CYPRUS savers take 10% hit

[Kiltacular]

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.

 

I'm not an old-timer yet (a bit under 40) but I asked my father, many years ago, what this was like in the 1970's in the U.S.

 

He said that people would leave their jobs (as administrators, secretaries, etc.) every 6 months because they could get a higher paying job.

 

However, is this how it plays out this time?  As Packer has pointed out (last year), there is little pressure on wages (at least right now).  This is one of the reasons why corporate profit margins have stayed high.

 

Others here might recall that Buffett has done a bunch of long discourses on inflation -- if you read all that I comment on below, I think you'll agree Warren has given this subject an enormous amount of thought -- and he was the son of a gold-bug. 

 

A great primer on what you want to own, if you believe Buffett, is in the appendix to the Berkshire letter of 1983.  This is a must read if you're interested in this subject. 

 

There is also this must read article by Buffett from 1977.  "How inflation swindles the equity investor" : http://features.blogs.fortune.cnn.com/2011/06/12/warren-buffett-how-inflation-swindles-the-equity-investor-fortune-1977/

 

I feel that his title is a bit confusing, though, because if you think an inflation protected business -- like the kind he describes in the 1983 Appendix -- is hurt by high inflation you haven't thought through what happens to "cash" (especially if after-tax interest rates are less than the inflation rate).

 

The body of the 1979, 1980, 1981 and 1984 letters contain 'inflation' commentary as well (as well as a few more letters after that).  These are very useful and unusual in some respects.  (Though, by 1984, Buffett himself was worried about the possibility of "runaway" inflation.  The predictions are difficult but the business insights in these letters are still awesome in my opinion and what I found particularly useful is the idea that a great business is also good even when there is not high inflation so you don't have to guess.)

 

By 1985, Buffett said this (in case you don't believe me about the appendix to the 1983 letter):

 

The dramatic growth in earning power of these three businesses, accompanied by their need for only minor amounts of capital, illustrates very well the power of economic goodwill

during an inflationary period (a phenomenon explained in detail in the 1983 annual report).

 

And, in 1986, Buffett said this:

 

Our aversion to long-term bonds relates to our fear that we will see much higher rates of inflation within the next decade.  Over time, the behavior of our currency will be determined by the behavior of our legislators.  This relationship poses a continuing threat to currency stability - and a corresponding threat to the owners of long-term bonds.

[moore_capital54]

Yes - exactly. When inflation spikes up rapidly it is everything else that declines including securities and real assets. You always want to be buying into a rising interest rate environment and selling into a declining interest rate environment. Ask any real estate baron and hell tell you that.

 

It's just nice to see all you intelligent keynsians for the first time realizing how flawed a fiat money system is. There could be no plausible scenario in a gold standard (and there was none for 600 years) where a wealth confiscation of this sort (forced, rapid, and introduced by surprise) occurred.

 

Most people in Argentina will view the Cyrpus event as something familiar. The thing that gets me is how the ECB specifically stopped shipping physical currency in anticipation so that nobody could withdraw funds (ECB Directive from Thursday) while they also closed the banks til Thursday. Just think about that. If you have no credit card and no cash, you are basically unable to tap into your life savings. If you are an honest citizen that followed the rules paid your tax and did the sensible thing (keeping your excess savings in a federally insured banking institution) knowing it could be tapped via an ATM machine or a short visit to your local branch during business hours you are F*CKED.

 

We keep a nice amount of cash and gold in our home safe in this household and many people think it is excessive and primitive. Primitive is trusting somebody else with the value of your hard earned money.

[moore_capital54]

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!

 

Parsad, the decision was simple for Cyrpus. As they are reliant on the ECB to issue their fiat they could have either defaulted and essentially be castrated by the Euro system (going back about 20 years in economic progress and maybe more when considering their sizeable offshore banking industry) or take a 10% hit to their deposit base and stay an ECB member.

