Wednesday, December 13, 2017

Greece Outperforming The World: Cassandras Beware

If you own a basket of global government bonds during 2017 you have a ho-hum total return so far: a mere +1.60%.  

But if you ignored the Cassandras and bought Greek Government Bonds (GGBs).... oh boy... what a spectacular year: you are now up well over +30%. And if you were even more of a risk taker and bought them back in 2015, you have more than doubled your money.

Yields on the benchmark 10-year GGB are now at 4.35%, the lowest since March of 2008, having plunged from a high of 8% just this last spring and 20% in the troubled summer of 2015. 

Conversely, if you were a Cassandra (alas, I know quite a few of you) and bought uncovered Greek CDS  betting on a collapse, you are now nursing 60% losses - just this year alone.

Now, there is yet another species of Cassandras out there, very much alive and kicking: those who are stubbornly still shorting Greek bank stocks, plus selected other shares like the Public Power Company.

Guys, a word of advice from one who has been through the boom-bust-boom cycle a few times.  You are shorting ... NOW? 

I mean, Greek banks are already down 99+% from their bubble highs and have been through three successive, massively dilutive re-capitalizations... and you are shorting.. now? Where were you when the party was going full swing and everyone was so drunk they couldn't see a shack without thinking it a mansion? Ain't you a bit LATE to the party?

But hey, that's what makes a market...

OK, OK, one last teeny bit of advice for you Cassandras, boys AND girls: the 2-year note is now at 2.09%.  What does this mean, you say? If you are active in the Greek market and you don't understand, good luck to you AND your jobs.  

For all the rest, it means that Greece is now very close to being able to fund itself from the market at a level very near that of the official sector loans (around 2.0%). And, much more importantly, it is rapidly becoming possible to expunge the IMF from the Greek program by repaying its 14 billion loans early - they carry a high 3.5% interest rate.

FYI, Greek government bonds are now at:

2-years: 2.04%
5-years: 3.45%
10-years: 4.25% 

The IMF has been the biggest "thorn" on the banks' side, agitating for more asset quality reviews and - possibly - yet another recapitalization.  Now... what if... well, you get my drift...

Monday, December 11, 2017

Greek GDP Prospects: Housing And Tourism

Understanding Gross Domestic Product (GDP) boils down to just three numbers: consumption, investment (also known as capital formation) and trade balance.  That's it.

Understanding the Greek Depression is even easier, since it boils down to just one number: investment in housing, i.e. new home building.  As you can see in the chart below,  housing construction - the largest driver of investment in the boom years, by far -  collapsed to nearly zero (0.65 billion euro in 2016).  I don't know how far one has to go back to see similar numbers - statistics only go as far back as 1995. If I had to guess, I would say at least back to the 1970's.

Transportation equipment (new car and truck sales) have also come down, while the rest of the sectors are basically unchanged.
The chart also points to how the Greek economy may revive. Given that a massive boost in consumption is unlikely with constricted personal incomes, substantial growth can only come from two sectors: construction and tourism (i.e. service exports).

How are things there? There is good news on both.

  • After ten years of constantly dropping (chart below), private sector building permits are finally on the rise.  Year to date (Sept. 2017) the number of permits are up +8.6% and the surface area +16.8% versus 2016.  There are more, and bigger, buildings being constructed in Greece this year.  

  • Tourism is going very well in 2017.  For the first nine months tourist arrivals and receipts were both up 10% and it looks like the fourth quarter is up strongly, too. Tourism is the single largest industry, accounting directly for roughly 8% of GDP and nearly 20% when all effects, indirect and induced are accounted for, so a strong showing there has a multiplier effect on the economy.

Strength in the tourist sector is also attracting capital investment, so we have a rather nice one-two punch going on here.

Assuming consumption does not take a dive (unlikely, given the robust increase in tourist arrivals), GDP should show a healthy rise in 2017, gathering momentum for 2018.

P.S.  Interestingly, new car sales are up, too: +21.6% ytd in September.

Saturday, December 9, 2017

Greek Residential Real Estate Construction

Just one chart today (ok, three ;) - the complete evaporation of new home building in Greece. 

