What Does The Turmoil in Greece Mean for Your Money : Update

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UPDATE No Vote Pulls Ahead

Cash within the Greek banking system will run out in just a few short days, a senior banking source has told me, amid fears that the financial crisis will force Greek companies to start laying off workers on Monday.

“This is a fully fledged banking and economic crisis,” said the despairing source. “The rate of cash withdrawals has trebled in recent days, even with the limits.”

Since I arrived in Athens, I have witnessed Greeks queuing at those cash machines that are working, to withdraw the maximum amount of cash they’re allowed under the restrictions implemented last Monday.

“People are taking out money around the clock, out of ATMs, on the internet transferring to HSBC – you name it, they’re finding ingenious ways to get their savings.”

He added: “We desperately need a solution. It will not be long before our country is on its knees, with the damage so great that it will be permanent.”

After the referendum polls close tonight, Greek Finance Minister Yanis Varoufakis will meet bank bosses, grouped together under the auspices of the Hellenic Bank Association, and the governor of the Bank of Greece, Yannis Stournaras, I have learned.

All options currently remain open. Greece could do what Cyprus did: default on some of its debts while staying in the euro. Tsipras could decide to accept the tax increases and the pension cuts demanded by the creditors while receiving only minor and vague concessions on debt relief. Greece could have run out of money and be out of the euro within 24 hours.

Some things though are clear.

Firstly, the Greeks have said no to austerity rather than to membership of the euro. Tsipras does not have a mandate to bring back the drachma, even if that is where this all ends.

Secondly, the referendum result means both economic and political chaos. As Joan Hoey of the Economist Intelligence Unit put it even before the vote: “Greece is angry and fearful; divided and conflicted.”

Inevitably, Greece faces a fresh period of acute economic pain. It will take months, if not years, to recover from the events of the past week, even if there is a speedy resolution to the crisis. The Greek economy has already shrunk by a quarter in the past five years.

Thirdly, it is no longer possible to kick the can down the road. Any solution to the Greek crisis that involves more austerity without measures designed to get the economy growing again and to make the country’s debt sustainable will be a pyrrhic victory. The upshot would be a period of feeble growth and mounting indebtedness that would bring the possibility of Grexit back on the agenda. Sooner rather than later, in all likelihood.

Fourthly, this is the most serious crisis in the euro’s relatively short history. There have been confident pronouncements that Greece has been quarantined so that there will be no knock-on effects on the rest of the eurozone. Such sentiments will be tested to the full if there is a Grexit. Share prices will inevitably take a tumble when the financial markets open for business, but more attention should be paid to the bond yields – or interest rates – on the sovereign debt of other eurozone members seen as vulnerable.

The short-term problem for Merkel and Hollande is obvious. If they take a tough line in talks with Athens, they will get the blame for Greece’s departure from the single currency.

The longer-term problem is perhaps even more serious. Greece has highlighted the structural weaknesses of the euro, a one-size-fits-all approach that doesn’t suit such a diverse set of countries. One solution would be to create a fiscal union to run alongside monetary union, with one eurozone finance minister deciding tax and spending decisions for all 19 nations. This, though, requires the sort of solidarity notable by its absence in recent weeks. The European project has stalled.

So, this story is not over. In Homer’s epic tale, it took Odysseus 10 years to return to his Ithaca home from the Trojan war, losing all his men along the way. Greece’s modern odyssey, similarly, is only half over. The next chapter begins on Monday).

Expect lower stock prices.

Faced with an apocalyptic unemployment rate of 28%, voters in Greece have drawn the line on austerity measures that have mired the country in a crisis rivaling that of the Great Depression. In the worst case, the move could lead to Greece’s exit from the European monetary union. In the best case, it will produce much-needed debt relief for the country’s ailing economy. But either way, it’s prudent to assume the turmoil will roil equity markets both here and abroad.

The issue came to a head earlier this week when Greece’s “radical left” Syriza party won a plurality of votes in the latest election. Led by 40-year-old Alexis Tsipras, Syriza campaigned on a platform to ease the “humiliation and suffering” caused by austerity. This includes debt relief and rolling back steep spending cuts enacted by Greece’s former government in exchange for financing from the International Monetary Union and other members of the European Union.

