Greece Defaults... Here's What's Next

Today’s Pfennigfor your thoughts…

Good day, and a wonderful Wednesday to you!

Well, the deed was done yesterday, Greece, defaulted on their loan payments due to the IMF.  I have to think the IMF is kicking themselves right now for bundling all those payments due during the month of June into one large payment due at the end of the month!

Well, Greece did attempt to get the eurozone leaders to accept their plea for a last minute funding of their loan payments, so they didn’t have to live with the stigma of “a default country”, but the eurozone leaders turned a deaf ear to the pleas.  And today, Greece joins the list of countries that have defaulted on loans through history.

The problem as I see it, is that this is NOW, and the world has to deal with this NOW.

So, the euro, continues to bounce between 1.11 and 1.12, although it did venture down to 1.1070 overnight, but then there were rumors going around that someone’s underground, no wait! The rumors going around are that Greece has finally signed off on all the creditors’ demands, and sent a letter overnight to Brussels.

That rumor brought the euro back above 1.11, but it’s about midday there now, and those “overnight letters” should have been delivered by now.

There was a new poll/survey taken in Greece regarding how voters would vote on the referendum this Sunday, and the result was not good. 46% intend to vote no, 37% intend to vote yes, and the remainder is uncommitted, or they just thought it wasn’t anyone’s business how they intended to vote.

That’s what I would tell someone that came to my door and asked me. That’s why we have individual booths to vote in, so no one can see who you voted for!

So, I ran through the decisions outcomes on the vote yesterday, and you can see from the pool results that it looks like things could get ugly.

But I’m so confused, doing my best Vinnie Barbarino face and voice. Has anyone stopped to ask this question?  If the referendum determines if Greek leaders go ahead and accept austerity to get the loans, or don’t, then what’s up with the rumored “letter”?

Is this one of those things that Greece is trying to pull the wool over creditors’ eyes, and say they’ll accept austerity, get the loan, make the payment to the IMF, so that they’re no longer in “arrears”, and then when the referendum says “no”, they back off and say the Greek people have spoken, and they won’t be adhering to the creditors’ demands? Or is the “letter” just a rumor? I sure hope it’s the latter.

Other than Greece, the U.K., Norway and Sweden printed PMI’s (manufacturing indexes) this morning, and they all three came in weaker than expected, and thus the three respective currencies are getting sold. For those of you keeping score at home, the U.K.”s index number was 51.4 VS 52.5 expected, Norway’s was 44 VS 48 expected, and Sweden’s was 52.8 VS 55.2 expected.

Of these three, I’m really concerned with Norway’s print. Many years ago, I shared with readers that were with me then, that if a country prints two consecutive months of PMI’s below 45, then they are in a recession.

In fact, the dollar seems to be on top of most of the currencies today, including the Chinese renminbi, and Russian ruble. The Indian rupee, New Zealand dollar/kiwi, and Mexican peso have carved out some gains vs. the dollar, while the Aussie dollar (A$) and Canadian dollar are pretty flat vs. the green/peachback.

Gold is flat this morning, after seeing another selloff yesterday. I might as well just get used to saying that every day going forward, because if gold can’t get wind in its sails with what’s going on in the world right now, when will it?

I told you last month, that friend Jim Powell, said recently that gold would remain stuck until either inflation began to take off, or a Black Swan event occurred.  Would a country like Greece, defaulting, constitute a Black Swan event?

Apparently not.

But could this be like the hole in the dam? And soon other leaks around the world will being to spring?  I wonder about the derivatives out there, you know those that insure against a default? Something for us all to keep an eye on, as we go into the 4th of July weekend!

I told you above that the A$ was flat this morning. Aussie May Building approvals gained 2.4% vs. 1.2% expected. More important to the A$ will be the print tonight, when May’s trade figures will print.

You may recall that April’s trade deficit has soared to 3.9 billion A$’s (a record level no doubt!), but most economists believe that May’s deficit will be much lower than April’s, and that would be a good and bad thing. Good that it is lower, bad, if it has deteriorated so much that it shows domestic demand as weak.

Well, the U.S. data cupboard yesterday had a couple of surprises for us. First, consumer confidence soared higher the month of June from 94.6 last month to 101.4. WOW!

Let’s just forget that we have over $18 Trillion of current debt, over $200 Trillion of Unfunded Liabilities (according to professor Lawrence Kotlikoff) and no idea as to how we’ll ever be able to pay for the Unfunded Liabilities; our economy, per Final Sales, hasn’t grown at more than 1% per year since 2007; the economy is so bad, the Fed, who was supposed to be raising interest rates in March, then June, and now are still at near zero; and real unemployment is 23%, according to John Williams at shadowstats.com.

