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A Winter Chill!!!

Just imagine that you are enjoying the weekend only to wake up Sunday morning and find out that you were robbed of 10% of your assets overnight.   If you had insurance, you might feel a little more secure.  Otherwise, you would feel vulnerable and less secure.  Now imagine if the thief was your government.  What would your first reaction be?

The above scenario sounds like a story written by a “Doomsday Prepper” and would be summarily dismissed.  The sad thing is that this is exactly what happened this weekend in the island of Cyprus.  Cyprus is a small island that is part of the Eurozone.  Cyprus is bankrupt and needs a bailout from the EU.  However, the Germans are wary of bailing out Cyprus because some Russian oligarchs deposited significant assets in Cyprus banks and German citizens do not want to bail out these investors.  Merkel (this being an election year) does not want to be seen as being easy on Cyprus.  She needs it to hurt so she could justify to German citizens why Germany should bail out another European, debt-laden countries.  So pain is what was going to be inflicted.

Any bank deposits of over 100,000 Euros will get levied an immediate “tax” of 9.9% and anything below that number will lose 6.7% of their deposits.  Citizens are in an uproar.  Despite this, the Cypriot government is looking to adjust those numbers to 12.5% on assets over 100,000 Euros and 3% on those below that number to make it hurt less for smaller depositors.  This is an unprecedented step and is sending a chill throughout Europe.

So what is the first reaction of Cypriot citizens?  Run to the ATM and take out all you can today so that it is not confiscated by the government.  That is happening throughout Cyprus before the levy takes effect.  But more importantly, what do you do in the future?  If we had clients in Cyprus – or any country in the Eurozone – we would tell them to accumulate hard assets and move assets overseas.  Why?  Because if this type of confiscation is allowed, it means your assets at financial institution are not safe.  Why not confiscate investment accounts?  Life insurance?  Sounds Orwellian, but who would have ever thought that a European country would just take money directly from your bank account?

We understand that this was done to appease Germany – specifically its leader Merkel – but the ramifications are dire.  FDR realized in the Great Depression that the security of the banks is sacrosanct and establishing the FDIC to insure deposits was one of the first things he did when he took office.  What the Germans don’t realize is that their stance is once again placing another nail in the coffin of the Euro.  This not only will hurt financial companies in Cyprus, but throughout Europe as investors pull their money out of those institutions.  More importantly, Germany is seen as a bully and is causing a revolution among the electorate (i.e., Italy’s recent elections).  This is another tear in the social fabric of the Eurozone.

As we stated in our update a few weeks back, this is a time to have a portion of your portfolio in hard assets – or companies developing those assets.  Europe is still not a safe place to invest and we believe there will be significant downward pressure on the Euro as Europeans move their money out of Euros for hard assets and safer currencies.  Even though Cyprus is small, the domino effect of this decision will be felt in the weeks and months ahead.

Sincerely,

Your THOR Team

Written by

James E. Gore, CFA®, CAIA, CMT®

Jim serves as the Chief Investment Officer of THOR, is a Chartered Financial Analyst charter-holder, a Chartered Alternative Investment Analyst, a Chartered Market Technician, a member of the Association for Investment Management and Research and a member of the Cincinnati Society of Financial Analysts.

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