Greek Stock Market Declines by 87% From Its High

In one of the e-mail groups we frequent someone told us yesterday of a trading idea recently proposed by an investment bank (which shall remain nameless). The idea was to short puts in the major euro area stock markets and use the proceeds to buy calls on the stock markets of the peripherals.

As we have recently noted, stock markets like e.g. those of Spain and Portugal look suspiciously similar in terms of their wave shapes to the post bubble Nikkei.

It is well known that stock market behavior after a major bubble bursts results in both short and long term patterns that are often eerily similar, in spite of the fact that every time period and geographical region is marked by its own  particular combination of economic fundamentals – in short, although the dynamic processes  various market economies have experienced throughout history were never the same,  stock market patterns have often tended to exhibit more than just superficial similarities.

It is therefore not entirely unreasonable to expect that the aforementioned markets will continue to mimic the shape of the Nikkei's secular bear market (until clearly proven otherwise). Since this 'model' bear market involved a series of big rallies alternating with even bigger declines, the idea to buy calls on such markets after a big decline has just occurred is not one that should be dismissed out of hand. The big question is of course whether the decline is actually over. On this point you may color us doubtful.

In any case, due to the above mentioned conversation, we took a closer look at all these markets again, and were struck by the fact that the stock market of Greece has just experienced one of the biggest collapses in all of history. From its 2007 high to its recent low, the Athens General Index has plunged by 87%. This is almost on a par with the collapse of the DJIA in 1929 to 1932, which amounted to 89%.

Further below is a long term chart of the Athens General Index that shows both the preceding rally phase and the plunge that began in 2007. Back when central banks were put in charge of manipulating interest rates and the money supply, one of the arguments forwarded by the supporters of central banking and fiat money was that a 'flexible currency' would allow the planners to avoid precisely what has now happened in Athens. We note that they weren't able to avoid a similar outcome in the early 1930's either, but that hasn't kept the supporters of the central bank-led fiat money system from continuing to claim that it is superior to a market chosen money the supply of which can not be manipulated by central planning agencies.

One recent example for this conceit has been provided by Nouriel Roubini, a prominent proponent of interventionism,  who said last November:

“A gold standard would just make business cycles more extreme, according to co-founder and chairman of Roubini Global Economics, Nouriel Roubini. What's more, a gold standard would make central banks unable to fight inflation or deflation, much less do anything to combat persistent unemployment, Roubini said in an interview with NetNet yesterday.”

Roubini has it of course exactly the wrong way around. We sure wouldn't want to employ him as a stable boy – the cart would always end up being put in front of the horse.

What exacerbates business cycles is precisely the willy-nilly expansion of the money supply that the fiat money system allows to happen. The idea that central banks need to 'fight inflation or deflation' rests on the erroneous assumption that without central banks, there would actually be something to 'fight'. If we had a free banking system based on a sound (market-chosen) money,  were to eschew fractional reserve banking and were instead to return to the traditional legal principles that have been a mainstay of European legal doctrine since antiquity, there simply could no longer be any inflation – and if there is no inflation, then there can not be any deflation either. After all, the big bogey-man deflation whom the Bernanke Fed has set out to battle is only possible if there are uncovered money substitutes, i.e., fiduciary media, in the banking system that can actually be extinguished – money the banks have created from thin air.

We want to refrain from commenting too extensively on the alleged ability of money printing to 'combat unemployment' – suffice it to say that the idea is theoretically untenable and that there exists not a shred of empirical evidence in its support either.  We strongly recommend in this context to check out  Lew Rockwell's reaction to Roubini's pro fiat money jeremiad.

As it were, for an empiricist like Roubini, the Athens General Index should prove beyond a shadow of doubt that there must be a big problem with his assertions. Last time we looked, Greece was not on a gold standard. And yet, this is what happened:



The Athens General Index: First a bubble, then a collapse that will make it into the history books as one of the biggest ever. Apparently possession of a 'flexible currency'  didn't prevent a rather stunningly volatile business cycle from playing out.


The Greek stock market obviously has a number of issues that have exacerbated the decline. Not only have the shares of Greece's banks become near worthless, but Greece is also home to a big shipping industry – an industry that still suffers from the huge capital malinvestment of the preceding boom. Today there are simply too many ships relative to the demand for shipping. Shipping cycles are especially tricky, as it takes a long time to actually build a new ship. During the 2002-2007 bubble period it appeared as though there would be a perennial shortage of shipping capacity, and the shipping companies ordered a great many ships to by built. By the time these new ships entered the market the boom had turned to bust. Today, daily charter rates are in many cases way below the break-even level. Scores of shipping companies are going to go bankrupt, and Greece finds itself at the epicenter of this particular bust as well.

