What Does the Cyprus Deal Mean For Individual Investors?

Cyprus put another nail in the coffin of Democracy and capitalism over the weekend.

Having found that the Cyprus people and Parliament wouldn’t stand for the confiscation (THEFT) of depositors’ savings, the EU bureaucrats simply chose an option in which voting doesn’t occur.

This is precisely what I feared would happen: that any basic rules or laws would be tossed out the window during times of extreme crisis. This has unfortunately proven to be the case.

The EU has now established that it will not only depose elected officials and replace them with unelected technocrats (Italy) but that it will impose its own laws and decisions on countries that do not proceed with its goals.

There is a word for this: it’s totalitarianism.

This was essentially an economic act of war. A sovereign nation has now officially seen its Government superseded by an outside governing body. For the EU, Cyprus is no longer Cyprus, it’s just a troublesome territory of the EU.

How the Cyprus Government and people will react remains to be seen. But as I warned Private Wealth Advisory subscribers last week, we’re approaching a time in which the option of open wealth confiscation has been put on the table. And it’s likely that going forward this option will be promoted more and more, often with an argument such as, “you have a choice, either you lose x% of your deposits and the bank stays afloat OR you lose everything.”

The Cyprus banks will reopen tomorrow. The key issue now is how depositors respond to all of this. If a bank run begins in Cyprus, then things could get very hairy. The only thing between Europe and a total banking collapse are bank runs. And if large depositors in Spain and Italy (or elsewhere in the EU) get spooked by what’s happened in Cyprus, then there’s little the EU or anyone else can do.

These are absolutely critical issues for the markets. Whether the market rallies or not this week is irrelevant. The market is notorious for failing to grasp the seriousness of banking issues (it rallied after Bear Stearns). What happens this week will set the stage for what happens later this year. And it could potentially be VERY big.

Now more than ever, investors need to be evaluating how to allocate their portfolios given the risks in the system. If you’re tired of being guided by namebrand analysts whose work is largely based on the companies their firms have a relationship with, you should consider joining us at Phoenix Capital Research.

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Graham Summers

Phoenix Capital Research

Posted by Phoenix Capital Research