Euro Tremors Send Message: Diversify Currencies And Add Precious Metals

by: Emmet Kodesh

If you want to grow your wealth or just keep up with inflation, you must hedge this wild market with precious metals and miners and diversify from fiat currencies. Despite troubling fundamentals and the alarm bell in Cyprus, the indices spiral higher: it can't happen here. Buyers are grabbing at the last nickels in front of a bulldozer named reality.

You might consider the Euro-hedged WisdomTree ETF (NYSEARCA:HEDJ) which just doubled in size to $98m. Though small it's an adroit play. The Euro has declined 2.79% against the $ this year: expect more.

Cyprus, no problem, it's a tiny nation. The ECB-IMF expropriate 40-80% of large savings deposits, no problem, the S&P sets a new nominal high. After many protests, much haggling and the fortuitous approach of German elections, only 'the 1%' are going to pay. As of this writing, only depositors with more than EUR 100k in Cyprian banks will get robbed of 40% of their wealth if they are in the Central Bank of Cyprus or 80% in Bank Laiki. For the Cyprus story, 100k became a magic dividing line as $250k was here on tax rhetoric: the reality has proven different as payroll taxes and the Affordable [sic] Care Act wreck the remnant. The new normal is that nothing can be taken for granted or on faith regarding banking or politics: the masters change the rules as the game proceeds. Examples: the closure of Cyprus' banks was extended three times and the same process is underway on capital controls: withdrawals are limited to EUR 300/day for "about a month" though the Foreign Minister Ioannis Kasoulides first said "a week." Capital control is a euphemism for "you can't get your money until we say so." Without faith there can be no banking, only robbery on a grand scale, thus:

"The government of Cyprus will review the restrictions each day with a view to 'progressive lifting of the measures as soon as circumstances allow.'" Without faith in the integrity of one's deposit, the banking system will collapse. It is not difficult to conclude this is the purpose of this exercise.

Stay tuned: a new structure of confiscations may be declared any hour in Cyprus with Slovenia and Malta on deck and other dominoes about to fall. We have entered the era of bank failure contagion and global wealth seizures. In this future whatever is not mandatory will be forbidden.

According to the St. Louis Fed, Americans have $6.913 Trillion in insured bank accounts with negative real returns. Are American Banks good for that $7 Tn? The FDIC which covers it has only $34 Bn backing. Consider putting some of your funds in EverBank's various foreign-denominated currency basket CD's. Buy gold and silver bullion coins and hard asset vehicles like Asian Gold Trust (NYSEARCA:AGOL), Swiss Gold Trust (NYSEARCA:SGOL), and Sprott Physical Silver (NYSEARCA:PSLV). Let some of your horses run with this mad bull: perhaps Sam Stovall of S&P Capital IQ is right about this being a 20%+ year since both January and February saw gains: March seemed to bear him out. But trim equities and move some to short term investment grade ETFs: at least here, unlike in Germany to which much European capital continues to flee, real returns remain positive, if barely. If you have followed my suggestion to lean into Consumer Staples and Health Care, you're doing well but an economy that depends on these sectors is not healthy. Indeed, Health Care companies may thrive but costs to consumers grow while quality of care declines as administrative expenses and priorities displace medical values.

Recent fund flows suggest Americans half get it: the week ended March 20 saw a net inflow into domestic funds and ETFs of $1.5 Bn while net $1.57 Bn was withdrawn from foreign funds. However, many people are fleeing to the "safety" of bonds which had a net $5.2 Bn inflow in mutual funds and ETFs for the week, Lipper reports.

Big Problem: Loan/deposit ratios are falling. Banks are scared, consumers are scared but the markets run higher. From Bank of America (NYSE:BAC) which nearly went under in 2008-09 (its NAV fell from $40 to $2), to Wells Fargo (NYSE:WFC), JPMorgan (NYSE:JPM), Citigroup (NYSE:C) to Joe and Jane everyone is scared while headlines adore the Emperor's New Clothes. In an apologetic for Bank tightness, Paul Miller of FBR Capital said "you've got to see sustainable economic activity before lending picks up." This underscores how bankers and analysts see this index-topped economy. Miller acknowledges the hoard of cash at banks but claims "there's no place for them to put it." That is, they see no valid investments. Other analysts blame citizens more directly. "Everyone wants to hoard cash, no one wants to borrow" claims Paul Ashworth from Capital Economics. Translated that means banks don't want to lend but hold to support their MBS. Surely they won't break their game by backing their digital credits with precious metals, bullion or by investing in small businesses. Moreover, as Ellen Brown writes, they are prepared legally to take deposits to cover their leveraged derivatives. Brown notes that BAC and JPM have $75 Tn and $79 Tn respectively in derivatives for which depositors are potentially on the hook. Their reluctance to loan and derivative exposure indicate that big banks should be separated from savings and loans. This discussion is ongoing but implementation seems to wait on another major crisis.

Instead of lending, Bankers sit on the enormous collateral they have in the form of deposits. Few societies can afford this degree of waste, certainly not an economy burdened with structural weaknesses like our own. The articles quoted above show that Banks "too big to jail" are among the worst offenders in using government credits and depositors' savings to anchor their leveraged, derivative-laden balance sheets, to hedge, speculate and give bonuses rather than loan and stimulate the economy organically. As in Europe, people are so scared they pile into fixed income or savings accounts (they should be called "waste" accounts) with negative returns. The makings of a panic are in place.

