Cypriot Banking Crisis - A Turning Point for Your Portfolio?

Cypriot Banking Crisis - A Turning Point for Your Portfolio?

via Casey-Report

A Turning Point for Your Portfolio?Dear Reader,Archimedes once said that if he had a lever long enough and a place to stand, he could move the world (Greek: ??? ??? ?? ??? ??? ??? ??? ??????). Today, the half-Greek island of Cyprus appears to be the fulcrum, and the long arm of the EU may be the lever that heaves the entire world over the edge of the abyss.As Dennis Miller so eloquently pointed out last Friday (inJust Whose Money Is It Anyway?), most Americans would not be directly affected if North Dakota decided to seize citizens' money in order to pay its bills, but all Americans would be deeply disturbed by such an action. The principle of the matter couldn't be clearer; outright theft is wrong. But it'd probably be fear, not principle, that would have people heading for their banks in droves to withdraw cash as fast as possible.

Of course, on a moral plane, government money printing is equally reprehensible and cowardly to boot; it takes value out of people's savings just as surely as taking money out of their bank accounts, but in a hidden, indirect way. (One could make the same argument of taxation in general, unless it's voluntary.) But again, most people won't storm the Fed with pitchforks and torches as a matter of moral rectitude. They would, however, if the government simply reached into their bank accounts and seized money those people had planned to spend tomorrow.

And if North Dakota's hypothetical troubles were mirrored in other, much more populous states, like New York and California, it's easy to see how people in those states wouldn't want to wait for their governments to do the same thing. This is the abyss toward which the EU's hard line with Cyprus has pushed all of Europe.

Europeans living outside Cyprus should not kid themselves that this is just a Cypriot problem - anyone with a bank account in Greece, Spain, Italy, etc. should be thinking very hard about how safe their cash is from confiscation. As we go to press, the Cypriot parliament has backed away from the bank levy on everyone that caused so much uproar, but the new deal still seizes money from larger depositors. This does not undo the fact that it's still stealing - nor that the ECB asked for some of every citizens' savings. Europeans living in non-PIIGS countries should not kid themselves about the impact on themselves if the countries near default tumble like dominoes.

And people not living in Europe should not kid themselves into thinking that this is just a European problem; in today's global economy, every country would get hurt by a banking and economic collapse in Europe. Those who think Asia will save the world must remember that the EU is China's largest trading partner. Or was - who can say it will be tomorrow?

Key point: with a fractional reserve banking system, it doesn't take a majority of bank depositors to decide to withdraw their cash to put their banks out of business. If something like 10% of depositors decided to withdraw all of their money, banks would be in real trouble - and even if only a smaller percentage were to initially decide to keep their cash at home, they could spook the required fraction into panicking and pushing the banks into insolvency. In stable times, fractional reserve banking may seem like free goodies for all, but during unstable times, it makes banks that much more precarious. Things have to be pretty dire for an entity like the ECB to demand action that could spark such a panic.

But wait - the banks are backed by the governments, so depositors are safe, right?

Yeah, right - the same bankrupt governments that are facing insolvency themselves...

Is This "IT?"

We've been saying for some time that the global house of cards could topple at the slightest rustling of the wings any of a number circling black swans. Something like the ECB turning draconian with Cyprus and scaring the heck out of everyone else in the EU seems more like a swan dive right into the heart of the teetering structure.

Many mainstream commentators are dismissing the significance of the Cyprus debacle - but the same type of people also dismissed the threat of the subprime crisis until it could no longer be denied.

This does not prove that what's happening regarding Cyprus today is the tipping point future historians will point to as the beginning of the end of the EU and hence the rest of the old economic order. But it could be.

Skepticism from the mainstream does not prove that Doug is right about the global economy exiting the "eye of the storm" this year, but it's a great contrarian indicator.

What is absolutely clear is that the extreme measures the ECB has just shown it is willing to take are solid evidence that we are right about just how shaky things are - just how close to the crumbling edge of the abyss the whole world is.

