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Cypriot Drama Continues

ted-spread1

The Russian English Language version of CNN posted the video interview above and I was astounded by it and wanted to share it (if you can’t watch the version here on the blog you can follow the link to YouTube where I found it).

Nigel Farage, the man being interviewed, is an English politician and founder of the Independence Party. He is a member of the European Parliament (MEP) in Brussels, and from the interview it sure sounds like he is the European version of Ron Paul or Ross Perot – telling a whole lot of truth that the other politicians do not want to hear.


Click Here for Today\'s Video on YouTube

News reports state that Cyprus and ECB are said to be working on a capital control plan as a contingency plan against bank runs ahead of bank reopening; Banks may stay closed until Tues 26th instead of this Thursday in light of the “No” vote by the Cypriot parliament to not agree with the plan to “tax” deposits.

Their plan – thus far – is:
– To issue an official statement is expected later tonight with details;
– It is likely to introduce border checks for cash over certain amount not being able to leave the country;
– ECB may fly euro notes from other countries to feed Cyprus ATMs to meet anticipated withdrawal demand;
– The contingency plan said to include daily limits on withdrawal transactions to limit the amount of money citizens can access each day; and
– The anticipate that these restrictions and others will be in place for weeks, until the threat of a bank run is past.

There are lots of stories floating around about how this is a tempest in a teapot – but given the tenuous situation in Europe, it is something we need to watch. No one in our government thought that allowing Lehman Brothers to go bankrupt would be a big deal, and it almost brought down the entire global financial system. I AM NOT saying that big of a problem is possible with the situation in Cyprus – what I am saying is that it is smart to watch what is happening (I prefer the European news agencies perspectives on YouTube) in order to manage the risk for our clients.

At the top of the page, you see the chart of the TED spread – I haven’t posted this on the blog in a few years (since the stock market crash in 2008). At that time, I wrote that this chart tells me if there is a significant chance for some event that will seriously impact the global financial system (generally a liquidity event or a solvency event). The key levels to watch are 1.000 and 2.000, and the direction of the line as it moves.

You can see right now that we are very low so the markets are not anticipating any sort of event that would negatively impact the global financial system – based upon this very reliable indicator, maybe it is correct that we are seeing a tempest in a teapot – however, I will keep track of this indicator and post it here periodically so that you are aware of what it says.

If you were a reader of the blog in 2006/7, you will recall that I got concerned with this indicator based upon the initial issues with the sub-prime market, and in the summer of 2006 we sold all of our stocks and bonds issued by banks. That turned out to be a very good move (although it was 18 months before the crash) – I just didn’t think that the policy decisions made by Washington and Brussels would add to the problems (like letting Lehman Brothers fail when they were so interconnected to the global financial system) and cause a liquidity problem worldwide. I want to make sure that if the indicator jumps up this time, we view it more globally and not just as it might impact financial service companies here in the US.

We have gotten increasingly conservative as the market has moved higher – and I see no reason to change that posture when we are so close to an all-time high in the S&P 500.

Listening to MEP Farage put me in the mood for a scene from one of my favorite movies…


Click Here for Today\'s Video on YouTube

But can the politicians in Brussels handle the truth? We’ll see (and we will see it before anyone else by keeping track of the TED spread).

Mark