Cyprus is a perfect example of how everything can go wrong when government gets out of control and too big. Ben Bernanke is saying what’s happening in Cyprus couldn’t happen in America. It already happened here during the Great Depression when 1 in 3 banks closed. So should we trust what Bernanke says?
In Cyprus, banks have been closed all week long. Bernanke does not think Cyprus could impact us here unless there was a contagion of bank withdrawals around the world. Groceries are running out of supplies, ATMs running out of money, not enough gasoline – they can’t deliver it because they can’t pay for it – only upfront cash purchases. It’s started to get ugly in Cyprus. What would you do if you woke up one morning and the banks were closed and they took 7-10 percent of your money on deposit as a tax? Do you think the US government can avoid something like this here? Do you trust the US government? Are you taking matters into your own hands? What are you doing to protect yourself? All questions a reasonable person should ask themselves.
There was angst last week for investors created by this tiny island, Cyprus. What is the big deal about Cyprus – this miniscule nation? Its economy is no bigger than Philadelphia.
Cyprus is a member of the Eurozone, a crisis there can trigger a contagion in Europe that could spread to the US. Cyprus is a big player in banking sector, 4 times larger than you’d expect given the size of its economy. It became a mini European version of the Cayman Islands, which made it a place for the wealthy to stash their fortunes, which boosted the economy, which has a large portion of its workforce now being employed by the financial services sector. An estimated 9000 of which may lose their jobs now.
But still why should US individuals care? It’s closer to the Middle East and the emerging markets than to London or Zurich, geographically. There are two reasons: If Cyprus’s banking system is built to spin out of control at a moment’s notice, then so is every banking system around the globe, including the U.S. Second, when banking systems fail, the economy goes from good to bad quickly.
When banks fail people feel times are bad and take optimal actions to insure collective terrible outcomes they expect. This is called coordinated failure or as sociologists call it, a nasty self-fulfilling prophesy. No matter what going forward, no one will use or trust Cyprus banks. This will shut down the banking system there. This will flip the Cyprus economy to bad and a replay of our Great Depression there. Failure of the Cyprus financial system can trigger bank runs in Greece. The domino effect begins. A run on Greece spreads to Portugal, Ireland, Spain, Italy, Belgium and France and eventually could make its way to the U.S.
Every bank in each of these countries has made promises they can’t keep. When push comes to shove, if all depositors demand their money back all at once, could Cyprus set off a bank and stock market panic in the U.S.? I believe the answer is yes, although it is a slight chance. The conventional thinking is that the Fed can print money to get us out of it, then give it to banks to pay off all depositors. The specter of massive money creation could add close to $12 Trillion overnight, but they can’t do that. This could unravel the rally in US markets.
Regardless of Cyprus, there are issues we have created all on our own in the U.S. FedEx and Oracle missed on earnings recently, which will be the start of tension filled earnings season. Year-to-date, 102 companies have warned to brace for weaker than expected earnings vs. 23 that raised projections according to Reuters. This is the worst since 2001. I believe that this is even way too optimistic. Many U.S. companies have cut costs to the bone over the last several years. That means revenue must rise to keep things expanding, yet S&P 500 revenue through last quarter was negative 3.07 percent year over year the last three years. The S&P 500 quarterly operating earnings peaked one year ago in the 2nd quarter 2012. Today it’s down 9 percent from that level.
Why is the market continuing to run higher? Last week there was a negative 5.8 percent plunge in University of Michigan consumer sentiment index, another harbinger of forthcoming weaker US economic stats. Bernanke has made no secret of the U.S. stock market as prop for consumer confidence and spending. With consumer sentiment falling, consumers are peering through the veneer of the Fed bubble and not liking what they are seeing. That’s why markets will break down.
U.S. reported domestic sales growth as positive, which is a mirage given that Walmart same store sales are unchanged. McDonalds sales are down year over year. Investors need to take these into consideration, particularly if they are dumping money into the US stock market right now.
The financial markets in the U.S. are almost looking for a reason to correct. There are a lot of reasons the U.S. market bubble may burst. Market indicators point down for U.S. markets as economic data always follows stocks down. Wall Street current psychology is wacky. Even main street, brokers and banks will spin Cyprus bank runs as a reason to buy U.S. markets. Bernanke’s stock prop job will fail just like other market and bank riggings. Cyprus is a wake up call for everyone. This is an old story we keep living over and over again, it’s just happening more frequently. FDIC insurance is only funded to $25 billion and can’t cover a $12 Trillion run on banks here. Is Cyprus doing anything worse than Bernanke is doing to us in the US?
Dawn Bennett is co-portfolio manager of Bennett Funds and CEO and Founder of Bennett Group Financial Services. She can be reached at [email protected]