Capital Controls

Signs Of Financial Turmoil In Europe, China And The United States

Earth In Peril - Public DomainAs we move toward the second half of 2015, signs of financial turmoil are appearing all over the globe.  In Greece, a full blown bank run is happening right now.  Approximately 2 billion euros were pulled out of Greek banks in just the past three days, Barclays says that capital controls are “imminent” unless a debt deal is struck, and there are reports that preparations are being made for a “bank holiday” in Greece.  Meanwhile, Chinese stocks are absolutely crashing.  The Shanghai Composite Index was down more than 13 percent this week alone.  That was the largest one week decline since the collapse of Lehman Brothers.  In the U.S., stocks aren’t crashing yet, but we just witnessed one of the largest one week outflows of capital from the bond markets that we have ever witnessed.  Slowly but surely, we are starting to see the smart money head for the exits.  As one Swedish fund manager put it recently, everyone wants “to avoid being caught on the wrong side of markets once the herd realizes stocks are over-valued“.

I don’t think that most people understand how serious things have gotten already.  In Greece, so much money has been pulled out of the banks that the European Central Bank admits that Greek banks may not be able to open on Monday…

The European Central Bank told a meeting of euro zone finance ministers on Thursday that it was not sure if Greek banks, which have been suffering large daily deposit outflows, would be able to open on Monday, officials with knowledge of the talks said.

Greek savers have withdrawn about 2 billion euros from banks over the past three days, with outflows accelerating rapidly since talks between the government and its creditors collapsed at the weekend, banking sources told Reuters.

All over social media, people are sharing photos of long lines at Greek ATMs as ordinary citizens rush to get their cash out of the troubled banks.  Here is one example…

And if there is no debt deal by the end of this month, the Greek debt crisis is going to totally spin out of control and financial chaos will begin to erupt all over Europe.  But instead of trying to be reasonable, EU president Donald Tusk “has delivered an ultimatum to Greece”, and it almost appears as if EU officials are more concerned about winning a power struggle than they are about averting financial catastrophe…

EU president Donald Tusk has delivered an ultimatum to Greece, claiming the country must ‘accept an offer or default’ at an emergency summit set for Monday – in a last-ditch effort to stop the debt-stricken nation crashing out of the euro.

‘We are close to the point where the Greek government will have to choose between accepting what I believe is a good offer of continued support or to head towards default,’ Mr Tusk said today.

His comments come as Greek Prime Minister Alexis Tsipras warned that his country’s exit from the eurozone would trigger the collapse of the single currency.

‘The famous Grexit cannot be an option either for the Greeks or the European Union,’ he said in an Austrian newspaper interview.

‘This would be an irreversible step, it would be the beginning of the end of the eurozone.’

While all of this has been going on, the obscene stock market bubble in China has started to implode.  Just check out the following numbers from Zero Hedge…

As the carnage began last night in China we noted the extreme levels of volatility the major indices had experienced in recent weeks. By the close, things were ugly with the broad Shanghai Composite down a stunning 13.3% on the week – the most since Lehman in 2008 (with Shenzhen slightly better at down 12.8% and CHINEXT down a record-breaking 14.99%).

Under normal circumstances, numbers like these would be reason for a full-blown financial panic over in Asia.  But these are not normal times.  Even with these losses, stock prices in China are still massively overinflated.  For example, USA Today is reporting that the median stock over in China is “trading at 95 times earnings”…

Margin debt in China has soared to a record $363 billion, according to Bloomberg, and the median stock in mainland China is now trading at 95 times earnings, which even tops the price-to-earnings multiple of 68 back at the 2007 peak.

That is absolutely ridiculous.  When a stock is trading at 25 or 30 times earnings it is overpriced.  So these numbers that are coming out of China are beyond crazy, and what this means is that Chinese stocks have much, much farther to fall before they get back to any semblance of reality.

Meanwhile, in the U.S. money is flowing out of bonds at a staggering pace.  The following quote originally comes from Bank of America…

“High grade credit funds suffered their biggest outflow this year, and double the previous week (and also the biggest since June 2013). High yield outflows also jumped to $1.1bn, the biggest since the start of the year. However, government bond funds suffered the most amid the recent spike in volatility, with outflows surging to the highest weekly number on record ($2.7bn). This brings the total outflow from fixed income funds to almost $6bn over the last week, the highest since the Taper Tantrum and the third highest outflow ever.”

What this means is that big trouble is brewing in the bond markets.  This is something that I warned about in my previous article entitled “Experts Are Warning That The 76 Trillion Dollar Global Bond Bubble Is About To Explode“.

