Well it was a wild ride yesterday.
More than 2 percent was lopped off the ASX, while overnight in Europe and Wall Street, things were a little better, but markets were still down about half a percent.
What caused all the hoo haa?
Now this place is better known for its long summers and as a tax haven darling of the modern world with a withholding tax rate of 4%. All you need to do is open up an account, “mums the word” and you can slash your tax massively from the traditional western standards.
Of course it’s a little tricker than that, you have to get the money there and that is always a challenge… But one worth solving.
So what’s all the drama?
Another European bailout package to another troubled European economy (Cyprus) aimed at stabilising Cypriot debt markets and of course the euro zone… Déjà vu.
The world is a strange place and only getting stranger – a stability package in Europe rattles every market in the world… and instability increases.
All because this policy might actually work!
The European bailout, will give Cyprus $12.6 billion, so long as they aise $6bn themselves. How? By placing a levy on bank deposits. They can dress it up all they want, but effectively, the Cypriot government is confiscating 10 percent of depositors’ funds. And with no attempt at progressivity. They’re just slugging mum, dad and everyone they can.
Can you imagine the hell that would break loose here in Australia if the Australian government said, ‘Oops, sorry. We’ve made a mess of the whole she-bang. So we’re taking 10 percent of your savings’?
There’d be latte glasses smashing all down Lygon Street.
Cyprus has delayed making a decision on whether they’ll accept the deal or not, but banks will be forced shut until Thursday.
It’s chaos in Cyprus. But why are global markets so spooked?
Well, first of all, no one really believes that the people of Cyprus are going to swallow that turd-burger lying down. The banks have long-enjoyed the reputation (with the support of governments and various guarantees) that they are the safest place for your money.
So telling people banks are the safest place for their money, and then swiping some of it to settle your debts is a massive betrayal of trust. Cars have been burnt for a lot less than that in recent years.
Second, a fair chunk of the deposits being pocketed actually belong to Russians (I still haven’t found out why so many Russians are parking their money in Cyprus – any ideas?) So how is Russia going to react?
Have you seen Vladimir Putin’s angry face?
No, that’s right. He only has one face…
He didn’t become the hard-man of global politics by letting the governments of little islands run off with Russian money. Russians will be egging him on into some “firm diplomacy” (which in Russian translates to “kicking heads”.)
Third, if it actually works, and the swindle becomes bailout best-practice, what does it mean for the rest of the Euro-zone? What does it mean for the banks in those other dysfunctional debt swamps (there’s at least half a dozen of them.)
Imagine you’re an Italian citizen. You know that if your government (now, as it happens, formulating fiscal policy under the direction of a comedian) doesn’t get its act together, there’s every chance they’ll be going cap in hand to the ECB. And if that happens, the creditor nations (mostly Germany) will force your government to take 10 percent of your savings.
I know where I’d be first thing Monday morning… joining the cues down at the bank, trying to get my money out before the mob starts lynching anyone in a suit and shiny shoes.
It sets a terrifying precedent. Who’s going to risk keeping their money in the bank – especially since deflation is more likely than inflation, and deposits are paying so little?
We could see a run on every bank in at least six European states. Bank runs have fallen from popular memory, but a single bank run as the ability to tear an entire financial system to pieces.
But we’re not talking about a single bank. We’re talking every bank in each of these economies… possibly with a bunch of economies popping off at the same time.
It’s an apocalyptic scenario.
It all serves to remind us that the while the stormy seas have settled in recent months, it’s not plain sailing just yet.
Last week, Jens Weidmann, head of the German Bundesbank, was taking pains to remind everyone of the challenges ahead.
“Even if reform policies are kept to, the necessary adjustments in the crisis countries are still going to take years… but the reform process has stalled in France; in Italy, the elections have cast a question mark over it; and the situation in Cyprus is even less clear…”
Well, at least Jens has got some clarity around the situation in Cyprus now…
And back home, anyone who thinks the rate cycle has turned, and that the RBA is planning on hiking rates at the next chance it gets, is way off beam.
And this includes a lot of the media and market analysts… who should know better.
Last week, after employment surprised on the upside, markets stopped pricing in any further rate cuts.
(The employment number was mostly a statistical glitch… good, but not awesome. Unemployment held steady at 5.4 percent, and that’s about right.)
The Australian even ran with the headline:
JOBS PUT PAID TO RBA GLOOM
Rubbish. Glenn’s not watching the potential collapse of the entire European financial sector, safe in the knowledge that the February employment numbers were unusually (and suspiciously) strong…
But at the end of the day, there’s probably not much to get excited about here.
We all knew that Europe was a mess, and will be for a while yet. And we all knew that the Australian economy and recovery was on track, though it won’t be a sudden lurch back into the golden days.
And we all knew that rates were not going anywhere anytime soon, and in fact, may actually have further to fall in this rate cycle.
These are the slowly evolving trends that lay below the bubble and froth of the ‘news’.
It’s a challenge for investors like us to cut through the noise, and to keep focussed on the bigger picture.
But get behind these big picture trends, and you can secure steady and consistent returns for yourself.
And let everyone else worry about the noise.