Saturday, March 16, 2013

Inflection Point

Is the Cyprus bank confiscation move the "butterfly flapping her wings which ultimately causes a worldwide  hurricane"?

The Euro elite and the IMF sought to punish the horrendous bank lending practices of Cypriot Banks by taxing their depositors, and not make the owners of the banks take a haircut, in order for the government to get a bailout.  Now if you are a depositor in Spain or Italy and you know a bailout is required, would you keep your money in a bank account?

For some perspective, Europe relies on investors to fund their lending leverage, whereas in America it has a much stronger depositor base.  Obviously, these investors are politically connected and the Euro elies know the game is up for them if they screw with investors and lose their funding sources.  But it might be a moot point anyway, as the Foriegn banks with access to the FED window has exchanged nearly 100 billion dollars in collateral of unknown worth for U.S. dollars. Yet the banks are still hopelessly underwater with loans swamping cash deposits We are now financing European banks and governments indirectly to keep the game going.  But for how long if people start pulling their money.

Why did they do it in this manner?  Governments are like bank robbers, they go where the money is, and against the weakest victim.  The money is sitting there, and most of these people do not vote in Cyprus.  They are taking a calculated risk.  The notion that this is a one off is laughable.  Once a government gets a taste for a revenue stream, it never gives it back.

They are pulling the tax out this weekend, and the reaction on Tuesday should be interesting in Cyprus, but judging by all the news articles addressing this, Monday in Europe may prove interesting.

This comes right on the heels of my view that the gold consolidation is ending and the great rotation is unrotating. Protestations by the Fed about tightening and reducing leverage will start to ring hollow and investors are going to start shifting money into something that will protect them from real negative interest rates as inflation ticks up and bond and market yields stagnate or fall.

My long term signals are flashing a buy for the week ahead for gold and treasuries.  After we get our obligatory Fed meeting smack down (maybe not, depending how the Cyprus mess is massaged), I will establish a longer term gold position with a stop at 148, and buy NUGT calls with a conditional sell order at GDX at $35.80.  This assumes gold and GDX are not bear flags, but I believe they will play out by Thursday.  I'll post any changes to these stops Wednesday night before I enter, as I won't be a hero and front run the Fed.

I will still post my buy and sell automated system as normal (it is optimized on the hourly), right now all three are buys (treasuries through IEF), with silver still a sell.  I got a buy signal on VXX, on Friday, as well.  We may be in for some rough waters again. (

Here are a few charts.

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