Turning a blind eye to Cyprus

When mainstream financial 'experts' agree something won't matter, it's time to pay attention. The Cyprus 'solution' is about to wreak havoc on the markets.

By Bill_Fleckenstein Mar 29, 2013 3:55PM

Euro © Royalty-Free, CorbisMarkets were initially soothed this week as bulls rejoiced over Cyprus finding a "solution" to its recent problems.


I suppose in a way that's true, but the differences between this week and the previous one are simply the institution of capital controls and the fact that larger depositors will take a big hit and smaller ones will get the guarantee they had been promised.


Thus, there was a bit of good news (along with the bad) in this decision, even if the consequences are liable to lead to plenty of trouble.


In fact, there is a lot we just don't know about what may occur, as my anonymous friend, whom I refer to as the Lord of the Dark Matter, pointed out about a week ago:


"How does the monetary transmission mechanism work across the eurozone in an environment of capital controls?" he asked. "How can any eurozone policymaker now claim, with a straight face, that a euro in one part of the eurozone is worth the same as a euro in a different part of the eurozone? (Or) going forward, why should there not be a tremendous risk premium in senior unsecured bank debt across the eurozone?"


Those are just a few of the more obvious questions.


Many details and knock-on effects will need to be sorted out, but because there haven't yet been meaningful perturbations in world equity or bond markets, nearly everyone has assumed that all is well.


Today's undervalued pick: Risk analysis

In rebuttal to that (non)thought, the LODM really hit the nail on the head -- about the nature of the market's response to both Cyprus and other negative events in general -- with his comments on how they are essentially forced to conclude everything will work out, thanks to the flood of money-printing by the world's central banks.


In his words, "You assume everything will be fine, right up until it is not."


He also pointed out that when Lehman Brothers defaulted in 2008, the Standard & Poor's 500 Index ($INX) closed out the week marginally higher, because it took a while for the market to realize the consequences of the default, as well as other cascading problems.


The moral of the story is that -- in an era when assets are levitated by central banks printing absurd amounts of money, monetizing government debts and spewing out liquidity -- markets don't discount much or analyze events very well (which is a point I have made often, but never summed it up as succinctly as I believe he did).


As this week wore on, however, it became clear that Cyprus is starting to matter. European markets lost around 1% midweek and, more importantly, debt markets in Italy, Spain and Portugal began leaking, and bank stocks in Europe were put under pressure.


You don't have to be much of a student of the European Union's financial plumbing to understand that the potential for a decent amount of chaos is quite high.


Still room for improvement

Of course, the platitudes being mouthed by U.S. stock market bulls that Cyprus was "contained" and/or immaterial were laughable from the outset, and those comments only demonstrated the bulls' complete lack of understanding of how the financial system, economies, markets and psychology are intertwined.


This is why they don't realize that this year’ sstock market rally has had nothing to do with things getting better and everything to do with people's willingness to believe all is well (or about to be), thanks to money-printing levitating the markets.


I would not be surprised to see the market get considerably weaker as we head into and through earnings season. I can't imagine that's going to be very pretty. And given the amount of "hope-ium" that has been consumed by so many, the potential for momentum building on the downside is quite high.


I haven't done anything on the short side, but I am debating with myself if and when I should test those waters.


Waiting on a trend

I know that for some time now gold and silver have been unresponsive to what has been a very positive set of fundamentals. But I don't think you could have designed an environment more conducive to precious metals, with all the world's central banks, save for the European Central Bank, printing at warp speed. And now that confidence about the banking system, at least in Europe, has been broken, ECB President Mario Draghi almost certainly will unleash his printing press.


A combination of the loss of confidence, potential bank/government debt problems and worldwide money-printing is the perfect recipe for a wild ride in the metals. I don't know when that will start, but it will.


Flash-flood warning

To conclude on the subject of Cyprus and Europe, the LODM this week sent a short and sweet follow-up email that brilliantly summed up the situation:


"From this week onwards, investment committees and risk managers at many of the world's largest pools of capital and let's not forget corporate treasurers will be convening to carefully reconsider their exposure. . . . In other words, there is a non-negligible risk that what has thus far been a steady drip of repositioning and reconsideration of exposure above the deposit insurance limit turns into a torrent."


On the air

My latest interview with Eric King of King World News is now available. In it I cover the situation in Cyprus and Europe, and the prospective implications for the psychology variables of trust and confidence.


Also, don't forget to follow @FlecksMarketRap on Twitter.


At the time of publication, Bill Fleckenstein owned gold.

