Greek crisis to go on and on and on without solution

Outlook:

We get a ton of data this week, with the real estate market probably dominating in the US. Today it’s the NAHB May Housing Market Index, and tomorrow it the April housing starts and permits. Thursday we get the NAR existing home sales for April.

It’s always possible that good US data will change minds back to the idea that Q1 was an aberration and Q2 will be fine, but don’t count on it. The historic norm for the dollar and its data is that good data is not necessarily supportive while bad data is always a downer. In the middle of a surprise euro rally, presumably it take some wildly favorable information to shove the move off its trajectory. To be sure, the euro has lost some momentum, but it’s far too early to say the move is ending. We would not be surprised at all to see a test of the next high over 1.1500.

The one big fly in the ointment is Greece. The commentary tends to use crisis and gamesmanship vocabulary—“at the brink,” “endgame,” etc. But the semantics are misleading and it would be more useful to use different words altogether. Words count! To be fair, everyone feels sorry for the Greeks, probably even German FinMin Schaeuble, who favors a referendum. They keep electing bad governments and they have a culture of accepting incompetent, corrupt and dysfunctional governments. It’s enough to want to throw out democracy in the country that invented democracy but can’t run it correctly. And yet the rules of finance are the rules of finance. Greece signed up for those, too. They may be inhumane, but they are the rules. As Argentina has discovered, nobody is exempt from following the rules, even if concessions get made. Greece is stretching empathy patience to the breaking point.

We say it breaks. A deal is not going to get done at Riga because the institutions are not going to accept Greek demands. Default and Grexit will ensue. Last week we had a funny story about a rally in the stock of an obscure Canadian company that prints banknotes—the story was that Greece had placed an order for drachmas. It doesn’t matter if the story is true. What matters is that it was just plausible enough. Grexit may not harm the euro, even if it harms the institution of the eurozone in some deep and horrible ways. As we have written before, why would a sovereign reserve manager want to hold euros if members can leave? What if it’s France or Germany next time?

Confidence is a delicate flower, easily wilted. Greece is throwing acid on the bouquet and if it succeeds in damaging the eurozone’s credibility, plus the IMF’s, it will be a pariah. To a large extent, Draghi’s role in all this is vague. The ECB committee that determines Greek access to emergency funds can pull the plug. Nobody expects it to do that, but why not?—pity does not suffice. The ECB faces the same problems the Fed and Treasury faced with Lehman and Bear Stearns. At some point you have to admit that some entities can’t be saved from themselves.

We expect the Greek crisis to go on and on and on, without solution. At some point this has to be a drag on the euro. But we won’t know for sure until the charts tells us so. Data may actually become secondary.

Note to Readers: Next Monday, May 25, is Memorial Day in the US, a national holiday. We will not publish any reports. Also, we have jury duty on Thursday, May 28. Sometimes we are excused the night before and sometimes not.