To market, to market to buy a fat pig. We learnt more about a little island in the Mediterranean than we knew before. Perhaps this decision, which has not yet actually been passed, will set a dangerous precedent, perhaps it is a lesson that the rest of Europe want to dish out. In reality, being in is better than being out. It is an election year in Germany. I am pretty sure that all sides have bailout fatigue. Oh, dash it all, the one Cypriot that I actually know, she has parents that live there and I saw her at the school dash this morning and forgot to ask her if she had chatted to her parents. Just to get a sense of the mood on the ground, which I am sure is more than a little frigid!
But surely it cannot be worse than nationalizing private pension funds, which has been done before, as someone pointed out on the twitter thingie, old, but relevant: Hungary Follows Argentina in Pension-Fund Ultimatum, `Nightmare' for Some. Both are just too awful to bear, but I suspect the government nationalising your savings because they couldn't get a grip on their finances, that is much worse. But how would you feel if the government dipped into your cash savings? Outraged. Crazy oligarch Russian money and tax avoidance deposits from Greece aside, this is dangerous. But I think a once off, this is NOT likely to happen in Spain, Italy, Ireland or even Greece for that matter. And seemingly, a spokesperson for the parliament suggests that this might not actually pass.
I also suspect that the Cypriots, the ones where the power lies, will bash this out until they reach a firm conclusion. Today and tomorrow have been declared bank holidays, parliament will make this decision. A very unpopular one. And no doubt will haunt them for the rest of their careers. A few little facts that Bloomberg neatly compiled in this article: Cyprus Bank Assets Dwarfing Economy to Make Aid Exception. Amazing stuff in there, really informative. The three biggest banks took heavy hits as they wrote down their Greek bond holdings, like everyone else. I am afraid that the quality of their loan books are more than poor, but someone would pay for that. The book I mean, if the banks went insolvent.
Depositors are seemingly guaranteed up to 100 thousand Euros per individual, per bank, as per this Deposit protection scheme from the Central Bank of Cyprus. But who would make good for these deposits, if the banks failed to get the necessary funding to stay afloat? No really, think about it for a second. What is missing and something I keep asking is, where are the regulators in all of this? Turns out two are British and one is Swiss: Independent Commission on the Future of the Cyprus Banking Sector. Or is this just a special commission? Turns out that they may have their work cut out for them. The banking system is outlandishly big. Too big relative to their economy.
Would this have happened if there was a central banking regulator? I guess not, because they would have been a whole lot stricter. Cyprus would not have been allowed to have done this, allowed their banking system to be 7 times the size of their GDP. Is there an alternative? The French finance minister just this morning suggested that there is no plan B. Nothing. A little bit of history is worth noting though, the Cypriot economy was worth 9.31 billion Dollars in 2000, to a whopping 25.3 billion Dollars in 2008. Mind boggling, that sort of growth. But of course nobody questioned that, that is expected! Byron pointed out something interesting, via the Motley Fool: Cyprus' Unprecedented Bailout: More Common Than You Think. That one key paragraph:
- "If Cyprus had its own currency, it would be dealing with its economic problems by printing money. That would eventually cause inflation. How much? I don't know, let's say 6.75%. In that case, those with cash deposits in Cypriot banks would lose 6.75% of their money in real terms -- the same amount being directly confiscated on most deposits through the IMF bailout."
Of course nobody knows what the benefits were for the country from being inside of the Eurozone, I wonder if that would be easy to quantify? Surely Russians, who are around 30 percent of all the deposits would NOT have flocked to Cyprus if their deposits were in Cypriot Pounds. They would have found some other place to park their funds. Surely loans would not have been extended to Greeks over the seas if they had been denominated in Cypriot pounds? No, those would have been taken elsewhere, perhaps Ireland, but the language most certainly helps. This is not a new problem, I saw a paper written last year in July, through all my trawling, titled: Macroeconomic imbalances - Cyprus. It is truly the most insightful thing I have read over the recent days on the country. And don't say you were not warned, it was here already. Note one sentence that almost puts it all into context: "The total private indebtedness (as a share of GDP) in Cyprus is the second highest in EU, with debt of non-financial corporations being the one that stands out."
Too much reliance on tourism, productivity levels have fallen, government has become bloated, banking sector got out of whack, too much exposure to Greece, too late to act decisively. And why were the folks over at the EU too late to act? Well, there were more important things to deal with last year. Greece. Italian and Spanish bond yields. Various programs designed to strengthen the Euro. Ironically if the economy was bigger it might have taken a closer front stage. I suspect that the recent push back will see a watered down proposal when eventually parliament does vote. Of course what you won't see is rich people marching in the streets in Moscow to demand that their government takes a look at this proposal. You are NOT likely to see that. The same could be said with rich Greeks, you are not likely to see them attract attention to themselves either. This small story continues to evolve, recent news suggests that those with under 20 thousand Euros pay nothing by way of the levy. Save the folks with smaller deposits.
Byron's beats the streets I am still reading those Warren Buffett annual Chairman's letters in my spare time and enjoying it immensely. If you are interested in investing, these letters that Warren Buffett has written to Berkshire shareholders every year are better than any financial book I have ever read. Plus they are free and available on the Berkshire Hathaway website. Here is the link, from 1998 onwards you can download the pdf version and sync it your iPad like I have done.
On Sunday I was reading the letter from the year 2000. The tech bubble popped in August 2000 but leading up to that period Berkshire had been criticized for not embracing the future of technology and missing the huge surge in those share prices. On the back of this very interesting period in the market where many lessons were learnt he came up with a very good analogy about distinguishing the thin line between investing and speculating. It was so good I had to share it with our readers.
"The line separating investment and speculation, which is never bright and clear, becomes blurred still further when most market participants have recently enjoyed triumphs. Nothing sedates rationality like large doses of effortless money. After a heady experience of that kind, normally sensible people drift into behavior akin to that of Cinderella at the ball. They know that overstaying the festivities, that is, continuing to speculate in companies that have gigantic valuations relative to the cash they are likely to generate in the future , will eventually bring on pumpkins and mice. But they nevertheless hate to miss a single minute of what is one helluva party. Therefore, the giddy participants all plan to leave just seconds before midnight. There's a problem, though: They are dancing in a room in which the clocks have no hands."
Now I am not saying that we stick to the Berkshire philosophy 100%. Warren Buffett would not invest in many companies we hold, especially the technology ones. But it is a great guideline, especially when you are feeling a little overconfident and need to be brought back down to earth. You see, their philosophy is very conservative. They will not touch a business that they do not understand 100% and do not go near speculation at all. In Buffett's world almost every South African business would not make his mandate because of their location. The theory that Africa is the next big growth story is far too speculative.
Here at Vestact we are flexible. We tend to amalgamate a whole host of theories and apply what we feel are the important parts. We are conservative but not to the point where we would abstain from investing in a company like Naspers because they have a high valuation. Sometimes I feel being able to look at the bigger picture can be more important than the intricate number crunching details which are usually based on presumptions. Of course we are still learning as we go along and that is what is so fascinating about working in the industry. It is great to have mentors like Warren Buffett to guide you along.
Crow's nest. The Cypriot parliament is closer to actually triggering a technical default than I guess we think. Not being able to pay peoples pensions and government officials salaries will sink home quite quickly. Ironically people will have to dip into savings. I genuinely feel desperately sorry for everyone here. I really do. But the alternative is much worse.
Sasha Naryshkine and Byron Lotter
Follow Sasha and Byron on Twitter
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