'Uncharted waters' for Greece...
'Uncharted waters' for Greece... The latest on the crisis... What it could mean for your money... What about European stocks?... One thing we are worried about...
Greek Prime Minister Alexis Tsipras broke off talks late Friday night... and set off a chain of events that sent markets plunging this morning...
Following the latest round of failed negotiations with creditors and European Union (EU) officials, Tsipras unexpectedly declared a July 5 "referendum" on the EU's latest offer. In other words, the Greek people will be asked to vote on whether to accept the terms of the latest bailout this weekend.
Unfortunately, there were some problems with this plan...
First, Greece has some large hurdles to clear before July 5. From an article in the Wall Street Journal...
The Greek government's decision to call a vote on measures its creditors demand in return for more bailout aid has cast the country into uncharted waters. As of Tuesday, Greece will be cut loose from international rescue loans for the first time in more than five years. It will also default on the 1.55 billion euro ($1.73 billion) IMF payment, whose deadline is the same day.
Many economists and officials fear that without further financial support, Greece may have to abandon the euro, sparking a messy departure from the bloc.
Second, it's not at all clear what the referendum will mean for Greece. More from the Journal...
A "no" vote in next Sunday's referendum would be treated by much of Europe as the end of the five-year effort to save Greece from bankruptcy and euro exit. Even a "yes" result wouldn't necessarily save the Greek bailout, because officials in Germany and elsewhere don't trust the Tsipras government to implement a set of austerity measures and economic overhauls Syriza opposes.
"If Greeks vote for 'yes,' then the government will most likely have to resign, and the country will either have elections or a coalition government," said Ilias Nikolakopoulos, a political-science professor at Athens University. "If the outcome is a 'no,' it is very hard to predict what is going to happen" to Greece or Mr. Tsipras, he said.
The Greek government also announced that the country's stock market and banks would remain closed until Monday, July 6. The government also instituted "capital controls," including a strict 60 euro per day limit on ATM withdrawals for all Greek citizens (more on this later).
Markets around the world sold off following the news this weekend. The benchmark Euro STOXX 600 Index closed down 2.7% today, while here in the U.S., the S&P 500 fell nearly 2%. Stocks didn't trade in Greece due to the market closure, but the FTSE Greek 20 Fund (GREK) plunged more than 20% in U.S. trading.
We've discussed the likely conclusions of this crisis many times. But given the frightening headlines today, we know many new readers are concerned. So we asked Stansberry Research Editor in Chief Brian Hunt for his stance on the situation...
We believe the Greece situation will likely be resolved by Greece remaining in the eurozone. Despite any bluster you read in the newspapers, European politicians desperately want to keep the eurozone intact. It's a union they've spent decades building.
Although the Greek economy is a relatively small part of this union (it makes up less than 2%), a Greek exit would be a damning indictment of its structure and policies.
A member leaving would be a big "PR" disaster, as well as a likely financial disaster. The alternative to working together and finding a way to keep Greece in the club is a financial crisis that will harm every eurozone member. Having said this, we can't know the future. Crazy things happen in the market from time to time. Greece and the rest of Europe could let their disagreement lead to disaster.
In this scenario, world stock markets would likely decline and central banks would respond with giant monetary stimulus. They would pull out the stimulus bazooka. This would set the stage for more gains in stocks. But it would also push the world a little farther down the road to monetary disaster. In other words, stay long stocks, but have your stop losses in place. And make sure to own plenty of gold, which as we've described many times, is your ultimate form of insurance against monetary accidents.
Brian also has an update for investors in European stocks in particular...
Regular Digest readers know we've been bullish on Europe. As we've discussed several times, the European Central Bank (ECB) – led by Mario Draghi – appears determined to engineer its own version of the "Bernanke Asset Bubble" in Europe.
Despite the negative headlines from Greece, that plan has not changed. As Brian and co-editor Ben Morris explained in this morning's issue of DailyWealth Trader...
Even with today's drop, the trend in European stocks is up.
The Greece issue does not change our bullish thesis on European stocks. It's just noise in the bigger picture...
The ECB has promised to do "whatever it takes" to improve the economy. Right now, it's lending money at low interest rates and printing massive amounts of cash to buy government bonds.
