Daily Clueless Musings 6/15--The Greek Show

The Greece situation feels like slow motion of Lehman Brother 2.0. Apparently when EU/ECB/IMF kicked the Greek debt can down, it was not far enough. Everyone thought one year of time would be enough for Greece, European banks and ECB to come up with a solution for the debt issue. They were wrong. Politicians have a tendency of avoiding answering hard questions as long as possible. Just like preparing for exams in college, only the last few days count. Now as the deadline for Greek debt rollover approaches, the situation is as complicated if not more as it was a year ago. ECB, German and Greece are locked in a prisoner's dilemma. The obvious and sensible solution may be derailed by the conflicts of interests between the parties. The consequence of the more unpredictable than the market perceives. Front contracts were under selling pressure again, although libor fixing continues to come in. Stocks market were lower as well and vix was bid, but they are not nearly at a level implying massive risk to the economic recovery. Euro were down more than 250 pips, but it is still significantly above the 1.20 level we saw when the Greek debt crisis first broke out. The economic data in the US was shadowed by the news on Greek debt crisis. The headline and core CPI increased 0.17% and 0.29% respectively in May. Both were larger than expected. Apparel price rose 1.2%, the largest increase in more than two years, which may suggest the labor and raw martial inflation in the emerging economies are finally showing up at consumer level. The annualized core CPI is very close to hit the lower boundary of Fed inflation target range. The Empire State manufacturing survey weakened significantly in June, with the headline falling 19.7 points to -7.8. The details are more worrisome. he ISM-weighted composite for the June Empire State survey dropped from 58.1 to 49.7.The workweek also posted its largest decline on record, plunging 25.7 points in June to -2.0, and employment fell from 24.7 to 10.2. Vols were bid on the rally. As paper were buying downside options in the U1 and Z1. However assuming central banks have learned their lessons from Lehman Brother's debacle, it is unlikely to see the liquidity issues in the market even if Greece defaults. The price Volatility of safe asset may actually decreases, as the increased supply of liquidity and decreased supply of safe assets.