For the moment, U.S. stocks are doing fine.  But just about everyone can see that we in a massive financial bubble that could burst at any time.  Presidential candidate Donald Trump says that what we are witnessing is a “big fat economic and financial bubble like you’ve never seen before”…

Yesterday during an interview on MSNBC, presidential candidate Donald Trump said he has some big names in mind for the Treasury secretary if he wins the White House. “I’d like guys like Jack Welch. I like guys like Henry Kravis. I’d love to bring my friend Carl Icahn.” He also opined on the economy and the stock market, admitting that the Fed has benefited people like him but that the economy and is in a “big fat economic and financial bubble like you’ve never seen before.“

Ron Paul also believes that this financial bubble is going to end very badly.  Just check out what he told CNBC earlier this week…

Despite record highs in the market, former Rep. Ron Paul says the Fed’s easy money policies have left stocks and bonds are on the verge of a massive collapse.

“I am utterly amazed at how the Federal Reserve can play havoc with the market,” Paul said on CNBC’s “Futures Now” referring to Thursday’s surge in stocks. The S&P 500 closed less than 1 percent off its all-time high. “I look at it as being very unstable.”

In Paul’s eyes, “the fallacy of economic planning” has created such a “horrendous bubble” in the bond market that it’s only a matter of time before the bottom falls out. And when it does, it will lead to “stock market chaos.”

Yes, this financial bubble has persisted far longer than many believed possible, but all irrational bubbles eventually burst.

And you know what they say – the bigger they come the harder they fall.

When this gigantic financial bubble finally implodes, it is going to be absolutely horrifying, and the entire planet is going to be shocked by the carnage.

The Economic Depression In Greece Deepens As Tsipras Prepares To Deliver ‘The Great No’

No Cards - Public DomainAs Greece plunges even deeper into economic chaos, Greek Prime Minister Alexis Tsipras says that his government is prepared to respond to the demands of the EU and the IMF with “the great no” and that his party will accept responsibility for whatever consequences follow.  Despite years of intervention from the rest of Europe, Greece is a bigger economic mess today than ever.  Greek GDP has shrunk by 26 percent since 2008, the national debt to GDP ratio in Greece is up to a staggering 175 percent, and the unemployment rate is up above 25 percent.  Greek stocks are crashing and Greek bond yields are shooting into the stratosphere.  Meanwhile, the banking system is essentially on life support at this point.  400 million euros were pulled out of Greek banks on Monday alone.  No matter what happens in the coming days, many believe that it is now only a matter of time before capital controls like we saw in Cyprus are imposed.

Over the past several months, there have been endless high level meetings over in Europe regarding this Greek crisis, but none of them have fixed anything.  And even Jeroen Dijsselbloem admits that the odds of anything being accomplished during the meeting of eurozone finance ministers on Thursday is “very small”…

Some officials believe Thursday’s meeting of eurozone finance ministers will be perhaps the last chance to stop Greece sliding into default and towards leaving the euro.

However the president of the so-called Eurogroup, Jeroen Dijsselbloem, said the chance of an accord was “very small”.

And it is certainly not just Dijsselbloem that feels this way.  At this point pretty much everyone is resigned to the fact that there is not going to be a deal any time soon.  The following comes from Reuters…

“People are getting anxious on both sides. Athens expects Brussels to move. And Brussels expects Athens to move. And it’s stuck,” said a senior EU diplomat, who declined to be named.

“It’s very dangerous, and we may have an accident.”

EU officials insist that it is Greece that needs to back down, but the Greeks have no intention of backing down.  Just consider the words of Greek Prime Minister Alexis Tsipras.  He says that he is not afraid to deliver “the great no” to the rest of Europe…

Greek Prime Minister Alexis Tsipras said he’s ready to assume responsibility for the consequences of rejecting an unfair deal with creditors.

In a sign that he’s being taken at his word, officials from the Netherlands, Portugal and Germany said they were bracing for a breakdown in talks that could roil the currency bloc.

With a viable solution “the Greek government recently elected by the Greek people will bear the cost of carrying through,” Tsipras told reporters in Athens on Wednesday. Without one, “we will assume the responsibility to say ‘the great no’ to a continuation of the catastrophic policies.”

To me, that sounds like a man that is not going to back down.  And to call it “the great no” is not an exaggeration at all.  I think that he realizes that this “great no” will unleash financial chaos all over Europe.

