Over the past month, there's been an increase in bank runs and deposit freezes to stop bank runs occur throughout Europe. See the links below:
- Major Italian Bank Freezes All Customer Accounts
- Greek Lenders See Bank Run
- Run on Nationalized Bank in Spain Begins
I consider it well within the realm of possibility that these stories will continue. The banking system in Europe, like the banking system almost everywhere else in the world, is unstable; this is the inevitable by-product of a world in which all money is loaned into existence, thus creating a debt burden that is greater than the entire existing money supply. There are thus only two possible solutions for the global debt crisis:
- Cancel debt and reform monetary policy.
- Keep printing money, although this adds to the debt burden (since new money will enter the supply via the issuance of new loans), so in a way it only exacerbates the problem, if delaying its ultimate collapse a bit longer.
At this point, individuals around the world should have cash, precious metals, and food in their home in the event of a national emergency. Bank accounts could be frozen, businesses could thus have trouble sustaining operations, and all sorts of madness could then ensue.
While bank freezes and national emergencies are a worst case scenario that I think is prudent to prepare for, I do not consider it likely. In the US, deposits are insured; in fact, in the 2008 financial crisis, deposit insurance was increased. I consider it likely that similar policies will emerge throughout Europe and quickly; there may be a period of a few weeks or months until these policies are implemented, but I consider it highly likely, as failure to do so will ultimately decrease confidence in the Euro and increase the likelihood of a complete run on the Euro. The political price of deposit insurance, though, may be greater fiscal unity and less national sovereignty in Europe. The Euro project has been marching towards greater integration over the past 50 years; remember the origins of the EU go back to 1958 via the European Coal and Steel Community, when it was originally meant to be a trade agreement amongst six countries to create a single market for coal and steel. Since then, it has evolved into a political and economic union of 27 countries, complete with its own central bank, currency, parliament, and court system. I do not expect this trend to be reversed without equally great political will -- and given that Syriza, the most rebellious group with a critical mass of followers still supports the eurozone, it does not seem sufficient political will is with us yet.
So, member countries get the money printing they want from the European Central Bank, which in turn ensures that deposits can be insured and that there is enough cash for withdrawals. There a few consequences of this:
- Price inflation of real goods throughout the eurozone. This should be intuitive; there will be more money circulating, but not more goods, so price goes up.
- However, this will stabilize the banking system and give strength to the Euro project. As a result, I think it will be very bullish for the Euro (FXE), and that global markets will turn their attention to other countries mired in sovereign debt that could turn into a currency crisis. Specifically, these countries are the UK, Japan, and the United States.
Ongoing weakness in the US dollar remains one of the key focal points for investors around the world to build a viable investing strategy around. Anything that points to dollar weakness -- and stopping bank runs in Europe, because it strengthens the Euro, will lead to a global capital flow into the Euro and outside of the US dollar -- is also bullish for US stocks, which are priced in US dollars. This is why resolution of the European sovereign debt crisis is ultimately bullish for equities. From this perspective, buying US stocks is a great opportunity if the eurozone sovereign debt crisis worsens and more bank runs occur in Europe; buy the equities when international investors are fleeing the Euro into the dollar and depressing equities, because once the eurozone steps in with bailout money, deposit insurance, and greater fiscal unity, the US dollar will weaken and US equities, as measured by the S&P 500 index (SPY), will go much higher.
From this perspective, the whole Euro crisis and its resolution boil down to three points to watch:
- Money printing out of the eurozone to insure deposits, preserve (and probably strengthen) their union and prevent a run on the Euro, and give countries debased currency they can use to pay off their debt.
- Once all of these measure go through or are on track to going through, the value of the Euro relative to other countries with larger debt problems -- namely the US and Japan -- will rise.
- A weaker dollar means a weaker Treasury bond market (TBT), higher US equities , and higher precious metals prices (GLD).
The longer point #1 is delayed and the more the market worries about bank runs, the more time investors have to accumulate while the US dollar is still strong. That, in my opinion, is the contrarian opportunity to exploit out of this whole mess with the eurozone.