If bankers do not see any valid investment / loan ventures, it signals that the economy is ready to sag and the markets to gasp, stagger and buckle. The bankers are voting against the economy by sitting in cash and attacking the economy with derivative exposure. That is a message to heed: Cyprus is a tiny canary in a big mine filled with miners/depositors. Consider that the % of small lenders rejected by major banks doubled from 11% in 4th quarter 2011 to 22% in 4th Q 2012. That is not the sign of a recovering or expanding economy. Perhaps retail sales, flat as during 2005-07 are again sending a clear and actionable message to cash out some gains. Perhaps you ought to buy some productive land as I suggested six weeks ago. One might add an emerging market high yield ETF (NYSEARCA:HYEM), International High Yield (NYSEARCA:IHY) or an RMB short term bond ETF (NYSEARCA:CHLC) which quickly sold out in Brazil and gives good yield. But in America a bond bubble already is in place. The new monetary order will be born in agony and blood as "money and intellect celebrate their last, greatest and most artificial triumphs." The ensuing "stage of depopulation [and impoverishment] can last for centuries."

Did IMF Chief Christine Lagarde intend to destroy faith in Europe's banking system by making depositors pay to bail out insolvent banks? That is what she has done not only in Europe but throughout the fiat zone. Perhaps the troika's handling of Cyprus, under review since January, is a trial balloon. Can it happen here? It can and did 4-5 years ago via taxes, debt service and devaluation. In 2001 the war on terror justified taxpayers bailing out the airlines. Moreover, the government may mandate transforming your 401k and IRAs into holding pens for T-bills which will accelerate impoverishment of savers, seniors and bond holders. The results would snowball through retail and housing and wreck the economy. Government debt is $16.6 Tn and Americans have about $19.2 Tn in IRAs. This match recalls Hardy's poem on the Titanic and the iceberg, "the Convergence of the Twain" that "shook two hemispheres."

National Seniors Council Director Robert Crone described a recent Treasury-Labor Dept hearing about the IRA scheme as "the first step toward a government takeover [of IRAs]. It feels like the beginning of the debate over health care and we all know how that ended up." In other words it is more fake concern designed to confiscate money and increase the power of the State, "the better to eat you with, my dears." Commentators were delighted that the administration finally presented a Budget but its provisions include "Automatic IRAs" sponsored by former Senator, now Secretary of State Kerry. The Service Employee International Union (SEIU) a de facto adjunct of this administration cheers on the change to "help low-income employees participate in government-sponsored retirement plans." It's "to serve man" again until there's nothing left to carve off the carcass.

Jeroen Dijsselbloem, Dutch Finance Minister said the Cyprus "deal is the template for future bank bail outs." Apparently he then was counseled, reversed himself and said Cyprus was "unique" but the cat had peeked briefly from the bag. The Euro is sliding and it behooves us to ask who's next. Citizens should buy physical assets and carry extra cash.

Those who spin the fiscal dials clearly believe the financial system must be protected at all costs. The break between finance and the economy is becoming more extreme every week. The last five years of rhetoric about protecting the middle class and the "99%" barely hides the truth that a "controlling oligarchy" as Huxley termed it runs the machine to manage everyone else. The administration invests in class warfare and impoverishes most Americans while trumpeting concern for "social justice." We need to read Animal Farm again: it's perspective resonates in these days.

As for inflation in energy and food, no problem: official stats say inflation is low though John Williams continues to report nearly 6% by pre 1990 standards. Equity indices rise on cash fleeing Europe so what's the problem?

The problem is that most Americans suffer a declining standard of living, growing debt and job losses. This vicious circle makes it nearly impossible for 40% of the working age population to live, buy and build. We have "peak debt, peak DOW and peak inequality." When the stagnant retail sector begins to drop the markets will collapse sending the economy into deep freeze. This is so predictable it might as well be government policy.

When an economy is booming, commodities basic to growth like copper and iron enjoy a seller's market: not so today. The distress is in plain view but Nero fiddles while the nation burns. Jim Sinclair believes that the Cyprus plan is a "Hail Mary" pass by the financial system to scare money out of banks into the indices and real estate. It is a calculated gamble that risks systemic bank failures and wealth confiscation.

The exuberant markets are heading for a serious re-connection with reality. If the bull runs after that it will be by various seizures of citizen assets via taxes and "bail-outs." We will get a 1933-7 cyclical bull within a deepening secular bear. But an alternative is available in Precious Metals. From Central Bank buying, to miners priced at "capitulation" levels, to devalued fiat currency and a new reserve system backed with gold the case for precious metals has rarely been stronger. Insider buying at GDX listed companies in March reached 7 - 1 buyers to sellers, a ratio typifying a market trough. Dividend-paying miners like Goldcorp. (NYSE:GG), Kinross Gold (NYSE:KGC), Yamana (NYSE:AUY) and streamer Silver Wheaton (NYSE:SLW) go well with bullion and farmland as in a mixed oil and gas, farmland, fertilizer and bullion play like Sprott Resources (OTCPK:SCPZF). Or you can grab for that last nickel: they say it's a bull, not a bulldozer.

Disclosure: I am long PSLV. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.