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John Nyaradi is publisher of Wall Street Sector Selector, Your Home for ETF Investing! (www.wall-street-sector-selector.com) a financial media site focused on news, analysis and information about exchange traded funds and global financial and economic developments. John writes a weekly guest... More
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  • The Black Swan Of Cyprus 0 comments
    Mar 18, 2013 1:18 PM
    European officials stun the world with a "black swan"

    Over the weekend, the involuntary wealth tax imposed upon Cypriots holding deposits in the country's banks stunned the investing world.

    Until now, the European debt crisis has been contained through the actions of the European Central Bank, the International Monetary Fund and the European Union, but now, for the first time, individuals have been asked (forced) to help foot the bill for the ongoing European debt crisis.

    This action, if approved this week by the Parliament in Cyprus, opens the door to very serious questions and potentially problematic outcomes.

    1. Will the action be limited to Cyprus? The spin is that Cyprus is a unique event, however, if Cyprus can nationalize private assets, why not Greece? Spain? Italy? Germany? Even the United States?

    2. Doesn't confiscation of private assets carry a strong hint of desperation? Why couldn't or wouldn't the European Union and IMF come up with a better solution to once again the long running crisis in the country? Is this all the water they have left to throw on this long burning fire?

    3. Can it happen here? Nobody believes that such an event could happen here, but we have a history of bank runs in the United States, including the Great Depression and more recently with the collapse of Bear Sterns and Lehman Brothers. The financial leaders of the United States have poured billions into saving U.S. banks just to avert such a calamity because they know that if a country's banks can't be trusted that the entire financial system is subject to collapse.

    4. Just how bad is the situation in Cyprus? The country's debt to GDP ratio is 73%. Compare this to the United States at 105%, Germany at 85% and Japan at 190% and it's easy to see that whatever problems the small country might have are significantly magnified in other parts of the developed world. National Debt Clocks

    What To Expect From Cyprus:

    1. Eurodollar weakness: Potential plays include short CurrencyShares EuroTrust, (NYSEARCA:FXE) ProShares UltraShort Euro (NYSEARCA:EUO)

    2. Increased interest in precious metals. Potential plays include SPDR Gold Trust (NYSEARCA:GLD) iShares Silver Trust (NYSEARCA:SLV)

    Bottom line: The ongoing European debt crisis flares again with the weekend's action in Cyprus. While not particularly significant on its own, the real threat lies in contagion and the possibility that the weekend's events become a part of the European Union's strategy for dealing with its crushing debt loads.

    For more on the European crisis, get Wall Street Sector Selector's free ETF Review!

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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