For Greece, the consequences would likely be catastrophic.  At least that is what the Bank of Greece thinks…

Failure to reach an agreement would, on the contrary, mark the beginning of a painful course that would lead initially to a Greek default and ultimately to the country’s exit from the euro area and – most likely – from the European Union. A manageable debt crisis, as the one that we are currently addressing with the help of our partners, would snowball into an uncontrollable crisis, with great risks for the banking system and financial stability. An exit from the euro would only compound the already adverse environment, as the ensuing acute exchange rate crisis would send inflation soaring.

All this would imply deep recession, a dramatic decline in income levels, an exponential rise in unemployment and a collapse of all that the Greek economy has achieved over the years of its EU, and especially its euro area, membership. From its position as a core member of Europe, Greece would see itself relegated to the rank of a poor country in the European South.

And no matter how confident the Germans appear to be right now, the truth is that a Greek debt default would be a complete and total nightmare for the rest of Europe as well.  The euro would drop like a rock, stocks would crash all over Europe and bond yields would go crazy.  And that is just for starters.

So we desperately need to see a deal.  But with each passing day that seems less and less likely.

In fact, a Greek parliament committee on public debt just released a new report containing their preliminary findings.  This report is not legally binding, but it does show the mood of the Greek parliament, and what this report says is absolutely stunning.  It concluded that the Greek government is under absolutely no obligation to repay its debts.  Just check out the following excerpt from the report…

All the evidence we present in this report shows that Greece not only does not have the ability to pay this debt, but also should not pay this debt first and foremost because the debt emerging from the Troika’s arrangements is a direct infringement on the fundamental human rights of the residents of Greece. Hence, we came to the conclusion that Greece should not pay this debt because it is illegal, illegitimate, and odious.

In other words, what this report is saying is that the Greek government should never pay back any of this debt.  That certainly is not going to sit well with the officials from the EU and the IMF.

And what happens if other financially troubled nations in the eurozone decide that their debts are “illegal” and “odious” as well?

Globally, there are more than 76 trillion dollars worth of bonds floating around out there, and the yields on those bonds are based on the assumption that they will always be paid off.  If nations such as Greece start defaulting, that will throw the entire global financial system into a state of tremendous chaos.

Of course the Greek financial system is already in a state of tremendous chaos.  At this point, many believe that it is just a matter of time before capital controls are imposed.  This is something that I have warned about in the past.  The following description of what capital controls in Greece may look like comes from Bloomberg…

No one knows the specifics for Greece, but here’s what happened in Cyprus: ATM withdrawals were capped at 300 euros a person per day. Transfers of more than 5,000 euros abroad were subject to approval by a special committee. Companies needed documents for each payment order, with approvals for over 200,000 euros determined by available liquidity. Parents couldn’t send children that were studying abroad more than 5,000 euros a quarter. Cypriots traveling abroad could carry no more than 1,000 euros with them. Termination of fixed-term deposits was prohibited, while payments with credit and debit cards were capped at 5,000 euros. Checks couldn’t be cashed.

Since most Greeks do not want to have their money trapped in the banks, they have been pulling out cash and hiding it at home at a record breaking pace.  This is precisely what we would expect to see when a nation is on the verge of total financial collapse…

“Everybody’s doing it,” said Joanna Christofosaki, in front of a Eurobank cash dispenser in the leafy Athens neighbourhood of Kolonaki. “Our friends have all done it. Nobody wants their money to be worthless tomorrow. Nobody wants to be unable to get at it.”

A researcher in the archaeology department at the Academy of Athens, Christofosaki said she knew plenty of people who had “€10,000 somewhere at home” and plenty of others who chose to keep their stash at the office. Was she among them? “If I was, I certainly wouldn’t tell you.”

As I wrote about yesterday, I believe that this is the beginning of the next great European financial crisis.

Eventually, it will spread all over the planet.

Unfortunately, even though global debt levels have never been higher and the signs of the coming financial implosion are all around us, most people have been lulled into a false sense of security.

Most people just assume that everything is going to turn out okay somehow.

The second half of this year is going to be much different from the first half, but most people will not be convinced until everything starts completely falling apart.

By then, it may be far too late to do anything about it.

