“I do not believe they’ve run out of surprises.” — Larry Niven
With news hitting that Greece would indeed get its second bailout, it’s worth considering what happens next. After all, even the most optimistic scenarios show that austerity and crushing debt will continue to be a long-term problem for the country.
However, I don’t think money cares anymore (at least for now). I say this because it seems more and more clear that EU leaders are now in a period of “escalating commitment” whereby any future bailout likely occurs simply because so much money has been put into prior bailouts already. Every time Greece gets close to the brink, it means the prior money that was given becomes meaningless from the perspective of ongoing bankruptcy risk.
The stocks’ side of the equation does seem to believe in the idea that the problem is for now resolved, allowing animal spirits to continue pushing risk assets higher. In truth, Greece has not mattered since Jan. 10. I referenced this idea in a Bloomberg Radio segment I did last week with David Wilson and Vonnie Quinn. Take a look at the price ratio of the National Bank of Greece (NYSE:NBG) relative to the iShares S&P 500 Index ETF (NYSE:IVV). As a reminder, a rising price ratio means the numerator/NBG is outperforming (up more/down less) the denominator/IVV.
Click to EnlargeJan. 10 was about the date when the ratio bottomed, and the National Bank of Greece surged relative to U.S. markets (pretty much doubling since then). The ratio has paused in the past week, meaning that, on average, the stock’s performance is behaving similarly to the S&P 500.
If the ratio can maintain its current level, it would seem to suggest that future bailouts will persist and that Greek debt won’t cause a 2008 Lehman-like disruption to global financial markets. So in many ways, smart money was betting on the deal getting done, and it may be of the belief that more is to come.
For risk assets, that doesn’t appear to be a bad thing because it reinforces the reflation theme I have addressed in my writings: The conditions expressing themselves in 2012 seem to mirror those of 2003 and 2009.