The Big Picture

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• Is Cyprus Too Small To Fail?
• Dubai’s Iconic Skyline as You Rarely See It
• U.S. vs Standard & Poors
• Reflections On a Major Debacle
• 10 Tuesday PM Reads
• Cyprus – A Total Fiasco
• The State of the News Media 2013
• More Homes Return to Positive Equity
• Fifth-Year Rally Precedents
• Ritholtz on Cyprus, Apple, Strategists & GOP
• 10 Tuesday AM Reads
• Contagious: How to Make Things Go Viral

Is Cyprus Too Small To Fail? Posted: 20 Mar 2013 02:00 AM PDT   "Just when you think they've hit bottom, they keep digging."   These were the words of the U.S. ambassador to Bulgaria spoken to us during the country's staccato political ejaculations which eventually drove the country into hyperinflation in the late 1990′s.  It was on the same trip to Sophia that a senior central bank official looked us in the eye and said they would not let the government default.  The government had lost the confidence of the markets to meet its debt obligations  even though it had an independent central bank. Bulgaria faced a choice to either default or monetize its bond maturities.  Unlike Russia who chose default over hyperinflation in 1998,  Bulgaria monetized the debt payments causing one of the worst hyperinflations in post-war history.  The economic chaos eventually resulted in a currency board FX/monetary regime.  This is a lesson to the modern monetary theorists who believe governments with independent central banks can't default. History shows when governments get into trouble with their local currency debt they have to make a political choice on who will take the pain.  The Russians chose to inflict the pain on David Tepper, his hedge fund buddies,  and rest of the creditors, many of whom were foreigners. Bulgaria chose the domestic population through hyperinflation. Fast forward to Cyprus 2013 who today  rejected the depositor bail-in scheme as part of its EU bail-out.  This is a game changer.  Just when we thought Cyprus may have hit bottom, they keep digging. We hope the government has a Plan B — i.e., Russian bail-out, etc. — as the 6-10 deposit tax will look golden to depositors if Cyprus decides to/is forced out of the Eurozone.   The EU could also cave and soften up the terms of the bailout, but wouldn't this increase the political contagion to other countries? If Greece, for example, sees Cyprus voting down unpalatable measures forcing a Troika retreat and softening of terms, wouldn't they try and do the same? The Cyprus rejection of the bail-out deal really complicates matters and significantly increases uncertainty. How and when will they get the banks back open?    Could this be the tipping point where Germany and the rest of northern Europe's commitment to the Euro experiment begins to falter? Will a Plan B resemble that of Argentina's forced conversion of confiscated bank deposits into BONEX during 1980′s? BONEX– Government bonds issued in the  1980's and early 1990's. The 1989 issue was used to compensate for confiscated bank deposits. Although BONEX bonds traded as low as 20-25% of par value, they generally enjoyed a good reputation and were all paid off. Many were purchased by foreign investors at discounted value, and then used (at full value) to acquire privatized public companies. - Argentina U.S. Embassy The financial resources needed to solve Cyprus are so small one would think the powers that be will not let the country fall into the abyss and increase the risk of taking much of Europe with it.   In other words, Cyprus is too small to fail. This does raise the question, however, is Cyprus, like Lehman, the problem or just the symptom of larger issues?   If not Lehman, who?  If not now, when? Tough to currently see the path to a decent outcome now and have no idea where this is going.  Does feel like more turbulence coming.  We've buckled up. video after the jump Cyprus rejects Eurogroup’s savings levy and bailout deal (click here if video is not observable) The Cypriot parliament has rejected the EU/IMF bailout for the country’s banks. Support for the deal, which would have involved a one-off charge on all deposit accounts in the country, ebbed away almost as soon as it was announced on Saturday at the Eurogroup meeting. Before rejecting the package Cypriot MPs had already decided to exempt any savers with 20,000 euros or less in their accounts, but this was not enough to gain support. The Eurogroup said the charge was justified because Cyprus has allowed its banking sector to mushroom, Iceland style, into a monster that is more than twice the size of the rest of the economy, and has sucked in so much foreign money, much of it Russian, that foreign deposits account for 37% of all savings in Cyprus. The Cypriots countered by saying they have a right to build up a services sector which they accuse Germany of wanting to destroy, and that they are being targeted because of ongoing disagreements with Moscow that the EU should work out elsewhere. The European public has not failed to notice the one big fact to emerge from this latest crisis in the Eurozone. That is, no-one’s money appears safe any more, unless its stuffed under the mattress. The implications for the EU’s already hard-pressed banking system are obvious. A collapse in confidence at this stage of the game could prove fatal for the entire European project. Yet although the Cypriot “no” vote appears to have struck a blow for ordinary people it plunges the country into a deeper crisis, one that could have serious repercussions for the rest of Europe.