To say Greece has paid dearly for these cuts would be an understatement. The consensus among mainstream economists is that austerity during a time of crisis exacerbates the underlying issues. We saw this in Germany after World War I when France and Great Britain demanded it pay colossal war reparations. We saw it throughout Latin America following the IMF’s structural adjustments of the 1980s and 1990s. And we’re seeing it now in Greece and Spain, where unemployment has reached levels not seen in the developed world since the Great Depression.

The problem for Greece is that Germany and other fiscally conservative European countries aren’t sympathetic to its predicament. They see Greece’s travails as its just deserts. They see a fiscally irresponsible country that exploited its membership in the continent’s monetary union in order to borrow cheaply and spend extravagantly. And they see an electorate that isn’t willing to accept the consequences of its government’s actions.

To a certain extent, Greece’s critics are right. Over the last decade, its debt has ballooned. In 2004, the country’s debt-to-GDP ratio was 97%. Today, it is 175%. This is the heaviest debt load of any European country relative to output.

It accordingly follows that the European Union stands once again at the precipice of fracturing. If the Syriza party sticks to its demands and Greece’s neighbors won’t agree to relief, then one of the few options left on the table will be for Greece to exit the monetary union and abandon the euro. Doing so would free the country to pursue its own fiscal and monetary policies. It would also almost inevitably trigger a period of sharp inflation in a reinstituted drachma.

This isn’t to say global investors should be petrified at the prospect of even the most extreme scenario — that of Greece abandoning the euro. In essence, the euro is nothing more than a currency peg that fossilized the exchange rates between the continent’s currencies in 2001. By going off it, Greece would essentially be following in the footsteps of the Swiss National Bank, which recently unpegged the Swiss franc from the euro after a drop in the latter’s value made maintaining the peg prohibitively expensive.

A more complicated question revolves around the fate of Greece’s sovereign debt. Seceding from the monetary union won’t eliminate its obligations to creditors. It likely also won’t change the fact that the country’s debt is denominated in euros. Thus, if Greece were to exit the euro and experience rapid inflation, the burden of its interest payments would get worse, not better. This would make the prospect of default increasingly attractive if not necessary in order to reignite economic growth.

But investors have shouldered sovereign debt repeatedly since the birth of international bond markets. Just last year, Standard & Poor’s declared that Argentina had defaulted after missing a $539 million payment on $13 billion in restructured bonds — restructured, that is, following the nation’s 2002 default. Yet stocks ended the year up by 11.5%. The same thing happened when Russia defaulted in 1998. Despite triggering the failure of Long Term Capital Management, a highly leveraged hedge fund that was ultimately rescued by a consortium of Wall Street banks, stocks soared by 26.7% that year.

Given all this, the biggest impact on investors, particularly in the United States, is likely to make its way through the currency markets. When fear envelopes the globe, investors flee to safety. And in the currency markets, safety is synonymous with the U.S. dollar. Over the last year, for instance, speculation about quantitative easing by the European Central Bank, coupled with the scourge of low oil prices on energy-dependent economies such as Russia and Mexico, has increased the strength of the dollar. This will only grow more pronounced if the U.S. Federal Reserve raises short-term interest rates later this year.

The net result is that American companies with significant international operations will struggle to grow their top and bottom lines. This is because a strong dollar makes American goods more expensive relative to competitors elsewhere. Consumer products giant Procter & Gamble PG 0.26% serves as a case in point. In the final three months of last year, P&G’s sales suffered a negative five percentage point impact from foreign exchange. As Chairman and CEO A.G. Lafley noted in Tuesday’s earnings release:

The October [to] December 2014 quarter was a challenging one with unprecedented currency devaluations. Virtually every currency in the world devalued versus the U.S. dollar, with the Russian Ruble leading the way. While we continue to make steady progress on the strategic transformation of the company — which focuses P&G on about a dozen core categories and 70 to 80 brands, on leading brand growth, on accelerating meaningful product innovation and increasing productivity savings — the considerable business portfolio, product innovation, and productivity progress was not enough to overcome foreign exchange.

