Archive - Mar 19, 2013 - Story

We are currently in an environment where policy makers are intent on devaluing their currencies in an effort to create growth. Real rates continue to stay negative in most of the developed world. Every marginal dollar of debt that is created is producing lower and lower amounts of growth. In a world overwhelmed by mountains of debt and economic growth which is sub-par at best, precious metals and real assets can act as insurance against the stupidity of policy makers. The evidence pointing towards the suppression of the gold price is becoming increasingly apparent. Don’t be the last person to figure this out! The current sell-off in gold should be viewed not with extreme trepidation but as an unbelievable opportunity to buy the metal at an artificially low value.

The Eurogroup agreed on Monday night to allow Cyprus to change the make up of its controversial deposit tax and President Nicos Anastasiades is now proposing that bank customers with deposits under 20,000 euros should not be taxed at all, while keeping the levy the same for the remaining depositors. However, what’s happened over the past few days and what’s likely to happen in the days and weeks to come has little to do with numbers. It is much more about perceptions. Even if capital flight from Cyprus as a result of this decision is less severe than many fear, even if Cypriot banks survive this real stress test, even if the island’s economy is not set back many years, even if savers in Greece, Spain, Portugal and Italy don’t panic, the idea of a deposit tax and the way it was adopted has released something poisonous in the air. It is difficult to see how these citizens will be able to trust the system - be it their governments, banks or eurozone partners - in the weeks to come. Belief in countries where the economy is contracting and unemployment growing is already vitreous and planting fears about a possible deposits grab in the future could shatter it completely.

Years ago we wrote of a not so far off future in which martial law, economic collapse, and the destruction of civil liberties stood imminent.  We related our views on the propaganda rhetoric of the SPLC, and how they were using false association to tie liberty groups to any deviant organization they could think of, including racists and domestic terrorists, in order to condition the American public to react to our message with immediate contempt. It became clear to us then that the SPLC, which had become the propaganda wing of the widely reviled Department Of Homeland Security, was helping set the stage for a paradigm shift in the U.S.  This shift would obviously include economic and social disruption, as well as political turmoil beyond anything our nation has seen for over 150 years.  But most importantly, it would pave the way for certain elements of the American populace, namely those who are awake, aware, and outspoken, to be labeled “enemy combatants” dangerous to the state. The SPLC, of course, has so far utterly failed in their efforts to stop the rise of Constitutional activists.  By their own admission, “patriot groups” have expanded exponentially since 2008, and continue to develop freely even in the face of wildly absurd character attacks taken from the amoral (immoral) guidebook of Saul Alinsky himself.  The truth, once realized, is difficult if not impossible to stop. Unfortunately, the establishment understands this as well...

While Spain's economy minister Luis De Guindos proclaimed in the Senate today that bank deposits under EUR100,000 are "sacred"and that "Spanish savers should stay calm," Spain, it would appear, has changed constitutional rules to enable a so-called 'moderate' levy on deposits - as under previous Spanish law this was prohibited. For now, they claim the 'levy' will be "not much higher than 0%" and is mainly aimed at regions in Spain that have "made no effort to collect taxes" based on new revenue expectations. As El Pais reports, the minister of finance and public administration, Cristobal Montoro, defends the need for such a 'levy' in their constitution on the basis of standardizing taxes across regions (and is preparing a proposal on the amounts to be paid) and although it would appear that while the European Commission could previously argue that such a 'tax' would violate the free movement of capital in Europe, it now leaves the door open to eventually effectively taxing the deposits. We can't help but remember the Tequila crisis and the constant reassurances from Zedillo up until even the night before Mexico devalued...

As is painfully clear to even the most naive observer, the biggest threat for Europe from this point on, now that Cyprus is officially "unfixed" is what happens when... if the Cyprus banks reopen - will the deluge of bank withdrawals drain 10% of the savings as the country's central banker warned earlier today, 20%, 50% or all of it? It is certain that any and all foreign "oligarch" accounts will be promptly pulled never to be heard of again, and after being treated like third grade European citizens, we doubt the locals will care much for having their cash in a banking system that Europe has shown is equal to all the other "united" banking systems, which however also happen to be just that much more equal. And once foreign TV crews show lines of people scrambling to pull money in Cyprus to the local viewers in Greece, Italy and Spain, will those countries also get comparable ideas? That is precisely the Pandora's box that Europe has now opened, and which it is scrambling to close. How? With the dreaded "contingency plans", among which are such last ditch efforts as capital controls, including "imposing limits on daily withdrawals from bank accounts; capping the amount of money that can be electronically taken out of the country and making these transactions slower to clear; and introducing border checks to cap the amount of cash leaving in the country," most recently utilized in the banana-est of republics such as Argentina.

President Truman famously called for a one-handed economist, so he would not have to hear, "on the other hand..." and so, BofAML notes, it may be the same at the March FOMC meeting with regard to the labor market - the apparent key to both QE and forward guidance. On the one hand, the recent US employment data have been stronger. On the other, the sequester is likely to result in significant job loss. On the one hand, the FOMC’s unemployment-rate projections are likely to be revised down. On the other, the labor market remains a long way from "substantially improved." The back-and-forth is likely to be broken by Chairman Bernanke’s press conference, where BofAML expect him to decisively come down on the side of an extended QE program. This should reduce concerns around the exit process and likely ratify market expectations of the first hike (priced for mid 2015), but one glance at the chart below tells you all you need to know about the diverging realities of our two-handed economy.