Dubai’s Iconic Skyline as You Rarely See It Posted: 20 Mar 2013 01:00 AM PDT Click to enlarge Source: AOL Hat tip Kid Lane!

U.S. vs Standard & Poors Posted: 19 Mar 2013 10:30 PM PDT

Reflections On a Major Debacle Posted: 19 Mar 2013 04:00 PM PDT 10-Year Iraq War Anniversary: What We've Learned In the Past Decade   Preface: Many experts and alternative writers pointed out the false justifications and huge downsides before the Iraq war started. I know for a fact that many letters and phone calls were made to Congress in an attempt to stop the war. And the protests against the Iraq war were the largest protests in history. Yet the politicians plowed ahead with the disastrous war and refused to listen to the facts … or the will of the people. The Iraq war started 10 years ago. This is a roundup of the facts that have been documented about the debacle in the last decade. The War Was Planned Long Before 9/11 The American government planned the Iraq war long before 9/11. Former CIA director George Tenet said that the White House wanted to invade Iraq long before 9/11, and inserted "crap" in its justifications for invading Iraq. Former Treasury Secretary Paul O'Neill – who sat on the National Security Council – also says that Bush planned the Iraq war before 9/11. Top British officials say that the U.S. discussed Iraq regime change even before Bush took office. In 2000, Cheney said a Bush administration might "have to take military action to forcibly remove Saddam from power." And see this and this. Indeed, neoconservatives planned regime change in Iraq – and throughout the Middle East and North Africa – 20 years ago. Weapons of Mass Destruction and 9/11 Everyone knew that Iraq did not possess weapons of mass destruction (update here). U.S. officials are guilty of war crimes for using 9/11 as a false justification for the Iraq war. Indeed, the entire torture program was implemented in an attempt to justify the Iraq war. American officials considered lettering Saddam should down a U.S. or UN plane, in order to provide a false justification for war. Saddam allegedly offered to leave Iraq if the U.S. would call off the war … but we refused. We wanted to invade. The Real Reason No wonder … As even the top Republican leaders have admitted, the Iraq war was – in fact – for oil. War Crimes The U.S. engaged in a systematic program of torture in Iraq, which rounded up innocent farmers, reporters, old people and children. People were murdered and sexually abused as part of the torture program. The American military widely used depleted uranium in Iraq, which can cause cancer and birth defects for decades (see this, this, this, this, this and this). Chemical weapons were used in Falluja, which greatly increased the rate of birth defects. The Pentagon sent in one of the main US creators of the death squads in El Salvador to set up paramilitary death squads and torture centers in Iraq. (And Iraqis are worse off now than before the Iraq war. Christians are more widely persecuted than under Saddam.) Cost: $5-6 Trillion Dollars Nobel prize winning economist Joseph Stiglitz estimated in 2008 that the Iraq war could cost America up to $5 trillion dollars. But a new study by Brown University's Watson Institute for International Studies says the Iraq war costs could exceed $6 trillion, when interest payments are taken into account. Given that top economists say that war is bad for the economy, the Iraq war is one of the primary reasons for our current economic problems. The War Has Hurt America's National Security National security experts – including both hawks and doves – agree that waging war against Iraq and other Middle Eastern countries has weakened America's national security and increased terrorism risks. See this, this, this, this, this, this, this and this.