Mar 29, 2013 9:21PM
Bonnie and Clyde are now running the banks' board rooms.

That is to say:

The best way to rob a bank is to own one.

It's a strange thing when you loan money to a bank by depositing it with them, that they think it is theirs.

Mar 29, 2013 11:09PM
The scariest thing here is that the EU, which some equate to be on par with the US in terms of setting financial status quo, not only didn't blink but encouraged Cyprus to use this confiscation of personal assets in order to restore financial solvency.  That's just a little too close to home for me!
Mar 29, 2013 8:19PM
When Central Banks reached into the accounts of savers to extract their manufactured dues-- they crossed a line that they cannot take back. Before year-end, banking will be mortally wounded if not dead. It doesn't work and it's full of jerks who don't work, they scheme. Some say bonds command over governments but most are filled now with bubble cash. They are as phony as stocks, metals, real property and other bandwagon investments. A recent analysis suggests that ALL the jobs being created are part time and that the smallest percentage of people globewide actually survive on the income they make. The forthcoming correction is a whopper and no Central Bank commands an army or weapons of mass destruction, except one... fear. I fear no bank and that sentiment is getting a nod everywhere. Hear me well ALL pariah... where do you run to once you've screwed the whole world? America will have a new currency very soon and a Main Street revival. It has to. That said, you have to put all other concepts aside and figure out how and where you will participate. No pariah- Law Biz Lawyer, Financier, Accountant or Administrators- allowed. The role of consultant is an insult... go get a REAL job, contribute to the greater good or get the F out of here.
Mar 30, 2013 8:01AM
Bills article basically refers to others (eurozone) whereby central banks need some means of transfering assets to other areas of the economy.  Otherwise prop up debts, stave off collapse, stave off bank failures, finance debt to pay debt etc.  What Bill fails to convey is that this very thing, confiscation of assets in this case actual cash deposits IS happening in the US.  Its called QE aka printing money, devaluation of currency.  QE has resulted in 2 things, plunging seniors, retirees into poverty via watered savings through negative interest rates.  Secondly, such negative rates has slowly confiscated uncalculated trillions in spending power vs use of US currency for normal purchasing power.  Such low rates staved off economic collapse, but in doing so stole from taxpayers, whereby they can never be repaid, but a devalued dollar will wipe out debts.  Such policy ends in ruinous, chaotic economic calamity.  The euro and dollar are doomed.   
Mar 29, 2013 9:31PM
The five largest banks have deployed Financial Weapons of Mass Destruction, aka derivatives. At least, that's what Warren Buffett calls them.

When those Financial Weapons of Mass Destruction explode, the bank stock holders will be destroyed when bonds and depositors are given massive stock shares to replace their cash. It is now time for depositors to pay attention to what their bank is doing. (See: Inside Job, directed by Charles Ferguson, narrated by Matt Damon).

It's time to move your money from large Too Big To Fail (or Jail) banks to smaller community banks and credit unions. Or gold and silver might be a better idea.

Mar 29, 2013 8:25PM

"How does the monetary transmission mechanism work across the eurozone in an environment of capital controls?" he asked. "How can any eurozone policymaker now claim, with a straight face, that a euro in one part of the eurozone is worth the same as a euro in a different part of the eurozone? (Or) going forward, why should there not be a tremendous risk premium in senior unsecured bank debt across the eurozone?"


We may ultimately be amazed that the word "complex" has no application to these questions, while the word "bedazzle" accompanied by "with BS" has more appropriate application. How is any of this any different than the build-up in France, first with Locke, then again some 80 years later. The main thing that has to happen this time is the burning of the Rothschilds so the playbook can no longer be passed to successors.

Mar 30, 2013 11:54AM
The Fed or Ben giving out tax payer money for free will bankrupt the country and make lots of bankers weathy.
Mar 30, 2013 5:47PM

The money the Cyprus Government and Banks are borrowing from the IMF has to be paid back.

Why shoundn't the money that is taken from the citizens be paid back when times are good again.

The Banks will make there Billion dollar profits and the Bankers will pay themselves bonuses and pat themselves on the back.

Mar 30, 2013 6:29PM

And of course we need to pay taxes, but is it right that 50% of Americans pay nothing for the defense of their lives and property?  Is it right that they pay nothing for the national highway system, and food safety, and and and and.  Is it right that the top 1% are robbed to pay for 38% of the federal income taxes?  Which is nothing more than a theift of their money for food stamps, and welfare, etc.