As an example, here is a long term chart of one of the better known dry bulk carriers operating from Greece, DryShips (DRYS):



DRYS – the boom and bust of the Greek shipping industry – note that what looks like a 'sideways move' on this linear chart since 2009 actually encompasses an additional collapse of 85% from the 2009 interim high at around $11.50 to the 2011 low at $1.75. All in all, DRYS went from a high of just over $130 to a low of $1.75 – a decline of roughly 98.7%



The bust in Greece's banks is best illustrated by the chart of one of the country's biggest lenders, National Bank of Greece:



The boom and bust in the stock of National Bank of Greece (NBG). This was a 96.3% collapse from high to low so far.



The Vicious Cycle

It is of course well known that Greece's travails are not yet over. As we write this blog entry, the default of the country's government appears as imminent as ever. The debates over what will likely trigger the CDS written on Greece's debt have just begun. It appears that if the latest idea of the leading euro-group politicians to tear up the private sector haircut agreement of July again and replace it with one that better reflects reality, the CDS will actually be triggered and swaps writers will be forced to pay out. Well, that is what CDS contracts are for after all, so no big surprise.

“Credit-default swaps insuring Greek government debt may pay out should proposals to increase losses on the bonds exceed the 21 percent already agreed, according to analysts.  Deeper cuts would likely have to be imposed on bondholders, triggering a credit event on the swaps contracts, analysts at Barclays Capital, Evolution Securities Ltd. and Credit Agricole SA said.

Luxembourg Prime Minister Jean-Claude Juncker triggered speculation that so-called haircuts on Greek bonds could exceed 60 percent when interviewed on Austrian television yesterday. Finance ministers are considering reshaping a July deal that foresaw investors contributing 50 billion euros ($69 billion) to a 159 billion-euro rescue.  “There’s increasing evidence everything is going to a bigger restructuring of Greece and that’s going to be difficult to engineer without triggering CDS,” said Thomas Harjes, a senior European economist at Barclays Capital in Frankfurt. “It’s very likely banks won’t voluntarily agree to that.”

We would actually be inclined to refer to Greece as a continuous credit event. The country has been bankrupt in 90 years of the past 180.

Meanwhile, the EU, not unreasonably, recommends that Greece should lower its minimum wage to tackle rising unemployment. It's quite funny that the etatiste eurocrats suddenly rediscover the laws of economics now that Greece is on the ropes and subject to their diktats. We should perhaps say better late than never.

Alas, this demand is certain to run into strong resistance from the country's militant unions. They have already announced that their placet won't be forthcoming:

The minimum wage is higher than those of other member countries at the same economic level and social partners should see whether this is an obstacle to the creation of jobs," Matthias Mors, a European Commission representative and part of the EU, IMF and European Central Bank 'troika' auditors currently in Greece, told the Kathimerini daily. The Greek minimum wage stands at 750 euros (1,032 dollars) per month. Unemployment in 2011 shot up to 16 percent.

But unions argue that the cost of living in Athens is much higher than the national average on which comparisons to other EU states is based.”

We know from credible sources that the cost of living in Athens is indeed quite high.  Many have begun to flee the city because of this. We would argue that the cost of living is likely to decline as a result. The Greek government should ideally rescind all wage and price control measures currently in place. Prices and wages would then soon find a level at which the country's competitiveness would be restored. The only reason why there is such a strong resistance against falling prices and wages is generally the fact that the current owners of the bonds and shares of the fractionally reserved banks would lose out as the fully loaned up banks go belly-up. This should no longer be a big concern in Greece: the banks are already insolvent anyway.

However, social unrest continues to paralyze the nation – transport workers, state television and radio journalists, lawyers, hospital doctors, teachers, customs and tax officers, seamen and municipal workers  are currently on strike, or plan on striking in coming days. Garbage is piling up in Athens. Even taxi drivers are planning to join the strike and a 'nationwide general strike' is planned for October 19. As the AP reports:

“Greece is becoming trapped in a vicious cycle. The government insists it has no choice but to impose the harsh austerity measures so it can to get bailout loans to pay its bills. But Finance Minister Evangelos Venizelos says the repeated strikes are leading Greece's international creditors to doubt the government's ability to achieve its fiscal targets, which in turn raise the issue that more austerity measures must be imposed.”

So Greece is trapped in a vicious cycle, one that is exacerbated by the refusal of its militant left-wing unions to come to grips with the fact that the 'free lunch' is simply over. We are not sure what they expect to achieve with their strikes. They won't improve the government's financial condition, that much is certain. One can not hope to successfully demand more nurture from the government's teat once the government is bankrupt.

