Grexit is averted (for now).

* No Grexit …
* Dollar heads higher on Yellen comments.
* Chinese exports pick up…
* Gold slips on mood change…

And Now. Today’s A Pfennig For Your Thoughts.

Chuck and his family finally got some sun down at the lake this weekend. He will be making his way back north today, so I’ve got the conn for another morning, with a little help from Frank Trotter who will get things started with a report from the western edge of our continent:

Sunday, July 13th – Portland, Oregon. After dinner tonight we walked past a a square here in downtown Portland. It looked like a band setting up for a great event. A DJ was spinning tunes and a crowd was gathering. We stopped at the gate and asked who was playing. The greeter said “right now it’s a DJ and a band is coming up. This is a celebration of a sustainable economy not run under the yoke of capitalism.” We allowed the party to continue without us.

Coming over the pass in the Cascades this afternoon we drove past vast fields of lava. It’s not an everyday occurrence for a simple kid from Saint Louis. Apparently this flow was about 1,800 years old; not really all that long ago in geological time. Combining that with the story of the formation of the Columbia River Gorge on Friday gave me a lot to study up on and try to understand. Monday morning as you read this we’ll be jumping on a flight following the return of the Lewis and Clark expedition to Saint Louis. We’ll be happy to be at 35,000 feet and not barefoot and starving in the Bitterroots but we still appreciate the unbelievable effort of the expedition. I’ve read both the journals and a few historical reviews of the endeavor and the fortitude of the explorers never ceases to amaze me.

A glance at the news feeds shows not much has changed over the weekend in Greece or China. Germany insists that Greece set a course to repay it’s obligations – what a concept, and China disappears from the front page. I’m not convinced this is the end, but rather the beginning of an ongoing back and forth that could fade into a hotter news week, or loom larger at any minute. Watch the for updates.

Things can change in a few hours, and Frank couldn’t have known that when he posted his ‘Pfennig Pfodder’ late last night negotiations were still going on in Brussels. This morning we learned that the European creditors had agreed to keep Greece in the euro and to extend an 85 billion euro bailout to the near-bankrupt country. “The agreement was laborious, but it has concluded. There is no Grexit,” European Commission President Jean-Claude Juncker told a news conference after 17 hours of bargaining. From a quick read of the news wires, it appears that Greek Prime Minister Tsipras and his leftist government emerged from the negotiations with almost nothing to show for their dramatic posturing. Well nothing except a country which now needs one and one half times more emergency money than when he started the negotiations. It will be interesting to see what happens to his government now that he must force several unpopular reforms through parliament including: a value added¬† tax, pension reforms, automatic budget cuts if Greece misses fiscal targets, and an EU banking law that could be used to make big depositors take losses if/when the banks get in trouble.

Speaking of the Greek banks, they remain closed today as Tsipras and the Euro zone leaders work on figuring out a bridge loan in order to get the banks back open. So as you can see, the negotiations are clearly not over, and Greece is not out of trouble. In fact, they are in much worse shape than a few months ago when Tsipras and his Syriza party came to power on a promise to end austerity in Greece. He promised to get the debt restructured, to end the strangulation of austerity measures, and to claim more dependence for the Greek people. Instead the Greek people have MORE debt, MORE austerity, and LESS independence. Again, I think Tsipras is going to have a tough time selling this to his constituents but he really didn’t have any choice. In the words of Greece’s Reform Minister George Katrougalos, “Either we are going to accept these draconian measures or it is the sudden death of our economy through the continuation of the closure of the banks. So it is an agreement
that is practically forced upon us.”

I take two important lessons from this Greek tragedy – First, power lies with those that own the debt. Liquidity matters, and countries need a reliable source of funding either from internal or external sources. In Greece’s case, they were dependent on external funding of their continuing deficits, and therefore they were forced to dance at the pipers tune (I think the quote is actually “Who pays the piper calls the tune.”).