Top to bottom the annual value of new home construction collapsed 25 billion euro, going from 26 billion per year in 2007 to just 1 billion in 2016. That's a 95.5% collapse!

In the same period Greek annual GDP dropped 50 billion, from 225 billion to 175 billion.  In other words, an amazing 50% of the Greek Depression is due to the collapse in residential real estate construction.

Housing construction is a sub-component of gross capital formation (a.k.a. investment), itself one of the three main components of GDP : consumption, gross capital formation and trade balance. 

From the chart below it is easy to see what led the Greek economy into a tailspin: housing construction collapsed from an unsustainable high 11.2% of GDP to a likewise unsustainable low of 0.65%.

 Why do I say "unsustainable"? Because (a) in the "boom" years Greek population,  new household formation and external demand (e.g. foreigners buying vacation homes) did not rise nearly as fast as the new supply of homes and, (b) in the current "bust" years this natural demand must be rapidly absorbing the excess housing stock created in prior years.

Using the number of weddings taking place every year in Greece as a very rough guideline for new housing demand, we can see how the boom years created a housing bubble (marriages did not rise nearly as fast as construction), and why the bust may now be overdone (marriages have not fallen off as dramatically as construction). 

 My prediction is that housing construction will soon start rising again to more sustainable levels, boosting gross capital formation and - thus - GDP growth.

Wednesday, December 6, 2017

And Yet, It Moves..

One of the most obvious characteristics of bubbles, manias and their opposites, implosions and apathy, is the stubborn refusal of the crowd to see what stares them in the face, choosing instead to believe only their version of "truth" - no matter how outrageous.

Thus, tulips are forever rare and precious, people invest in companies formed "for carrying-on an undertaking of great advantage but no-one to know what it is!!” (1720 South Seas Bubble),  real estate only goes up, big banks can't go bust, Capesize bulk carriers are "worth" $250 million each, garbage (sub-prime loans) cut into small pieces turns into gold (CDOs), etc.

It doesn't matter what it is, once people fall victim to the crowd mentality they take leave of their common sense.  Those who try to say otherwise are scoffed, ridiculed or outright threatened with dire consequences.  Galileo was a famous case in point, when he had to choose between scientific nonsense or death on the pyre - though he did manage to say "E pur si muove" (and yet, it moves) sotto voce.

Today's case in point is the cacophony of analysts who stubbornly refuse to accept that the Greek economy is rebounding and that investor confidence is returning fast.  

On the economy (see previous posts), one can parse the GDP numbers and come up with their own interpretation - at least for a while. But you definitely cannot "spin" government bond yields crashing to 4.78%, the lowest levels since 2009 when they stare you in the face.  Greek risk is going down fast, period.

The good news is that some smart money is taking notice.  Brevan Howard is one of the world's most respected hedge fund money managers with some $20 billion AUM, and it just announced the launch of two long only funds to invest in Greek securities and real estate.

 Yes, it moves.  And IMHO it has a very long way to go before Greek assets are fairly valued once again.

Tuesday, December 5, 2017

Greek Electricity Consumption

The Greek economy is finally growing again. Official projections put real GDP growth for 2017 at 1.6% but many think it will be less, closer to 1%.   I disagree with the lowball estimates because, as always, the devil is in the details.

In my opinion current euro (aka "real") GDP numbers are more valid in an economy going through a long period of deflation because GDP deflators can be very tricky in such circumstances. For example, Greek CPI jumped from -1% to +2% in just a couple of months early in 2017.  

Greek CPI: Red dot is month YOY, Blue line is 12 month average

The latest 3Q GDP growth number in current euro came in at +2.1% versus 3Q2016, the highest since 2008.  Also, GDP has been growing for three consecutive quarters, also a first since 2008. In contrast, "real" growth came in at just +1.3% showing just how noise in the CPI series can affect popularly reported GDP.

 Being an engineer by training, I prefer to pay attention to more basic data such as electricity consumption.  Looking at the chart below, it is clear that the Greek economy is rebounding strongly in 2017 when compared to a weak 2016, particularly in the summer tourist season which went very well this year. As of October electricity consumption is up 3.8% year to date versus 2016.