10 Tuesday PM Reads Posted: 19 Mar 2013 01:30 PM PDT My afternoon train reads: • Political blowback from Cyprus (FT Alphaville) • A Beginner’s Guide to Irrational Behavior (coursera) • Perspectives on a Sluggish Recovery (Conversable Economist) • Carl Levin, The Senate's Muckraker (NYT) see also Jamie Dimon Told Regulators He Would Not Follow Regulations (FDL) • Earthquakes and the Mind-Bending Laws of Markets (Bloomberg) • K is not capital, L is not labor (Interfluidity) • When Mom and Pops Battled Five and Dimes (Echoes) • On the Brink? China's Solar Industry Debt Drama (The Diplomat) • WTF?! Sequestration Slashes Scholarships for Children of Iraq and Afghanistan War Casualties (ABC) • For Civilian Drones, the Sky is the Limit (Bits) What are you reading?   Workers Saving Too Little to Retire Source: WSJ

Cyprus – A Total Fiasco Posted: 19 Mar 2013 01:00 PM PDT Kiron Sarkar's his newsletter can be subscribed to here sarkargm.com.  This is a free excerpt . . . ~~~ I summarise below (in note form), the current situation in Cyprus. Background: • Cypriot banks are some 8 times larger than the country's GDP. • Cyprus is one of the 17 members of the EZ. Its small – just 0.2% of EZ GDP, with a population of around 1.1 mn people. • A number of the country's banks are insolvent, in particular as they invested in Greece/Greek sovereign debt. • Cyprus requested a bailout from the EZ, having previously received a Euro 2.5bn loan from Russia, which has kept the country afloat for some 2 years to date. Cyprus is negotiating with the Russians to reduce the interest rate on this loan and to extend its maturity. • The country needs funds by May this year, or it will become bankrupt. • Allegedly, a number of Russians, Ukrainians etc have laundered money, using Cypriot banks. • Russians and others do use Cyprus due to its low tax rates and allegedly "lax" money laundering measures. Once the money is parked in Cyprus, individuals invest in Russia, with "clean" money. Russian banks have apparently lent some E40bn to Russian companies domiciled in Cyprus, though their principal activities remain in Russia. • The EZ (Germany in particular) refused to negotiate with the former (Communist) regime in Cyprus. • The newly elected Cypriot President (Mr Anastasiades), a Conservative, met with EZ heads of State and finance ministers on Thursday/Friday last week. • He requested a bailout. • A number of EZ countries, lead by Germany, though including Finland (in particular), together with Slovakia and (partly) Holland stated that Cyprus would have to contribute to the bailout. • Germany was concerned that Cyprus would default on the EZ contributions in due course – they believe that Greece will. The German's are increasingly wary of the cost of bailouts of EZ countries. Essentially, countries, including Germany and, in particular, Finland wanted Cyprus to contribute to their rescue for domestic political considerations. • The maximum amount offered by the EZ (with, potentially, some contribution from the IMF) was E10bn. • The IMF insisted that if they were to contribute, Cypriot debt needed to sustainable – that required around E6/E7bn more than the E10bn proposed by the EZ (effectively in the form of equity, rather than debt), making the total package E16/E17bn. • The real crunch came when the ECB stated that they would not extend support to Cypriot banks, as they were deemed insolvent. This forced the Cypriot President to accept the bailout proposed by the EZ and to charge depositors a "levy". • Imposing a "levy" (in effect a tax) was the only way Cyprus believed that they could raise the extra E6/E7bn, demanded by the EZ. The current proposals will raise E5.8bn. • Junior bondholders are to face a haircut, though senior bondholders (around E2bn) will not be affected !!!. • The Cypriot President wants Cyprus's banking sector to continue post the bail out and, as a result, does not want to impose material haircuts (over 10%) on large depositors. In addition, he believed that if everyone (including small depositors) shared the pain, it would be less damaging to the Cypriot banking sector, in the future. There were suggestions (allegedly) by some EZ countries, the EU, ECB and the IMF, that the Cypriot President apply the "Levy" on deposits above E100k. They proposed a rate of 15.6% on all deposits above E100k. However, they left the decision to the Cypriots. Amazing !!! • As a result, an "agreement" was reached over last weekend, whereby ALL depositors in Cypriot banks would face a levy, which increased in percentage terms on larger deposits. • Cyprus has an E100k bank deposit guarantee scheme, though no funds to back it up. • The "levy" or tax does not (technically !!!) fall foul of the EZ deposit guarantee scheme, though there is no EZ wide deposit insurance scheme in place – the "guarantee" is the responsibility of individual EZ countries. Germany will not agree to an EZ wide deposit guarantee scheme or banking union at this time. • Germany is keen to reduce the size of the Cypriot banking sector, quite rightly. Politics • The Cypriot President's Party (Disy) has only 19 