April 4, 2013
By Steve Blumenthal
With the S&P 500 Index reaching a new high, excitement builds and a focus on risk sinks slowly beneath the surface. I found the following “Then and Now” and “Total Debt” charts enlightening and a reminder that the world remains uniquely out of balance. Oh, the debt.
The events in tiny little Cyprus are surprisingly big as it relates to the EU and you and me. Niels Jensen at Absolute Return Partners in London states, “An invisible line in the sand has been crossed and there is no way back. Next time a bank in a major Eurozone country runs into serious difficulties, there is likely to be a bank run, primarily because the trust was broken with the shambolic handling of events in Cyprus. As outgoing BoE Governor, Mervyn King, once quipped (and I paraphrase): “It is irrational to start a bank run but, once it gets going, it is perfectly rational to join in.”
Sadly, the travesty doesn’t stop there. Almost farcically, the London branches of the two troubled Cypriot banks were kept open during the early stages of the crisis, allowing many horses (Russian money) to escape before the stable doors were firmly bolted. In the early stages of the crisis it was widely expected that a haircut of 20-30% on deposits over €100,000 would raise the capital required for Cyprus to receive the emergency funding – now the talk is 60-80%. Local Cypriot businesses stand to be the big losers from this comedy of errors. Many of them will go bankrupt whereas the Russian oligarchs will be laughing all the way to the next bank.”
Here is the link to Niels’ most recent piece entitled, “The Need for Wholesale Change”.
Additionally, what’s going on in France matters. Hint – not good.
I’m happy to see the market’s new high and I’m pleased to have participated; however, I believe it remains mandatory to focus on risk management.
With warm regards,
Stephen B. Blumenthal
Founder & CEO
Philadelphia Office – King of Prussia, PA
CMG Capital Management Group, Inc.
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