Words Of Warning: Get Your Money Out Of European Banks

Words Of Warning: Get Your Money Out Of European Banks - Photo by Julien JorgeIf you still have money in European banks, you need to get it out.  This is particularly true if you have money in southern European banks.  As I write this, the final details of the Cyprus bailout are being worked out, but one thing has become abundantly clear: at least some depositors are going to lose a substantial amount of money.  Personally, I never dreamed that they would go after private bank accounts in Europe, but now that this precedent has been set it should be apparent to everyone that no bank account will ever be considered 100% safe ever again.  Without trust, a banking system simply cannot function, and right now there are prominent voices on both sides of the Atlantic that are loudly warning that trust in the European banking system has been shattered and that people need to get their money out of those banks as rapidly as they can.  Even if you don’t end up losing a significant chunk of your money, you could still end up dealing with very serious capital controls that greatly restrict what you are able to do with your money.  Just look at what is already happening in Cyprus.  Cash withdrawals through ATMs have now been limited to 100 euros per day, and when the banks finally do reopen there will be strict limits on financial transactions in order to prevent a full-blown bank run.  And of course anyone with half a brain will be trying to get as much of their money as they can out of those banks once they do reopen.  So the truth is that the problems for Cyprus banks are just beginning.  The size of the “bailout” that will be needed to keep those banks afloat will just keep getting larger and larger the more money that is withdrawn.  Cyprus is heading for a complete and total banking meltdown, and because the economy of the island is so dependent on banking that means that the economy of the entire nation is going to collapse.  Sadly, similar scenarios will soon start playing out all over Europe.

So if you hear that a “deal” has been reached to “bail out” Cyprus, please keep in mind that the economy of Cyprus is going to collapse no matter what happens.  It is just a matter of apportioning the pain at this point.

According to the New York Times, it looks like much of the pain is going to be placed on the backs of those with deposits of over 100,000 euros…

The revised terms under discussion would assess a one-time tax  of 20 percent on deposits above 100,000 euros at the Bank of Cyprus, which has the largest number of savings accounts on the island. Because the Bank of Cyprus suffered huge losses on bets that it took on Greek bonds, the government appears to be taking  depositors’ money to help plug the hole.

A separate tax of 4 percent would be assessed on uninsured deposits at all other banks, including the 26 foreign banks that operate in Cyprus.

Does that sound bad to you?

Well, if a deal is not reached, there is a possibility that those with uninsured deposits could lose everything.  According to Ekathimerini, EU officials are telling Cyprus to choose between a “bad scenario” and a “very bad scenario”…

The main question surrounds the future of the island’s largest lender, Bank of Cyprus. If unsecured deposits (above 100,000 euros) at all Cypriot banks are taxed then large savings at Bank of Cyprus are likely to be taxed between 20 and 25 percent. If the levy is not imposed on deposits at other lenders, the haircut for Bank of Cyprus customers will be much larger.

The option of a full bail in of Bank of Cyprus depositors is still on the table. As with the Popular Bank of Cyprus (Laiki), which is to go through a resolution process, the full bail in option could lead to deposits above 100,000 euros being lost. The only compensation for unsecured depositors will be shares in the “good” bank that will be created by a possible merger between the “healthy” Laiki and Bank of Cyprus entities.

When asked by Kathimerini how the Cypriot economy will survive if all company and personal deposits above 100,000 euros disappear from the country’s two biggest lenders, the EU official said: “Unfortunately, Cyprus’s choices are between a bad scenario and a very bad scenario.”

So what percentage of the deposits in Cyprus are uninsured deposits?

Well, nobody knows for sure, but according to JPMorgan close to half of the total amount of money on deposit in EU banks as a whole is uninsured.

Do you think that some of those people will start moving their money to safer locations after watching how things are going down in Cyprus?

They would be crazy if they didn’t.

And if you think that “deposit insurance” will keep you safe, you are just being delusional.

According to CNBC, very strict capital controls are coming to Cyprus.  These rules will apply even to accounts that contain less than 100,000 euros…

Financial controls are coming. Depositors with less than 100,000 euros may not lose their money outright, but they won’t like the restrictions–no matter how much they have in the bank. Limits on withdrawals, limits on check cashing, and perhaps even outright conversion of checking accounts into fixed term deposits are coming (translation: you don’t have a checking account, you have a bond from the bank).

A lot of people are going to lose a lot of money in Cyprus banks, and a significant percentage of them are going to be Russian.

And as I wrote about the other day, you don’t want to have the Russians mad at you.

According to the Guardian, Moscow is already considering various ways that it might “punish” the EU…

However, with Russian investors having an estimated €30bn (£26bn) deposited in banks on the island, the growing optimism about a deal was accompanied by fears of retaliation from Moscow. Alexander Nekrassov, a former Kremlin adviser, said: “If it is the case that there will be a 25% levy on deposits greater than €100,000 then some Russians will suffer very badly.

“Then, of course, Moscow will be looking for ways to punish the EU. There are a number of large German companies operating in Russia. You could possibly look at freezing assets or taxing assets. The Kremlin is adopting a wait and see policy.”

Could this be the start of a bit of “economic warfare” between east and west?

One thing is for sure – the Russians simply do not allow people to walk all over them.

