Saturday, March 16, 2013

Cyprus Citizen's Bank Accounts Looted By Government: Is Your Money Safe?

Last night we received word that the global sovereign debt crisis has opened an incredible new chapter. Up until about 24 hours ago the bankrupt governments and banks (which are now government backed) of the developed western world (Japan, United States, Europe, U.K.) have dealt with the problem using one simple tool: bailouts paid for with printed money.

There have been an endless array of fancy names used for this simple process such as Quantitative Easing, LTRO, OMT, etc. It comes down to additional debt being raised (or sometimes moved around with sleight of hand as seen in Europe) and the global central banks "easing" this process by flooding with world with printed money.

Looking at it from the government's perspective, this strategy seemed to me as the more intelligent way to go because it was far less likely that the average citizen could figure out what was actually going on. Only those that have taken the time to study history can see what is actually happening: their hard earned wealth was being removed in the form of their purchasing power. This process is no secret and even has a name in the world of finance: "financial repression." For an simple walk through see What Is Financial Repression. Not only do people not understand what is taking place, they actually cheer for it because it comes with additional social programs, government transfer programs, or "stimulus.". They see it as a way to earn something for nothing, or a "free lunch" as it is called in the world of economics. This was seen most vividly during the recent election in the United States when Obama ran away with the votes promising more of the same.

Over time this process continues on until you reach the point of a complete currency collapse when very suddenly the remaining wealth transfer is moved from paper assets to things. I believe this will occur first in Japan then move to the rest of the developed world, but it could just as easily begin in the United States, U.K. or Europe.

However, as I mentioned at the beginning, something very different occurred in the small nation of Cyprus last night which became the fifth country in Europe to receive a bail out. As part of receiving their money from the "authorities" to keep their reckless government spending and bankrupt banks in business the nation has decided to remove 6.75% of the money in every bank account of its citizens which hold less than 100,000 euros and to remove 9.9% of the money in accounts with more than 100,000 euros.

That's right. They closed the banks for the weekend and will re-open them on Tuesday. When the people open their accounts on Tuesday their money will be gone. Stolen.

This move is truly shocking and one that will have massive consequences. Imagine waking up in Greece, Portugal, Ireland, Italy, or Spain this morning understanding that your government and banks are in desperate need of money. What would stop them from closing your bank this Friday and removing your funds?


Anyone who still has their money in one of these accounts will hopefully take this opportunity to remove it as quickly as possible.

This extrapolation can move out much further beyond the Eurozone. If you are living in a country with a bankrupt government and insolvent banks (remember the banks are now government backed), why would you keep a large amount of money in a bank account? 

This conversation goes back to a topic I refer to time and time again which is raising "safe cash." People often assume I mean holding money in the bank when I say that because that is the most widely regarded standard of safety in the United States due to the FDIC (which currently guarantees up to $250,000 in deposits). However, looking through the lens of last night's Cyprus confiscation shows that it could be one of the most unsafe options for your "cash." I have often recommended that people hold "safe cash" in a fund that rolls 3 month or less t-bills, not in a bank account, and now I hope you understand why. For more on this topic see 2013 Outlook: How To Invest

To bring this conversation and thought experiment full circle, it is important to understand that removing funds from savings accounts is inherently deflationary (the opposite of the reflationary tactic prescribed during the sovereign debt crisis so far). I understand that they have "swapped" this former cash with worthless bank shares, but we'll see how much those shares are worth when they give the citizens the ability to sell them back for cash.

What would further bank confiscations through Europe mean for assets such as precious metals? The concept would be very similar to a Greek citizen believing that there was a coming overnight currency devaluation should one of the European countries leave the Eurozone. It would result in citizens thinking about pulling their money first, then deciding what to do with their money after it has been removed. For more on this topic see:

Why Precious Metals Could Surge During A Deflationary Bank Run

How To Short Japanese Yen & Government Bonds Through ETFs

I have spent a large amount of time over the last year writing about Japan and the crisis that I believe is coming for their country. For those that need a review on the fundamentals why this crisis will occur, I highly suggest you review the link at the bottom of this page.

Whenever I discuss Japan the first question or comment I receive on the topic is "how can an individual investor can profit from the coming crisis?" Today we are going to move beyond the "why" in Japan's coming crisis and look at both how I believe the process will play out and subsequently how investors can both prepare for its arrival and potentially profit from it.

The government debt crisis in Japan is going to be different from the crisis we have observed in the European Union over the past 3 years for one very important reason: Japan has a central bank that stands ready with no political hindrance to unleash an unlimited amount of printed money to purchase assets in their capital markets.

As a brief review, the opposite has recently occurred in Europe as the yields on the government bonds moved higher as investors knew that their central bank did not have explicit authority to enter capital markets and buy bonds to push yields back lower. This allowed speculators who in many cases have close to an unlimited amount of leveraged purchasing power in markets over the short term, especially through the derivatives market, to push bond yields higher (this is a topic beyond the scope of this discussion).

This meant that a hedge fund, or group of hedge funds, could enter the Credit Default Swaps (CDS) in Greece and cause the cost to carry insurance on Greek debt to rise significantly. This would trigger panic in the Greek bond market where they had laced an enormous amount of short positions on their debt. They would then push as hard as they wanted on both markets (shorting both the swaps and the actual debt) to push the markets lower and create a feedback loop.

The European Central Bank had to stand back helplessly and watch this occur, and the hedge funds knew this, which is why the crisis began first in Europe - a crisis which has significantly helped Japan as attention was diverted away form their own balance sheet disaster, which we will come back to in a moment.

