Small Cap Value Report (17 Jun 2015) - AIE, KBC, INL, AGA

17th Jun '15 by Paul Scott

22 comments 29039 reads

Good morning!

This article from Paul McManus of Walbrook PR is worth a read. I met Paul recently, and we talked at length about ways to improve communications from listed companies to the private investor community, for the benefit of all - after all, it's PIs who create the liquidity, narrow the spread, and set the share price. So it's perplexing why some city firms just ignore PIs, when they should be building channels of communication & engagement.

Thoughts on Greece

The increasing likelihood of a Greek default, and possible ejection from the Euro, is the topic on everyone's mind at the moment. I've got mixed feelings about this. Clearly Greece is insolvent, so needs to default, and move on. Prolonging the agony in this way, is not doing anyone any good in the long run - it's just deferring the inevitable.

This issue has been rumbling along for years now, so arguably the market has already priced it in. The market might even rally once this issue is resolved, after the initial panic has subsided - since a major uncertainty would have been removed.

Also, the politicians and civil servants now know what to do in a financial crisis, which they didn't in 2008. They have to recapitalise and/or nationalise major failing banks. No ifs or buts, it has to be done, and fast. They know that this time, so I think Govt action will be more decisive this time compared with 2008, if we do go into another financial crisis.

On the other hand, the market has been sanguine up until now, because last minute deals have always been found re Greece. This time it looks as if there's a decidedly increased risk of Greece defaulting, being ejected from the Euro, its banks collapsing, and Greece reverting to the Drachma, which will then instantly depreciate greatly. Although in reality, I think Greece will become a cash-based, black economy, with the population continuing to use Euros for day to day transactions. That makes it even harder for the Govt to collect in tax revenues. So I don't think going back to the Drachma will be a cure-all by any means.

I can't think of any historic example where a country has abandoned a strong currency, and created a new, weaker currency. Normally it's the other way around - after hyper-inflation, countries scrap their old, failed currency (e.g. Weimar Germany, Zimbabwe) and issue a…

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bsharman

17th Jun '15

Hi funnymoney. I bought two products which are a simple hedge against a market correction or crash. DBX FTSE100 SH ETF (LON:XUKS) and DBX S&P500 SH ETF (LON:XSPS). These are both inverse ETF trackers on the FTSE 100 and S&P 500. They are simple products to understand, cheap to buy and offer some insurance.

Graham Neary

"I can't think of any historic example where a country has abandoned a strong currency, and created a new, weaker currency." - the US in 1971, Germany in 1999.

aflash

The other example is Argentina which had a 1:1 peg to the US dollar in the late 90s. Devalued to 2 in 2001 then declined to 5, then 7 and today 12.
Today the situation is exactly what you describe. The black market in US dollars is so huge that the 'blue' dollar rate is quoted in the electronic and printed media alongside the 'official' US-Peso rate. Cash transactions are the norm even for property.

MrContrarian

Greece will impose capital controls to prevent massive Euro outflow while it Grexits then keep them for some time to stop exactly what Paul says, a constant conversion and devaulation by all and sundry.
The elite will side step this as usual.

Rusty2

Did not Turkey devalue in 2001?

Mercurius

...I am not sure what the distinction between Greece changing currency and every other devaluation is either. It generally isn't common for countries to actively adopt a stronger currency either and the only examples I can think of in which this has happened have been caused by politics: Britain in the 1920s, Britain again in the 1960/70s, and the Plaza Accord (Japan, Germany, etc.) in the 1980s. Lots of examples with the gold standard and Latin American countries probably too...pretty much always relating to the big monetary power bullying the little ones into taking its budget/current account deficits (perhaps).

Either way, the reason why people won't sell new Drachmas is because all existing claims denominated in old will get transferred to new. You might hold Euros in cash but you can't pay your taxes with it, the government won't hold balances in it, debts won't be denominated in it, etc.

An example might be Russia, large sections of the economy are foreign currency (more than the case would be with Greece, I think) but the ruble still trades and has value.

An interesting topic to think about though...I mean the BOE has a good record but why should I trust them? In theory, it is safer to just buy gold bars with my £££ and stuff them under the bed...brb.

Paul Scott

Hi Graham N,

Thanks for that. Although I suppose what I really meant, is that I cannot think of any historic examples where a new, weaker currency was introduced, whilst the old, stronger currency was still available for use.

