“When it becomes serious, you have to lie."
-Jean Claude Juncker, PM of Luxembourg, and the head of the Eurogroup council of eurozone finance ministers
Prior to yesterday, if you were trying to
handicap how the unelected leaders of the Eurozone were going to react to a
tough situation, you only had to refer to the quote above from Mr. Junker to
understand their mindset.
But so long as someone at the ECB was willing
to flood the world with free EURs (with significant backup provided the US
Federal Reserve) the market closed its eyes, held its breath and took the leap
of faith that all was well.
However, post the Cyprus decision, the curtain has been pulled back and wizard
revealed with all his faults and warts. The age of
innocence is dead and with it died institutional and retail trust, confidence
in the system writ large and the rule of law.
It would be hard to over-emphasize how
significant the Cyprus situation is. The EU
demonstrated under no uncertain circumstances that they will destroy the rule
of law to maintain their own power. It was a recognition of tyranny that
many of us have always assumed was the case but yesterday became reality.
The damage done here is not related to the size of the haircut -
currently discussed between 3 and 13% - butrather that the legal language which each and every investor
on the planet must rely on in order to maintain confidence in the system has
been subordinated to
the needs of the powerful elite. To the power elite making the major
decisions in DC, London, Berlin, France, Brussels, et. al., laws are like ice
cream, easily melted.
Which begs the question, who is next? Will it be Portugal?
Greece? Spain? Italy? France???
Will they impose a “one-time” tax on your bank account? Your
house? Your stocks and bonds? Retirement accounts?
The major banks of Europe are levered beyond anyone’s wild guess.
They cannot afford a hit to their capital base lest they be exposed for the
over-levered giants they are. This, of course, opens up the exposure all
of these banks have to the greater than $1tr derivatives market where the
failure of any one of these derivative banks could lead to the collapse of them
all.
So, of course, the powers that be in Europe must do everything in their
power to prevent the world from noticing that their banks are broke. This
means they will lie and take anything they deem necessary. Including the
forceful seizure of savings accounts of innocent people.
The Government Is Your Friend?
Markets have been rallying for years on
the back of the idea that government’s are going “all-in” to save the current
economic system. To many of the talking heads on the business channels, we are
supposed to view this as a good thing.
This has produced all kinds of non-market
based solutions such as the bailout of the major US banks
and their subsequent TBTF moniker, the “bailout” (I use the term loosely
because this was really a political stunt) of GM and a never-ending stream of
free money being handed out by the major central banks.
The markets have seemed to like this ham-handed involvement and have
rallied to all-time highs.
But all along the way there have been
those of us who have said that there will eventually be a price pay. With
the Cyprus decision, investors now know what the price is: your money is not
really your money. Your bank account is not really your bank
account. Your bonds, stocks, home and anything else you think you own isn’t really yours. The
governments of the world will take it from you whenever things get bad enough.
Look at China. Do you
think if the global economy ever shrinks far enough that the Chinese will allow
all those American companies to keep their assets on Chinese soil? How
likely is it that the Chinese will suffer through their own problems of
inflation and social instability and yet allow Apple, GE, GM and the rest to
keep benefiting?
Think about global mining and oil
stocks? Most own assets in countries other than the
home domicile of the company. If the prices of precious metals and/or oil
ever meaningfully breaks out, do you think the poor governments that originally
granted the mining/drilling concessions will simply respect the rule of law and
allow these multi-national corporations to keep sending their country’s wealth
abroad? Not likely.
How about in the US? Could
the US declare a bank holiday and unilaterally devalue the currency in one
swift move? I will get over 9,000 responses saying this could never happen
in the good ol’ US of A but of course it could. In fact it has already
been done before during FDR’s first 100 days in office. The template
already exists. Electronic banking only makes the process that much
easier.
Technically, since the Fed has been
running a policy of monetary inflation since about 1920, the government here
already has been quietly taxing the savings accounts of its citizens without
their permission for decades. The subtle difference between what Europe is doing in Cyprus and
what the Fed does every day to American citizens is that the Cyprus theft is
happening in one discrete event while the Fed’s theft drips in slowly over
years.
But no matter which way you look at the situation, expect
things to deteriorate from here.
Lehman Part Deux
What could be next?
Bank runs will continue apace where
they are already going and will begin in countries previously seen as
impervious to such events such as France, Germany and even Switzerland.
The difference in pricing between the paper
and physical precious metals markets will rise. Good luck to those of you owning
paper gold and thinking this will help you when things get bad. The legal
language on your piece of paper is worthless. If savings accounts aren’t
sacrosanct, then neither is that ETF.
Did you or your firm stash a bunch of
money off-shore in some tax-friendly haven that probably has a favorable
relationship to the British Crown? Best of luck with that. Tax havens are nothing more than
legal arbitrages. With the value of law moving to zero, the value of your
account approaches the same.
Trade wars will begin to rear their ugly
heads as the losers in the currency wars retreat to their last line of defense. Once
you tear up the rule of law, trade agreements quickly get thrown by the wayside
once your domestic situation deteriorates enough.
Moar and moar government micro-management
of individual economies, markets, sectors and companies. The Amateur Barack Obama and his
minions will continue the tradition started by George II of abandoning free
market principals to ostensibly save the free market. Once they are done
there will be little left of the market and none of us will be free.
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