If their strikes 'succeed' in scuttling the austerity program, Greece will suffer a 'hard default' and no longer get any money from the bailout program. In that case, the government would be forced to cut its expenditures to the level of its  actual revenues, as it could not hope to be able to borrow money from anyone for at least a few years. To be sure, this would be a salutary event. Imagine that, a government spending only what it takes in!

Zimbabwe had to do it once it was laid low by hyperinflation – the country's economy has been on a strong upswing ever since, a sure sign that getting the government out of the economy completely  is just about the best thing that can happen anywhere.

Investors and traders meanwhile must ask themselves if there isn't finally an opportunity shaping up in Greek stocks. After all, once a market has declined by nearly 90%, it probably discounts just about the worst possible scenarios short of an asteroid strike. Consider that when the DJIA fell by 89% from 1929 to 1932, by 1932 the US economic output had declined back to the level of 1886 and unemployment stood at 33% – more than twice as high as Greece's unemployment rate is today (admittedly we are probably guilty of comparing apples to oranges to some extent here, due to the different methods of measuring joblessness). The Greek economy is a shambles, but it is not as bad as the US economy was in 1932. Moreover, while euro area money supply growth has screeched to a halt over the past year, the US money supply actually contracted by about one third in the years '29-'32, in spite of the Fed's  pumping measures (the Fed increased free bank reserves by over 400% between 1929 and 1933, a fact that is generally roundly ignored by modern-day 'experts on the Great Depression' such as Ben Bernanke).

If one looks at this market in more detail one can surely find a few good  value propositions by now. However, we must repeat a caveat we mentioned before: in its final stages, a bear market usually produces the biggest losses on a percentage basis. Indeed, the action in the ATG this year bears this point out. It probably looked 'cheap' at 1,400 points already, but at 700 points it is yet another 50% cheaper. Will it decline even more? We don't know, but we do know one thing: whether it has already happened or not, a historic low in this market is nearby.


Addenda –

1. Slovakia

As was widely expected, Slovakia has now cleared the way for approving the enlargement of the EFSF bailout fund. According to Bloomberg:

“Slovakia will approve Europe’s enhanced bailout fund today or tomorrow, completing the ratification process across the 17 euro countries as the region’s leaders prepare for a summit this month.

Party leaders in Bratislava yesterday secured backing for the European Financial Stability Facility in a second vote, Robert Fico, head of the largest opposition party Smer, said. Prime Minister Iveta Radicova’s SDKU party in exchange agreed to back early elections to be held on March 10.

“We will proceed with ratification of the bailout mechanism immediately after the constitutional law on early elections is approved,” Fico told reporters. The timing of the EFSF vote depends on how quickly lawmakers get through tomorrow’s debate and ballot on the early election, said Mikulas Dzurinda, the chairman of Radicova’s party.”

So much for that.


2.    Erstebank's Andreas Treichl

In the context of our recent article on the losses reported by Austria's Erstebank, we would like to add a quote by its evidently quite level-headed CEO Andreas Treichl. As we have pointed out, Erstebank's decision to deal with its problems head-on should serve as an example worth emulating for all other euro area banks. Whatever clouds there were over the bank have now been lifted. Shareholders were stung in the short term by this recognition of the bank's losses, but they have every reason to be grateful for the medium to longer term stability this action is likely to bring. Anyway, here is what Mr. Treichl had to say (from an article at the Economist):

“Mr Treichl would like to see Austrian politicians be as tough on the economy as he is on his own bank. “Either you print money, like the Americans, or you admit your mistakes and take extremely tough measures,” he said. “I would favour the latter, but my view hasn’t got much support.



3.    Economic Liberty

Finally, for readers who wonder why the US economy continues to be in the tank, here is an article from the Economist that really should give everyone pause. 'Rules for Fools' or the 'Terrible Threat of Unlicensed Interior Designers'.

A pertinent snip:

“ IN 1941 Franklin Roosevelt added two new items to America’s ancestral freedoms of speech and worship: freedom from fear and freedom from want. Today’s politicians offer a far more generous menu: freedom from unlicensed hair-cutters, freedom from cowboy flower-arrangers and, most important of all, freedom from rogue interior designers. What is the point of enjoying freedom from fear or want, after all, if you cannot enjoy freedom from poorly co-ordinated colour schemes?

In the 1950s, when organisation man ruled, fewer than 5% of American workers needed licences. Today, after three decades of deregulation, the figure is almost 30%. Add to that people who are preparing to obtain a licence or whose jobs involve some form of certification and the share is 38%. Other rich countries impose far fewer fetters than the land of the free. In Britain only 13% of workers need licences (though that has doubled in 12 years).

