Feb

2

 The Greek finance minister is very astute with game theory forte. So far he has made a credible threat of a willingness to blow out of the EU–not a bad first move from a disadvantaged starting position.

John Floyd writes:

Many excellent points are being made in our discussions on Greece, Europe, and related topics such as Russia's 1998 default. Inclusive in the comments are the micro, macro, political, and social influences. Stefan is always excellent at bringing some historical context. Fittingly I am listening to the American Colossus at the moment.

One of, if not the KEY question, as a speculator is how best to extract capital from markets given a specific view, market, potential, catalysts, time frame, risk level, etc. A close friend, Dr. Ari Kiev, used to say to me when I would elaborate on a market thesis "John, that is great and makes a lot of sense. But, how is the best way to make money from it? What are the specific goals, etc.?".

The economics and politics of the European situation are fairly straight forward. I have followed them, more fastidiously than I care to admit for many, many years. I have included everything from men on the ground following bank deposits, meetings with current and past leaders and the 10,000 foot view of how this may play out on a broad macro level. Milton Friedman made some typically prescient comments upon the forming of the single currency, and they are panning out. Many of the same issues and characteristics were present in the European Rate Mechanism (ERM). Those more learned than I might also weigh on the potential utility of different currencies in the present day U.S., the Confederate currencies, etc.

Directly from a market perspective though I would consider some key points and questions:

How do previous crises provide some examples for a potential playbook? In the past few decades for examples…how was the Tequila Crisis backstopped? What about the ERM crises? The Argentine peg removal? Hungary's revaluations and devaluations? The currency policy of Egypt in the mid 1990's?

Does the size of the problem relate to the size of the market impact? The Russian default was relatively small and debt held by a limited number of participants. I can remember sitting in a conference room with a group who held about 80% of the local debt. But the market impact globally was very large. What was the macroeconomic situation at the time? Why did the default happen when it did? Further a butterfly flapping it's wings in tiny Iceland had a demonstrably large global impact.

If a country leaves the single currency, Eurozone, etc. does the Euro go up or down? What happens to rates, equities, etc.? What is the path and what market instruments can be best employed? The flash crash, October 2014 market moves, and more recently SNB move all would point to the need to try and answer this question.

What is the sequence and through which markets and how fast is this likely to play out? I can remember positioning for wider spreads between Germany and Spain in 2005 at about 25 basis points on the same thesis that is playing out now. But, that view has required quite a bit of timing, frustration, etc.

What is the broader thesis guiding what is happening and where else and how is it likely to play out?

This is just a quick list. What else is there to consider?


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