No their is inequality here.  We punish the virtue of industrialness, innovation, and hardwork; and when they result in success, we call those virtues GREED.  Then we all call those who did not study, went to kegger, droped out of school virtuous.  We say they have been cheated by the forementioned Greedy.

Mar 30, 2013 6:24PM



I WAS called COOOOO COOOOO for saying the same thing.  Are we slaves?  Does the government just ALLOW us to borrow property (hard assets or otherwise)?  I would say the answer is obviously, yes that is exactly the view of the Progressives.  Our Constitution should protect us from such thinking and actions, but the reality is Progressives see the Constitution as ****'carte document at best and they get to decide on a daily whim what is good and what is to be ignored.


All this talk about the "rich" paying their fair share is a watered down version of Cyprus.  The left gets to decide how much money anyone can have and keep (at least until they come back for the rest).


I realize the leftist here will brainless reject this, not because it is wrong, but because they support the idea of stealing other people's money as long as it is not their money. 


Who is John Galt?

Mar 31, 2013 10:58PM
Great article again Bill!  Now that money laundering center of Cyprus has been shut down, can other offshore banking centers of questionable repute be far behind?
Mar 29, 2013 9:17PM
There is a lot more going on than bankers making bad decisions and being punished for it along with the governments that permitted it.

There was a need to destroy the Greek and Cypriot economies so they become more agreeable to Turkey in resolving the Cypriot problem, allowing Turkey into the EU and including Turkey in tapping the gas wealth.
Mar 30, 2013 9:40AM
Fed's charter renewal comes up in August we'll see something roil in the markets to anchor the Fed's continued roll in orchestrated financial disaster.
Mar 31, 2013 10:58PM
Argue what you want about the money supply, that fact is you can only print as much money as there is energy to sustain it, otherwise it will collapse. 
Apr 1, 2013 10:43AM

Cyprus took a hair cut on their citizens bank accounts over 100,000 euros, about 37.5%. What will the American government haircut and when??? Bank accounts, saving, treasuries, what?????

Mar 31, 2013 9:55PM



The Federal Reserve Charter does not contain an expiration date for various reasons. However, the charter is subject to revocation by Congress

Apr 1, 2013 11:26AM
Flash flood warning!!   Large depositers, will lose all the money over the insured amount. Example,  If you had a house worth a million dollars, would you insure it for only 100K?  Diversify,  You were warned!  so if you don't diversify, you deserve to lose your money.
Mar 31, 2013 9:33PM

Does the dollar buy more in austin than it does in NYC. Same basic logic in the euro zone.

Cyprus will be like the south bronx in the 1970 everyone knows where it is but you don't go there.

Mar 30, 2013 2:52PM
As long as the feds keep printing money 85 billion a month, things will look good.  But how many more month, or years will they be able to do that.  When it stops our money will absolutely be worthless. Thanks to the Jewish bankers.  Inflation will be tremendous.
Apr 1, 2013 6:58AM

"Does the dollar buy more in austin than it does in NYC. Same basic logic in the euro zone.

Cyprus will be like the south bronx in the 1970 everyone knows where it is but you don't go there."


Not. All of the Southern European nations have always had sub-economies. People in them-- live on, without banks, organized financial tyranny or servitude to loan sharks. It isn't uber-finance that causes existence, its basic sustaining that founds that premise for finance. A Dollar doesn't necessarily spend any differently in Austin or NYC with one exception, you can sustain more easily in Austin without any forced reliances. NYC is a parking lot with ivory towers and sewers. No one can sustain in that without a thriving Society that comes with prosperity. We are seeing Bernanke use the credit card of our kids future to pay for the NYC lights and Kool Aid bill now. The plug gets pulls REALLY soon (early as this week now that Congress F'd itself into oblivion) and the lights go out in NYC. When falsehood makes 300,000 new millionaires in a week while ignoring 100 million families living below the poverty line- who ARE the economy, your theories and psychopathic delusions just don't add up. People often go broke, stand back up, change course and live on. It is CLEARLY OBVIOUS that replacing 100 million families below the poverty line with 100 million low life psychopaths is the solution. Will you be as good at dumpster diving for your dinner? I doubt it. Laugh now but you lack sustaining skills (like this false economy), its a pre-requisite mandate not an elective to existence.

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Image: Bill Fleckenstein, MSN money

This column is a synopsis of Bill Fleckenstein's daily column on his website, FleckensteinCapital.com, which he's been writing on the Internet since 1996. Click here to find Fleckenstein's most recent articles.



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