Greece missed a debt payment to the IMF on Tuesday, which heightened fears that Greece would be forced to exit the euro. The uncertainty surrounding Greece’s future created volatility throughout global markets on Monday and caused U.S. stocks to suffer the worst drop of 2015. Greece only accounts for 0.3% of the global economy, but the uncertainty of Greece’s future caused a global market sell-off as the Dow Jones shed 350 points, nearly a 2% drop, the S&P 500 fell over 2%, and the tech-heavy Nasdaq lost 2.4%. Financial markets bounced back from these declines over the next few trading days despite no new resolution in Greece.
Greece’s Prime Minister Alexis Tsipras attempted to renegotiate a last minute deal but he was rejected by European political leaders, particularly German leaders. Now the fate of Greece’s status as a Eurozone country will be left up to the Greek citizens in an upcoming referendum vote to be held this Sunday. Greeks will be asked whether they agree to the complex terms for renewed support demanded by the country’s main creditors: the European Union, the European Central Bank and the International Monetary Fund.
A “no” vote could propel Greece out of the euro, and early polls indicate that most Greeks want to avoid this outcome. A “yes” vote will most likely add pressure for Prime Minister Tsipras to resign, and there may have to be another election before any negotiations restart. In other words, regardless of the outcome of the vote on Sunday, the Greece crisis will continue to plague headlines for months to come.
Puerto Rico Crisis:
On Sunday, Puerto Rico Governor Alejandro García Padilla announced the island territory has accumulated $72 billion in debt that it cannot repay and needs to restructure the outstanding debt. To put this into perspective, the $72 billion is roughly 89% of all personal income generated in Puerto Rico. The most indebted U.S. state (by this measure) is Hawaii, and their ratio sits at 10%.
Puerto Rico bonds have long been a tax-haven choice for investors, as the income is exempt from federal, state, and local taxes. The problem, however, is that Puerto Rico seemingly took on debt because there was a demand for it from investors, rather than a need for infrastructure/projects at the island level. They therefore did little in the way of spending that would benefit them over the long-term. As the debt began piling up, Puerto Rico began taking on debt to pay off debt, leading investors to demand higher interest rates based on this risk, a process that continued for several years.
This crisis can actually be traced back to 1996, when Puerto Rico began phasing out federal tax advantages to U.S. corporations over a ten year period. By 2006, no tax advantages existed and its corporate tax base has largely diminished. This was right before the 2008 financial crisis, after which investors were more wary of municipal debt. The tourism industry also took a heavy hit from the recession that followed. Additionally, Detroit’s bankruptcy in 2013 showed investors that bankruptcy is possible and identified Puerto Rico as a likely candidate of “the next Detroit”. Furthermore, the island’s tax base has been shrinking due to its declining population and this trend is expected to continue.
Puerto Rico was able to pay the $1.9 billion it owed in debt obligations due this week. This provides them some time, but may just be delaying the inevitable. Overall, what will happen next is largely unknown, as there is not really a process established in bankruptcy court for a state/territory. The Puerto Rican government will likely attempt to get its creditors to accept less than $1 for each dollar they owe. Whether they will take it or not will dictate the next steps. Relatively speaking, $72 billion is not a large amount of money so it’s unlikely to send ripples through the stock market in the way that Greece has over the past few months. However, this will likely become important from a precedence standpoint to other municipal debt issuers and may ultimately lead to the discussion regarding the possibility of Puerto Rico becoming a U.S. state or succeeding its territory-ship.
June Employment Report Released:
The U.S. Labor Department released another strong jobs report this morning for the month of June which may put pressure on the Federal Reserve to begin raising the Federal Funds rate in September. The U.S. added 223,000 jobs in June following a revised 254,000 increase in May. The unemployment rate also dropped to a seven-year low of 5.3 percent. Not all the data in today’s report was positive however; while job creation remains strong and average hourly earnings continue to rise modestly, we are still seeing large amounts of people exiting the workforce. The Labor Force Participation Rate decreased to 62.6 percent and is now the lowest since October 1977 as 432,000 people last month exited the workforce. The participation rate is defined as the percentage of the U.S. population age 16 and older that are employed or actively looking for a job, this statistic essentially tells us how much of the working age population are “in the game” or at least on the bench waiting to be put in. Many economist believe that the Labor Force Participation Rate is one of the key economic data points that impacts the Federal Reserve’s policy decisions.
Overall, the labor market in the U.S. continues to show signs of improvement, but we would like to see more pressure on wages and a reversal in the participation rate.
The U.S. added 223,000 jobs in June following a revised 254,000 increase in May.
The Labor Force Participation Rate decreased to 62.6 percent and is now the lowest since October 1977 as 432,000 people last month exited the workforce.
Earnings at private employers held at $24.95 an hour in June on average and rose 2 percent over the past 12 months.
Mid-Year Financial Checkup:
We are at the halfway point of 2015 already, so now is a good time to review where you are with your goals and plans for the year. Just some reminders:
1. Make sure you are taking advantage of any employer match in a retirement plan through work. If you want to maximize contributions to the allowable limit, you can contribute $18,000 per year to defined contribution plans such as a 401(k) and those over the age of 50 can add an additional $6,000 per year. If you do not have a retirement plan available, consider contributing to a traditional IRA or a Roth IRA. The max one can contribute to an IRA account is $5,500 per year and those over 50 can contribute an additional $1,000.
2. Consider donating items to charitable organizations during the summer. Instead of waiting until late in the year take care of these now and make sure to keep good records of what you donated.
3. If you received a significant refund on your 2014 taxes and expect the same again for 2015, consider reducing your withholdings to minimize this amount of refund. This is a great way to give yourself a “raise” on your paychecks.
4. Harvest any capital losses you may have available in your investment accounts. This helps reduce your realized capital gains, and could potentially offset some ordinary income as well. Any unused losses can be carried forward to subsequent years.
Paradigm Office Closed Friday, July 3rd:
In observance of the Fourth of July holiday, the markets will be closed tomorrow, July 3rd. The Paradigm office will also be closed tomorrow. We will re-open Monday, July 6th.
Have a great weekend everyone! Good luck to the U.S. Women’s Team in their hopes to bring home the World Cup!