Readers will remember that a few weeks ago we commented on the events unfolding in Cyprus and how banks seizing assets may actually turn out to be a benefit for the US economy. Since then, we have seen the original bailout plan fail, a new plan approved which includes a 40% haircut on accounts valued at over €100,000 ($130,000) and a startling comment from the Eurozone Chairman.
We commented on how a cash grab in Cyprus would more than likely result in a cash grab in other European nations. However, this could possibly be beneficial to the US economy; if US corporations with cash in European banks feel that their assets will be frozen and then seized, they would feel more inclined to bring that money back to the US and spend it on property, plant, equipment or even employees.
We now feel even more strongly that US corporations will begin to bring their money back to the US. Imagine that a corporation has cash sitting in a Cyprus bank as well as several other European banks. If the Eurozone is going to take 40% of that money just to maintain the integrity of the Euro, they are better off bringing that money back to the US and paying the corporate tax on it and putting it to work.
We also made a prediction last week that came true; that Cyprus would likely be a model for a future cash grab in other European nations. The Eurozone Chairman Jeroen Dijsselbloem hinted this week that the events in Cyprus were being used as the blueprint for any similar situations that may arise down the road in Europe. This has many British expatriates and multi-national corporations worried about their cash in the European banking system.
Since the announcement in Cyprus was made, many pundits have speculated that one day the US could attempt the same move and seize citizens’ private savings. We do not believe that this will be the case, however we would like to entertain the idea just to put the collective worrisome minds at ease. Let us imagine that the US was in such foul fiscal shape that the government decided to raid banks in order to save the USD. What would you do, and where would you put your money?
The easiest answer is to put your money in a place that is not as easy for the government to access it. Stocks, bonds, mutual funds and other brokerage account holdings would be much more difficult to obtain than cash sitting in the banking system. Sure, the market has an inherent risk and prices fluctuate up and down on a day to day basis, but the idea of raiding financial markets is almost unfathomable.
Believe it or not, Warren Buffett’s father, Howard, actually started a brokerage company during the Great Depression for this reason. There was such a strong distrust of banks that he helped people looking to save put their money into stocks and bonds so that they could keep funds segregated from the banking sector.
Another relatively safe bet would be hard assets such as Real Estate or metals. Again, while prices fluctuate up and down, the odds of the federal government seizing your land or assets are not nearly as likely or realistic as seizing bank assets.
If investors truly are afraid of there being a US raid on personal savings, they face a very difficult choice; they are standing on the corner of “Do I” and “Don’t I.” Investors have a choice of leaving their assets on the (perceived) vulnerable sidelines, or investing on the hopes that the US economy still has massive growth potential. In the world of investing, there is no right or wrong answer, just options. If investors fear a US cash grab, they have options, but the options will not choose themselves, and inaction does not benefit anyone.