Somehow, someway, the markets simply keep moving up. Perhaps they are climbing a wall of worry. Perhaps stimulus that is coordinated and assisted by loose monetary policy simply keeps all the plates spinning. At some point, gobs of stimulus will meet the headwinds of a global financial slowdown in Europe, an inflationary overheating and under performing Asia and Pacific Rim, and a flight to safety from risky assets as smarter money says, "screw this".
ISLAND BACKGROUND
Quickly, let's review a little about Cyprus. The tiny island attempted to create its own niche economy in Europe by becoming a financial haven. They offered very low tax rates and an even lower concern for the origins of the global cash horde that was being deposited within their banks. Cyprus become an outsized financial powerhouse and a haven for money laundering. Russian gangsters like Putin and his crony oligarchs have hidden massive amounts of stolen money in Cyprus.
Bankers were all too happy to take the money and of course, they had to invest in bonds of other Euroland sovereigns. They purchased a ton of Greek debt, which of course has been a disaster. Cyprus' financial condition has been a known problem for a while, but clearly, the ECB desired to act. As little as a month ago, financial and political leaders in Cyprus stated emphatically that bank institutions were fine and depositor money was safe. This weekend, this all changed as Cyprus posted documents outlining the "bailout" where the ECB would step in and give approximately $10 billion in funds, but it required depositors to kick in a total of about $7 billion. Now think about this. This isn't the bank getting crushed. This isn't some bond holder or stock purchaser, this is someone that was saving and simply putting money away. Depending on how much you have, you'd potentially pay anywhere from 7% to 12%, in a sense, you just took a pretty big haircut for being dumb enough to save and trust a bank.
LOCKED OUT
Over the weekend, the people started hearing about a bank lock up and started sharing information about the vote about the fate of their money that was going to be held on Monday. Clearly the upset people took to the street and wouldn't allow politicians to steal their money and give it away. As I type, political and financial leaders in Cyprus attempt to walk a very small line where they can somehow appease the ECB and global banking syndicate and yet keep their heads as they have awoken a very interested and angry population. The Cypriot legislative body will attempt to forge a solution that placates the bankers and limits the impact on regular folk that never had anything to do with Cyprus banking institution's purchases of Greek bonds with their deposits.
Don't forget too that the Russians are the ones that will take a huge hit in this "bailout". Possibly the ECB calculated that the funds were illegally garnered, but my guess is that Putin and his buddies will not take kindly to a 12% or greater haircut of their stash. The ECB is screwing around with these guy's personal cache of money, they better watch it.
THE GLOBAL BANK DEPOSITOR'S DILEMMA
Banks essentially removed the "haircut" from bank accounts almost immediately, and therefore the effective "tax" was confiscated. As a depositor, what would you do now? Can you trust the bank? As a citizen in a Euroland country like Italy, Spain, or even Portugal, are you certain that this would not happen to you? The outright theft of deposits is simply too easy for governments when they can shut a bank down electronically and remove funds before anyone has a chance to prevent it. The Cyprus example is surely a scary test case. So what will they do? We are hearing that there is calm in other Euro countries and no one is rushing to take their funds. The better question in my mind is WHY AREN'T THEY? It only takes a few people to start a panic, reasonable depositors should be calmly removing funds. Do you think they wouldn't do something similar in the United States given extraordinary circumstances?
I've often advocated that you should have some cash on hand in case banks were suddenly inaccessible and you should also couple that with some physical metal holdings like gold, silver, or even palladium. Make a trip to the bank today and get enough cash to ensure you could make it through a couple of weeks with no problem. I'll do another follow post about metals, but is there any way this cannot be bullish for them?
INVESTMENT IMPLICATIONS - EMB:TENZ -
Despite what you are told and what we are seeing, the global financial markets don't like this. US markets somehow keeps levitating, but that divergence is getting way out of bounds of what it should look like.
Take a look here at the EMB:TENZ ratio chart. Remember, this is a measure of the emerging markets stocks versus the ten year treasury. Essentially, this is a measure that show when investors desire risk versus when they want safety. Emerging markets have been really under performing and in a sense, the 10 year treasury is beating on a relative basis. If investors were feeling risky, they'd want to go long emerging markets. As you can see in this view, the ratio of EMB:TENZ has been very good at tracking the SPX (black line behind the red/black ratio) and probably even leading it up and down. Now look what has happened recently. The ratio has cratered suggesting that investors don't want emerging risk at all. Despite the risk-off move, SPX continues to power higher.
RISK ON? RISK OFF?
This is a slightly different look, which might be better. It is still the same concept charted with the MSCI Emerging Markets Index against the Dow Jones Treasury Index. I provided a monthly view and I think it shows how strikingly in sync this relationship is. The only two questions we should be asking is how long can the divergence remain, and which direction will it resolve?
GOATMUG
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