The second lesson I took from the Greek crisis is that there is eventually going to be a day of reckoning, and typically the longer you try push this day off the worse the consequences become. I’ve read a lot of the rhetoric used by Tsipras and his party to come into power – that the big bad creditors were ‘choking’ their country and that he would make sure they were able to negotiate a ‘better deal’. Well in the course of negotiations Tsipras was able to make sure Greece’s credit was downgraded, more debt was accumulated, and the country was brought to an absolute standstill for a couple of weeks. Ireland and Portugal were both subjected to some pretty harsh austerity measures as a result of the financial crisis, but each took their ‘medicine’ and are now in much better fiscal positions because of it.

We will have to see if our leaders here in the US have taken note of what is happening over in Greece – maybe they can use some of what they have learned to figure out how to deal with Puerto Rico.

The euro was up a bit just after the announcement but dropped back as currency traders locked in some of its gains from the past few days. Looking at the trading screens this morning I see the dollar is heading higher vs. all but the pound sterling. I guess Janet Yellen’s comments on Friday have helped push it up. Yellen said she is still expecting a 2015 interest rate increase – in spite of the global uncertainty. With a ‘pause’ in the Greek drama and Chinese stock market settling down traders are again focusing on the interest rate expectations which favor the US$.

Chinese export sales unexpectedly rose for the first time in four months in June which buoyed hopes that the Chinese economy could be picking back up. Chinese exports increased 2.8% last month from a year earlier, beating forecasts of a .2% decline. Imports fell for an eight consecutive month, but the fall was less than expected and the smallest this year. Overall domestic demand seems to be improving in China which is good news for the global economy. Investor confidence is still shaky, as the stock market rout and several macro events have led to questions on the overall global economic recovery.

Gold slipped almost 1 percent in early trading as the US$ began rising again. Yellen’s comments along with successful negotiations in Europe have investors focusing on another rate increase here in the US this year which put pressure on the precious metals markets. We had seen some safe haven buying (albeit not as much as we expected) during the Chinese stock market sell off and the Greek debt drama and those flows are now reversing. But in reading over the news wires it looks like the main driver of the price of gold this morning is the expectation that US interest rates are back on course for a 2015 increase.

To recap, no Grexit in Europe as Greek negotiators give in to the demands of the creditors – ‘he who owns the gold, makes the rules.’ The dollar rallied mostly on comments from Fed Chair Janet Yellen on Friday which suggested she is still ready to raise rates in the US sometime this year. Chinese trade data suggest the Chinese economy may be healing, and gold slipped as the dollar rallied and traders looked at the possibility of a 2015 rate increase.

Currencies today 7/13/15. American Style: A$ .7425, kiwi .6706, C$ .7859, euro 1.1045, sterling 1.5524, Swiss $1.0548 . European Style: rand 12.4792, krone 8.0520, SEK 8.4910, forint 281.02, zloty 3.7511, koruna 24.505, RUB 56.6815, yen 123.37, sing 1.3540, HKD 7.7520, INR 63.532, China 6.1133, pesos 15.733, BRL 3.1715, Dollar Index 96.507, Oil $51.81, 10-year 2.44%, Silver $15.50, Platinum $1,026.25, Palladium $658.25, and Gold. $1,155.24

That’s it for today. The summer came back in force this weekend with temperatures hitting the 90’s. The humidity was high with all of the rain making things even more uncomfortable. But it was great weather for ‘slide the city’ which is a 1,000′ waterslide which was in St. Louis this weekend. I competed in a triathlon along with Alex Butler yesterday morning – Alex ended up on the podium, placing 3rd in his age division. He also beat my time by a little over a minute, but I told him he has to spot me a minute for every decade which means I get 3 minutes on the next race! I’ve got to get this out the door so I can start the week. I hope you all have a Marvelous Monday and a great week.

Chris Gaffney, CFA
EverBank World Markets