Last November, in an act of sheer monetary desperation, the ECB issued an exhaustive, and quite ridiculous, pamphlet titled "Virtual Currency Schemes" in which it mocked and warned about the "ponziness" of such electronic currencies as BitCoin. Why a central bank would stoop so "low" to even acknowledge what no "self-respecting" (sic) PhD-clad economist would even discuss, drunk and slurring, at cocktail parties, remains a mystery to this day. However, that it did so over fears the official artificial currency of the insolvent continent, the EUR, may be becoming even more "ponzi" than the BitCoins the ECB was warning about, was clear to everyone involved who saw right through the cheap propaganda attempt. Feel free to ask any Cypriot if they would now rather have their money in locked up Euros, or in "ponzi" yet freely transferable, unregulated BitCoins. And while precious metals have been subject to price manipulation by the legacy establishment, even if ultimately the actual physical currency equivalent asset, its "value" naively expressed in some paper currency, may be in the possession of the beholder, to date no price suppression or regulation schemes of virtual currencies existed. At least until now: it appears that the ever-benevolent, and always knowing what is "in your best interest" Big Brother has decided to finally take a long, hard look at what is going on in the world of BitCoin... and promptly crush it.
As Europe wakes up to what could be a tumultuous day, Handelsblatt reports that the ECB has decided that, due to the "great danger" of a bank run once they reopen next week, it will enforce capital controls independently of Cypriot (elected) officials. With perhaps a nod towards negotiating some ELA funding for Cypriot banks next week (if the government accepts this ECB-enforced 'program'), the rather stunning restrictions on people's private property include:
- Freezing Savings - no time-frame (it's not your money anymore)
- Make bank transfers dependent on Central Bank approval (a money tzar?)
- Lower ATM withdrawal limits (spend it how we say?)
The capital controls will be designed "so that citizens have access to sufficient cash to go about their lives." So, there it is, a European Union imposed decision on just how much money each Cypriot can spend per day. Wasn't it just last week, we were told Europe is fixed?
The wave of social unrest that rumbled across Europe between 2008 and 2011 has become less intense. This has come as a cause for relief in financial markets, as it has helped to underpin the marginalization of ‘tail risk’ already addressed by the ECB and the Greek debt restructuring. And yet the latest crisis over the Cyprus bail-out/bail-in not only shoots an arrow into the heart of the principles of an acceptable banking union arrangement, if it could ever be agreed, but also signifies the deep malaise in the complex and fragile trust relationships between European citizens and their governments and institutions. Some people argue that protest, nationalist and separatist movements are just ‘noise’, that the business of ‘fixing Europe’ is proceeding regardless, and that citizens are resigned to the pain of keeping the Euro system together. UBS' George Magnus is not convinced, even if public anger is less acute now than in the past, it is far from dormant, and its expression is mostly unpredictable. So is the current lull in social unrest a signal that the social fabric of Europe is more robust than we thought, or (as we suggested 14 months ago) is the calm deceptive?
Why is the global economy in so much trouble? How can so many people be so absolutely certain that the world financial system is going to crash? Well, the truth is that when you take a look at the cold, hard numbers it is not difficult to see why the global financial pyramid scheme is destined to fail. In the United States today, there is approximately 56 trillion dollars of total debt in our financial system, but there is only about 9 trillion dollars in our bank accounts. So you could take every single penny out of the banks, multiply it by six, and you still would not have enough money to pay off all of our debts. Overall, there is about 190 trillion dollars of total debt on the planet. But global GDP is only about 70 trillion dollars. And the total notional value of all derivatives around the globe is somewhere between 600 trillion and 1500 trillion dollars. So we have a gigantic problem on our hands. The global financial system is a very shaky house of cards that has been constructed on a foundation of debt, leverage and incredibly risky derivatives.
Local TV station CYBC reports that police in the Cyprus' capital are scuffling with protesters (including employees of Cyprus Popular Bank) outside the nation's parliament:
*CYPRUS POLICE CLASH WITH BANK EMPLOYEES OUTSIDE PARLIAMENT
CYBC says more protesters gathering at Parliament House
With some predicting China will import 79% of its oil by 2030, could domestic shale gas extraction help China meet its energy needs? As shale gas fever sweeps through Beijing, analysts are looking at the costs and benefits of extracting what is increasingly a controversial source of energy. But for China, with its growing middle class, the immediate and long-term demand for energy has the potential to spark a revolution in shale gas before sufficient and safe technological know-how and regulations are developed.
Goldman's 'Swirlogram' places the global industrial cycle squarely in the 'Slowdown' phase as growth momentum fades rapidly. Driven by plunges in aggregate confidence levels and New Orders (less inventories) - as well as CAD and AUD data - this reinforces last month's preliminary view of a slowdown beginning. Goldman notes we could potentially see weaker global activity over the coming months. Is it any wonder we are seeing bellweather names missing in a big (un-unique) way.