With this in mind, it seems best to assume revenue and earnings at American companies will take a hit while Europe works toward a solution to Greece’s problems. In addition, as we’ve already started to see, the hit to earnings will be reflected in lower stock prices. There’s no way around this. But keep in mind that we’ve been through countless crises like this is in the past, and the stock market continues to reward long-term investors for their patience and perseverance.

More Limbo

“Irrespective of the referendum outcome, it is unlikely that there is an immediate resolution to the crisis the next day,” Marco Stringa, an economist at Deutsche Bank AG in London, wrote in a research note before the polls closed. “A ‘yes’ vote would be significantly more likely to lead to a quicker agreement with the creditors, but not without risks. Ultimately, the economic emergency will remain a key catalyst.”

A “yes” could force the end of the Tsipras government and fresh elections, a possibility to which Finance Minister Yanis Varoufakis alluded on Thursday. A result so close that it’s inconclusive may only extend the current stalemate, which began when Tsipras called the surprise plebiscite on June 27.

Some Greeks are despairing of their country’s situation.

“This vote is a test of our collective IQ,” said Hara Nikolou, a retired biochemist who lives on the island of Serifos, before casting her “yes” vote. “If our society opts to turn this country into Balkan wasteland, I don’t want to continue living here.”

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One of the worst trading days this year has even market bulls warning investors to brace for sharper pullbacks and volatility in days to come.</p>
<p>   Fears over Argentina’s default sent equity markets tumbling Thursday, as analysts say that investors are becoming less forgiving of worrisome economic and geopolitical news, warning that a stock correction could be looming. The S&P 500 fell 39.4 points or 2%, or to close at 1,930.67, while the Dow Jones Industrial Average saw its gains for the year erased after falling 317.06 points or 1.9% to 16,563.30. The S&P/TSX Composite slid 194.08 points or 1.3% to 15,330.74. “We are witnessing … classic signs of an impending correction,” said Michael Hartnett, chief investment strategist at Bank of America Merrill Lynch who was once seen as the biggest cheerleader of the current rally. “We expect volatility will rise in coming months. TORONTO — North American stock markets had their biggest one-day tumble since early February on Thursday but analysts were hard-pressed to identify a single reason for the drop. The S&P/TSX composite index in Toronto fell 194.08 points to 15,330.74, as a number of big Canadian corporations missed earnings forecasts, but the index remained up about 1,736 points since the beginning of the year. New York’s Dow Jones industrials plunged 317.06 points to 16,563.3, leaving the index below where it started the year by about a dozen points. The Nasdaq lost 93.13 points to 4,369.77 and the S&P 500 index declined 39.4 points to 1,930.67.   The loonie closed down 0.02 of a cent to And volume is less than usual with many market participants on holidays. But the stock market declines also come at a time when many investors have registered substantial gains. “You get thinner markets and it doesn‘t take much to move things around,” said Wes Mills, chief investment officer Scotia Private Client Group. “Clearly everyone has made good money and there is no evidence that people are taking money off the table yet. It‘s probably just an overdue correction in a thin summer market with a combination of factors.” Valeant Pharmaceuticals International Inc., which is making a hostile takeover bid for Botox maker Allergan, posted a quarterly net profit of $126 million or 37 cents a share. Adjusted income was $651 million, or $1.91 per share, missing estimates of $1.98 a share, and its shares fell $9.59 or 7% to $127.83. Barrick Gold Corp. delivered a US$269-million quarterly net loss and $159-million of adjusted earnings in the second quarter, missing analyst estimates on both counts. The adjusted profit amounted to 14 cents US per share, two cents below estimates. Barrick shares dipped 44 cents to $19.70. 91.71 cents US. The U.S. Federal Reserve indicated Wednesday that it will keep short-term interest rates low “for a considerable time” after it ends its bond purchases, likely in October. The Fed is expected to start hiking rates mid-2015, but stronger than expected economic growth in the second quarter has investors concerned that the Fed could raise rates sooner. Argentina moved into a debt default for the second time in 13 years after a deadline of midnight Wednesday night came and went without a deal with bondholders.

Stocks Slide With Portugal Bonds as Treasuries, Gold Gain

European stocks fell and Portuguese bonds dropped as concern deepened over missed debt payments by a company linked to the nation’s second-largest bank. Standard & Poor’s 500 Index futures signaled a selloff earlier this week will resume, while the yen, Treasuries and gold gained.

