The Week That Was

What a fascinating week we just experienced within the world’s financial sphere!  Within the span of just four days, two news stories emerged that, under normal circumstances, would have never happened within days of one another:

1)      As so often occurs within the financial world, U.S. investors woke up Monday morning, March 25th, to bad news from Europe.  The European Union’s “solution” to a long brewing banking crisis in Cyprus was to have the Cyprus government “collect” a certain percentage of the balance within every Cyprus bank depositor’s account (6-13%) as a way of funding a bailout of Cyprus banks. The bailout was needed because a shameless lack of risk management by those banks managed to make the J.P. Morgan Chase “London Whale” look like a success story in comparison. Those banks had managed to lose billions of dollars on now worthless Greek bonds, precipitating a crisis that emerged in 2012 and led to banks being closed two weeks ago.  The EU’s “solution” provoked a popular revolt, which forced Cyprus to go with “Plan B”  — steal just from accounts totaling over 100 Euros. After promising for several days that banks would re-open the following day, Cyprus banks finally did open on Thursday – but with a tight cap on how much can be withdrawn.

Although it has an economy as small as Vermont or Jackson, Mississippi, Cyprus  held the attention of the world’s financial markets this past week. (Map from commons.wikipedia.org)

1)      On that same Thursday, after hovering within 10 points of an all-time record closing high during the prior 13 sessions, the S&P 500 Index finally breached the old closing price record of 1,565.15 (set five and one-half years ago, on October 9, 2007) – settling at 1,569.19.

These events occurring in tandem created such a seeming paradox that I put on “hold” my original intended theme and shifted to a brief look at each of these events separately.

First, the Cyprus “event” is a paradox in and of itself. Cyprus managed to hold the world’s full attention all week long – despite the fact that its economy is only the size (relative to GDP) of the entire state of Vermont, or the city of Jackson, Mississippi! A quick look at Cyprus’ little economy shows another anomaly: its banking system holds capital that is at least seven times greater than the national GDP!  Cyprus banks obviously drew in billions of dollars from outside its borders – generally because Cypriot authorities “look the other way” with regard to the moral character of its foreign depositors and the legal propriety of the activities that generated the deposited funds!  Personally, I don’t feel sorry for Russian moguls and mobsters losing a good-sized slice of their deposits because of this crisis.

However, the overriding reason that the world’s focus this week was on Cyprus is simple – a telling fear that this so-called “solution” might become a “template” for European management of its ever deepening debt crisis as we move into the future – whether for future bank bailouts or for the bailout of a sovereign government. That prospect sent shivers of fear throughout the hearts and minds of citizens (and investors) everywhere!

The best analogy I heard regarding the initial proposal of (on average) taxing ten percent of all depositor funds in order to fund the bailout was this:

Imagine a father, who allowed his children to deposit all of their babysitting, lawn cutting, or birthday/holiday gift funds into a family savings account. Later, unilaterally and without warning, the father then proceeds to raid that account and empty it in order to pay off an out of control gambling debt. 

No matter how morally appalling and unfair that would be – that is what almost happened in Cyprus! The fact that it was even seriously proposed should “scare us straight” (to borrow a phrase) regarding how perilous a nation’s debt can become – be it big bank debt or the debt of a national government.

I have heard from some folks this week whose response to this is a dismissive shrug of the shoulder, saying: “It could never happen here!”   Unfortunately, such folks are very naïve. Within U.S. history, we have already seen something similar. In 1933, in the midst of the Great Depression, President Roosevelt issued Executive Order 6102, criminalizing the private holding of gold (“hoarding”) and requiring everyone to deliver to authorities, within a short 25 days, all but a very small amount of any gold they possessed. Violation of the order was punishable by a fine of up to $10,000 (over $180,000 in current U.S. dollars) or ten years in jail (or both). http://en.wikipedia.org/wiki/Executive_Order_6102