seats out of the 56 member Parliament. Its coalition partner has indicated that it will vote against the "levy". The other 4 parties are also opposed to the current proposals. • Mrs Merkel needs the approval of her Parliament in respect of any bailout of Cyprus – which she cannot be assured of. In addition, she does not want to be accused of bailing out alleged "Russian money launderers" ahead of her September general elections. Furthermore, there is increasing bailout fatigue in Germany. • As a result, Mrs Merkel wanted Cyprus to share in the burden, inspite of the overall sums being relatively small. • The main German opposition (the SPD) have traditionally been more EZ friendly than Mrs Merkel's CDU/FPD. Indeed, Mrs Merkel has had to rely on SPD support to pass legislation to bail out other EZ countries for example, as members of her own coalition opposed such measures. For political purposes (ahead of the September general elections), the SPD does not want to be seen to be too generous to Cyprus and the peripheral EZ countries, as it will lose them votes. The alleged money laundering charges has helped the SPD's argue its case to be tougher on Cyprus. Indeed, the SPD have demanded an increase in Cypriot corporation tax and other fiscal measures, including a financial transaction tax. • In particular, the Finns, for quite some time (domestic politics, once again), have increasingly opposed bailouts, as have the Slovaks, with the Dutch becoming increasingly sceptical. Russia is furious. They were not consulted. They deem the levy unfair or worse. The Cypriot authorities (and the EZ) are to discuss the situation with Russia. The Russians have threatened that they will not amend the terms of the existing E2.5bn loan. • The relative insignificant amount of funds required to bail out Cyprus is not the issue. Its the domestic political considerations, as far as Mrs Merkel and other EZ leaders are concerned, which are paramount. Current situation: • Cypriot authorities have advised their banks to remain closed until Thursday. The Cypriot Parliament are to debate a proposal, which would charge depositors a "levy". The original proposals have been amended, such that depositors with E20k will not be subject to a levy, though the levy on sums above E500k will be increased. The Cypriot President is wary of raising too high a levy on large deposits, though there were some discussions that the "levy" is raised (possibly to 15%) on deposits above E500k. The numbers are changing all the time. • The current view is that the Cypriot Parliament will not approve the proposed "levy" on depositors, even in its revised form. The clock is ticking. Banks cannot continue to be closed. Some deal is necessary this week. • Press reports suggest that the Cypriot finance minister has offered to resign, though this has been denied. • The ruling party has announced that it may (will?) abstain from voting on the proposed levy. • If depositors are charged a "levy", inspite of being technically legal, what's the worth of a deposit guarantee scheme, in particular by financially weaker EZ countries. • The threat of contagion spreading to say Spain and Italy is high. Spain, for example, cannot afford to pay out on "guaranteed deposits". • Why wont depositors withdraw funds from banks in the peripheral and weaker EZ countries?. Money was returning to a number of peripheral EZ countries – this trend will reverse. Banks in a number of the peripheral EZ countries will have to rely on ECB liquidity, once again. Target 2 imbalances will rise. • Whilst talked about, it is unlikely that Russia will impose any trade sanctions (involving energy) on the EZ. • Cyprus allegedly has significant reserves of offshore gas. Russia is deeply interested in these reserves. Gazprom has suggested that they will bailout Cyprus if they are, in effect, granted exclusive rights in respect of the offshore gas. Whilst possible, such a scheme looks unlikely at present. The Cypriot politicians/officials are to meet with Russian officials shortly. • To date, the market reaction has been muted, admittedly – a surprise. This lack of concern will embolden Germany (and Finland and Slovakia) to continue to take a tough line. However, does such a deal raise the risk of contagion spreading to other EZ countries. I very much believe that it does. • Cyprus could default, though its bonds are bound by UK law, making a restructuring problematic. Furthermore, the prospective currency would be much weaker than the Euro as they would have to exit the EZ and forego ECB support. Not attractive, at all. • The EZ claims that this is a "special case", a view which is complete nonsense. There have been too many special cases. • The contagion risks to peripheral EZ countries (Spain and Italy) are extremely high. The Euro looks vulnerable. • The risks to a number of EZ peripheral countries, in particular of the Cypriot proposals to tax allegedly "guaranteed deposits" (of up to E100k), are a huge mistake in my humble opinion. Kiron Sarkar ~~~ Kiron's daily newsletter can be accessed on his website www.sarkargm.com 19th March 2013

