Friday, June 19, 2015 [Money and Markets] By Mike Larson
“Market players have literally had years to prepare for a
Greek default.” When the money dries up, it’s “Game Over.” And that’s what
Greece is facing now that bank runs are accelerating rapidly!
Consumer and business depositors have reportedly yanked 1.85
billion euros from the Greek banking system in just the last two days. That’s
more than 115 million euros PER HOUR, assuming two eight-business-hour days.
More than 2% of all the private money held in Greek banks
has now vanished in just the last week. The only thing standing between banks
and insolvency is the European Central Bank, which is providing them with emergency
liquidity assistance (ELA) since they can’t raise money in the private capital
markets.
Unfortunately, their needs are rising at an ever-increasing
rate. Case in point: The ECB just raised its ELA limit by 1.1 billion euros on
Wednesday. But because so much money fled the banking system, it had to raise
that limit again today (though by less than the 3 billion euros Greece
requested).
The ECB is standing between Greece and insolvency.
If we’ve learned anything from this whole sorry process,
it’s that policymakers will obfuscate, clam up, or outright lie about what
they’re doing or saying behind closed doors just to keep people calmer than
they would otherwise be. But that wall of silence is now breaking down.
Reports emerged yesterday that European officials are openly
wondering whether Greek banks can open their doors on Monday. Capital controls
– such as strict withdrawal limits – may be required within days, just as they
were in Cyprus when that country’s banking system collapsed.
Despite all of that, Greek Prime Minister Alexis Tsipras is
still spouting happy talk. He said today that he’s optimistic euro-zone
officials will cut him a deal when they meet for an emergency summit Monday.
The summit precedes by a few days the expiration of Greece’s 245 billion euro
bailout program on June 30, and a required 1.54 billion euro payment due to the
International Monetary Fund.
Me? I wonder what he’s been smoking! It seems like the
Greeks have badly overplayed their hand, not realizing that Europe is fed up at
this point. They seem much more ready to just cut Greece loose, come what may
in the markets or the economy. That’s because private banks, hedge funds, and
other market players have literally had years to prepare for a Greek default.
My recommended course of action remains the same: Take some
profits. Maintain a healthy cash cushion. Avoid long-term government bonds. Then
focus on stocks and sectors that have already been beaten down dramatically,
like energy. They are so cheap they have some insurance against further
Greece-driven declines. Pair those with other stocks that are the “cream of the
crop” in strong sectors, from aerospace to consumer non-durables to health
care.
Then buckle up and see what happens over the weekend and
early Monday – and stay tuned here for the latest guidance on what to do next! While
we all wait, let me know what you think about the Greek bank run. Are
depositors going to be lined up 100 deep on Monday at ATMs around the country
before long? Or will Greece manage to wrangle a last minute deal out of Europe
and the IMF? What kind of spill over impact will we see here in U.S. markets?
What steps are you taking to prepare yourself, if any? Hit up the website
and let me know ASAP.
Our Readers Speak
The Greek situation is coming down to the wire, that’s for
sure. But the Fed’s actions this week also spurred a hefty amount of discussion
at the website.
Reader Frebon said rising rates would actually help the
economy by drawing global funds to our shore – money the politicians could then
spend! The comments: “If the Fed finally comes to their senses and lets rates
normalize, they wouldn’t have to worry about the national debt. Almost all the
money in the world would flow here seeking the higher rates, which would allow
the politicos to spend even more money — especially in an election year.
Inflation would rise well above the Fed’s target, which would have them raise
rates again and repeat the cycle.”
Reader Fred1 said not to read too much into short-term
market moves in the wake of “Fed days.” His take: “It seems the market always
goes up for a couple of days after the Fed utters their nonsense. I would not
put much into it. Besides, they are always looking at data that is from last
month, last quarter, last year, whatever. They look backward.”
Reader John noted the Fed is purposefully conducting “open
mouth” operations because it wants to avoid taking real actions. His view: “The
Fed is ‘talking’ a good fight – something smart Fed Chairs have done for a long
time. That is because getting any kind of result by ‘talking about it’ beats
actually taking actions, which often have the potential for unpleasant
consequences. So fighting the battle with words is eminently the more
intelligent way to go. And Yellen seems to be doing a good job of it – which IS
her job. “As far as inflation goes, that danger has been on the horizon for
some time. I don’t think anyone at the Fed fails to understand that the danger
of inflation has been shadowing monetary policy due to actions taken in response
to the financial crisis of 2008-09. A lot of people are in denial about the
danger of inflation because they claim that ‘they don’t see any’ looking at the
numbers.”
Lastly, Reader Chuck B. said the Fed’s easy money ultimately
will drive inflation higher here – but not as much as in the past due to global
wage competition. His opinion:
“The money the Fed has printed has been tied up in the
banks. But it’s slowly working its way into the economy, with resulting price
inflation. “However, it is doing so in the face of an economy that is hamstrung
by the decline in American production, due to the politicians forcing
production overseas with their harsh economic policies. That is why we are on
our way to second, or even third world status among nations.”
Good observations all around, and I appreciate you sharing
them. The Fed has definitely had less impact on the real economy with all its
pump-priming in this economic cycle. But given how much easy money it has
thrown at the system, the consequences of the eventual unwinding process are
likely to be much more severe than in the past. That’s why we should all expect
much more volatility going forward.
If you want to add more to the Fed discussion over the
weekend, here’s where you can do so.
Other Developments of the Day
[Bullet]Chinese stocks have been incredibly volatile over
the past several weeks, and this one was no exception. The Shanghai Composite
Index plunged more than 6% Friday alone, bringing its weekly loss to 13.3%. That
was the worst week for Chinese domestic shares since October 2008, the midst of
the global financial crisis. But the bubbleicious market has still more than
doubled in the past year.
Speaking of China, the country’s entry into the World Trade
Organization 14 years ago helped eliminate anywhere from 1 million to more than
2 million U.S. factory jobs. So say economists at the Federal Reserve, Yale
University, and MIT. Studies like these help show why the Trans-Pacific
Partnership votes are facing so much opposition from Democrats in Congress.
The IPO of fitness band company Fitbit (FIT) went well
yesterday, surged 52% from its sale price of $20. The deal allowed the company
to raise $732 million, making it the third-biggest initial share sale this
year. We’ll have to see how it faces up to competition from Apple and others
over the next couple of years.
Have you invested in any of the recent crop of IPOs? What do
you think of China’s market turmoil? Anything else I haven’t covered here that
has you ready to sound off? Then here’s the website link where you
can share your comments.
Until next time, Mike Larson
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Market RoundupDow-101.56 to 18,014.28S&P-11.53 to
2,109.71NASDAQ-15.95 to 5,11710-YR Yield-0.084 to 2.267%Gold-$1.40 to
$1,200.60Oil-$0.98 to $59.47
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