Yesterday morning, I was vainly trying to create one more analogy to these events, and their potential repercussions. To my surprise, I discovered such an analogy by mid-afternoon, as I headed out toward an appointment.  There, at the end of the driveway, just off the edge of the curb, was a blue plastic newspaper wrapper. I assumed it had blown over from a neighbor’s home, so I walked out to retrieve it. As I got closer and closer, I noticed the blue plastic had something in it. Without much thought, I picked it up so I could remove the unsightly trash to help maintain a litter-free neighborhood. I was halfway up the drive when I realized precisely what I had in my hand – through no fault of my own.  It was the droppings from a careless dog owner’s pet – meticulously stashed into the bag and then left for me to remove.

I realized in that moment what it might have felt like to be a Cypriot bank customer this past week: innocent, and yet left with responsibility to help clean up the smelly, rotten mess!

In the next installment, I will relate this Cyprus story to a 2013 Pew Research Center poll.

Submitted by Thomas Petty

Be Sociable, Share!

Related Posts

 

MarketTamer is not an investment advisor and is not registered with the U.S. Securities and Exchange Commission or the Financial Industry Regulatory Authority. Further, owners, employees, agents or representatives of MarketTamer are not acting as investment advisors and might not be registered with the U.S. Securities and Exchange Commission or the Financial Industry Regulatory.


This company makes no representations or warranties concerning the products, practices or procedures of any company or entity mentioned or recommended in this email, and makes no representations or warranties concerning said company or entity’s compliance with applicable laws and regulations, including, but not limited to, regulations promulgated by the SEC or the CFTC. The sender of this email may receive a portion of the proceeds from the sale of any products or services offered by a company or entity mentioned or recommended in this email. The recipient of this email assumes responsibility for conducting its own due diligence on the aforementioned company or entity and assumes full responsibility, and releases the sender from liability, for any purchase or order made from any company or entity mentioned or recommended in this email.


The content on any of MarketTamer websites, products or communication is for educational purposes only. Nothing in its products, services, or communications shall be construed as a solicitation and/or recommendation to buy or sell a security. Trading stocks, options and other securities involves risk. The risk of loss in trading securities can be substantial. The risk involved with trading stocks, options and other securities is not suitable for all investors. Prior to buying or selling an option, an investor must evaluate his/her own personal financial situation and consider all relevant risk factors. See: Characteristics and Risks of Standardized Options. The www.MarketTamer.com educational training program and software services are provided to improve financial understanding.


The information presented in this site is not intended to be used as the sole basis of any investment decisions, nor should it be construed as advice designed to meet the investment needs of any particular investor. Nothing in our research constitutes legal, accounting or tax advice or individually tailored investment advice. Our research is prepared for general circulation and has been prepared without regard to the individual financial circumstances and objectives of persons who receive or obtain access to it. Our research is based on sources that we believe to be reliable. However, we do not make any representation or warranty, expressed or implied, as to the accuracy of our research, the completeness, or correctness or make any guarantee or other promise as to any results that may be obtained from using our research. To the maximum extent permitted by law, neither we, any of our affiliates, nor any other person, shall have any liability whatsoever to any person for any loss or expense, whether direct, indirect, consequential, incidental or otherwise, arising from or relating in any way to any use of or reliance on our research or the information contained therein. Some discussions contain forward looking statements which are based on current expectations and differences can be expected. All of our research, including the estimates, opinions and information contained therein, reflects our judgment as of the publication or other dissemination date of the research and is subject to change without notice. Further, we expressly disclaim any responsibility to update such research. Investing involves substantial risk. Past performance is not a guarantee of future results, and a loss of original capital may occur. No one receiving or accessing our research should make any investment decision without first consulting his or her own personal financial advisor and conducting his or her own research and due diligence, including carefully reviewing any applicable prospectuses, press releases, reports and other public filings of the issuer of any securities being considered. None of the information presented should be construed as an offer to sell or buy any particular security. As always, use your best judgment when investing.