By Charles Biderman
Cyprus banks reopened Friday, the last trading day of the first quarter of 2013. That's nothing to cheer about. It may in fact be a milestone on the road to economic disaster. For Cyprus is only the most recent problem in a world of no growth and huge financial asset inflation. (By the way, ZeroHedge has by far the best coverage of all things Cyprus. Tyler, great job.)
So let's review the quarter as to where we are and where we are headed. Overall, the major central banks are creating fake money with which to buy financial assets. On the other hand the economies are not growing.
Specifically let us start with Cyprus. What has changed is that stealing depositor cash and wiping out bond and equity holders is now okay. That says to me that when it comes to crunch time, the central banks care more about governments and central banks than individuals and even banks.
Meanwhile, all the most recent data says that the European economy is declining. The best that can be said about Europe is that Germany might be barely growing. But that is it. Ireland still has capital controls. Greece is literally dead and Italy, 30 days after a general election, still has not been able to form a government. Meanwhile, Spanish banks are hemorrhaging deposits. Despite all that, believe it or not EFA, the Europe ETF, rose over 3% in Q1.
The only real growth in Japan is the amount of Yen in existence. The brilliant Kyle Bass has predicted that Japan has less than a year to go before suffering the consequences of having survived the past decade solely by creating new money to pay old bills. The amount of existing Japanese government debt to its economy is more than twice the U.S. And that is before the new head of the Bank of Japan floods the world with even more Yen. While the Europe EFA was only up 3%, the Japan ETF, EWJ, surged 11% in Q1.
China is all bubbled up with real estate. Cities are being built with no occupants. The vacant homes are owned by investors, and all is good according to the banks. There will be consequences to pay. When reality hits, it will be interesting how it plays out between the billions of Chinese and the Mandarins that run both the government and the economy.
And then there is the U.S. Real-time numbers which indicate that after tax-incomes are barely growing adjusted for inflation. The only good stuff happening is a supposed housing revival. Yes, housing numbers do look better. But underneath those supposedly good numbers is that investors are buying foreclosed properties to rent out.
Remember, early in 2012 QE3, AKA Operation Twist, mortgage rates dropped from 5.5% to 3.5%. That boosted the value of all homes, causing a huge spike in institutional investor demand for rental housing. What that means, for example, is that a $300,000 short sale that rents for $1,000 a month after all expenses generates a 4% return on the $300,000 purchase. When mortgage rates were 5.5%, a 4% return was a loser. But with mortgage rates at 3.5%, a 4% return becomes a big winner. And the institutions are piling in.
Meanwhile two thirds of the existing housing stock is frozen in place. Only one third of current homeowners have enough equity and a good enough credit score to become a move-up buyer. And without move-up buyers, the housing market will not be any engine of growth. Bottom line? The U.S. economy is barely growing incomes by a few hundred billion dollars even with trillions in fake money creation. Despite that, the S&P 500, SPY, rose 10% in the quarter.
Well that is where we are. The world economies are stagnating at best. The Federal Reserve, the European Central Bank and the Bank of Japan have been arguing that all they are doing is building a paper money bridge over the economic malaise to the next economic recovery. But if there is no global economic recovery anytime soon, as I suspect, Cyprus will just be one of first of many economic calamities to occur as this year rolls along.
The financial markets are all addicted to the free-money drug being pushed by central banks. When either the drug is withdrawn or no longer creates new market highs, cold turkey will not be pleasant.
What Cyprus really means is that we are now closer to that point in time.