Similar policies in the U.S. resulted in a stock market boom, higher home prices, and employment growth... And European politicians are hoping for the same.
But as they explained, even if Greece ultimately leaves the eurozone, it's unlikely to have a long-term effect on stocks...
We don't expect this would have a lasting impact on European stocks. Germany's economy, which accounts for 20% of the European Union, is on much more stable footing than Greece's. The economies of the U.K. (which makes up 16% of the European Union) and France (15%) are in far better shape, too.
As with any trade, we have to be prepared for the worst-case scenario. That's why we have stop losses in place in case we are wrong. However, we doubt these stops will be hit. The politicians will find a way to keep things together. It will involve more actions that, in the end, will provide monetary stimulus and send European stocks higher...
We're not alone in thinking fears are likely overblown...
According to a report from financial news site MarketWatch, the risk of "contagion" to other countries and markets is no longer what it was during the early rounds of the crisis in 2011 and 2012...
As of March, Greece's outstanding debt stood at 312.7 billion euros ($349.6 billion). Of that, 231.2 billion euros is in the form of loans, with 205 billion euros belonging to the institutions, or the "official" sector (as opposed to the private sector). The institutions include the International Monetary Fund, the eurozone's European Financial Stability Facility and bilateral loans from eurozone countries.
The fact that so much of Greece's debt is seen in the hands of official creditors is one reason analysts say investors have remained relatively sanguine throughout the latest chapter of the drama.
"The private sector has almost no direct exposure to Greece anymore," wrote strategists at J.P. Morgan Cazenove, [in a] note urging clients to get back into German stocks.
While we believe markets are likely to weather either eventual outcome of the Greek crisis, there was one weekend development we found worrisome. From Bloomberg...
Greece shut its banks and imposed capital controls in an announcement designed to avert the collapse of its financial system, heightening the risk it will be forced out of the euro. European stocks and Greek bonds tumbled.
The measures, which were announced in the dead of night, limit daily cash withdrawals to 60 euros ($66) and ban payments and transfers abroad. The stock market and banks will be closed at least until July 6, the day after Greeks will vote in a referendum on proposals needed to restore bailout aid.
Broke and desperate governments will resort to all kinds of extreme measures to save themselves, and capital controls are some of their favorites.
Longtime readers may remember the government of Cyprus used capital controls most recently when it was on the verge of bankruptcy in 2013.
These measures can be devastating for citizens who don't see them coming, and for those dependent on fixed incomes and pensions. Fortunately for most Greeks, the "writing has been on the wall" for several months or more...
"With Greece, a lot of money has already left the country and they're sort of shutting the gate after the horse has left the barn," Michael Klein, a professor of international economic affairs at Tufts University's Fletcher School, said from Dallas prior to Greece's announcement.
Still the photos of senior citizens lined up at Greek ATMs to withdrawal their daily limit of 60 euros were disturbing to see... and according to our friend Bill Bonner, it's something every American needs to be paying attention to...
As you may know, Bill is the founder of Agora, our parent company, and a personal mentor to Stansberry Research founder Porter Stansberry. And as we mentioned last week, Bill's latest research is concerning...
In short, Bill believes a similar scenario could occur right here in the United States. But unlike the Greeks, the average American would be completely unprepared.
If you're like most folks, you've probably never considered this situation. Bill himself admits this sounds crazy... But the facts he has uncovered surprised even him.
What would you do if banks were closed? What if you could only remove $66 per day from the ATM – if it even worked at all? If you can't answer these questions, we urge you to check out Bill's research now. You can access his free presentation right here.
New 52-week highs (as of 6/26/15): Allied World Assurance (AWH) and Dollar General (DG).
In the mailbag, a subscriber chimes in with his thoughts on Friday's update to the ETF portfolio Porter introduced in 2014. Send your questions and comments to feedback@stansberryresearch.com.
"Thank you for evaluating your ETF recommendations. I reflected on my own portfolio and noticed that I too was overweight on commodities. I will transfer those funds into insurance stocks and that will cut down considerably on volatility. Your willingness to make an honest evaluation of your recommendations is a major reason I continue to read your newsletters." – Paid-up subscriber Bill Huitt
Regards,
Justin Brill
Baltimore, Maryland
June 29, 2015
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