Below is Fitzwilson’s exclusive piece for KWN:

“A phrase which many of us are familiar with and often use is “Taking Money Off Of The Table”.  It is first and foremost a gambling reference, but it is generally used to describe a reduction of risk.  People have viewed “going to cash” or pulling out of the investment markets as a way to not be “invested” in order to achieve a reduction in volatility and market-related risk. 

It has also been seen as a way to avoid business and solvency risks specific to an issuer of various forms of stock and fixed income.  Preferred stock has been considered to be safer than straight equity.  More like a bond.  Notes and bonds were often high on the pecking order in case the issuer ran into trouble or was even being liquidated.

We found out with the Cyprus Crisis that taking money off of the table is no longer the safe and secure alternative to being in the investment markets....

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“Having a bank account in Cyprus became the least secure option.  Account holders were shocked to find out that they were not in a protected position relative to the other creditors of the banks.  They were really unsecured lenders and de facto investors in the bank.  As the banks became insolvent, the government confiscated part or all of what were considered safe and insured accounts, not investments.

The government originally went back on the pledge to protect account holders with 100,000 Euros or less, and has since reversed that edict.  While this story is constantly evolving, the claim that the deposit insurance will be honored remains suspect given that capital controls were initiated.  In most circumstances, only very small amounts may we withdrawn. 

However, despite a policy that no money was to leave the country, it is apparent that certain account holders were allowed to transfer billions of Euros to other jurisdictions.  The depositors and people of Cyprus will have to make up the difference.  Who knows whether or not that pledge to protect the accounts with 100,000 Euros or less can be fulfilled until the government of Cyprus determines what is left in the till.  If too little is left, the insurance guarantee will mean nothing, even to the account holders of what they are calling the “good bank”.

What this is really about is counterparty and solvency risk.  Since 2008, the focus has been on the massive and grotesque amount of derivatives that have been created by the financial services industry.  One estimate is that it is at least $1 quadrillion.  It is a ridiculously large number with which our minds are incapable of grasping. 

What Cyprus proved to anyone paying attention is that the counterparty risks extend to almost all assets classes, including cash.  There is no way to be uninvested and get money off of the table.  No spectators.  Everyone is in the pool.  Counterparty risk should be assumed to be just about everywhere.

Counterparty risk means that it is unclear whether or not agreements can be honored.  If not, that leads to solvency risks.  The Greek Crisis revolved around counterparty risk.  The Cyprus Crisis has led to the final risk in the chain, solvency.  The banks were not.

For the vast majority of investors, taking money off of the table meant getting out of the investment markets into cash or short-term fixed income.  For many, that meant the U.S. dollar and U.S. Treasury securities, much to the dismay of gold and silver investors.  What is so historic and monumental about the Cyprus events is that the curtain has been pulled back. 

In a world where transparency and the rule of law have been eradicated, a smart investor must adopt the attitude that everything has counterparty and solvency risks.  Bank deposits and even cash itself must now be considered as investments with severe downside risk in the event that the Cyprus “template” spreads to other countries.

This is a huge change.  In choosing investments, which assets have little or no counterparty and solvency risks is probably the most important consideration at this point in history.  The list is short.  Unlevered real estate with a recorded deed in one’s possession might be one.  Ownership in an unlevered private business is another.  Collectibles are another.

Investments in public companies could also be problematic.  We saw with MF Global that assets could be rehypothecated to infinity and triggered both counterparty and solvency risks.  One has to consider the possibility that the same has been done to both stocks and bonds. 

It used to be that investors held certificates as evidence of their ownership.  Today, it is mostly electronic ownership in “street name”, hidden behind the facade of the Depository Trust Corporation.  Could there be more share and bondholders than actual shares and bonds?  It is certainly worth a consideration when one ponders how to position their savings to mitigate the damage from a global version of Cyprus.

If this becomes a change in a decades old mindset, going to cash will take on new meaning.  The obvious beneficiaries will be secure, allocated gold and silver in physical form.  Compared to the $1 quadrillion of derivatives, the amount of gold and silver is tiny. 

Fear and greed drive the investment markets.  Those two emotions rarely manifest themselves at the same time.  Doubts about the safety of bank accounts and sovereign debt could trigger such a confluence.  The impact on the prices of real assets, particularly gold and silver, would be a sight to behold.”

© 2013 by King World News®. All Rights Reserved. This material may not be published, broadcast, rewritten, or redistributed.  However, linking directly to the blog page is permitted and encouraged.

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Eric King

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© 2013 by King World News®. All Rights Reserved. This material may not be published, broadcast,

rewritten, or redistributed.  However, linking directly to the blog page is permitted and encouraged.

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