The State of the News Media 2013 Posted: 19 Mar 2013 12:00 PM PDT Click for complete graphic Source: State of the Media     Click for ginormous graphic

More Homes Return to Positive Equity Posted: 19 Mar 2013 11:00 AM PDT Click to enlarge Source: CoreLogic   • 200,000 more residential properties returned to a state of positive equity during the fourth quarter of 2012; • 10.4 million, or 21.5 percent of all residential properties with a mortgage, were still in negative equity at the end of the fourth quarter of 2012; • 38.1 million residential properties with positive equity, 11.3 million have less than 20 percent equity; • 23.2 percent of all residential properties are under-equitied mortgages; • $658 billion in aggregate negative equity; • $323 billion of negative equity are first liens without home equity loans; • $334 billion first liens with home equity loans.

Fifth-Year Rally Precedents Posted: 19 Mar 2013 09:00 AM PDT Click to enlarge     How have markets done in the 5th year of a bull run? The chart above comes from Jeffrey Kleintop, LPL Financial's chief market strategist. The bull market that began in March 2009 is the seventh to last at least four years since World War II. Of those seven, only four ran for five years or more, with an average gain of 22%. The four-year gains ranged from 58% in October 1990, to 138% in August 1982. Before getting too excited, note that this is an exceedingly small sample set, one that is barely better than even money (57%). One other noteworthy factoid: David Wilson of Bloomberg notes that two and one half months into the new year, “the S&P 500 has yet to retreat for more than two days in a row this year.” That is a helluva streak just begging to be broken . . .   Source: Chart of the Day David Wilson Bloomberg March 13

