CYPRUS savers take 10% hit

[Cardboard]

I would like to hear some thoughts from Moore Capital as to what he meant exactly from "unencumbered cash" recently.

 

Obviously, holding any cash in a country where banking is weak would not qualify. Moreover, brokerage accounts in Canada are protected only for the first million dollar. If a broker goes belly up, then what you have above $1 million could be gone. I can't recall if it is only for margin accounts since cash accounts have to be segregated from broker's assets. And, this protection fund is only useful or won't get depleted if it is not all the brokers going belly up at the same time.

 

Cardboard

[ERICOPOLY]

We need to go back to the old rules: 25% downpayments, 25% of your monthly income to service mortgages. Anything else is leading to trouble down the road or over-levered situations somewhere else. Hence No Free Lunch. People thought and keep thinking that government insured mortgages is a good idea. It just means that someone else in the system is absorbing the risk for folks who should not receive a loan in the first place. It is prone to blow-up and these organizations will come to the taxpayers to cover the gap that will inevitably come.

 

I find it amazing that a person can put their last penny into their 20% down payment, walk out with a 30 yr mortgage based on their income, and be 65 years old.  Are they going to work until they are 95?

 

I work in the mortgage business in the US and feel it best to clean up some misconceptions.

 

Eric's scenario is not wholly correct. Yes, someone who is 65 can get a 30 year loan provided the income/credit profile is acceptable. The irony is that a lender cannot use common sense that the borrower will almost certainly NOT be earning the same income 15 years hence, let alone 30, as that would be age discrimination. The part I will take issue with is that they would be hard pressed to get this loan using their last penny as reserves (assets AFTER the loan closes) are required. Now, if this same person wanted to only put down 10% thereby holding the remaining 10% in reserves, and they were OK with paying for mortgage insurance, then they would be golden.

 

 

I appreciate being corrected -- if nobody does that for me I'll just remain ignorant.  That's worse!

 

 

[Mark Jr.]

They made a terrible mistake. Genie is now out of the bottle regarding confiscation of assets. Something that people other than gold bugs have never thought about before or even possible is now contemplated as a real practical solution by politicians. Markets around the world are now coming down. S&P futures are down 1.1%.

 

And remember that if you are on this board, you are the rich. You are the "enemy" of at least 90% of the people. You may not all be in the 1% yet, but close enough to be lumped in. Lots of people, an overwhelming majority that will not protest at all or drop a tear for you and could easily be persuaded to take over your assets by force if things get really out of hand.

 

I have warned about this before, especially concerning Obama who made a huge deal about taxing the rich more which provided next to nothing in terms of budget solution. I was not opposed to more taxation on the rich to ensure fairness, but I was opposed to making them THE target. His intention seemed almost entirely aligned to gain political points with the vast majority instead of resolving the issue. It has succeeded and now, the door is open for much nastier stuff. Highlighting a minority as the problem has led to terrible stuff in the not so distant past.

 

I wrote this a couple weeks ago and it seem very appropriate now and on the heels of what Cardboard said.

 

 

http://wealth.net/2013/03/05/the-tragedy-of-contrarianism/

 

The heart of it is the parable from Marc Faber's latest GBD report, I'll repost that part here:

 

    “My friend Ahmed Ayob sent me the following wonderful story from a South African newspaper.

 

    ‘A group of children were playing near two railway tracks, one still in use while the other disused. Only one child played on the disused track, the rest on the operational track.

    The train is coming, and you are just beside the track interchange. You can make the train change its course to the disused track and save most of the kids. However, that would also mean the lone child playing by the disused track would be sacrificed. Or would you rather let the train go its way?’

 

    Let’s take a pause to think what kind of decision we could make…

    Most people might choose to divert the course of the train, and sacrifice only one child. You might think the same way, I guess. Exactly, to save most of the children at the expense of only one child was rational decision most people would make, morally and emotionally.

 

    But, have you ever thought that the child choosing to play on the disused track had in fact made the right decision to play at a safe place?

 

    Nevertheless, he had to be sacrificed because of his ignorant friends who chose to play where the danger was. This kind of dilemma happens around us every day. In the office, community, in politics and especially in a democratic society, the minority is often sacrificed for the interest of the majority, no matter how foolish or ignorant the majority are, and how farsighted and knowledgeable the minority are.

 

    The great critic Leo Velski Julian as well as Sourav who told the story said he would not try to change the course of the train because he believed that the kids playing on the operational track should have known very well that track was still in use, and that they should have run away if they heard the train’s sirens.. If the train was diverted, that lone child would definitely die because he never thought the train could come over to that track!