So far, Cyprus has not been able to pass a direct tax against depositors and has gone to Russia for a helping hand (and failed). However, the question of whether such an event could happen in the U.S. is a much more interesting point of discussion. While to most onlookers the idea of a direct deposit tax instituted by domestic US banks remains far off - the issue of the Fed's monetary policies, particularly since the last recession, has had a significant impact on "savers." While the individuals in Cyprus have been faced with an outright extraction of capital from their accounts - U.S. savers have had their savings negatively impacted much more surreptitiously. The continued drive by the Fed's monetary policies to artificially suppress interest rates to create a negative interest rate environment for savers is a defacto "tax" on savings. The destruction of principal since the turn of the century, which is far more disastrous than it appears when adjusted for inflation, has ended the dream of retirement for many individuals. So, can the U.S. potentially have a direct tax on savings? It's already happened.
While it will be no surprise to any ZeroHedge reader, academic research from ETH Zurich shows that not only are "commodity markets becoming very financialized and computerized... and more susceptible to minor shocks," but "at least 60-70% of price changes are now due to self-generated activities rather than novel information." In other words, only about a third of commodity price moves are caused by real fundamental news now (as opposed to 75% pre-HFT).
While Cyprus grabs the headlines, there are stirrings in Spain, New Zealand, and the UK with regard to how depositor funds (and their apparent insurance) is considered in the new normal banking system. As John Aziz notes, essentially, if there is to be any confidence in the banking system, the possibility of depleting liquidity insurance funds to bail out banks needs to be taken off the table completely. The possibility of insured depositor haircuts needs to be taken off the table completely. If banks need bailing out, the money must not come from insured depositors, or funds designed to compensate insured depositors. If banks fail, the losers should be the uninsured creditors.
The Bernank confirmed, in almost perfect hypocrisy to his previous implied comments, that the Fed is not targeting some asset price appreciation but no matter which way you look at it - the 'wealth' effect is an easy concept to comprehend as levered unrealized gains are seen as disposable income. However, as we have pointed out many times, the 'wealth' effect only helps an already wealthy few and as BofAML notes today, spending across income groups is extremely disparate reflecting the 'spending gap' in our aggregately stimulated economy. It is quite intuitive that those with more income will be able to spend more. The top 20% of the income distribution make up nearly 40% of total consumer spending. The spending gap is the most extreme for apparel and services and the least for healthcare and food. Lower income households, unsurprisingly, allocate a larger share of their budget toward necessary items. When will the trickle begin...
Goldman Sachs and Morgan Stanley are down 6.5% on the week (and even BofA has turned red on the week) as US equities have started to show 'slight' strains on European fears (as well as global PMIs and US earnings - what else is there?). Homebuilders gave up all their week's outperformance in the first hour of the day. Dow Transports are down 2.5% on the week now - notably underperforming and reverting their outperformance. VIX surged 1.25 vols to 14.00% - with protection remaining bid relative to stock's modest drop so far. While Treasury yields pushed lower all day (-6bps on the week) as did WTI (-1.5% on the week now), gold and silver flatlined after the spike higher this morning (both up 1.4% on the week). JPY strength was a key factor today as carry-trades were unwound. Risk-assets in general were once again highly correlated as credit tracked lower closing at its lows of the day like stocks. Equity trading volume was above average but average trade size is still falling and S&P 500 futures inability to hold VWAP into the close suggests institutional selling pressure is picking up.
Cyprus "Capital Control / Solidarity Fund" Plan 'C' Vote Tomorrow After Rumor Russia Rejects All ProposalsSubmitted by Tyler Durden on 03/21/2013 16:47 -0400
Rumors and news continue to play but some slight weakness after-hours (Treasuries at session highs) suggest fears might have legs. While the Cypriot government submits its bank restructuring (good-bank / bad-bank and capital controls) and Solidarity Fund (CCOs), there will be no vote until tomorrow morning Europe time.
- *CYPRUS SUBMITS LAWS ON CAPITAL CONTROLS, SOLIDARITY FUND
- *CYPRUS SUBMITS LAW ON BANKING REFORMS, SPEAKER SAYS
- *CYPRUS PARLIAMENT TO DISCUSS NEW LAWS TOMORROW, CYBC SAYS
All of this after rumors of a 'rejection of all Cyprus government proposals' by Russia was the talk on desks and that more than a few Cyprus MPs believe the bank bill is too strict and needs more discussion. The ECB/ELA deadline looms with the path/hurdles now "Cyprus discussion" - "Cyprus vote" - "Troika analysis" - "ECB / EU Agreement" - and theoretically find a (non-Russian) funder for the CCO - before Tuesday's European open. Stay long Brussels and Nicosia caterers.
Surprise! No decision came out of the Eurogroup conference call (and none is expected this evening) as:
- *EUROGROUP EXPECTS CYPRUS TO SUBMIT NEW RESCUE PROPOSAL QUICKLY and
- *EUROGROUP SAYS IMPORTANT TO GUARANTEE DEPOSITS UNDER EU100,000
- *EUROGROUP SAYS TROIKA ANALYSIS NEEDED ON NEW CYPRIOT PROPOSAL
However, Cyprus has decided that it will only undertake small deposit levy (if at all) and prepares to present a new proposal. And just to rub some salt in the wound:
- *CYPRUS CUT TO CCC FROM CCC+ BY S&P; OUTLOOK NEGATIVE
So, Laiki has only hours of liquidity; the government hasn't voted on a proposal yet; Eurogroup won't act until Troika analyzes the proposal; and Cypriot Central banker wants major capital controls.