That’s our System 1 (fast) thinking  kicking in after hearing the news of the Cyprus bail-in of depositors.  Our fast thinking really fears contagion and makes us want to vendere la casa!   We often get into trouble trading with System 1 thinking.

Our System 2 (slow) thinking is more analytical and raises the following questions before we jump on the bandwagon with those who think the Cyprus bail-in is tantamount to financial thermonuclear war.

1)   Can a country with a GDP ($23 billion) only 1/10th the size of Detroit, Michigan  or one half of Tulsa, Oklahoma be a systemic risk to the global economy and clip, say,  $300 billion in value, off the U.S. stock market?   Seriously doubt it.   Detroit, for example, is on its way to bankruptcy and you hardly hear a peep from the Euro Bears or their American comrades.

2)   Will depositors in Italy, Spain, and Greece view their banking systems similar to Cypress and move their money?   That’s the biggest risk, but no doubt the ECB will be there to provide the liquidity if they do.   Furthermore,  it is doubtful the OMT mechanism will include a depositor bail-in.  If I were an Italian, Greek, or Spanish depositor, however, and saw a bunch of Russians lining up at my bank,  then I’d be a little more scared.   No doubt some bank depositors will withdraw and ask questions later.  Will it be enough to overwhelm the ECB?  Nope.

3)  Would Cypriot depositors have lost more money by leaving the eurozone and suffering a currency devaluation?   We think so,   Ask the Venezuelan depositors  who had their currency devalued more than 40 percent a  couple weeks ago.   Then compare to the 6-10 percent deposit tax.  Seriously, folks, do you think Germans bailing out Russian depositors was really an option?

4)  Is it unprecedented?  No.  Here’s a headline from a few years back:

Banks Shut By Brazil For 3 Days

AP, March 14, 1990

Brazil’s central bank closed the nation’s banks late today for the rest of the week until an emergency economic package is announced by President-elect Fernando Collor de Mello.

The three-day bank holiday was decreed at the request of Zelia Cardoso de Mello, the nation’s new Economic Minister, who is to take office on Thursday with the new President

5)  Could the deal have been structured better?  Absolutely.  Remember, the EU went through several painful iterations before completing the Greece PSI deal.   The first Greek haircut was not really a haircut and actually increased the country’s interest costs and it was clear those who financial engineered the deal had absolutely no idea what they were doing.   See here.   Cyprus should be no different.  We doubt what we have seen is the final deal.   Don’t expect the Eurocrats to deliver a clean first deal.

6)  Were markets overbought going into the weekend?   Very overbought.  The Nikkei, Dow, and Russell 2000 had RSIs over 70.   The Cyprus news gave markets an excuse to sell.

7)  Is it now risk off and a new bear market?    First,  risk on/risk off is so 2012.  Take a look of the returns this year.  Money is flowing into U.S. equities and some select countries with weak currencies,  mainly Japan and the United Kingdom.  The emerging markets are performing poorly, the BRICs are dogs, and commodities are doing nothing.   Risk on is now about as vogue as snail mail and for non-Twits.  In fact, the Cyprus deal only reinforces the 2013 trade.  The U.S. and its large cap stocks will be now viewed even more as a safe haven, in our open.

Second,  we seriously doubt Cyprus’ $20 billion economy is going to derail the fundamentals that have been driving the U.S. stock market.   Will it end fracking and cheap energy?  Derail the housing market?  Cause the Fed to remove quantitative easing prematurely and raise interest rates?   Get frickin’ real, comrades.

Finally,  could it dislodge some stock and cause some real selling?  Of course,  and probably some at the U.S. open by traders who were too long or leveraged.  Will the buyers disappear?  We doubt it but they may pull their bid to buy lower.

The S&P futures are down over 20 points as we write.  We’re not buying French dips but will buying this sell-off when it turns.   Could be wrong and always with a stop.

Category: Bailouts, Think Tank

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

11 Responses to “WTF Were They Thinking?”

  1. gms777 says:

    Barry, you ask if economic malfunctions in a country with a GDP of $23 billion pose a risk to the global economy.

    Could the assassination of an obscure Austrian archduke touch off a World War?

  2. Is it the fumes or the spark that causes the fire?*

    It is the context, not the action. It was not the archduke assassination, it was everything else leading up to it that mattered so much.


  3. stonedwino says:

    The biggest problems with the Cyprus crisis is that the bank-run perception may lead to contagion throughout the Eurozone…

  4. [...] the blather, choosing to focus my limited time and attention on smart analysis and commentary. Like this and [...]

  5. Of the 70b euros of Cypriot deposits, I’ve seen estimates that as much as 20b euros were Russian.

    Putin said the actions are “unfair, unprofessional and dangerous.”

  6. Boffin says:

    Since when has rationality been man’s strength?

    People act based upon ‘system 1′ and ‘sheep mentality’. It’ll be clear to see when the Cypriot banks open for business, and the reaction from the scenses will be global.

  7. Kerry says:

    But that means *at least* EUR50bn (72%) of deposits are not Russian…that’s a huge majority.

  8. Robert M says:

    I do think 4 is a non starter. You are comparing Brazil, a nation w/ its own independent Central Bank and its own currency w/ one that doesn’t; if you’re in the EURO you do not have an independent Central Bank. As pointed out in your morning reads the idea of runs in the weaker countries is closer to 70 30 than 30 70 as you suggest.

  9. wally says:

    It’s pretty to be relaxed about it when it isn’t your own money being taken away.

    “System 1 thinking” is not the same as “wrong thinking”. Very often, in fact – usually, it is correct and provides a good early warning of risk situations.

  10. socaljoe says:

    Is it the fumes or the spark that causes the fire?

    When it comes to the European banking system, I think we can all agree that there are plenty of fumes.

    So maybe they should be careful when playing with matches.

  11. DJ2000 says:

    Russian money in Cyprus is parked in local companies set up only for that purpose, so it is estimated at 50% of all deposits. Don’t underestimate the Euracrats’ ability to survive against all odds. Do you really think the Germans would risk international wrath by grabbing small depositors’ money? Read this: