Greek ATMs, Liquidity Illusions and Doughnuts
I've been on vacation for the last two weeks and had no access to financial news because I turned my phone off. So I'm really just catching up; please bear with me. Let's see:
How's Greece doing?
I was fully prepared to come back to find no deal in Greece, with lots of angry posturing and talk of a referendum. So, check. But I always expect every status quo to continue forever, so I was not prepared for the crisis to have gotten a lot worse, with bank closures and capital controls. Neither was my usual editor Zara Kessler, who is now on her vacation in Greece, where the banks are closed and there is no way to get cash. So I assume that I will never see her again, it is comma splices and swear words from here on out, la la la la. (No, I kid, she brought cash, and anyway the withdrawal limits at Greek ATMs seem not to apply to tourists. But some honeymoons in Greece have allegedly been ruined.)
In other vacation news, Paul Krugman is blogging from "a bicycle trip in an undisclosed location." (He would vote for Grexit, if he had a vote.) If you're an American vacationing in a European country where the ATMs work, though, congratulations, you're rich; the euro is selling off. But Spanish bonds are doing just fine, suggesting that in 2015, unlike in 2012, no one is worried that a Greek exit from the euro would cause contagion to other euro countries. Bloomberg News attributes the difference to "the construction of a series of firewalls to guard against contagion," and JPMorgan's Greg Fuzesi expects a robust ECB response to any hint of contagion, but I'm kind of in Tyler Cowen's camp: Greece's protracted and miserable journey toward default is itself a pretty effective guard against contagion. Who would want to follow Greece?
Here is Greek finance minister Yanis Varoufakis justifying next Sunday's referendum, where the Greek people will decide whether to accept the deal that the creditors are offering. Or, I mean, they won't really; Christine Lagarde of the International Monetary Fund points out that "legally speaking, the referendum will relate to proposals and arrangements which are no longer valid," and they'll be especially no longer valid after Greece misses a payment to the IMF this week. No one seems particularly impressed by this referendum, which asks voters to ratify some pretty hairy documents; Yves Smith calls it "a cynical exercise in democracy theater," and here at Bloomberg View Marc Champion says that "It will come too late and ask the wrong question."
What else? Jacob Lew would prefer that Europe find a solution. Mark Dow: "The heartless truth is Greece adds very little to the EZ and has subtracted a lot." Hedge funds who invested in Greece will have an exciting week. Capital controls don't have much history of having, you know, a good effect on anything. The New York Times has an explainer. Peter Eavis considers what a Grexit, and a new currency, would look like. Josh Brown looks at 2,500 years of Greek defaults. FT Alphaville has further reading. And "UK gambling company William Hill has stopped taking bets on the likelihood of Greece exiting the eurozone before 2016."
People are worried about bond market liquidity.
Still! Here is a Bloomberg News article finding that "there are three things that matter in the bond market these days" and all of them are liquidity. I was prepared for, like, two of them to be liquidity -- liquidity, liquidity and default risk, say -- but, no, it's "liquidity, liquidity and liquidity." One hundred percent liquidity! What were the odds?
Important bond market liquidity worriers include the Bank for International Settlements, which released its annual report yesterday, complete with worrying about bond funds, the liquidity illusion, and the retreat from market making. There is Federal Reserve governor Daniel Tarullo, who is worried about bond market liquidity, but in a sort of nebulous way: "I don’t think there is at this point a very precise and convincing explanation for exactly what has happened." There is the Brookings Institution, which last week released a paper arguing for "taking the issue seriously and recalibrating a series of technical measures to reduce the damage to market liquidity without increasing the risks to financial stability in any significant way." And I don't entirely know which way this cuts in the liquidity worrying, but: "Morgan Stanley thinks it can rack up more business trading bonds and other debt securities without enlarging its balance sheet."
On the other hand, Planet Money asked Carmen Reinhart if they should be worried about bond market liquidity, and she literally laughed at them. Now, look: I've been laughing at worrying about bond market liquidity since before it was cool, but at this point I've become fond -- even protective -- of worrying about bond market liquidity, and honestly I was a little offended on its behalf by Reinhart's disdain. What, is she too good to worry about bond market liquidity like the rest of us?