When the Euro was created, I think the expectation was that it would be as strong as the Deutschmark, or at least that's what the German public were led to believe.
For all their complaining about the Euro, it's Germany that is actually the main beneficiary of it - since it gives them an artificially cheap currency in which to export - Germany being similar to China in having a grotesquely large trade surplus.

So far from ironing out economic imbalances, the Euro has made them far, far worse. Of course the Germans are going to end up picking up a very large bill for the Euro going wrong, which makes me wonder whether Merkel will blink at the last minute, and strike a deal with Greece after all, for more debt relief.

Regards, Paul.

janebolacha

The parallel market for the US dollar has existed in Argentina and in just about every S. American country for just about ever, for several reasons, tax evasion, fear of inflation and government confiscation, distrust of banks, etc, etc. As you said, the parallel rates are printed in the media and one simply goes along to the moneychanger and changes the local currency into safer dollars. It´s very efficient, really, particularly when inflation is out of control (try 4,000% pa inflation, as we did have one year in Brazil!). People who work independently or who have secure jobs can manage okay, provided they have no foreign currency debts. The people who get hurt are, imo, people unemployed, the old, retired, people without protection, although family support systems mitigate this. The wealthy and powerful take care of themselves, as everywhere.

Piledriver42

Rational arguments and projections are fruitless when a country has given itself over to Leninist Ideologues.

I think you can forget rational market theory (if it exists) until this has all run its course.

coombe

We learn from history, that we don't learn from history..........

The Latin Monetary Union (LMU) was established in 1865 in an attempt to unify several European currencies into a single currency that could be used in all the member states. According to the BBC, "its chronically weak economy meant successive Greek governments responded by decreasing the amount of gold in their coins, thereby debasing their currency in relation to those of other nations in the union and in violation of the original agreement".

Greece was formally expelled from the Latin Monetary Union in 1908.

Fair enough Paul. But you know, the classical way of looking at this is that German consumers are made poorer by the Euro because their wages and salaries are artificially depressed on the world stage, reducing their purchasing power in the international markets. It's a wealth transfer from the population at large to the people who own export businesses. Just a distortion and a subsidy program.

cig

The Greek government may have a leftist background, but the current Greek-side proposals are essentially what any standard bankruptcy practitioner would do. Ultimately a country is like a business, some sort of fancy trailer park, renting out lots and charging for common services. If you try to fix a failing business by firing staff and increasing prices too much, you just lose the few remaining customers. In a country's case, the inhabitants (buyers of government services) just leave. You can't quite liquidate a country, so the only viable option for creditors is to write off debts to a bearable enough level, where the tax/services mix is in a state where people stop leaving.

The problem of the IMF model is that they analyse countries as if they were North Korea, that nobody can't leave, so they don't incorporate the feedback cycle of people leaving in response to IMF programmes and the ensuing vicious cycle. If anyone has a soviet mindset, it's the IMF.

Flackwell

Glad so many people are up on the economics. For those that aren't please watch with interest and remember the lessons when it comes to our In/out vote

and of course vote UKIP

I think that there is a huge degree of moral hazard involved, the country appears to have been run by a small oligarchy for years, they have been busy siphoning off the Trailer Park revenues whilst, at the same time, borrowing from the town bank to keep the staff on (and onsite).

Perhaps someone has to tell the Trailer Park folk that this blissful existence is not sustainable in either the short or long term.

underscored

What about the moral hazard of the private banks that lent the money to Greece and been bailed out by the EU taxpayer already...

I'm not defending the actions of the banks.

If i were apportioning "blame" I might lay a lot of that at the door of an overly federalist Europe that allowed Greece to cook the books and gain entry to the Euro.

Digressing slightly, it's the same "Euro Enlargement" mentality that is seen by many as a major reason for the Ukraine conflict.

kenobi

we must recall that much of the blame for eu enlargement falls to the uk, it was John Major, who as a way of combating closer integration argued for a wider not deeper europe. Which was always madness, letting in spain, portual and greece never mind all of eastern europe. Still we have to start from here.

K

Funnymoney

18th Jun '15

Thanks for the info

Re Anite (LON:AIE) it seems to have settled slightly above the offer price, somewhat bizarrely (hope of a better bid? algo trading funniness?) so there's an opportunity for an early exit at a better price than settlement of the cash offer. (I sold my entire holding.)

Small Cap Value Report (17 Jun 2015) - AIE, KBC, INL, AGA

Thoughts on Greece

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Paul Scott

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