 

This won't happen with Italy or France or even a Portugal because those economies are too large. Cyprus was small enough and unimportant enough for the ECB troika to place a tough stance. It also doesn't help that Cyrpus has been a haven for a significant amount of tax evasion from countries like France/Germany/Spain.. and of course Russia. This was a chance to hit all those offshore tax evaders with a nice lump sum.

 

But again I have to stress to keep your eye on the price. Not the nominal wealth confiscation in Cyprus but the logic that in the end ALL DEBTS MUST BE PAID either via a default or a monetization. The majority of the developed world is choosing monetization - which will lead to an uncontrollable inflation.  Between 75 and 84 the yield went up almost 400%. This was what was required to combat uncontrollable inflation. This time around I suspect the 10 year can reach 10% from its current 2%.

 

 

[Phaceliacapital]

Anyone who has a link to a decent neutral write up of the current (and how we got there) situation at Cyprus?

 

Interesting discussion to say the least

[jay21]

Yes - exactly. When inflation spikes up rapidly it is everything else that declines including securities and real assets. You always want to be buying into a rising interest rate environment and selling into a declining interest rate environment. Ask any real estate baron and hell tell you that.

 

I can't remember who it was, but some famous RE guy was asked why he did so well in the 70s and/or 80s.  He said it's hard to do poorly when you borrowed at 5% and then had a period of double digit inflation.  Wouldn't that be the best time to invest for real estate?  If you think inflation is coming shouldn't you borrow now at low single digits and buy an inflationary resistant asset like RE?

 

I guess what you are saying make sense if we are buying in all cash.

[Uccmal]

Yes - exactly. When inflation spikes up rapidly it is everything else that declines including securities and real assets. You always want to be buying into a rising interest rate environment and selling into a declining interest rate environment. Ask any real estate baron and hell tell you that.

 

I can't remember who it was, but some famous RE guy was asked why he did so well in the 70s and/or 80s.  He said it's hard to do poorly when you borrowed at 5% and then had a period of double digit inflation.  Wouldn't that be the best time to invest for real estate?  If you think inflation is coming shouldn't you borrow now at low single digits and buy an inflationary resistant asset like RE?

 

I guess what you are saying make sense if we are buying in all cash.

 

Strictly speaking, you are hedging by taking on a known amount of fixed rate debt, and paying it back in cheaper dollars down the road.  Which is exactly what the governments will do.  Buying long dated treasuries is not what one wants to do in an inflationary environment. 

 

The problem with real estate, aside from your own home, is that rent control comes into play during an inflation. 

[CONeal]

For now I think the whole tax on bank deposits are a bit overblown.  I feel they (Cyprus) brought up the tax on deposits as a game of psychology.  Propose something that is so over the top and outlandish that once the goverment does what the really wanted regarding the tax, people would be more inclined to accept it b/c its would seem as the lessor of two evils.

 

This game is played all the time here in the states.  I would be more interested in hearing from someone living in or close to the country regarding the situation.  Mainstream media has a tendency of overhyping and screwing up the details in most of the stuff the media reports. 

[ERICOPOLY]

Yes - exactly. When inflation spikes up rapidly it is everything else that declines including securities and real assets. You always want to be buying into a rising interest rate environment and selling into a declining interest rate environment. Ask any real estate baron and hell tell you that.

 

I can't remember who it was, but some famous RE guy was asked why he did so well in the 70s and/or 80s.  He said it's hard to do poorly when you borrowed at 5% and then had a period of double digit inflation.  Wouldn't that be the best time to invest for real estate?  If you think inflation is coming shouldn't you borrow now at low single digits and buy an inflationary resistant asset like RE?

 

I guess what you are saying make sense if we are buying in all cash.

 

 

He was just thinking of the price.  However, people who are renting face higher rents every year.  The imputed rent for the heavily mortgaged homeowner is fixed (nearly, property tax increases, but the interest costs are fixed).

 

A landlord, unless there are rent controls, gains positive operating leverage from inflation if he is heavily leveraged at a fixed rate.

[ERICOPOLY]

Yes - exactly. When inflation spikes up rapidly it is everything else that declines including securities and real assets. You always want to be buying into a rising interest rate environment and selling into a declining interest rate environment. Ask any real estate baron and hell tell you that.

 

Housing in the US (median home prices) never once declined during the 60s/70s/80s.

 

There were years when they lagged inflation.  A typical homeowner who started with 20% down payment before rates spiked, I believe, had real gains in home equity nearly every year if not every year (levered 5:1 initially against the nominal rate of appreciation).

 

My father remembers those years fondly because he bought his home in 1970 and inflation eviscerated the real cost of his mortgage.  He was an engineer with a secure job -- wages climbed with inflation, mortgage payments did not.  His largest annual expense rapidly declined in real dollar terms.

 

Inflation improved his purchasing power.  We enjoyed more luxuries because of it.

 

Inflation gave our family positive operating leverage.

[hyten1]

so does this mean to fight inflation we all should lever up with low interest rates :)

 

and use the proceed to pay for cash generating assets

 

(obviously timing is another issue all together)

[LC]

so does this mean to fight inflation we all should lever up with low interest rates :)

 

and use the proceed to pay for cash generating assets

 

(obviously timing is another issue all together)

 

Kiltacular's post was important: namely the part that the best assets in an inflationary environment require little capital expenditure. So you can sell inflated goods without having to spend on inflated maintenance capex.

[Cardboard]

"so does this mean to fight inflation we all should lever up with low interest rates :)

 

and use the proceed to pay for cash generating assets

 

(obviously timing is another issue all together)"

 

I think that if you are financially solid: a stable job or income, your house paid off and at the very least as much investments on the sideline as the value of your home. It may make a lot of sense to borrow against your home at locked rates for 5+ years and to wait for fat pitches to appear. In Canada, the longest locking period is 10 years if I am not mistaken, but it could be much longer in the U.S., 30 years? It is a collateralized loan, your home is at risk if you will, but the rates are so low that it is almost free money.

 

You have to remember that once the locking period expires, that rates will skyrocket on you under high inflation. Renewing may not make any sense at all, so you have to be ready to pay the balance in full. The key with such approach will be to be patient and to only buy when true fat pitches appear and not fear the monthly interest payments and small principal repayments (you have to amortize over as many years as possible). Not everyone has that discipline. If you think of deploying the capital as soon as you can and things like the dividend or yield matches the loan payments, then it is not for you.

 

Cardboard

[premfan]

so does this mean to fight inflation we all should lever up with low interest rates :)

 

and use the proceed to pay for cash generating assets

 

(obviously timing is another issue all together)

 

Kiltacular's post was important: namely the part that the best assets in an inflationary environment require little capital expenditure. So you can sell inflated goods without having to spend on inflated maintenance capex.

 

Being tangible asset light with pricing power are the best businesses in inflationary times. These are the cokes and see's of the world.  In private business the goal is to create operating leverage. Like previous posters have mentioned getting a rate fixed now and then paying off the asset with cheaper dollars in the future is a great plan. That being said if people believe the endgame is crazy high inflation then waiting til that manifests and buying real estate is a home run. Also service based private businesses with little tangible assets would do well only if you are considered the "expert" in town. An expert can easily increase prices while slightly increasing demand or keeping it relatively fixed. Due to competition if you are not considered one of the best i dont think inflation would be your friend. Due to obamacare there will be a shortage of doctors due to increased demand of people getting healthcare.  This seem like a good profession but, insurance companies are combating that with reinbursing doctors less money per service rendered. In the end doctors will have to much work harder and render way more services for a bit more income.

[oddballstocks]

so does this mean to fight inflation we all should lever up with low interest rates :)

 

and use the proceed to pay for cash generating assets

 

(obviously timing is another issue all together)

 

Kiltacular's post was important: namely the part that the best assets in an inflationary environment require little capital expenditure. So you can sell inflated goods without having to spend on inflated maintenance capex.

