How Greece Is Mocking the Rest of the World

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tdp2664 InvestorPlace On Thursday, stocks rallied after Germany and France gave assurance that Greece will remain a member of the euro. Haven’t we been down this road before? How often have there been statements assuring that Greece is fine or will be fine? An Associated Press article stated this week that: “Hopes were raised by the outcome of a teleconference Wednesday between leaders of France, Germany and Greece.” Hope worked as propaganda tool for President Barack Obama three years ago, but hope is not a suitable investment strategy. Einstein’s famous definition of insanity comes to mind: Insanity is doing the same thing over and over again and expecting different results. Since the beginning of 2010 there have been five 10%-plus selloffs. All of them, with the exception of the March 2011 decline (after the earthquake in Japan), were blamed on Greece. When stocks recovered, it was credited to Greece’s rigorous adherence to the demanded austerity measures or new bailout money. The S&P has made no net progress since January 2010. After two years of water treading and lessons in Greek-style financial mockery we have to ask: Is Wall Street insane? Greece’s Prime Minister George Papandreou just pledged that a reform program would be on the top of last Thursday’s Greek cabinet meeting. To buy stocks based on a pledge to push a concern that initially was sold as a non-issue but has morphed into a matter of survival on the top of an agenda does seem insane. Or should we just consider the Greeks geniuses? After all, they have figured out how to control Wall Street. Today it only takes mythical Grecian hope for a hopefully hopeful outcome to excite Wall Street. A German saying might describe Greece’s situation. Loosely translated, it goes like this: Once your reputation is ruined, you may live blatantly uninhibited. Insane Financial Pain The Greek saga began more than two years ago, when, on June 23, 2009, Greece’s finance minister nonchalantly disclosed that “The rate of growth for the Greek economy in 2009 is expected to slow more than forecasted. Specifically, it will range around zero and only return to growth in 2010.” The disclosed budget deficit at the time was $3.1 billion. Growth obviously didn’t return in 2010, but the following headlines all offered hope in 2010: “ECB member says no bailouts for Greece” “Bulls run on Greece news” “Debtors bet Greece won’t spill” “Is Greece’s crisis over?” “Greece contagion fears unfounded” “IMF approved $3.3 billion for Greece amid impressive fiscal adjustment” “If Greece’s adjustment was that impressive, why are we still talking about Greece?” Small Fish in the Debt Pond Greece has made quite a splash, but it is just a small fish in the European debt pond. Given some more time, we’ll probably find out that bigger fish make bigger splashes. Next in line are Portugal, Spain, Italy and France. In terms of size, this is probably like comparing a goldfish with a tuna. The Wall Street Journal reported last Monday that “European banks are cutting back on dollar denominated loans, a troublesome sign of credit contraction at a time when American and European economies can least afford it.” Credit contraction is the mother of deflation and Bernanke’s most feared enemy.