Here is a story about Bill Gross attempting and failing to purchase a doughnut from a Morgan Stanley intern, but it is also a story about the meaning of life, and bond fund management. "I just wanted to run money and be famous," says Gross, and good lord don't we all? Your mileage may vary but this story made me very fond of Bill Gross. Of the obsessive hungers, the one for fame seems relatively benign compared to the one for money, which in turn is downright charming compared to the obsessive hunger for power.
In other fund management news, here's the latest S&P Persistence Scorecard, which measures whether any actively managed mutual funds reliably outperform. And, nope:
An inverse relationship generally exists between the measurement time horizon and the ability of top-performing funds to maintain their status. It is worth noting that no large-cap, mid-cap, or small-cap funds remained in the top quartile at the end of the five-year measurement period. This figure paints a negative picture regarding the lack of long-term persistence in mutual fund returns.
And Morningstar found "that actively managed funds lagged their passive counterparts across nearly all asset classes, especially over a 10-year period from 2004 to 2014."
Meanwhile in Puerto Rico.
I gather that it is unusual for a municipal bond issuer to default on its debts via an interview with the New York Times? But Puerto Rico's "governor, Alejandro García Padilla, and senior members of his staff said in an interview last week that they would probably seek significant concessions from as many as all of the island’s creditors" because Puerto Rico can't pay its $72 billion in debts. (For comparison, that's about eight Detroits, though only about a quarter of a Greece.) It seems there will be an official announcement this evening. The timing is ... I mean, I don't know, I guess it's a good week to default? In any case it seems unlikely that Puerto Rico will leave the dollar zone, so it's got that going for it.
They caught the guy who did Cynk!
I would not have predicted this one. Last week the Justice Department announced:
Gregg R. Mulholland, a dual U.S. and Canadian citizen, was arrested at Phoenix International Airport earlier today during a layover of his flight from Canada to Mexico on charges of securities fraud conspiracy and money laundering conspiracy for fraudulently manipulating the stocks of numerous U.S. publicly-traded companies and then laundering approximately $300 million in profits through at least five offshore law firms.
Perhaps the lesson is, if you're avoiding U.S. justice, go north or south but never both. According to the Justice Department, "Mulholland was intercepted on a court-authorized wiretap in May 15, 2014, admitting to his ownership of 'all the free trading' or unrestricted shares of CYNK," the not quite real social network that was briefly worth $6 billion. His previous greatest hits include being fined more than $5.3 million by the Securities and Exchange Commission for "a pump-and-dump manipulation of a sports drink company founded by Daniel 'Rudy' Ruettiger, the inspiration behind the film 'Rudy,'" and are you not looking forward to the Cynk movie?
Elsewhere in securities law enforcement, I took a break from vacation to write about the Sand Hill Exchange, the blockchain bucket shop shut down by the SEC. Davis Polk & Wardwell points out that Sand Hill is "the first time that the SEC has publicly wielded its newly acquired authority under Title VII of the Dodd-Frank Act over security-based swaps," so there's that. And it's almost two weeks old, but I enjoyed this SEC enforcement action against Norstra Energy, which allegedly hired a promoter who "falsely proclaimed that 'Norstra Energy could be sitting on top of as much as 8.5 billion barrels of oil!' and said the planned wells had a 99 percent chance of profitability." I mean, anyone could be sitting on top of 8.5 billion barrels of oil, though the probabilities are probably below 99 percent. For comparison, Exxon Mobil is sitting on about 7.4 billion barrels of oil.
Good news! Greece is running out of time to find money to repay the IMF on Tuesday, but it will get a little more time to find the money. Because Tuesday is leap second day, when clocks will have to add an extra second. They can either do that at 8 p.m. New York time or, delightfully, they can do a "leap smear," where they "slice up the leap second and spread it around in fractions." So if Tuesday feels extra long this week, that will be why.
The SEC is considering universal proxy ballots. The Chinese stock market is pretty volatile. GE is selling a bunch of its fleet business. Blythe Masters's Digital Asset Holdings is buying blockchain startups. Calpers doesn't know how much it pays private equity managers. Dark Trading at the Midpoint: Pricing Rules, Order Flow, and High Frequency Liquidity Provision. "On the whole, Steare’s results show that finance professionals are more moral than people who work in government, the print media and politics." Listen to this Reply All episode about office life and theories of humor. Joe Weisenthal and Alix Steel picked a good week to launch their new show. Big Data Versus Hayek. Museum of boulders. World's ugliest dog.
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