The Financial System's Death Knell? Or an Over-Reaction?

By: Larry Cyna | Tue, Dec 11, 2012
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An Over-Reaction to Current Debt Issues

Those that are sophisticated enough and experienced enough, know that after every exuberance in an economic cycle, financials matters become so difficult that many come to the conclusion that "This Time It Is Different". Analysts come to the conclusion that there is no escape from the inevitable and doom and gloom is here to stay. In the economic cycle that recently collapsed, matters were a bit different. In the US, there was a Fed Chairman named Greenspan, who came to the conclusion that economic cycles could be smoothed out by printing money every time a bump appeared on the economic horizon. The result was that in the mess that followed, the downturn was far more exaggerated that it would otherwise be.

An Example of The Extremes of Doom and Gloom

On July 18th, 2012, the German government sold US$5.13 billion worth of 2-year bonds at an average yield of -0.06%, that is MINUS 0.06%. In other words, you invest your money in order to get less money that you started with, when the investment matures. The German government borrowed money for less than nothing. When those specific bonds expire in two years' time, the German government will pay back the original $5.13 billion minus 0.06%.

This year the Netherlands, Switzerland and France have also issued short-term government debt at negative yields. Like Germany, they've been able to do this because European bond investors would rather park money in a bond that's guaranteed to only lose a small amount rather than risk losing more in a PIIGS bond in which they would actually earn some interest.

To be fair in describing this phenomena, the investors had another rationale. These investors view German, French and Dutch bonds to be cheap options on the possible break-up of the Eurozone. If the EU currency union collapses, euro-denominated bonds issued by those specific countries will likely be paid back in re-issued deutschmarks, francs or guilders, which will be more valuable than the euros that were spent to buy the bonds in the first place. Viewed this way, it is an inexpensive way to bet on the disintegration of the ECU. As a result of this thinking, the bond market auctions for these select countries have seen overwhelming demand, making NIRP (Negative Interest Rate Policy) the new ZIRP (Zero Interest Rate Policy)

Buy When There is Blood in the Streets

Baron Rothschild once said "Buy When There is Blood in the Streets. Many successful investors, including Warren Buffet, and so many others, have recognized that the world continues after every economic cycle. Exuberance rises to the extreme, and then collapses, and when it does it brings misery, losses, and fear. Despondency produces a loss of hope, and when the market in houses, or investments, or stocks, or currencies, bottoms, those that realize what has happened start investing and buying. Those that do so, profit enormously.

Investing in Gold

Those of great doom and gloom, seize upon the historical value of gold, and repeat the beliefs that one must invest in bullion (gold) to survive the coming financial apocalypse. It is true that gold has had almost a continuous rise in value since it was worth $250 to the time it reached a value of $1,900 in 2011. Still, in spite of a number of attempts to break out above that high, gold has stagnated in the same $1,600 to $1,750 range for over a year now. Today, it was trading at $1,704. It has not reached $2,500 or $5,000. It, like all other asset classes has reacted to the economic downturn in a measured and reasonable way. In previous posts, I tracked gold and the reasons and technical analysis of gold and shall not repeat this herein.

What to Do

As in every cycle, this too shall pass. The US fiscal cliff will be resolved. Politicians will posture and pontificate, but in the end, reason will win out, the debt ceiling will be raised, expenditures will be cut and taxes will be raised. As the US economy gradually improves, as it always has and always will, natural growth and minor inflation will slowly over the next decade or two, make the deficit seem a bit smaller every year, until it is no longer so significant in relation to the GNP. The actual amount of US debt, although far too high, is only slightly above historical highs. The tragedy is that those previous debts were incurred for national defense and matters of extreme urgency. This debt is indirectly the fault of Alan Greenspan and the US government.

At any rate, the USA will not disappear and USA assets will recover in value. The European Economic Union is probably fatally flawed, but the countries comprising the EU remain individually as they were. Whatever economic strength lost in the EU, has been more than replaced by the rise of China. The world is not ending, and the next cycle is already commencing.



Larry Cyna

Author: Larry Cyna

Lawrence J. Cyna, CA

Larry Cyna

Larry Cyna, CA, is CEO and Portfolio Advisor to Cymorfund, a boutique hedge fund. He expresses his insights several times a week on his blog and offers a free newsletter which can be subscribed to here.

Mr. Cyna is an accomplished investor in the Canadian public markets for over 20 years, and has managed significant portfolios. He is a financing specialist for private and public companies, and has expertise in real estate and debt obligations. He has assisted private companies accessing the public markets, has been a founding director of public companies and is a strategic consultant to selected clientele.

He is and has been a director, a senior officer and on the Advisory Board of a number of TSX and TSXV public companies in the mining, resource, technology and telecommunications sectors, and the Founding Director of two CPC's with qualifying transactions in mining and minerals. He was an honorary director of the Rotman School of Management MBA IMC program, has completed the Canadian Securities Institute Canadian Securities Course & Institute Conduct and Practices Handbook Course, was a former Manager under contract to an Investment Manager at BMO Nesbitt Burns, a roster mediator under the Ontario Mandatory Mediation Program, Toronto, a member of the Institute of Corporate Directors of Ontario, a member of the Upper Canada Dispute Resolution Group, and the Ontario Bar Association, Alternate Dispute Resolution section.

He obtained his designation as a Chartered Accountant in Ontario in 1971 and was the recipient of the Founder's Prize for academic achievement together with a cash reward. He became a CPA in the State of Illinois, USA in 1999 under IQEX with a grade of 92%. He is a Member of the Institute of Chartered Accountants of Ontario and the Canadian Institute of Chartered Accountants.

He holds certificates in Advanced ADR & in Civil Justice in Ontario, Faculty of Law, University of Windsor, certificate in Dispute Resolution from the Ontario Institute of Chartered Accountants. Previous accomplishments are Manager of Cymor Risk Consultants LP specializing in Risk Management Assessment; CEO of Cyna & Associates specializing in mediation and ADR; Founder & Senior Partner of Cyna & Co, Chartered Accountants, a fully licensed and accredited public accountancy firm with international affiliations; and was a partner in a large public accountancy firm.

Mr. Cyna is well known in the Canadian Investing community. He attends presentations given by public companies to the industry on a daily basis.. These presentations are intended by the various hosting companies to present their inside story for the purpose of attracting funding, or of making parties more interested in acquiring shares of those companies. Being in constant communication in this manner keeps Mr. Cyna deeply involved in the current market and leads to numerous investment opportunities.

Mr. Cyna is currently a Director of Argentum Silver Corporation and Telehop Communications Inc.

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