time since the rally began a year ago. The first time was a false signal but this time may be different.

If we do sell-off below 4464 we could see some dramatic panic selling as any new long positions of the past 5 months are cleared out and the long term downtrend of the past few years rears its head. There is no reason why the market couldn’t start a downtrend from there that heads towards the lows from March 2008.

Fundamentally I believe this is what should ultimately occur and with the news that’s floating around at the moment there is no reason why this won’t be the case.

Where the catalyst will come from to reignite the fear in the market is anyone’s guess, but there are so many to choose from now, in my opinion it’s only a matter of time.

For example the front page of the Wall Street Journal said that “Spain is the real test case for the Euro”. With 19% unemployment and a couple of years of negative growth in a row it doesn’t take much imagination to see that Spain is in a lot of trouble. The cracks in the Euro are getting bigger and bigger by the day.

China is the other big area of concern. Joint research by Holdways and Knight Frank showed the average prices of new homes in urban Beijing, Shanghai, and Shenzhen were up 66%, 68% and 51% respectively in November, from a year earlier. This sounds a lot like a bubble to me. And when it pops Australia is going to hear it loud and clear.

The US has a huge problem brewing in their commercial real estate. The Congressional Oversight Panel released a report into “Commercial Real Estate Losses and the Risk to Financial Stability”. In it they said that “over the next few years, a wave of commercial real estate loan failures could threaten America’s already weakened financial system. Between 2010 and 2014, about $1.4 trillion in commercial real estate loans will reach the end of their terms. Nearly half are at present “underwater”. Losses at banks alone could range as high as $200-$300 billion. The stress tests conducted last year for 19 major financial institutions examined their capital reserves only through the end of 2010.”

“A significant wave of commercial mortgage defaults would trigger economic damage that could touch the lives of nearly every American. Empty office complexes, hotels, and retail stores could lead directly to lost jobs. Foreclosures on apartment complexes could push families out of their residences, even if they had never missed a rent payment. Banks that suffer, or are afraid of suffering, commercial mortgage losses could grow even more reluctant to lend, which could in turn further reduce access to credit for more businesses and families and accelerate a negative economic cycle”.

When looking at the situation this way it’s hard to come up with an argument about how the world is going to muddle through from here without suffering another crisis and another dip back into recession.

This rally has always had a time limit on it and we have said over and over again that it was due to government intervention anyway. The Keynesian game of borrowing more and more money to prop up the economy cannot possibly go on ad infinitum. None of the politicians will ever admit this of course because it is in their interests to borrow against your future to make themselves look like heroes and so they can act like they are “doing” something to help us.

But people, by and large, aren’t stupid. They know what’s going on. And the really clever ones are moving now to protect themselves before the music stops.

Murray Dawes
Editor, Slipstream Trader
for Markets and Money

Murray Dawes
Murray began his career on the Sydney Futures Exchange trading floor in 1993 with Swiss Banking Corporation (SBC). He spent a couple of years in the 3 and 10 year bond and option pits before moving on to the Share Price Index (SPI) futures and options pit. From there he became a broker with SBC specialising in SPI futures and options to institutional clients. After leaving SBC Murray continued his career in broking at Bankers Trust Australia. Then in 2001 Murray moved to Melbourne to work as a hedge fund trader for one of Australia’s wealthiest families. In 2003 he was ready to set up his own firm providing the same proprietary technical trading system to some of Australia’s boutique hedge funds. The success of Murray’s system led to him trading a $10 million account for a high net worth individual. This involved trading Australian and US futures and Australian stocks. Now Murray heads up the technical analysis desk for us passing on to readers some of his experience from 16 years of trading.
Murray Dawes

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2 Comments on "Capital Flight Out of Greece"

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Hi Murray, Great article and at very least concerning but where you left off has me intruged. How do we protect ourselves from this? Is there any certainty when it comes to parking our money into another parties jurisdiction? Is the suggestion that gold is going to explode seen as valid or merely a grab at ‘history repeating itself’? It also leaves me absolutley bewildered that if what you say is correct, there is a very real and distiinct possibility that a fire storm is a months shy of running through commerical and personal finacial and housing markets. If this… Read more »
Joan Murray

Talking about the situation in Greece a few nights ago and your article seems to hit the nail on the head – well written.

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