Go figure, eh?

The other data yesterday, was the S&P/CaseShiller Home Price Index (HPI)  which grew in April vs. March, but not as strongly as was expected, and March was revised downward. Hmmm. That’s interesting, not alarming, just yet, just interesting, don’t you think?

Oh, and two regionals, Milwaukee and Chicago (you would think they would be just one, but so be it) ISM or PMI (same things) Indexes and both printed below 50. Taken with the Philly Fed, and the Empire State PMI’s one would think that the National ISM which will print today at 9:00 am CT, would show a weaker index number.

But guess what?

The experts have the consensus increasing from 49.5 to 51. So, we’ll see, but that would make no sense, would it? Not to me. You add up all the regionals, and they point to a weaker ISM, and instead it prints stronger? Somebody give me a sucker, I need to settle down, before I throw a temper tantrum!

Well, I’ve talked about China and gold for a long time now. There are tons of Pfennigs that have talked about Chinese accumulation of gold, what they will use it for, their new silk road gold fund, and all the other things connected to gold and China.

I get most of that stuff from gold researcher, Koos Jansen of www.bullionstar.com  where you can find his reports, in English, I must add, on Chinese gold. His latest report details a meeting held on May 22nd regarding what was called: “One Belt And One Road” Conference, that had taken place with any organization that had anything to do with gold in attendance.

The theme of the conference basically centered around the representatives from gold and financial institutions talking freely about bringing gold’s superiority into full play, seizing the historic and strategic opportunity of the “One Belt, And One Road.”

If you would like to read the article you can click here, for I think you’ll see that China means business with regards to Gold. So go ahead and click here.

Before I head to the big finish this morning, I wanted to share something with you from the book by Bernard Dozier, titled Waling In the Light:

We sometimes find ourselves in environments where we are the stranger, the “new kid on the block”. As much as we’d like to be accepted into established clusters of friends, it isn’t always easy. In some cases, other have pre-conceptions of the kind of person we are, and those pre-conceptions can be hard to change. No matter how hard we try to be accepted, this little couplet often seem to apply: Try as we may, they’ll think the say way. Try as we will, they think the same way still.

Well, I was sitting in the Big Boss’ office on Monday talking to Frank Trotter, about stuff and the subject of Puerto Rico came up. I had not been following this, and Frank told me to look into it. And, well, looking into it, I wondered why hadn’t I heard of this, and where the hell is the media on this?

Puerto Rico is sitting on $72 billion of debt that it can’t repay. I know, I know, you’re thinking “what’s the big deal? The Fed can print up $72 Billion for Puerto Rico in a heartbeat, and no one gets hurt, right?

Well, not so fast there. Did you know that U.S. giant insurers of debt, MBI, Assured Guaranty, and AMBAC have on their books a good amount of this debt?  MBI guarantees $4.5 billion in Puerto Rico muni-bonds, and if Puerto Rico defaulted, that would wipe out MBI’s net worth…

Well, here’s a couple of snippets from an article on CBSnews.com  that you can read here:

But this story isn’t just about MBI.  It’s about the companies that, along with MBIA, provide “insurance” for bonds and derivatives.  These firms have assumed potential liabilities that dwarf their ability to cover them.  Not just in the worst case scenario.  I believe Puerto Rico’s financial demise could trigger the dreaded financial nuclear daisy chain of counterparty defaults.

The problem with creating “actuarial” payout models for insurance guarantees on financial assets, and this especially true for derivatives, is that the outcome is pretty much binomial.  Either the assets pay off or they become worthless or near worthless.  Furthermore, with the extreme degree of Central Bank intervention, which has enabled literal financial zombies to continue living and has enveloped the entire financial system with opacity, it’s impossible to model in expectations on, and potential sources of, counterparty default risk.  It’s like lightening.  It can unexpectedly strike anywhere – just ask Hank Paulson and Goldman Sachs.

This is exactly what occurred in 2008.  Only this time around the problem is significantly greater than it was in 2008.  Global debt and gross derivatives outstanding are much bigger than in 2008.   And, except for the Plan B hyperinflation of the money supply, Central Banks are out of bullets.

Chuck again. Oh no reason to believe that this isn’t going to cause a problem in the markets, eh?

I have to say that I was really intrigued by the thought that Puerto Rico could cause major problems for companies here.  But’s it’s all there. And potentially this is not a good thing.

That’s it for today…

Regards,

Chuck Butler
for The Daily Reckoning

P.S. The Daily Pfennig is first published everyday, right here.

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