 

    Moreover, that track was not in use probably because it was not safe. If the train was diverted to the track, we could put the lives of all passengers on board at stake! And in your attempt to save a few kids by sacrificing one child, you might end up sacrificing hundreds of people to save these few kids.

 

    ‘Remember that what’s right isn’t always popular… and what’s popular isn’t always right.’

 

    I like the above story because in today’s western democracies it is most likely that voters would have decided to sacrifice the child, who was prudent in order to save the children who were [not]“

[moore_capital54]

The CYPRUS event is one of the most important of the last 25 years and ranks in line with the Greenspan post 9/11 reduction of rates to 1%, the bernanke AIG bailout and QE, and the Argentina default.

 

The Cyprus event confirms that all this debt will have to be paid. For a country that is not able to print its own currency the debt is paid in the form of a wealth confiscation (the savers prudent capital is unfairly used to pay for fiscal irresponsibility) but as I continue to say, for a country like the US the result will be far worst. But not a nominal confiscation of wealth (the keynsians will never let that occur) but a disgusting inflationary confiscation of the kind that will make the 1970's look like a walk in the park.

 

 

[berkshiremystery]

Cyprus bailout: British pension payments delayed

 

All future pension payments paid by the government to British citizens in Cyprus will be temporarily put on hold until least tomorrow (Tuesday).

 

http://www.bbc.co.uk/news/uk-politics-21832594

[LC]

for a country like the US the result will be far worst. But not a nominal confiscation of wealth (the keynsians will never let that occur) but a disgusting inflationary confiscation of the kind that will make the 1970's look like a walk in the park.

 

Question...do you think TIPS will be adequate to hedge this type of event? I have a small %age of my portfolio in vanguard's TIPS ETF, however I am a bit non-convinced that it will actually function correctly as a hedge if S.H.T.F.

 

Specifically I am concerned about a lollapalooza effect. If inflation occurs suddenly and unexpectedly, will the pent-up inflationary pressures be so great that no matter the level of TIPS exposure, will drastic increasing inflation will make the dollars worthless? Or do you think foreign holdings or commodities (see: gold) would be a more adequate hedge against drastic, sudden inflation?

[oddballstocks]

for a country like the US the result will be far worst. But not a nominal confiscation of wealth (the keynsians will never let that occur) but a disgusting inflationary confiscation of the kind that will make the 1970's look like a walk in the park.

 

Question...do you think TIPS will be adequate to hedge this type of event? I have a small %age of my portfolio in vanguard's TIPS ETF, however I am a bit non-convinced that it will actually function correctly as a hedge if S.H.T.F.

 

Specifically I am concerned about a lollapalooza effect. If inflation occurs suddenly and unexpectedly, will the pent-up inflationary pressures be so great that no matter the level of TIPS exposure, will drastic increasing inflation will make the dollars worthless? Or do you think foreign holdings or commodities (see: gold) would be a more adequate hedge against drastic, sudden inflation?

 

I'm not moore so I can only speak for myself.  I'm worried TIPS won't capture all of inflation.  Right now TIPS are saying there is very little inflation.  Yet antecdotally what we're seeing in my household, and with everyone we know (upper middle class young families in 30s) everyone's budget is tight.  No one's pay is going up and expenses are rising fast.  It isn't one specific category that's rising, it's an across the board rise.  We've had to alter our budget a few times now, what comes next is either I find more sources of income (which I'm working on) or we cut back on our savings.  Most of our friends have zero extra sources of income, so savings takes a hit.

 

The problem is what I'm seeing when I talk to people is not reflected in TIPS pricing.  This leads me to believe that market dynamics are stronger than the actual inflation dynamics, or the measurement is wrong.

 

I'm worried about inflation, I'm also worried about the dollar becoming worthless.  I diversify internationally, I have Yen, Euro, Pound, Franc, I had some NZD for a while.  I like having non USD holdings, if something were to happen to the USD I would at least have something left. 

 

I don't have any hedging plan, and I don't think wealth can ever be completely protected.  My goal is that if SHTF scenario I will come out with something.  Maybe 10 or 20% of what I had originially, but 10 or 20% is a heck of a lot better than 0%.

 

 

[Guest]

If the SHTF happens, wouldn't gold be the best solution?

[ERICOPOLY]

This isn't for me, but if you really want to bet on inflation with both TIPS adjustments and GLD as a combined tailwind:

 

Say you start off with $10,000 in the account -- account is 100% in cash.

 

1)

You write a deep-in-the-money GLD put, then purchase a GLD call with the same strike.  You now have a $10,000 notional long GLD position

 

Thus, you have not used any cash yet.