Even if the direct, overnight theft of Cypriot bank deposits does not spark a bank run across Europe, it won't change this fact. The ECB will certainly admonish us all to "pay no attention to the man behind the curtain," but we've all seen the truth.

The question to ask is not, "How can we be certain?" That one's easy to answer: we can't be. The question to ask is, "What do I risk if this is it and I fail to prepare for the hell that's coming two steps behind?"

To Doug, me, and all of us here at Casey Research, the answer to that is obvious: if we bet on the resumption of the economic storm and the so-called recovery continues, we'll miss some opportunities and maybe lose some money on investments that don't work out - but if we don't make that bet and the economy does come unglued, we will suffer heavy losses.

If - Doug would say "when" - the wheels fall off the economic "recovery," the vast majority of people will see a substantial reduction in their standard of living - and many will simply be wiped out. We don't plan to be among them.

What to Do?

You've heard most Casey recommendations before, at least in general terms, but that doesn't make them any less true or important now... indeed, just the opposite, if the inevitable has now become imminent.

  • Liquidate: Sell or dispose of any assets you have that might have been favored by the old economy, but are unlikely to hold value or generate income in the new one. That includes speculative real estate holdings in formerly hot markets and stocks in formerly invulnerable blue-chip companies. You might even sell your house, if you can, and rent instead. You should lighten your load in every way possible - even household junk filling your basement and attic - the storage unit you may be renting - anything you don't truly need. Turn it into cash.
  • Consolidate: Cut your expenses to the bone and consolidate your assets into things that will hold value come hell or high water. The single best asset class for doing this is the precious metals: gold and silver. A substantial amount should be in cash form (coins). This is where you put your savings. Productive (not speculative) real estate is also good, but make sure it's in a jurisdiction that is unlikely to see you as a victim to be fleeced for the public good. As Doug constantly reminds us, a critical element is getting a major portion of your assets offshore.
  • Speculate. With governments around the world on the verge of insolvency, most of them printing money by the helicopter-load, there are predictable economic consequences. Massive bubbles will be created, such as the one we see ahead in precious metals, and other bubbles will pop, like the collapse of more major corporations. There are no safe bets in such an environment (even gold can be confiscated if you leave it all in a jurisdiction that turns to stealing, as the EU has just shown it's willing to do), so you're better off speculating on a variety of bets placed on these trends. It's possible in such volatile times to make a lot of money - this is the raison d'ĂȘtre of most of our publications. How to profit from the coming mania in gold and silver is the main focus of our BIG GOLD newsletter, and how to shoot for spectacular returns is our goal in the International Speculator.
  • Create: Despite all of the above, we are not apocalyptic, but actually quite optimistic, about the long term. In the coming years, the world is likely to change as radically as it did entering the industrial revolution - major change will impact everything: economy, politics, technology, demographics, social customs and mores, the military. Everything. This is a good time to look around and ask yourself what goods and services you can provide that people will need in the future. What worked during the late Long Boom won't work in the future - in order to create, you're going to have to think creatively, but it will be worth it. Life today is immeasurably richer than it was a thousand years ago, and in 100 years it will be better by a factor beyond our ability to comprehend. Maybe even 50. And in just 25, it will be beyond most people's belief. Become a forward thinker, or become road kill.

Personally, I just sold my sports car and consolidated down to one vehicle. We really didn't need two, and I'm using some of the proceeds to speculate on an emerging gold producer that has the potential to return ten times my investment. I plan to speculate on more great companies in the months ahead, especially if the market goes into a true panic, which it has not yet. Saving in gold has long been my practice, so that's nothing new for me. As for the future, I plan two things: A) invest in technologiesand companies I believe have great potential, starting with some of those covered by the Casey technology division; and B) work hard to keep myself from becoming obsolete.

Do not underestimate the importance of the latter; there is medical technology right around the corner that could drastically prolong the human lifespan. Everyone not at death's door should have at least a 25-, if not 50-year financial plan. This, in my view, makes the addition of our new income letter, Miller's Money Forever, as timely as it is important.