Ad Hoc Commentary – Cyprus, the wealthy can run but they cannot hide
In medieval times, when the king is broke, the wealthy took their gold onto a ship and sailed for another continent. The poor was left behind and taxed to death. That was capital flight. The king couldn’t possibly send the galleons to hunt the rich down.
In the present world, the kings need not send the air-force to hunt down the rich. Money is going electronic. Any country that have the audacity to defy the kings will have themselves disconnected from the international payments system. Ask the Pope Emeritus or the Ayatollahs. They can tell you on how they were disconnected when they didn’t follow the rules of the game. It does not matter if you are well endowned with natural resources, i.e. Iran, or with supernatural resources, i.e. the Vatican. If you did not follow the rules of the game, you will be disconnected.
Offshore financial centers thrives on bending the rules of global finance and tax. The Cyprus debacle was seen by some as a raid on an offshore financial center. The wealthy are learning from Cyprus that it does not matter who you are. The Russians can flex their muscles in the Black Sea. But when the Eurocrats strike at part of the 20 trillion dollars rumored to be stashed away in offshore financial centers, you just have to watch and pray they don’t take another of your tax havens.
Cyprus opens up the pandora box. In the age of electronic money, you cannot hide. The best you can do is to play by the rules of the game. Every central banker from Bernanke to Zeti (for those who don’t know Zeti, she’s Malaysia’s central banker) takes pride in a booming stock market. And Uncle Ben, for his part, wants a booming housing market. So, if you play by the rules, you will start flocking into stocks and homes. It sounds counterintuitive. Why bring your money into the official economy where governments are free to tax? Well, if you keep it offshore, you risk losing 40% in an offshore financial center raid.
The pertinent question then becomes, what are the best investment out there given the new reality that offshore funds can lose 40% in a raid. Some might rule out European offshore financial centers completely. Some might move to Singapore. Some might move to the stock market. Some to real estate. You get the idea.
Of all the things that Merkelections was capable of, yours truly was truly astounded by what they did to Cyprus. Merkel’s willingness to appear tough on debtors reflects the fatigue within Germany on the seemingly endless bailouts. France – beware your socialistic ways.
Despite the crazies of crazies in Europe, and massive flight to America, yours truly maintain that the lows in US treasury 10 year yields had already been seen in 2012. Money will likely not venture into government bonds in this phase. Xi Jinping formally succeeded Hu as the new ’emperor’ in mid-March. The first imperial trip was to Russia to do business – Russia has the materials, China has the factories. China will be Russia’s biggest oil customer. And they are building submarines and trading jet figthers. The lesson? This is not the time to be cowering in US treasuries.
Good luck in the markets.