Ritholtz on Cyprus, Apple, Strategists & GOP Posted: 19 Mar 2013 07:30 AM PDT Barry Ritholtz, chief executive officer at FusionIQ, and Brian White, an analyst at Topeka Capital Markets, talk about possible cash strategy for Apple Inc. and the company’s growth outlook. They speak with Tom Keene, Sara Eisen and Scarlet Fu on Bloomberg Television’s “Surveillance.” If video does not load. click link on each Bloomberg White, Ritholtz on Apple’s Growth, Market Strategy Source: Bloomberg, March 19 2013 ~~~ Douglas Holtz-Eakin, president of the American Action Forum and a former Congressional Budget Office director under President George W. Bush, speaks about the outlook for the Republican Party and the 2016 presidential election. He talks with Tom Keene and Sara Eisen on Bloomberg Television’s “Surveillance.” Barry Ritholtz, chief executive officer of FusionIQ, also speaks. Holtz-Eakin on Republican Party, 2016 Election Source: Bloomberg, March 19 2013 ~~~ Jacob Kirkegaard, a research fellow at the Peterson Institute for International Economics, talks about the proposed levy on bank deposits in Cyprus and its impact on Europe’s sovereign-debt crisis. He speaks with Tom Keene on Bloomberg Television’s “Surveillance.” Barry Ritholtz, chief executive officer at FusionIQ, also speaks. Kirkegaard Sees ‘No Immediate’ Cyprus Contagion Source: Bloomberg, March 19 2013

10 Tuesday AM Reads Posted: 19 Mar 2013 06:45 AM PDT My morning reads: • When emotions rise or fall with the Dow (MarketWatch) see also Stock Bulls Get New Member of Club (WSJ) • Bernanke Tightens Hold on Fed Message Against Hawks (Bloomberg) • Doug Short: Is This Bull Market Fundamentally Driven? A Look at PE Expansion (Advisor Perspectives) see also One of the Most Sentiment-Driven Rallies Ever (TRB) • H.Res. 112: Celebrating the 100-year precedent of the Federal tax exemption for municipal bond interest (Govtrack) • Martin Wolf: Why bankers are intellectually naked (FT.com) • Meet the Hedge Fund Managers Turning a Profit on the Sandy Hook Massacre (The Sparrow Project) • Google’s penetration of Android (Benedict Evans) • Denmark Races to Prevent Foreclosures as Home Prices Sink (Bloomberg) • A Look Behind the Curtain at Wall Street’s 24/7 Effort to Gut Finance Reform (Mother Jones) see also Regulator sides with big banks on avoiding break-up votes (Reuters) • 74 Things Every Great Star Wars Movie Needs (Wired) What are you reading?   More Homeowners Dig Out Source: WSJ

Contagious: How to Make Things Go Viral Posted: 19 Mar 2013 06:00 AM PDT Contagious: Why Things Catch On by Jonah Berger   "Jonah Berger is as creative and thoughtful as he is spunky and playful. Looking at his research, much like studying a masterpiece in a museum, provides the observer with new insights about life and also makes one aware of the creator’s ingenuity and creativity. It is hard to come up with a better example of using social science to illuminate the ordinary and extraordinary in our daily lives." -Dan Ariely, James B. Duke professor of psychology and behavioral economics at Duke University and bestselling author of Predictably Irrational. "Why do some ideas seemingly spread overnight, while others disappear? How can some products become ubiquitous, while others never gain traction? Jonah Berger knows the answers, and, with Contagious, now we do, too.” -Charles Duhigg, author of the bestselling The Power of Habit "Jonah Berger knows more about what makes information 'go viral' than anyone in the world." -Daniel Gilbert, Harvard College Professor of Psychology at Harvard University and author of Stumbling on Happiness “A provocative shift in focus from the technology of online transmission to the human element and a bold claim to explain ‘how word of mouth and social influence work . . . [to] make any product or idea contagious.” -Kirkus Reviews "Think of it as the practical companion to Malcolm Gladwell's The Tipping Point." -Tasha Eichenseher Discover "Contagious contains arresting — and counterintuitive — facts and insights. . . . Most interesting of all are the examples Berger cites of successful and unsuccessful marketing campaigns." -Glenn C. Altschuler The Boston Globe "An infectious treatise on viral marketing. . . . Berger writes in a sprightly, charming style that deftly delineates the intersection of cognitive psychology and social behavior with an eye toward helping businesspeople and others spread their messages. The result is a useful and entertaining primer that diagnoses countless baffling pop culture epidemics." -Publishers Weekly   video after the jump   Jonah Berger Knows How to Make This Video Go Viral Hat tip: Fast Company If video does not load, click here

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