The Stoxx Europe 600 Index lost 1.3 percent at 8:35 a.m. in New York, led by a gauge of banks dropping to this year’s low. Financial bond risk increased in Europe for a fifth day. Standard & Poor’s 500 Index futures fell 0.9 percent. Portugal’s 10-year bond yield rose 11 basis points to 3.88 percent while Treasuries gained and the yen advanced against all but one of its 16 major peers. Indonesian stocks climbed to a one-year high as polls showed Jakarta’s Governor Joko Widodo won the presidency. West Texas Intermediate oil slid 0.3 percent to $101.62 a barrel while gold climbed 1.1 percent.

Bonds of Europe’s most-indebted nations declined as speculation resurfaced that the euro region remains vulnerable to shocks as it emerges from the sovereign debt crisis. The sell-off comes after minutes of the Federal Reserve latest meeting showed yesterday some policy makers were concerned investors may be growing too complacent. The value of global equities climbed to a record $66 trillion last week, data compiled by Bloomberg show.

Photographer: Dimas Ardian/Bloomberg
One-month rupiah forwards added 0.2 percent as unofficial counts showed Jakarta… Read More
“The concern of an event like this is always determining whether it’s occurring in isolation or whether it’s the first domino,” said Lawrence Creatura, a fund manager at Federated investors Inc. in Rochester, New York. His firm manages about $363.8 billion. “People will shoot first and ask questions later when news like this hits. It’s a classic flight to safety across the equity, commodities and bond markets. Portugal has been perceived as a weaker link so it’s not a particular surprise they’re encountering this kind of trouble now.”

Fewer Americans than forecast filed applications for unemployment benefits last week, a sign the labor market is strengthening, a government report showed today.

Peripheral Bonds

Portuguese bonds fell for a fourth day. The yield on 10-year Italian notes rose six basis points to 2.94 percent and Spain’s rate jumped six basis points to 2.82 percent. The Markit iTraxx Europe Senior Financial Index of credit-default swaps on 25 European banks and insurers rose two basis points to 71 basis points, the highest since June 4.

While Portugal’s central bank said Banco Espirito Santo SA, the nation’s second-largest lender, is protected after its parent missed debt payments, Moody’s Investors Service downgraded a company in the group citing a lack of transparency and links to other companies.

Banco Espirito Santo tumbled 17 percent before the Portuguese securities regulator said it stopped trading in the shares pending an announcement. Espirito Santo Financial Group SA, which owns 25 percent of the lender, fell 8.9 percent before the company suspended trading earlier in stocks and bonds, saying it’s “currently assessing the financial impact of its exposure” to Espirito Santo International, which has missed payments on short-term paper.

Fugro Tumbles

More than nine shares declined for every one that advanced in the Stoxx 600, with trading volumes 72 percent higher than the 30-day average, according to data compiled by Bloomberg. The gauge of banks tumbled 2.7 percent to the lowest since Dec. 18.

Banco Popular Espanol SA (POP) dropped 4.8 percent. The Spanish lender said it postponed a planned issue of the riskiest bank debt because of “heightened volatility” in credit markets.

Fugro NV (FUR) sank 20 percent, the most since November 2012, after the Dutch deepwater-oilfield surveyor forecast a drop in profit margin and writing off of as much as 350 million euros ($477 million). Skanska AB lost 2.5 percent after the Nordic region’s biggest construction company by global revenue said it will scale down operations in Latin America after booking 500 million kronor ($73.7 million) in project writedowns and restructuring costs.

Jobless Claims

The S&P 500 index (SPX) rebounded 0.5 percent yesterday following two days of losses.

Jobless claims declined by 11,000 to 304,000 in the week ended July 5, the fewest in more than a month, a Labor Department report showed today in Washington. The median forecast of 45 economists surveyed by Bloomberg called for 315,000.

Federal Reserve Bank of St. Louis President James Bullard said yesterday that a surprisingly fast decline in unemployment will fuel inflation and back the case for higher interest rates.

