Cyprus' problems must be country-specific
Recent events in Cyprus show just how far banks and governments may be willing to go to justify their policies -- and at whose expense.
By now everyone should be aware of the European Union-inspired plan to confiscate a portion of the money depositors had in banks in Cyprus. I don't want to rehash what has been discussed ad nauseam in newspapers, investment columns and on TV, but I would like to focus on the consequences, as I think they are significant.
While the Cypriot parliament voted down the measure, the psychological damage has been done and, more importantly, cannot be undone.
What this does, in no uncertain terms, is shatter whatever confidence (i.e., trust) depositors may have had in banks in Cyprus. (It is also a great example of known problems not mattering until they matter.) By extension, I would think that depositors everywhere in Europe, and potentially other parts of the world, would be inclined to think twice about the safety of their deposits and what might happen to them.
Thus, the fabric of trust has been torn; or, said differently, confidence has been lost. It is not easy to generate confidence, and it is even harder to regenerate it once it has been destroyed. The genie quite simply will not go back in the bottle.
Wishes? They'll be lucky to get three guesses
The geniuses running the European Central Bank and International Monetary Fund have let it be known that they are liable to do anything to depositors at any time, which is a very poor policy decision, given the cards they have to play.
On the other hand, at least they are being brutally honest, though I am sure they don't see it that way. As Joan McCullough of East Shore Partners noted this week, the two different tax rates proposed to be levied on depositors in Cyprus are at least a direct hit that one can accept and move on from.
Contrast that with what the other G-7 central banks are doing -- robbing savers every day by not paying a fair interest rate, debasing currencies and creating more inflation. (Since Cyprus is part of the eurozone, it is actually getting a double whammy of higher taxes and wealth erosion.)
In any case, this marks a watershed in the bailout era, in that justifications for the bailouts to date have been to prevent people from losing confidence in the authorities and the banking system.
Obviously, this has done the exact opposite. However, this action is one of the reasons people own physical gold, since you are relying neither on deposit insurance nor sanity on the part of central bankers, although you do have to put up with a lot of price volatility (there is no free lunch in the world of investing).
'Cyprus is unique' = 'Subprime is contained'
Finally, stock bulls and media cheerleaders have already concluded that Cyprus is contained, even as the exact details of the bank deposit confiscation are still being worked out. (See Andrew Ross Sorkin's March 18 column in The New York Times headlined, "A bank levy in Cyprus, and why not to worry," in which he argues that there is no risk because "Cyprus is unique.")
This is yet another example of a serious problem not having a devastating impact instantly and non-thinkers thus concluding that all is well. A similar scenario played out when the stock bubble burst, and all through the unwinding of the housing/credit bubble.
In fact, there is no better example of data becoming cumulatively worse and people still being unable to connect the dots than what we saw as that latter bubble began to burst. The beginning of the end was in the spring of 2007, when first-payment defaults were being taken by the subprime lenders and caused them to blow up. The stock market, of course, ignored that and peaked in August 2007.
Never show up late to the end of the party
Subprime was never going to be "contained." The losses spread to Alt-A mortgages and then to everything else, eventually infecting the idiots on Wall Street and the commercial bankers who had levered themselves up on ludicrous mortgage paper.
As the financial system nearly collapsed and the economy went south, the damage was a consequence of the fact that the economy had been powered by the housing bubble, combined with too many folks using stupid amounts of leverage.
However, to this day mainstream pundits refer to the collapse of Lehman Brothers as the start of the crisis, when in fact it was in essence the end of it, as Hank Paulson and the gang came up with TARP, TALF and other alphabet-soup programs to try and turn back the tide. My point is that many people did not understand what was occurring right in front of their eyes. Now, four years later, they still don't have the right timeline.
I bring that up because oftentimes events come along that change the psychology, the fabric of trust, or affect the business cycle and go unrecognized simply because such things take time to play out, or one event impacts another, and then another. Stated more succinctly, just because there was no "implosion" this week as markets got a chance to react to the Cyprus bank plan does not mean that it will not have many more consequences down the road.
Psychology is an extremely important component of the whole investment landscape. The willingness to suspend disbelief regarding inflation and the monetization of debt here, in Europe and everywhere else, for that matter, is a big reason stocks and bonds are where they are. When one considers what people have been willing to look past (or disregard), it is clear that it wouldn't take much sobering up to cause a whole litany of problems.
Definitely behind the eight ball
It is impossible to know what will happen next, as the billiard balls move around the table in random and unpredictable fashion. I would just caution people to be careful not to draw conclusions on any given day about how the dominoes will tumble in the wake of what has occurred in Cyprus.
Some of the knock-on effects won't be known for days or weeks, and though the talking heads and journalists will make proclamations, we really don't know where all this will lead to, other than to say that confidence will erode at the margin and people who have money in Cyprus and other shaky banking systems will take action over time. I cannot see how this is anything but bullish for precious metals, even though this week they didn't do anything all that special.
At the time of publication, Bill Fleckenstein owned gold.
No way this ends any way but bad. They are still talking about a "less than 1% levy." Regardless of the exact amount the message is the same: "if you put your money in a Cyprus bank, it could be confiscated at any time, and you have no control of it." If I were a Russian mobster with money there, I would yank it out the minute banks reopen, regardless of the official 'solution.' Cyprus is circling the drain, they just don't know it yet.
We are borrowing some $.42 of every dollar our Federal Government is spending on all their programs. If lenders decide they need more interest-risk because of all the Fed's money creation and our current $500 billion in annual interest on our debt sky rockets, where is the government going to get more money? Confiscation is one option because the people with money are already supporting the Welfare State and there is more money in a "wealth tax" than in an income tax.
Just wait, Mr. Buffet and the hedge fund managers will be paying "their fair share" with such a wealth tax.
As Margaret Thatcher said, "Socialism is fine until you run out of other peoples money."
No wonder the Democrats want to win the House so badly.
"It took a few weeks after the Archduke was assassinated for mobilization to occur."
GREAT point. A reminder that our own "cataclysmic Monday" is April 1st. It won't be a joke when Congress fails to cooperate and pieces start falling off the machine.
"Desperate Governments Do Desperate Things!"
How very true. So... the Cypress Crisis ends late on a Sunday. Basically, the second largest bank is shuttered and all the rich depositors get screwed out of millions. Few are actually Cypriots! Yes, we are watching the matinee of the Great American Fleecing because we are not solvent either. Unfortunate as it may be... the banks are flush with Bernanke fiat, as are the corporations. The paranoid went into metals and the ignorant are in stocks and bonds. Bonds have no substance and cannot redeem, so... why do anything when there is nothing to do but wait out those extremely long durations to expiration? What remains? Yep... stocks on the chopping blocks! You have no assets, you're automated but your customer base is broke. You are very top-heavy and bureaucratic. What are you? That thought that is in your head... how is that any different than Terrorists?
I definitely applaud MSN for publishing this article.
And I'm afraid that everything that Veteran Lender is saying is true.
Nothing to do now but wait for the third and final episode of the movie Atlas Shrugged.
Lord have mercy.
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ABOUT BILL FLECKENSTEIN
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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As the devil-may-care bravado of Wall Street marches on, history warns that -- in the end -- there will be the devil to pay.
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