Meanwhile, things in Cyprus are getting more desperate with each passing day.  Because they cannot get money out of the banks, many retail stores find themselves running low on cash.  In a few more days many of them may not be able to function at all…

Retailers, facing cash-on-delivery demands from suppliers, warned stocks were running low. “At the moment, supplies will last another two or three days,” said Adamos Hadijadamou, head of Cyprus’s Association of Supermarkets. “We’ll have a problem if this is not resolved by next week.”

But do you know who was able to get their money out in time?

The insiders.

According to the Daily Mail, the President of Cyprus actually warned “close friends” about what was going to happen and told them to get their money out Cyprus…

Cypriot president Nikos Anastasiades ‘warned’ close friends of the financial crisis about to engulf his country so they could move their money abroad, it was claimed on Friday.

Overall, approximately 4.5 billion euros was moved out of Cyprus during the week just before the crisis struck.

Wouldn’t you like to get advance warning like that?

Well, at this point it does not take a genius to figure out what to do about any money that you may have in European banks.  The following is from a recent Forbes article by economist Laurence Kotlikoff…

Whatever happens, no one is going to trust or use Cypriot banks.  This will shut down the country’s financial highway and flip Cyprus’ economy to a truly awful equilibrium in a replay of our own country’s Great Depression, which was kicked off by the failure of one-in-three U.S. banks.

Cyprus is a small country.  Still, the failure of its banks could trigger massive bank runs in Greece.  After all, if the European Central Bank is abandoning Cypriot depositors, they may abandon Greek depositors next.  A run on Greek banks could then spread to Portugal, Ireland, Spain, and Italy and from there to Belgium and France and, you get the picture, to other countries around the globe, including, drum roll, the U.S.   Every bank in each of these countries has made promises they can’t keep were push come to shove, i.e., if all depositors demand their money back immediately.

We’ve seen this movie before.  And not just in real life.  Every Christmas our tellys show It’s a Wonderful Life in which banker Jimmy Stewart barely saves his small town from economic ruin arising from a banking panic.

Others are being even more blunt with their warnings.  For example, Nigel Farage, a member of the European Parliament, is warning everyone to get their money out of southern European banks while they still can…

The appalling events in Cyprus over the course of the past week have surpassed even my direst of predictions.

Even I didn’t think that they would stoop to stealing money from people’s bank accounts. I find that astonishing.

There are 750,000 British people who own properties, or who live, many of them in retirement down in Spain.

Our message to expats now that the EU has crossed this line, must be: Get your money out of there while you’ve still got a chance.

And Martin Sibileau is proclaiming that if you still have an unsecured deposit in a eurozone bank that you should have your head examined…

What are depositors of Euros faced with today? Anything but a clean bet! They don’t know what the expected loss on their capital will be, because it will be decided over a weekend by politicians who don’t even represent them.  They don’t really know where their deposits went to and they also ignore what jurisdiction they really belong to. Finally, depositors are paid mere basis points for their trust in the system vs. the 20% p.a. Argentina offered in 2001 (thanks to the zero-interest rate policies of the 21st century). In light of all this, I can only conclude that anyone still having an unsecured deposit in a Euro zone bank should get his/her head examined!

So where should you put your money?

I don’t know that there is anywhere that is 100% safe at this point.  But many are pointing to hard assets such as gold and silver.  The following is what trends forecaster Gerald Celente had to say during one recent interview…

“People always say to me, ‘Mr. Celente you are always talking about gold.  What are you going to do with gold when everything collapses and there is no money?’  Well, let’s say you are a Cypriot and all of the ATM machines are out of money and the banks are closed?  Do you think those pieces of silver are going to buy you what you need?  Do you think that ounce of gold is going to get you what you want?

That’s the real money.  There is no other money.  When it all comes down, gold and silver are the only things you have to buy what you need, get what you want, or even get out if you need to.”

I used to tell people that putting their money in U.S. banks was safer than putting it other places because U.S. bank deposits are covered by deposit insurance up to a certain amount.

But now we see that deposit insurance means absolutely nothing.  If they decide to “tax” (i.e. steal) your money from your bank accounts they will just go ahead and do it.

So what should we all do?

Personally, I think that not having all of your eggs in one basket is a wise approach.  If you have your wealth a bunch of different places and in several different forms, I think that will help.

But as the global financial system falls apart, there will be no such thing as 100% safety.  So if you are looking for that you can stop trying.

Our world is becoming a very unstable place, and things are going to get a lot worse.  We are all going to have to adjust to this new paradigm and do the best that we can.

The Euro Is Falling