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WTF Were They Thinking?

Posted By Global Macro Monitor On March 18, 2013 @ 6:00 am In Bailouts,Think Tank | Comments Disabled

That’s our System 1 [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 [2]

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 [3] 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 [4].   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 [5].  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 [6].  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.


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URL to article: http://www.ritholtz.com/blog/2013/03/wtf-were-they-thinking/

URLs in this post:

[1] System 1: http://www.trchome.com/trc-blog/entry/lessons-from-thinking-fast-a-slow-system-1-and-system-2.html

[2] Banks Shut By Brazil For 3 Days: http://www.nytimes.com/1990/03/14/business/banks-shut-by-brazil-for-3-days.html

[3] not really a haircut: https://macromon.wordpress.com/2011/10/03/greek-haircuts-a-clarification/

[4] here: http://www.bloomberg.com/news/2011-08-05/europe-s-plan-won-t-cut-greek-debt-allen-eichengreen-and-evans.html

[5] Very overbought: https://macromon.wordpress.com/2013/03/16/overbought-and-oversold-markets-march-15/

[6] returns this year: http://macromon.wordpress.com/2013/03/16/week-in-review-63/wir_equity_ytd-78/

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