 

Being tangible asset light with pricing power are the best businesses in inflationary times. These are the cokes and see's of the world.  In private business the goal is to create operating leverage. Like previous posters have mentioned getting a rate fixed now and then paying off the asset with cheaper dollars in the future is a great plan. That being said if people believe the endgame is crazy high inflation then waiting til that manifests and buying real estate is a home run. Also service based private businesses with little tangible assets would do well only if you are considered the "expert" in town. An expert can easily increase prices while slightly increasing demand or keeping it relatively fixed. Due to competition if you are not considered one of the best i dont think inflation would be your friend. Due to obamacare there will be a shortage of doctors due to increased demand of people getting healthcare.  This seem like a good profession but, insurance companies are combating that with reinbursing doctors less money per service rendered. In the end doctors will have to much work harder and render way more services for a bit more income.

 

I think the problem with the asset-lite company that can raise their prices is they can be hit by a demand slump.  In a perfect world with high inflation where workers wages keep up this isn't an issue.  Unfortunately wages don't keep up and workers get squeezed, that's why inflation is difficult.  When inflation is high people start to cut back on non-necessary items, I would think Cokes and See's candies would be in the discretionary purchase category.

 

I don't think there's a good investment in an inflationary environment.  I don't think it's anything anyone should ever hope for either.  Outside of the wealthier who own companies resilient and have ample cash most citizens are seriously harmed by inflation.  If inflation were a good investment people would be flocking to Argentina right now to capitalize on their rampant inflation, instead money is trying to escape, not get in.

[Phaceliacapital]

Royalty companies should be very interesting in a high inflationary environment

[ERICOPOLY]

The tax brackets weren't adjusted in the 1970s and early 1980s.

 

So incomes got taxed more and more as the nominal wage was rapidly pushed upwards by inflation into a progressive tax structure.

 

It's unclear to me how much of the pressure on households came from this issue.

 

Mortgaged homeowners lost much of their positive operating leverage to this problem of taxation.

 

So it was like a powder keg of demand building up that was set off when Reagan brought the tax rates back down.

 

This time around, if they let the tax brackets adjust annually for inflation it won't be the same kind of situation.  I'm not sure if they will though -- it sort of defeats the purpose of using inflation to bring down the Govt's debt.

[oddballstocks]

Good interview on the situation: http://www.businessweek.com/articles/2013-03-19/a-cypriot-nobelist-appalled-by-the-bailout-bank-tax#r=hp-lst

[CONeal]

Good interview on the situation: http://www.businessweek.com/articles/2013-03-19/a-cypriot-nobelist-appalled-by-the-bailout-bank-tax#r=hp-lst

 

1. Why can't they just post the damn email word for word of what he said?  Kind of takes the context out of it.

2. The last I saw no one would be taxed under 100k.  So this interview might be dated.

 

[premfan]

so does this mean to fight inflation we all should lever up with low interest rates :)

 

and use the proceed to pay for cash generating assets

 

(obviously timing is another issue all together)

 

Kiltacular's post was important: namely the part that the best assets in an inflationary environment require little capital expenditure. So you can sell inflated goods without having to spend on inflated maintenance capex.

 

Being tangible asset light with pricing power are the best businesses in inflationary times. These are the cokes and see's of the world.  In private business the goal is to create operating leverage. Like previous posters have mentioned getting a rate fixed now and then paying off the asset with cheaper dollars in the future is a great plan. That being said if people believe the endgame is crazy high inflation then waiting til that manifests and buying real estate is a home run. Also service based private businesses with little tangible assets would do well only if you are considered the "expert" in town. An expert can easily increase prices while slightly increasing demand or keeping it relatively fixed. Due to competition if you are not considered one of the best i dont think inflation would be your friend. Due to obamacare there will be a shortage of doctors due to increased demand of people getting healthcare.  This seem like a good profession but, insurance companies are combating that with reinbursing doctors less money per service rendered. In the end doctors will have to much work harder and render way more services for a bit more income.

