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A Light Goes On (understanding why Greece matters again)

I’m can be slow to understand the implications of things. I don’t immediately see what in retrospect should be obvious.  Instead I have to get people to spell things out for me before I get it.

I think this is partially a consequence of not being able to spend as much time thinking about the world as I need to.  I have a job, I have a family and so I really don’t get a chance to sit down and work out all the potential impacts on a regular basis.

I’ve been looking at some private equity stocks lately, trying to understand them better and determine whether they are buys.  As part of this research I stumbled upon a market commentary from Michael Novogratz, a principle at Fortress Investment Group.  He crystallized for me why we are seeing the carnage we are in the markets (you have to wait until about 4 minutes in).

The key moment in the interview for me was when Novogratz spelled out that the Greek election was a game changer.  If Greece leaves the Euro it is, in his words, a Lehman moment.   If they leave, we don’t know for sure who owes who what or whether they can pay it back or if the assets and liabilities of any particular entity are going to balance out.  Novogratz is saying that Greece could breed the sort of counter-party uncertainty that could cause credit markets to seize.

That’s when I suddenly got it.  Its not that anyone can say with certainty that its going to end well or end badly.  Novogratz himself said that the ECB and the Europeans governments have been preparing for a Greek exit for months.  Its possible that they have worked out all the contingencies.  But at the end of the day no one really knows.  If Greece leaves it all goes out the window.   You are really just guessing to bet what happens next.

Just to throw out some of the uncertainties, there is the effect of funds and banks with mixed liabilities of Euro’s and Drachmas’.  There are the TARGET2 balances between Greece and other Eurozone countries that now become debt.  There is the strange consequence that a Greek exit destroys all the capital of the ECB.   There are the cross-border balances of companies that trade across the Eurozone.  There is the deep recession in Greece that results.  There is the investor response to Portugal, Italy and Spain sovereign debt.  There are simply a lot of moving parts and it is perhaps impossible to estimate how they all play out.

It has the same flavour of uncertainty as Lehman did.  And one thing that I learned from Lehman is that the decision makers know far less about the consequences then I thought they did.   They aren’t that much smarter than the rest of us.  Nobody knew what was going to happen when they let Lehman go until stuff started to happen after they let it go.  I think its the same thing with Greece.

Today I raised 20% cash.  I just sold a bit of everything, and I sold all of Gramercy Capital (GKK) because I wasn’t sure about it anyways.  It helped that gold stocks rallied.  It hurt that PHH and Newcastle had bad days.  Maybe this is a terrible time for it.  We could rally because we are so oversold. But I feel like I have no choice.  Now that it makes sense to me it seems like too much risk.  I want to get back to at least 50% cash by the Greek election or until there is a resolution that makes it clear Greece is staying.

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