Here’s the news of the week – and how we see it here at McAlvany Wealth Management:

Bond Markets Vote “No” to Greek Deal

In a stunning turn of events, all but a few Syriza officials in Greece appear ready to cast a “yes” vote tomorrow for a €53.5 billion/three-year bailout proposal. The deal includes austerity measures that the officials feel creditors will accept on Sunday. Why the change of heart? Greek banks are bleeding cash and may run dry as soon as Sunday. That, combined with an obvious standard-of-living reduction among its citizens, has authorities in a bit of a panic. Of course, another loan won’t fix anything. In my opinion, Greece should be vying for humanitarian aid instead of saddling itself with another series of loans. Greek officials simply debated too long while what little they had in reserve evaporated. Anyway, I suppose we’ll see a deal made this weekend, but it’s pretty clear the financial markets do not approve. For anyone paying attention, German and French bonds were clubbed pretty hard overnight just after the deal was announced. They sustained losses that far outpaced any gains seen in PIIGS debt the same day. I suspect that this is the market telling us that this won’t be the last time one of the PIIGS draws on the German banks for aid. So the Germans have much to consider before setting a precedent with the Greeks that could cost them dearly down the road.

MWM-15-7-10Equities everywhere bounced rather nicely on the prospects for the deal, especially in China where extreme sell-side trading restrictions saw stocks up more than 6% on any given day. Since mid-June, about $3.0 trillion, or 30.0% of China’s market cap, has gone up in smoke – and that’s while the PBoC has been pumping record amounts of QE into its markets. It just goes to show that when you allow investors to run with a 5-to-1 leverage ratio in the marketplace for too long, containing prices in the fallout can be a near impossibility. In any case, I thought it worth mentioning; it’s a chink in the armor of central bank supremacy that I believe US investors will be faced with sooner rather than later.

Away from all that, the precious metals continued to suffer – though mildly – on a marginally stronger dollar and the belief that a second-half recovery/rate hike (as Yellen confirmed today) was in the offing. With all that is happening at the moment, I can’t understand why anyone would continue to believe that the Fed will follow through with its dreams and tighten. Next Tuesday we’ll see if the US retail sales data changes that perception. Early reports say that consumers were “out in force” in June, but that was because of severe discounting. It will be interesting to see if bulls choose to recognize the latter element of that news. If they do, the precious metals may begin to see a reversal that has the potential to last a while.

Best Regards,

David Burgess
VP Investment Management