They soon moved pass Greece once the blood was in the water and began attacking the government bond markets in Portugal, Ireland, Italy and Spain. This caused their bond yields to rise and provided speculators with enormous profits. Once again the European Central Bank was forced to sit back and watch helplessly, like a chained junk yard dog that watches the criminals loot the junk site.

Please understand that I am not saying that Greek government bonds were, or are today, worth anything close to full value. The same applies to Portugal, Ireland, Spain, and Italy. The speculators would have been correct in shorting the debt on a fundamental basis even if central banks were not part of this discussion.

However, some can look at the balance sheet of Spain and clearly see that it is in better shape than the United States and it is certainly in better shape than Japan, which is by far the worst government balance sheet on the planet (and in history). So why were the speculators not attacking the US and Japan with the same technique?

Because the watch dogs, the central banks in both these countries, have no leash. If a speculator enters their markets and dares short government bonds they have promised an unlimited amount of printed currency to keep their bond yields lower. The gun is pointed at the front door daring a brave sole to enter. So far in this story no one has.

The following shows the 10 year Japanese government bond yield for Japan from March 1990 to March 2013. Yields have fallen from close to 8% to .62% where they stand today. Yes, that is a decimal point on the current yield. Investors today are willing to give the completely bankrupt Japanese government their money for 10 full years at .62% per year.

On the opposite side, yet equally important to this story, you have their currency the Japanese yen. The following chart shows the yen U.S. dollar exchange rate over this same period, March 1990 to March 2013. It has fallen from 160 to 95 where it stands today.

So how will this story play out?

I believe that in the end both the yen and the government bonds will fall significantly in value. It has been my estimation over the last year that the central bank would focus on devaluing their currency to boost their export market as well as "stand ready" to unleash an unlimited amount of firepower into the bond market in order to keep rates low. This would cause their currency to fall in value before we saw the movement in the bond market (the opposite of what occurred in Europe as the bonds led the currency lower).

This is exactly what we have seen take place so far.

The problem is that the central bank cannot keep both their currency high and bond yields low. As they create new currency to purchase bonds it creates a surge in the quantity of yen available in the market. Those familiar with basic economics know that all things equal a larger supply ultimately ends with a lower price.

When investors asked me how to play the situation I responded by saying that you should focus your investments on shorting the yen first and then slowly layering your positions in on shorting the bonds. I still agree with this thesis but with the following caution in place:

The Japanese yen has already fallen by close to 20% over the last 6 months, a huge move in the currency markets over such a short period of time. Some investors have already begun to put the larger picture together, and they have sold their yen position. I do not like to enter markets after a major move up (or down if you are shorting), and I do not like to enter a trade when sentiment is high toward it. Both are the case as of this writing toward shorting the Japanese yen. That does not validate the long term view I have of the currency, it is only a caution flag for those looking to enter at this moment. Here is a close up view of the chart above highlighting the recent move:

There are two ETF's available today to bet against these markets:

SJPY - Shorts the Yen in U.S. Dollars

JGBS - Shorts 10 Year Japanese Government Bond 

Shorting Japanese government bonds has been a losing trade for over 20 years. It has been dubbed "the widow maker" in the investment community. Can the bonds move lower from here? Of course they can. Hypothetically they can move to 0% as the central bank has the ability to purchase every bond on the planet. Hyperinflation would arrive before they had the ability to do that, but it is "hypothetically" possible.

My guess is that you will see the currency markets move first (which may already be in the process of happening with the recent 20% decline). Once yields on the Japanese government bonds finally stop falling and then reverse, it is lights out for the bond market as interest expenses will instantly overwhelm all revenue.

For a review on why this collapse is coming please see:

2013 Outlook: Japan's Government Debt Bomb Goes Off

For an understanding of how Kyle Bass is putting on this trade in the derivatives market (and how it differs from what the average investor is capable of doing, which is very important to understand) please see:

Kyle Bass On Japan & The Best Investment You Can Purchase Today

I am not an investment advisor. Please speak with one before making any investment decisions.

Jim Rickards Updates The Currency War Outlook On Bloomberg

Wednesday, March 13, 2013

Kyle Bass On Japan & The Best Investment You Can Purchase Today

Kyle Bass took the time to speak at the Myron Scholes Global Markets forum last week in Chicago. The embed link is not available, so I cannot post it here, but you can hear its entirety by following this link:

Kyle Bass Speaks In Chicago

Kyle discusses much of what you have heard and read here over the past few months. For a written and visual primer on the coming collapse in Japan please see:

2013 Outlook: Japan's Government Debt Bomb Goes Off

In the discussion he moves further beyond his normal scope (because he is speaking to a higher level financial  group), and he even goes into some detail on his current trade against Japan. He describes it as almost the same exact trade he put on in subprime in 2006 where he bought protection against the debt in the derivatives market (becoming a billionaire household name). He goes on to say that if Japan stays at a flat line some young kid working at a bank gets a bonus check on the year. If Japan rates move just a little then that young kid that sold him the debt blows up the bank. This is exactly what happened in 2008.

He says that some of these banks are now calling him and asking him to close his position, just as they did in 2007, as more and more people realize what is coming in Japan.

The number one investment the average person around the world can make today? He would buy gold in Japanese Yen and go to sleep for ten years. "You can wake up 10 years later and be okay."

Once the understanding of a real (impossible to bailout) government debt collapse sets in to the mindset of Japanese citizens you will see a rush to gold in the country that will be just incredible. Those that have just a small amount of foresight will be able to extrapolate forward and see that the balance sheet of the United States is also insolvent. Some of the strongest investors, such as Kyle Bass, have looked down this path and are already buying gold today ahead of the world wide rush.

He notes that you will never get a signal that this trouble is coming from the government. The Mexican government made a public statement that they would never devalue their currency the night before they devalued their currency by 60%.