Prophets

Greece, Oil and Fed Give Markets the Look of Wonderland

The use of purposeful misdirection by politicians is on the rise.

Markets are in a state of disbelief.

Photographer: Michael Nagle/Bloomberg

The markets are full of presumptions. They are often incorrect. They are generally manufactured, and driven, by politicians touting their own particular wares in an attempt to bolster their positions to the detriment of market participants and investors. This is not noise but purposeful misdirection.

Take Europe. The European Union structure is a large part of the problem. Brussels makes the pronouncements, but Berlin writes the scripts. Brussels is little more than a mouthpiece and all statements that emanate from there should be viewed with great suspicion. A politician from one country makes some pronouncement, then one from another country replicates it, then some member of the EU reinforces it, and they all hope that you accept it as truth. Don’t be fooled. These people have their own agenda, and accuracy is not part of their equation.

If you read the business press you would think that some deal had been achieved between Greece and its creditors. This is not factual. Athens is being forced to accede, once again, to more European demands, and, once again, more austerity has been demanded. That part of the story is correct. The ball is back in Athens’ court.

European finance ministers still have to approve the deal and Greece has a $7 billion debt payment looming in July. The rub here is the International Monetary Fund. Sweden, the Netherlands and Germany have all voted in their parliaments to not approve any deal without the IMF’s involvement. The IMF has stated, repeatedly, that they will not support any deal unless there is “debt forgiveness” and Germany, for its own political purposes, will not allow it. The crux of that matter, then, comes down to what the IMF may or may not do.

Bear in mind that America provides most of IMF’s funds and that our representatives now report to the Trump administration. This is a game-changer for the IMF, in my view.

There are several notable things to consider about the IMF. First, their economic forecasts, especially about Europe, have about the same validity as a five-year-old’s, except that those of the kid are a best guess while the IMF’s are politically motivated to support their European masters. I think that Trump revises this agenda.

Second, the IMF has said over and over that debt forgiveness must be granted to make the Greek situation tenable. I believe they are correct in this assertion as Germany scoots left, and then scoots right, to try to avoid this unpleasant reality. In any event, what we know for certain, regardless of the nonsense printed, is that there is no deal at present, and the likelihood of one is not even close to execution at this point in time.

Another area where Wonderland prevails has to do with oil. OPEC and its minions promise production cuts, outsource their oil to third parties, and claim that they have met their quotas. No surprise here. It is a very old and established game.

What is new is America and her shale oil production. The U.S. is not just a game-changer but a back-breaker. OPEC can produce less and America can produce more and the price of oil is not going up significantly any day soon.

Fracking, re-fracking and horizontal drilling have changed the world, and America, under the Trump administration, is in the process of demonstrating this to the world. We will soon see a federal tax on importing oil and natural gas, and tax credits for exporting them both. America is not only going to be just energy self-reliant but the world’s biggest exporter of energy, and woe be it to the nations that support terrorism and used their energy resources to do it. They are about to get trampled by American technology that keeps lowering the costs of oil production in the U.S. I am with Marie Antoinette here: “Let them eat cake!”

“Not so fast” is also applicable to the Federal Reserve. They will make all kinds of statements today, and the markets will focus intently on them. Me, not so much.

Trump is about to appoint at least four new members to the Fed, and the statements of today are quite likely to be much different than the statements of tomorrow. Pragmatism, I believe and hope, is about to arrive at the Fed, and the economic theorems of a “return to normalcy” are going to get Trumped by lower rates for longer. The Treasury Department is going to provide a new set of instructions, in my opinion, and the ivy is going to be raked off the walls.

We are also facing Brexit, Frexit, an Italian baking system in serious disarray, the possibility of Italgo, and the questionable ability of Trump to deliver on his programs. “Not so fast,” is at work here as well.

On Nov. 8 and 9, I said to “buy equities.” I have changed my position recently. I find it much safer to use the strategy of “cash flow investing,” where you purchase corporate bonds, now yielding more than municipal bonds on an after-tax basis in most cases, and very carefully chosen closed-end bond funds. You can achieve a 7 percent to 7.50 percent return if you know what you are doing from the date of inception. I point out that nothing is without risk, but I also point out that this strategy has far less risk than trying for appreciation in a world that is facing a sea of potential troubles. “Preservation of Capital” are Grant’s Rules 1-10, and always uppermost in my mind.

Bloomberg Prophets Professionals offering actionable insights on markets, the economy and monetary policy. Contributors may have a stake in the areas they write about.

    To contact the author of this story:
    Mark Grant at mjgrant@bloomberg.net

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    Robert Burgess at bburgess@bloomberg.net

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