 

I think the problem with the asset-lite company that can raise their prices is they can be hit by a demand slump.  In a perfect world with high inflation where workers wages keep up this isn't an issue.  Unfortunately wages don't keep up and workers get squeezed, that's why inflation is difficult.  When inflation is high people start to cut back on non-necessary items, I would think Cokes and See's candies would be in the discretionary purchase category.

 

I don't think there's a good investment in an inflationary environment.  I don't think it's anything anyone should ever hope for either.  Outside of the wealthier who own companies resilient and have ample cash most citizens are seriously harmed by inflation.  If inflation were a good investment people would be flocking to Argentina right now to capitalize on their rampant inflation, instead money is trying to escape, not get in.

 

Depends on the value proposition. If i increased my prices by 10 percent i would make 50 percent more income due to operating leverage. The price increase would go straight to the bottom line. To increase prices there was to be a reason given to the customers so then they can rationalize it so they are getting the same or greater value proposition.  Coke and very few other companies can increase prices in shealth mode. Would anyone care or really even notice if coke increased there prices by 10 percent tomorrow?  Would the demand suddenly drop? I agree if wages dont increase it would be an issue .  I dont think coke or see's is a discretionary item due to what it represents in the mind( happiness/ v-day). It all depends on the value proposition of the product and what it represents in your mind.  Price is what you pay and value is what you get. In an scenario of high inflation and wages not keeping up. The customer would still buy discretionary items ( This is the US its what we do) only with the greatest value proposition.

[ERICOPOLY]

The customer would still buy discretionary items ( This is the US its what we do) only with the greatest value proposition.

 

However 75% of Coke's sales are not in the US.

[JEast]

Call me a skeptic, but this Cyprus stuff seems to be a red herring.  Why has the Russian government introduced itself into the conversation?  Maybe this has less to do about the banking system and has more to do with the Russian underworld.  Just a thought.

 

Cheers

JEast

[ERICOPOLY]

Call me a skeptic, but this Cyprus stuff seems to be a red herring.  Why has the Russian government introduced itself into the conversation?  Maybe this has less to do about the banking system and has more to do with the Russian underworld.  Just a thought.

 

Cheers

JEast

 

The question is then, why is Russia protecting it's tax evaders?  The answer might be, the tax evaders are powerful.

[berkshiremystery]

Call me a skeptic, but this Cyprus stuff seems to be a red herring.  Why has the Russian government introduced itself into the conversation?  Maybe this has less to do about the banking system and has more to do with the Russian underworld.  Just a thought.

 

Cheers

JEast

 

You are right on the mark. About 33-50% of all bank deposits in Cyprus are of Russian origin.

 

http://www.bbc.co.uk/news/business-21831943

[CONeal]

Call me a skeptic, but this Cyprus stuff seems to be a red herring.  Why has the Russian government introduced itself into the conversation?  Maybe this has less to do about the banking system and has more to do with the Russian underworld.  Just a thought.

 

Cheers

JEast

 

The question is then, why is Russia protecting it's tax evaders?  The answer might be, the tax evaders are powerful.

 

I noticed somewhere that Russia gave Cyprus a loan and that Cyprus is neededing another loan from Russia after the so called deposit clawback. 

[ubuy2wron]

Call me a skeptic, but this Cyprus stuff seems to be a red herring.  Why has the Russian government introduced itself into the conversation?  Maybe this has less to do about the banking system and has more to do with the Russian underworld.  Just a thought.

 

Cheers

JEast

 

The question is then, why is Russia protecting it's tax evaders?  The answer might be, the tax evaders are powerful.

 

I noticed somewhere that Russia gave Cyprus a loan and that Cyprus is neededing another loan from Russia after the so called deposit clawback.

The deposits are Russian and they are dirty. The depositer bail in just failed the Plan B being planned is giving the Russian Mob the keys to the bank be afraid be very very afraid. The damage a true BANKSTER can do to an economy is breath taking.