It was an ugly day for the global financial system on Monday as the cheap money tranquility was abruptly shattered by the breakdown in the Greek bailout negotiations over the weekend. A Greek exit from the eurozone is growing more and more likely, ending the irrevocability of the euro and potentially undermining one of the world’s major reserve currencies.
The Dow Jones Industrial Average lost 2% in its biggest fall of the year to close below its 200-day moving average, the S&P 500 lost 2.1%, the Nasdaq Composite lost 2.4% and the Russell 2000 lost 2.6%.
The fear was palpable, sending the CBOE Volatility Index (VIX) surging 35% for its best one-day gain since 2013. The iPath S&P 500 VIX Short Term Futures TM ETN (NYSEARCA:VXX), with a short open float of around 80%, posted its best one-day performance since 2011 as complacent investors were caught wrong footed heading into the weekend.
That boosted the Credit Suisse AG – VelocityShares Daily 2x VIX Short Term ETN (NASDAQ:TVIX) recommended to Edge subscribers to a 34% gain.
Global markets were hit as well, with the Shanghai Composite down 3.3%, falling into bear market territory, despite the announcement of a double policy easing by the People’s Bank of China in an effort to reverse the selling. Japan’s Nikkei declined 2.9%. Germany’s DAX lost 3.6%.
Safe-haven flows boosted Treasury bonds and gold. Crude oil lost 2.4% to close at $58.19 a barrel.
Long story short: The far-left Syriza party in Athens is going to hold a referendum on July 5 to let the people decide whether they want to stay in the euro (and adopt more punishing austerity) or move toward restoring their national dignity and national currency by defaulting on their debts to the European establishment and the International Monetary Fund.
Greek banks are closed, capital controls are in place and deposits are limited after the European Central Bank responded to this by freezing its support of Greece’s financial system.
What’s got investors running scared is that this is a problem that cannot be solved by more cheap-money easing by the major central banks. Monetary policy stimulus depends on the sanctification of debt; Greece’s firebrand Prime Minister Alexis Tsipras is undermining that in a big way, noting today that banks default, but countries don’t.
The bankers have sacrificed the Greek people at the altar of fiat currency worship, enacting punishing austerity measures that have tipped the country back into recession, pushing the youth unemployment rate up to 50% and extinguished the dreams of an entire generation. Now, the birthplace of democracy is fighting back — threatening to undermine the myth of central bank omnipotence.
Escalation is coming.
Tuesday marks the deadline for a $1.8 billion debt repayment to the IMF, something that Athens has already said it won’t pay. Tsipras has said that even if the referendum results in a “yes” vote to austerity, he won’t quit. Tomorrow also marks the last day of the extension of the old Greek bailout program. The ECB is expected to start pulling back its support of Greece’s financial system if no new deal is ironed out.
In other words, the selling is likely to continue.
And that’s just fine with me: The July $17 VXX puts recommended to Edge Pro subscribers last week are carrying a gain of 350% while the July $129 puts against the iShares Russell 2000 Index (ETF) (NYSEARCA:IWM) are up 180% as the crisis deepens.
Anthony Mirhaydari is founder of the Edge and Edge Pro investment advisory newsletters. Two- and four-week free trial offers have been extended to InvestorPlace readers.
