Stealing Really Is That Bad

By: Michael Ashton | Mon, Mar 18, 2013
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Cyprus banks are closed until Thursday. At this point, the Cypriot legislature has not voted on any particular scheme of theft, although some Eurozone officials seem to think that it would be okay to only rape the people who have deposits bigger than €100,000, just as long as it's a really brutal rape to make up for letting the smaller depositors off. (This only sounds like it makes sense if you use their words, but not if you use their meaning.)

It is incredible but the Eurozone elite really don't seem to understand why the Cyprus plan is so bad. They really are natural Socialists! As Merkel and her party became the primary defenders of the decision to seize Cypriot depository assets today, there was a very good article in Businessweek that contained several jaw-dropping quotes.

"I have to go to my constituency and explain to my people in my constituency why we are willing to lend more than 3 billion euros ($3.9 billion) to Cyprus," Michael Fuchs, deputy parliamentary leader of Merkel's Christian Democratic Union party, said in an interview with BBC Radio 4 today. "Why should Germans bail out these people and they are not willing to accept at least a minor bailing out by themselves?"

Well, Mr. Fuchs, here is the problem: you didn't ask them if they would "accept" at least a "minor" bailing out. You ordered people who didn't need a bailout - savers with earned balances in the banks - to pay for the bailout. I daresay that it doesn't seem "minor" to those who had their money stolen to save someone else.

Yes, I understand the parallel, that you feel the alternative was to have your taxpayers foot the bill, and they don't need a bailout either so why should they pay for it? As Merkel said: "the responsible people are partly included and not only the taxpayers in other countries." But here's the thing - at least you have the authority to order that the taxes your citizens paid be used for things they didn't want, but you did. You have no authority, and indeed no one had the authority, to order the seizure of private assets for something you wanted. (Cyprus, and Cypriot banks, had the ability to seize the assets, but that's not the same as the legally-sourced authority to do so.)

Moreover, you had another alternative, and that's to recognize that the elite who want the Union to survive in its current form can't afford to foot the costs for it to do so - and to let Cyprus go. Yep, I understand that to you that would have been tantamount to Armageddon. But the more you destroy the foundations of capitalism and the free market in favor of naked Socialism, the more appealing Armageddon looks by comparison...

And here's another quote, by the budget spokesman of Merkel's main opposition party: "The profiteers of the Cypriot business model must pay the bill - not the European taxpayers." I heartily agree, but the "profiteers" aren't the depositors! If that appellation is attached to anyone, it would be to the bank equity holders, and perhaps the bondholders. Arguably, it may apply to the citizens of Cyprus, but almost equally to the people of the Eurozone who benefited when Cyprus lived and consumed beyond her means. But the depositors were not 'profiteering' by putting deposits in the bank. They were saving.

So it's the Russian and the Greek depositors that you really wanted to target? Then why not target anyone who is Russian or Greek? I would go further and say that it isn't the Russians' fault that Cypriot banks were willing to take their money, and not the Greeks' fault that European oversight of Eurozone banks was so fractured that Cypriot banks sought out these deposits as they grew and became unsustainable, ungainly creations. Being a Greek or a Russian with money isn't a crime - unless you're a Socialist. And if you're a Socialist, then it isn't the Greek or Russian's the "having money" part.

But they don't seem to see why people are concerned.

Now, in the micro picture none of those reflections are very market-oriented, but in the macro picture they certainly are. We all have to deal on a day-to-day basis with the reality that markets are nakedly manipulated by central banks these days (with fancy names like "portfolio balance channel," for example). I was speaking today to an investor about a particular type of arbitrage in my sphere of expertise. As we were brainstorming what could go wrong with the trade, the biggest possibility was "what if one central bank decides to stop manipulating markets and another central bank continues, but they're the wrong ones? Or what if they start manipulating markets in a different way?" We didn't directly consider the question of "what if they just seize the profits?" but investors actually now need to consider that in the calculus of risk and return.

But that part isn't new, as some readers of my articles have pointed out. Government witch-hunts have long been carried out in search of the miscreants who "caused" market mayhem. After the 1929 crash, the Senate held hearings and even went after stock exchange members who'd actually held long positions during the crash. What is new is the targeting of people who have saved simply because it would be more convenient for the government to have their money.

They came for the hedge funds, and I didn't speak out because I wasn't a hedge fund. They came for the banks, and I didn't speak out because I wasn't a bank. They came for the savers...and there was no one left to speak for me. Right?

Equities took the news with surprising aplomb. Yes, stocks fell 0.55% after being down somewhat more than that, but that reverses only two average days during this most recent run. Commodities, which should be a direct beneficiary of global monkey-business associated with fiat money deposits, sold off hard with the notable (and reasonable) exception of gold. That is borderline insane, but consistent with the insanity of the last couple of months. These days I wake up every morning half expecting to see commodities prices offered at zero. Interestingly, inflation traders seemed to grasp the point, as 10-year inflation swaps and breakevens were stable even though rates generally declined. But commodities is Q1's red-headed stepchild (and I say that as a red-headed stepchild).

It sounds crazy to say, but Europe losing its collective mind on this topic is bad for equities only if the bank run spreads to other countries in Europe, or if Cyprus decides to leave the Euro and to flee into the tender mercies of Russia's embrace. Those aren't certainties by any stretch of the imagination. Consequently, anything that looks vaguely like calm will likely be rewarded by a melt-up in stocks, probably to new highs. The outcomes are distinctly binary at the moment, which isn't risk I personally care to take since equities are aggressively valued even if these risks were not present.


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Michael Ashton

Author: Michael Ashton

Michael Ashton, CFA

Michael Ashton

Michael Ashton is Managing Principal at Enduring Investments LLC, a specialty consulting and investment management boutique that offers focused inflation-market expertise. He may be contacted through that site. He is on Twitter at @inflation_guy

Prior to founding Enduring Investments, Mr. Ashton worked as a trader, strategist, and salesman during a 20-year Wall Street career that included tours of duty at Deutsche Bank, Bankers Trust, Barclays Capital, and J.P. Morgan.

Since 2003 he has played an integral role in developing the U.S. inflation derivatives markets and is widely viewed as a premier subject matter expert on inflation products and inflation trading. While at Barclays, he traded the first interbank U.S. CPI swaps. He was primarily responsible for the creation of the CPI Futures contract that the Chicago Mercantile Exchange listed in February 2004 and was the lead market maker for that contract. Mr. Ashton has written extensively about the use of inflation-indexed products for hedging real exposures, including papers and book chapters on "Inflation and Commodities," "The Real-Feel Inflation Rate," "Hedging Post-Retirement Medical Liabilities," and "Liability-Driven Investment For Individuals." He frequently speaks in front of professional and retail audiences, both large and small. He runs the Inflation-Indexed Investing Association.

For many years, Mr. Ashton has written frequent market commentary, sometimes for client distribution and more recently for wider public dissemination. Mr. Ashton received a Bachelor of Arts degree in Economics from Trinity University in 1990 and was awarded his CFA charter in 2001.

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