The Cypriot parliament tonight voted against a bill to introduce a tax on bank deposits, in return for a €10bn bailout offered to the country by Germany and other eurozone governments. Not a single Cypriot MP voted for the deal. The vote leaves Cyprus’ place in the eurozone hanging in the balance and threatens the escalation of the crisis to a new level, though the most likely outcome is that the Cypriot parliament votes a second time, on a revised deal. The governing party (DISY) abstained (with one member absent), while the junior coalition partner (DIKO) voted against – this signifies the huge political divisions at work in Cyprus. Even if a bailout deal is eventually approved the government’s position continues to look untenable. As we have noted before, this has the potential to be a very serious twist in the eurozone crisis. Previously, Germany and the eurozone have stressed that Cyprus has no alternatives to the deposit levy. Now, all eurozone partners are forced back into difficult negotiations. Both sides have some serious decisions to make. Below we outline the potential scenarios...

Confused by the litany of threats, paliatives, urgings, promises and outright lies just uttered by the German's finmin wheelchair maestro? Fear not for we are here to explain it all...

We all know what's supposed to happen in the global economy: we get more of everything: more stuff manufactured, more coal dug up and burned, more "aggregate demand" i.e. insatiable desire for more of everything, more innovation, more wealth, more money printed, more debt taken on to buy more stuff and more education, more tourists occupying more beaches sipping more drinks, more strip malls built, more airports expanded, more jobs created, more taxes collected-- more "growth" of everything, in every way and every day. But what if this baseline scenario doesn't appear and the center cannot hold, and the Status Quo devolves - there will be less of everything, not more, and a gradual but steady erosion of all "growth" baselines: fewer jobs, lower wages, fewer taxes collected, less profits, fewer retail outlets. In this case, printing more money and spewing more reassuring propaganda will no longer tamp down the crisis. Rather, the failure of these Status Quo responses will unleash an even more destabilizing crisis.

In Nigel Farage's first TV appearance since the Cypriot wealth tax was announced, the Englishman pulls no punches. In all his years and all his experience of the desperation of the European Union's leadership "never did [he] think they would resort to stealing money from people's savings accounts." The simple fact is that they know they cannot let any country leave, no matter how small, for "once one country goes, the whole deck of cards will come tumbling down." There is now "clear irreconcilable differences" between the North and the South of Europe and now that they have done this in one country, "they are quite capable of doing it in Italy, Spain and anywhere." The message that sends to people is "get your money out while you can." As far as his British constituents, he strongly recommends George Osborne (UK Chancellor) urge ex-pats to remove all their money and do monthly transfers from home. "Do Not Invest In The Euro-Zone," he concludes, "you have to be mad to do so - as it is now run by people who do not respect democracy, the rule of law, or the basic principles upon which Western civilization is based."

Stocks bounced off yesterday's lows on the "no" vote from Cyprus led by a miraculously visible hand smashing EURUSD (and implicitly EURJPY) higher instantaneously (BIS or banks repatriating in a hurry). That faded after S&P 500 futures touched VWAP and major volume was dumped but stocks, after an ebullient morning reaching into the green from Friday, fell back once more, only to exhibit the low-volume liftathon on ECB 'no news' to green into the close (for the Dow). Treasuries practically ignored the hyped up pump in the last hour and ended at their lows yields of the week (down 10-13bps) - 3-week lows. VIX surged on the day but drifted back a little into the ramp ending at 14.5% +1vol. FX markets reverted like stocks in the afternoon but the main theme is EUR weakness and JPY strength (carry-off) and despite the USD strength, gold pushed higher to $1612. The S&P and Nasdaq ended the day red (at VWAP) while the magic of the Dow closed it green - once again hedging dominated actual selling for now.

One of the most important indicators of stress in the financial markets of Europe during the heady days of the crisis was the EUR-USD basis swap. Simply put it is an indication of the trouble that European banks are having funding themselves. Thank to the LTRO and a wash from the ECB, it has been largely off the radar for most media types. However, we note that today the 1Y EUR-USD basis swap smashed lower (more stressed) by the most since December 2011 and is at its most stressed since November. It seems trouble, no matter how much Draghi promises, is not too far under the surface...

Trade Update: Stopped out of long EUR/GBP on increasing Cyprus tensions

We opened a long EUR/GBP recommendation based on the idea that further Sterling weakness is likely given the prospect of additional monetary easing and the increasingly weak external position. Since then BoE Governor King has signalled less desire for a weaker currency and the increased Eurozone tensions linked to the Cypriot bail-out package have pushed the EUR lower. Our views on Sterling have not changed but more EUR weakness is possible in the near term and will depend on the Eurozone news flow.

We close the recommendation for a potential loss of 2.8%.

We were waiting for the ECB response, and seconds ago we got it, when the ECB uttered the magic words, saying it would provide "liquidity within existing rules." What this means is unclear, but the algos loved it and sent the EURUSD up over 50 pips higher in milliseconds. What the algos apparently don't get is that this does not account for the additional liquidity needed that would only be released if Cyprus passed the bailout vote. The last thing the ECB wants is to appear weak, and fold letting every other broke deadbeat country to demand the same equitable treatment and diluting Germany's political might. For now however, the is a move to be faded.

While everyone awaits in stunned silence to see what Citadel, GETCO and of course the NY Fed will do with stocks in the aftermath of the shocking Cypriot decision, which nobody has any idea how to respond to because as Europe made it very clear ahead of the vote, there is no "Plan B", here is some comic interlude. The name Jerome Cahuzac should be familiar to our readers: he is the French Budget minister who had been tasked with battling tax fraud. Well, technically it is not is but was: moments ago Monsieur Cahuzac resigned, for the same reason he had been investigated several months ago. Namely, having an "undisclosed" Swiss bank account. Minister in charge of battling tax fraud... resigns for having a secret Swiss account. We'll let that sink in for a bit before we go back to that other farce in the eastern Mediterranean.