The Jakarta Composite Index added 1.4 percent to 5,095.20, heading for its highest close since May 2013. The rupiah gained 0.7 percent to 11,555 per dollar, according to prices from local banks, after touching the strongest level since May 22.

Both Widodo, known as Jokowi, and his opponent Prabowo Subianto claimed victory in yesterday’s presidential vote. Jokowi had about a five percentage point lead in the poll, according to unofficial counts from two survey companies that declared him the winner. Official results aren’t due for about two weeks. Bank Indonesia will probably hold its reference rate at 7.5 percent today, according to the median of 21 estimates from economists surveyed by Bloomberg.

The Hang Seng China Enterprises Index of mainland companies listed in Hong Kong advanced 0.3 percent, after losing 1.6 percent yesterday, its biggest decline in two weeks. The Shanghai Composite Index slipped less than 0.1 percent, extending yesterday’s 1.2 percent retreat.

China Exports

China’s overseas shipments fell short of the 10.4 percent expansion that was the median of 47 economists’ estimates compiled by Bloomberg. Imports grew by 5.5 percent in June, less than the 6 percent increase projected. The trade surplus fell to $31.6 billion for June, from $35.92 in May. Data yesterday showed producer prices fell last month at the slowest pace in more than two years.

“Extreme cautiousness towards China’s economy has receded overall, with the government showing signs it will step in to support growth when needed,” said Mari Oshidari, a Hong Kong-based strategist at Okasan Securities Group Inc.

West Texas Intermediate oil dropped to $102.01 a barrel. Gasoline inventories increased by 579,000 barrels last week as a measure of consumption slid, the Energy Information Administration said yesterday. Brent declined 0.2 percent to $108.10 a barrel, the ninth consecutive decline in the longest streak since May 2010. The crude closed at a two-month low yesterday amid signs that Libya, the holder of Africa’s largest crude reserves, will boost exports, while Iraqi production remains unaffected by an insurgency.

Treasury Sale

Gold for immediate delivery jumped to $1,342.23 an ounce, the highest since March 19. Palladium rose 0.3 percent to $876.25 an ounce, the 14th consecutive advance and the longest streak since June 2000. Cotton fell 0.4 percent to the lowest price since July 2012 on ample supplies.

The yield on 10-year Treasuries dropped five basis points to 2.50 percent. The rate on 30-year notes declined five basis points to 3.33 percent as the U.S. prepares to sell $13 billion of the debt.

Greece’s five-year note yield increased 11 basis points 4.33 percent. The government sold 1.5 billion euros of three-year notes via banks, priced to yield 3.5 percent. That’s higher than forecasts earlier this week for a rate of about 3 percent from HSBC Holdings Plc and Royal Bank of Scotland Group Plc.

The yen strengthened 0.3 percent to 101.36 per dollar and gained 0.3 percent to 138.31 per euro.

Australia’s dollar retreated from the highest in a week, falling against all of its 16 major counterparts after the nation’s jobless rate climbed. The Aussie weakened 0.4 percent at 93.74 U.S. cents.

Bill Gross : U.S. Still Faces Permanent Slump

When the Federal Reserve meets this week, the Wall Street Journal reports the most challenging question won’t be where to push interest rates in the near term, but where they belong years into the future. The WSJ indicates policy makers have believed the benchmark interest rate — known as the federal-funds rate — should be about 4% in a balanced economy, but officials are now debating whether interest rates need to remain below that threshold long after the economy returns to normal (i.e. once inflation is stable at 2% and unemployment around 5.5%).

Pimco, the world’s largest bond manager with close to $2 trillion in assets under management, believes the federal funds rate will remain well below the “neutral” policy rate of 4% once the economy returns to full health. The firm is predicting a “new neutral” rate of 2% (nominal), given the highly leveraged economy. In the video above, Pimco founder and CIO Bill Gross says the difference is “critical” as the neutral policy rate “basically determines the prices of all assets.”

He tells us the biggest investment theme for the next five years will be, “how far does the Fed go in terms of their tightening and their journey back up, as opposed to down,” as the central bank moves to get out of the business of buying treasury bonds and mortgage-backed securities, and begins to raise rates from near zero.