 

 

2)  Use $10,000 of cash to purchase TIPS.

 

 

When hyperinflation hits, you get the CPI adjustments from the TIPS as will as the skyrocketing price of gold.

 

You really high margin allowance for TIPS, given that they are a government security.

 

 

[NormR]

IIRC, TIPS suffer from drag in hyperinflation because the coupon payments are not reset all that often (semi-annually?) whereas the dollar is depreciating a sizable amount on a daily or hourly basis.  Again, just a dim memory on this one. 

 

As previously pointed out, the simply way to hurt TIPS holders is to redefine CPI.  Again, IIRC, Argentina fixed the price of big macs because the Economist's fun big mac cost index put the lie to the official stats.  As a result, it became hard to get the burger in the country as only a few were put up for sale each day.     

 

 

[hyten1]

man you guys scary me with these SHTF talk

 

 

the only thing i can think of if inflation skyrockets, is buy good asset that generate cash? don't have too much cash lying around in the bank?

[wknecht]

I recall reading some time back that someone - I believe Seth Klarman - had the same fear that TIPS wouldn't capture inflation as the indices are controlled somewhat by the government.  Buying out-of-money puts on bonds was his thought to circumvent this potential problem (a lot of government intervention in the bond market these days too though).

 

Buffett has always made the argument that a good business is the best hedge. Think it was the '79 - '81 letters where he got into more specifics. Might be worth a re-read if worried.

[writser]

The CYPRUS event is one of the most important of the last 25 years and ranks in line with the Greenspan post 9/11 reduction of rates to 1%, the bernanke AIG bailout and QE, and the Argentina default.

 

The Cyprus event confirms that all this debt will have to be paid. For a country that is not able to print its own currency the debt is paid in the form of a wealth confiscation (the savers prudent capital is unfairly used to pay for fiscal irresponsibility) but as I continue to say, for a country like the US the result will be far worst. But not a nominal confiscation of wealth (the keynsians will never let that occur) but a disgusting inflationary confiscation of the kind that will make the 1970's look like a walk in the park.

 

I disagree. The Cypriotic banking system functions as a massive money laundering system for (mostly) rich Russians. My guess is that the EU made the clawback a requisite for a bailout because they don't want to pay so the 'mobsters' can keep all their money. Cyprus is tiny, can be saved easily, it's just a bit of politics. Basically Europe is saying: "if you stash all your money here, you better help us.". The EU doesn't want to target the local population, they affirmed this today:

The Eurogroup continues to be of the view that small depositors should be treated differently from large depositors and reaffirms the importance of fully guaranteeing deposits below EUR 100.000.

 

http://www.forbes.com/sites/afontevecchia/2013/03/18/eu-takes-shot-at-moscow-with-cyprian-haircut-as-russians-own-22-of-deposits/

 

http://www.eurozone.europa.eu/newsroom/news/2013/03/peg-statement-cyprus-18-03-13/

[ItsAValueTrap]

Again, IIRC, Argentina fixed the price of big macs

Argentina is an odd country and their economy is getting out of hand (e.g. expropriation of foreign assets).  Their currency is in big, big trouble and everyday people there are trying to get physical US dollars on the black market (and they pay a premium for them).  They aren't hoarding gold.

 

I think buying quality businesses is probably a better idea.

If you are wrong about inflation, you will do ok.

If there is high inflation, you will do ok.

If there is hyperinflation, you will lose purchasing power but quality businesses should beat most other asset classes (except for maybe gold or commodities).

 

Berkshire Hathaway for example is slightly cheap right now.

 

2- Out of the money call options on commodity futures might be worth looking at if you really knew what you were doing.  e.g. future options on cotton weren't that expensive last time I looked.  (But in my opinion cotton prices are more likely to skyrocket due to weather destroying crop somewhere, rather than hyperinflation of the US dollar.)

[Mark Jr.]

What I find interesting is that on this, probably the "most serious" and levelheaded board I frequent, there is a serious thread on the SHTF. It's not just for tin-foil hats anymore. I believe "The Cyprus Event" has been a game changer in this respect and it hasn't even quite happened yet.

 

I once read that during the (Brazilian? Argentine?) hyperinflation the banks had second clocks installed, one showed the time, the other showed the value of the currency. In a real honest to god hyperinflationary episode, I really don't see the government CPI (from which the TIPs rates are set) adequately reflecting what the inflation rate actually is (it doesn't now, why would it then?), or that it would reset fast enough.

