"Kee" Points with Jim Kee, Ph.D.

Events in Europe regarding Cyprus are currently overshadowing last week’s positive U.S. data (retail sales, jobless claims, consumer sentiment, and industrial production – all better than expected).  European finance ministers proposed a one-time, approximately 9.9 percent tax on larger bank deposits in Cyprus in order for them to share in the cost of an over 13 billion Euro bailout for that country. This predictably caused a bank run as depositors rushed to get their money out. Germany’s Chancellor Angela Merkel made the point that she can’t ask her country’s citizens to bail out Cyprus if Cyprus’ citizens aren’t willing to do their part as well.

 

“Huge and Scary” is how one analyst, Jefferey’s David Zervos, described the risks of taxing large bank deposits, arguing that it could lead to bank runs in Italy and Spain as depositors move their funds to Germany or perhaps even out of Europe  altogether. Other research analysts from shops like Societe Generale and Goldman Sachs see far less potential downside (New York Times). That’s partly because Cypress, one of the 17 nations that uses the Euro, makes up only ½ of 1 percent of the Euro economy. Its banking system is several times its GDP, and ¼ of deposits are from Russian citizens. That leads to charges that if depositors aren’t taxed, then European citizens are just bailing out Russian depositors (that’s also why Russian President Vladimir Putin opposes the levy). So the crux of the whole thing comes down to this: Is Cyprus too unique and one-off to warrant concerns that a tax on depositors there could set a precedent for other European countries? Cyprus’ government has postponed a scheduled vote on the bailout until at least tomorrow, and its banks are closed (i.e. the old “bank holiday”) today and probably tomorrow as well (to stem bank runs). So far, global risk measures like credit and CDS (credit default swap) spreads haven’t moved much, but we’ll, of course, be watching those closely. And stocks here in the U.S. opened down but are almost flat as I write this.

 

Speaking of stocks, since I addressed bonds last week, I’d like to make an important point regarding stocks this week. Almost totally overlooked by the press is the fact that stocks are up BIG this year in spite of increases in dividend and capital gains (i.e. “investor”) taxes! How can that be? Well, one of the things I have discussed in Kee Points over the past year is that, as interesting as all of the potential fiscal cliff scenarios were, the real question for investors was “What’s already priced in?” From what I could gather based upon analysis going back to the original 2001-03 tax cuts, the market never priced them to be permanent in the first place. If so, a partial reversal of the Bush-era tax cuts like we saw in January would have a negligible impact (or perhaps even a positive impact if the market was expecting worse), and that seems to be the case. That doesn’t mean we won’t have a pullback, but it does mean that you don’t have to resort to stretched Fed-liquidity stories or bubble mania hype to explain the market’s recent movements.