The head of the International Monetary Fund on Monday said the Fed should move rates up only gradually when it finally begins to lift borrowing costs, Reuters reports.

While tightening may be the next phase of the monetary policy story, what does Gross think about the impact of the Fed’s easy money policies and how successful they have been over the last five years — with rates held near zero and the balance sheet expanded by trillions of dollars?

 

He says, “so far, so good.” Gross credits the Fed for over five years of “beautiful deleveraging,” as hedge fund titan Ray Dalio calls it. Gross also sees success in other factors, including real economic growth of 2%, institutions being shored up, the stock market being close to record highs and employment growing at 200,000 a month. He says it remains a legitimate question what the central bank can do when it stops buying bonds and starts raising rates, though, conceding that things could get ugly.

And while 2% growth is less than stellar considering a historical norm of 3.5% to 4%, the lower growth is inline with what Pimco dubbed the “new normal” for the economy back in 2009. More recently, economists such as Larry Summers have advanced the idea that the U.S. may be facing secular stagnation — a permanent slump, with the economy hindered by structural issues such as demographics and the automation of jobs.

Related:  Has the U.S. Economy Entered a ‘Permanent Slump’?

In the video below, Gross says he agrees we are in a secular stagnation period and says it is difficult to get out of. He jokes that Summers “took our [new normal] idea and called it secular stagnation,” adding, “come on, Larry … give Pimco some credit!” Check out the bonus video for more.

 

 

 

Goldman on High Frequency Trading

There’s only one bank that’s come out publicly against high frequency trading, and that’s Goldman Sachs.

It’s not an easy thing to do. Banks work with high frequency trading firms to execute orders, they also have their own dark pools — private, anonymous exchanges that have become a part of the new market ecosystem synonymous with HFT. Goldman’s dark pool is called Sigma X.

So why would a bank take on HFT?

Because Goldman bank believes it’s hurting their equities trading business, which has been on the decline for some time now. And as the WSJ’s Justin Baer and Scott Patterson point out, the bank would rather have a healthy stock trading business that can make it billions of dollars than a dark pool that only brings in hundreds of millions of dollars.

Thursday morning’s first quarter earnings numbers say it all. Goldman is losing stock trading share to its rivals. In Q1 2014, the bank made $416 million trading equities for clients. That’s down 49% from the same time in 2013 when the bank made $809 million.

In 2013, a year when the price of stocks exploded, Goldman’s client stock trading revenue fell from $3.2 billion in 2012 to $2.6 billion.

Arch rival Morgan Stanley, on the other hand, has seen it’s equity sales and trading rise 16% over the last year, and 24% over the last quarter.

Obviously for the biggest baddest bank on Wall Street, this is worrisome. The bank is not only losing market share in equity sales, but also its dark pool has lost its share of the market as rivals from Barclays, Deutsche Bank and Morgan Stanley have entered the market.

So once big institutional clients — the mutual funds and hedge funds that HFT firms love to pick off when they notice the institutionals’ big block trades in the market — started complaining about HFT, Goldman knew it was time to change their strategy.

Patterson and Baer reported that at a meeting in London several weeks ago, Goldman’s institutional clients voiced concerns that are now familiar thanks to Michael Lewis’ book, ‘Flash Boys‘.  They said that they felt HFT firms were given an unfair advantage and that the market was too opaque, complicated and dangerous.

That’s when Goldman started sending around internal memos asking for commentary on market structure, and COO Gary Cohn wrote the anti-HFT op-ed that shocked people across the Street.

In the op-ed, he mentions one more issue that has Goldman worried about HFT. The bank is known for having some of the best technology in finance, but last August a glitch in its software sent erroneous quotes into the market and cost the bank $100 million. And Goldman doesn’t lose $100 million.

From Cohn’s op-ed:

The economic model of the exchanges, as shaped by regulation, is oriented around market volume. Volume generates price discovery and liquidity, which are clearly beneficial. But the industry must recognize how certain activities related to volume can place stress on a market infrastructure ill-equipped to deal with it.

In other words, exchange software is now so complicated that it is not something a firm can do as a side show — it has to be the main event. 

Read more: http://www.businessinsider.com/why-goldman-sachs-2014-4#ixzz2zFx4Mt9a

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