 

Gold: the big problem there is I'm nearly 100% convinced that confiscation of private gold holdings is a lock, as in guaranteed-to-happen (remember, this has already happened in the US in 1930 and it didn't become legal to own gold for another 40+ years)

 

If you are really and truly worried about a hyperinflationary, or even very high inflationary episode in the US ( or your home country), one where gold would actually protect you, what you really need to do is get out of the country (or at least your gold) before the capital controls kick in.

 

You need to be setup and in-place long before it ever happens.

[premfan]

It looks like the rules have changed again. The rules have been changing since 2008 and all the players in the game keep adjusting there moves to the new rules placed in the system. We are an optimistic society so all the rule changes don't matter until it does.

[Parsad]

It looks like the rules have changed again. The rules have been changing since 2008 and all the players in the game keep adjusting there moves to the new rules placed in the system. We are an optimistic society so all the rule changes don't matter until it does.

 

It also begs the question...if things are so good and improving in Europe, why would a Euro country resort to such drastic measures?  Are they simply playing the North Korea of Europe and bluffing for an easier to implement plan?  If so, at what point to other Euro nations get tired of the bluffs from Greece, Cyprus, Spain et al, and say go fu*k yourself!  I'm still of the mindset that a monetarily united Europe, is not possible without a fiscally and politically united Europe...we're in the 3rd inning of a 9-inning game over there!  Cheers!

[premfan]

It looks like the rules have changed again. The rules have been changing since 2008 and all the players in the game keep adjusting there moves to the new rules placed in the system. We are an optimistic society so all the rule changes don't matter until it does.

 

It also begs the question...if things are so good and improving in Europe, why would a Euro country resort to such drastic measures?  Are they simply playing the North Korea of Europe and bluffing for an easier to implement plan?  If so, at what point to other Euro nations get tired of the bluffs from Greece, Cyprus, Spain et al, and say go fu*k yourself!  I'm still of the mindset that a monetarily united Europe, is not possible without a fiscally and politically united Europe...we're in the 3rd inning of a 9-inning game over there!  Cheers!

What is the endgame? Using chess as an example which is a finite game. Either you win, lose, or tie. Chess would be essentially an infinite game if there was no way to tie.  Your opponent would make there best move then you would make your best countermove and it would repeat forever.  If this European situation cant create a "tie" isn't it logical that each side would make the best move and the other side would make its best move repeatly  creating no endgame.

[moore_capital54]

It's truly funny to see all you smart guys try and figure out how to game the inflation. You don't get it you can't evade the inflation when it comes. Physical gold may rise substantially but in that case some type of a windfall tax will be implemented. Owning gold in the ground in the form of a mine or deposit may help as well but that too would be subject to a windfall tax. The crux of the matter is to comprehend and understand that as an investor what you want in such a scenario is to be largely in near cash assets so that you can be ready to deploy the cash at attractive valuations.

 

Inflation is not an event to profited on rather the reconciliation of years worth of folly. It is the moment when the roosters come home. The best thing you can do is crystalize your net worth's today as I have done for myself and my investors. If I am wrong I may miss out on 5-10% percentage points, if I am right I will make 50-100% again over the next 3 years.

[moore_capital54]

The only way to beat inflation is to avoid having it in the first place. Intelligent investors must come to terms with the severe flaws in the current system and make their voices heard to the elected officials. A prudent fiscal + central banking regime needs to be implemented after the massive inflation.

[turar]

The crux of the matter is to comprehend and understand that as an investor what you want in such a scenario is to be largely in near cash assets so that you can be ready to deploy the cash at attractive valuations.

I'm confused, why would you want to be in "near cash assets" when (hyper)inflation hits?

[LC]

 

Inflation is not an event to profited on rather the reconciliation of years worth of folly. It is the moment when the roosters come home.

This is very insightful...you are right, I have no reason to assume that inflation will occur in a nice, linear manner at X%. That is Fed boilerplate thinking...

 

I think I need to find an old timer and ask what the environment felt like during super inflationary times! Or at least, re-read Buffett's inflation piece.

 

[Hielko]

The crux of the matter is to comprehend and understand that as an investor what you want in such a scenario is to be largely in near cash assets so that you can be ready to deploy the cash at attractive valuations.

I'm confused, why would you want to be in "near cash assets" when (hyper)inflation hits?

Historically cash has been a pretty good inflation hedge. Interest rates go up when inflation goes up.

[no_free_lunch]

At least the market is rejecting the whole concept of this type of "bailout".  I'm sure policy makers will learn a lesson from this and go back to the old, dependable printing press.

[turar]

Historically cash has been a pretty good inflation hedge. Interest rates go up when inflation goes up.

Hmm, it does make sense when you think about it. I guess it depends on the situation. I did live through hyperinflation once as a kid, and cash was trash basically, but that situation was somewhat different.