Tags: Greece | Greece | Fiona Frick | ECB | Bill Gross

Grexit: What, Me Worry?; Gross Asks How Fed Would Handle Liquidity Panic

By    |   Wednesday, 01 July 2015 07:20 AM

As traders decide how to position themselves in case there are fireworks in financial markets, USA Today summed up the situation in Greece with a cartoon depicting a stuffy IMF official telling Greece: “We think the way you handle the billions we keep giving you is irresponsible.”

In the first clip, Fiona Frick, CEO of Unigestion, predicts greater volatility but joins those money managers who discount systemic risk arising from the latest Greek debt crisis, because since 2011 the authorities, thanks in large part to the ECB, have gotten it under control, and, “Banks have been immunized a little more than they were in 2011.” Thus her firm is still positioned with risk and “overweight equity in all the portfolios.” So the main fear appears to be Fear of Missing Out (FOMO) in a market that is sponsored by the global treasuries and central banks. This writer would add that from a trader’s perspective, volatility is a good thing. Also, a Senate subcommittee recently held a hearing on Greece without touching in any meaningful way on the implications of measures devised by bank lawyers to “immunize” TBTF banks.

Next, University of Chicago Prof. Luigi Zingales, author of Saving Capitalism, makes the case for European junk bonds and the risk they entail because, “I don’t see a lot of default, with the economy picking up, I don’t see a massive rise in default, I don’t see a refinancing problem, so it’s a risk I’m more willing to bear.” The interviewer asked whether Zingales is not worried that action by the Fed to raise interest rates could have an adverse effect on bonds, as Chair Yellen has already warned that, in the interviewer’s words, “Your high-yield portfolio is gonna get bashed up.” Zingales responded that this risk is “higher in the States than here” (“here” meaning Europe, where powerful QE is still in effect). Another panelist asked whether a high-yield strategy isn’t really a play on oil, and Zingales readily agreed. This writer would note that Prof. Zingales is a hot academic in the U.S., where he has been tapped to head an in-house think tank and an obscure agency called the PCAOB, created by the Sarbanes-Oxley Act of 2002 as a diversion from the dot-bomb scandals associated with Enron and WorldCom.

Finally, Bill Gross, now a portfolio manager with Janus, was asked by CNBC’s Tyler Mathisen, who admitted he is “no Talmudic scholar of the Fed,” whether Gross sees anything new in recent comments by Fed Vice Chairman Stanley Fischer about the timing of a rate hike. Gross responded that there is nothing new, but he still expects the Fed to raise rates once this year “because they simply have to get off of the zero dime, and they need to show that the economy in the U.S. and elsewhere can exist and prosper with interest rates that are non-zero.”

Gross stressed that rate increases will be “very gradual.” However, he expressed concern about liquidity in financial markets and possible legal constraints on a Fed response. He recalled that during the 2008 episode, “The Fed provided liquidity as the buyer of last resort, but now the Fed is in a more limited position. They’re not able to address the situation like they have in the past, certain regulations and rulings by the Justice Department, in terms of AIG and otherwise, suggest that the Fed will not be the same significant player in the future. The market is depending upon itself for liquidity, and I wonder whether, during a panic situation, whether it’s China, whether it’s Greece, or a butterfly flapping its wings, whether or not liquidity will be sufficient.” This writer holds a contrary view, that a rate hike, if and when it occurs, may not be smooth, but if there is a panic, the Fed will intervene aggressively once again to redeem the Yellen put.

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Robert-Feinberg
As traders decide how to position themselves in case there are fireworks in financial markets, USA Today yesterday summed up the situation in Greece with a cartoon depicting a stuffy IMF official telling Greece: "We think the way you handle the billions we keep giving you is irresponsible."
Greece, Fiona Frick, ECB, Bill Gross
646
2015-20-01
Wednesday, 01 July 2015 07:20 AM
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