Some occupations clearly need to be licensed. Nobody wants to unleash amateur doctors and dentists on the public, or untrained tattoo artists for that matter. But, as the Wall Street Journal has doggedly pointed out, America’s Licence Raj has extended its tentacles into occupations that pose no plausible threat to health or safety—occupations, moreover, that are governed by considerations of taste rather than anything that can be objectively measured by licensing authorities. The list of jobs that require licences in some states already sounds like something from Monty Python—florists, handymen, wrestlers, tour guides, frozen-dessert sellers, firework operatives, second-hand booksellers and, of course, interior designers—but it will become sillier still if ambitious cat-groomers and dog-walkers get their way.


(emphasis added)

We urge our readers to check the article out in its entirety. This, dear readers, is what State Capitalism is inter alia all about: a system where established businesses get protection by enlisting the coercive powers of the State in order to erect the highest possible barriers to entry for upstarts. It is a combination of bureaucracy and business that reminds one of the mafia.

Obtaining licenses is time consuming and costly. Infringing against the license laws can be financially fatal. None of this serves the consumer – although this is precisely the reasoning forwarded as to why these regulations are allegedly needed. The entrepreneurial spirit and competition are crushed by all this red tape. Consumers as a result pay higher prices and have fewer choices. Job growth is stunted and economic progress grinds to a snail's pace. These regulations should have no place in the 'land of the free'. They make a mockery of all the US once stood for – and yet, the left is crying for ever more regulations and taxes, as though it were possible to regulate and tax oneself back to prosperity. As Jeffrey Tucker observes here, today's protesters are actually not 'radical' at all.

“The protesters of the "occupy" movement imagine themselves to be in the spirit of history's great radicals — speaking truth to power and all that. As many have said, the movement seems blind to the real source of power in society, else they would be protesting government bureaucracies and the Federal Reserve.

Actually, however, it is even worse than that. The protest movement is not just blind to the actual driving force behind impoverishment and injustice. The main ethos of the movement is actively supportive of government and the powerful interests that back the status quo, so much so that this movement doesn't even deserve the name radical.”


and ibid, regarding the stance espoused regarding regulations:

“As for government regulations, check out this mind bender [the 'mindbender' is from a post on Alternet, ed.]:

A business wants to make a profit, and will only care how regulations affect that goal. It makes sense for government to set up regulations because the rest of us are concerned about the larger world of the rest of us, and therefore understand more clearly how the actions of a business will affect the rest of us.

The implied assumptions: government acts on our behalf; government is all knowing about what is needed and what is not; businesses never favor regulations as a means of outcompeting upstarts; in a market, businesses can profit even without serving the public.

None of this is true. Government acts on behalf of itself and the interest groups it represents. Government is not omniscient and is, actually, the dumbest institution in society because it does nothing but take by force and reward its friends.

As for controlling business, there is probably no regulation on the books that wasn't pushed by some fat cat somewhere as a means of clobbering the competition through legal channels. In contrast, in a market economy, there is only one path to profitability: service to others.


(emphasis added)

We couldn't have said it better. This is the essential truth most on the political left utterly fail to understand. As Tucker remarks further, it is quite odd that their stance toward imperialism and war is perfectly agreeable and correct at the same time. How can people be so blind and not connect all the dots?


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3 Responses to “One of the Biggest Stock Market Collapses in History”

  • worldend666:

    Remember also that in the Great depression the stock market had a recovery only when gold was seized and the dollar was devalued.

    Take a look at the chart of the period:

    The down bottomed in mid 1932. Gold was seized in April 1933 and the USD was devalued by almost half. The Dow the doubled, so in real terms it was more or less unchanged and stayed that way until 1935.

    There was a 2.5 year window to catch the bottom (in real terms), so we don’t need to rush into catching a falling knife in Greece today.

    • I agree of course that there is no rush. I’m merely noting that once a market has declined by so much, it has discounted all sorts of bad things and it is time to begin thinking about the possibility that a major low may be close.
      And buying Russia at the default low would have been an extremely good trade as it were. Even better was to buy Soviet Era bonds. They were given away for next to nothing – and Russia eventually redeemed them at par if memory serves.

  • worldend666:

    I’ve just been looking at the collapse of the Russian Stock index in 1998. Hard to get exact data but the index lost at least 90% of its value, peak to trough, but when you consider also the currency was devalued it was much more.

    The big crash came 4 days before the devaluation when the index lost 65% of its value in a single day. That took it to a level just 12% of its peak 8 months earlier.

    However, 4 days after that the currency was devalued by 80% meaning in foreign currency terms the market was actually down 97.5% peak to trough!

    I think it’s better to buy greek equities after the Drachma is circulated.

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