Stocks in Cyprus Are Down 98%—Time to Start Edging
In?
Readers who have been
with us for a while know that I've been hinting at the project Doug Casey and
I have been working on in Cyprus for a while now. It's a project that
dovetails perfectly with Doug's unique expertise. Now is the time to reveal
what we have been up to.
Nick Giambruno: Doug, you are one of the foremost
authorities in the world on the topic of crisis investing. Tell us about your
background on this topic and the potential for life-changing gains it offers
for those who have the intestinal fortitude to speculate in crisis markets.
Doug Casey: After my second book, Crisis
Investing, came out in 1979, I started publishing a newsletter. I used
the Chinese symbol for crisis as the logo.
It is actually a
combination of two symbols: the symbol for danger and the symbol for
opportunity. The danger is what everybody sees; the opportunity is never
quite so obvious as the danger, but it's always there.
Speculating in crisis markets is the ultimate way to be a contrarian,
which means buying when nobody else wants to buy.
It is true, as a general rule, that you want to "make the trend your
friend." But there always comes an inflection point when trends change
because a market becomes either greatly overvalued or greatly undervalued.
And when any market is down by 90% or more, you've got to reflexively look at
it, no matter how bad the news is, and see if it's a place where you want to
put some speculative capital.
Nick: Massive fortunes have been made throughout history
with crisis investing. Was Baron Rothschild right when he said the time to
buy is when blood is in the streets?
Doug: That's a very famous aphorism, of course. It was
supposedly occasioned by the Battle of Waterloo, when he was buying British
securities while the issue was in doubt. He was able to pull off that coup
because he made sure that he got the information as to whether Wellington
beat Napoleon a day before anybody else did. He recognized that Europe was in
a period of tremendous crisis; Napoleon, after all, was actually kind of a
proto-Hitler.
But a key point here is that a successful speculator capitalizes on
politically caused distortions in the market.
If we lived in a completely free-market world—one without government
interventions like taxes, regulations, inflation, war, persecutions, and the
like—it would be impossible to speculate, in the sense I'm using the word.
But we don't live in a free-market world, so there are lots of good,
speculative opportunities that, in effect, let you turn a lemon into
lemonade.
And a good speculative opportunity is both high potential and low risk—not
high potential and high risk. Most people don't understand that.
Nick: That brings to mind the Russian oligarchs, who
became oligarchs in the first place because they did some crisis investing,
i.e., they bought when the blood was in the streets and picked up some of the
crown jewels of the Russian economy for literally pennies on the dollar. Are
similar opportunities a possibility today in other countries?
Doug: It's interesting with the oligarchs because in the
Soviet Union, everybody got certificates, which were traded for shares in
businesses that were being privatized. The average person had no idea what
they were or how to value them. The people who became oligarchs were able to
buy them up for a couple of pennies on the dollar, taking advantage of the
negative public hysteria following the collapse of the Soviet Union.
So this is a recurring theme—buying when the blood is in the streets. It's
what speculation is all about: namely, taking advantage of politically caused
distortions in the marketplace, or taking advantage of the aberrations of
mass psychology.
Nick: Exactly—and that was the main reason why you and I
were recently in Cyprus. We were there to see if that recent crisis presented
a contrarian opportunity.
We all know what happened with the bank deposit confiscations and the
capital controls, and most people would think you'd have to be crazy to put
money into such an environment. Tell us how Cyprus fits into the theme of
crisis investing.
Doug: What drew my attention to it was the fact that the
Cyprus stock market is down 98% from its all-time high in October 2007.
That's like a bell ringing at the bottom of the market. So I thought it was
critical to go and get boots on the ground to see what the story really was.
It's down about as much as any market index has been in history, which
makes it a unique opportunity. In any case, it was worth seeing whether or
not it's really only worth 2% of what it was at its peak.
I'm not saying that we are absolutely at the bottom. I'm just saying that
now is the time to pay close attention because when any market is down 90%,
you're obligated to go and investigate.
Whether you buy when it is down 98% or you wait for it to be down
99%—which amounts to another 50% drop—is perhaps like looking a gift horse in
the mouth.
Nick: Let's talk about the intrinsic value of Cyprus
throughout history that comes from its geography—being at the crossroads of
Asia, the Middle East, Africa, and Europe. Does the collapse in the paper
Ponzi scheme banking system diminish Cyprus's natural value, or do you think
it creates some interesting speculative opportunities?
Doug: Cyprus not only presents a tremendous speculative
opportunity, but it is also quite instructive.
The banking sector there got quite out of control; it's similar to what
has happened to the banking sector in other countries, like Iceland and
Ireland in the recent past. But it's also predictive of what's very likely
going to happen to larger banking systems in the near future.
Essentially, Cyprus became a favorite place for people of many
nationalities—particularly, Russians—to put money that they wanted to
diversify offshore.
The banks became overwhelmed with large amounts of money that dwarfed
their capital. When a bank takes money in, it's got to find something to do
with that money, and when the local economy couldn't absorb much of it, they
became quite reckless.
Since most Cypriots are Greek-speakers, they naturally looked to Athens
and wound up buying a lot of Greek government bonds, partly for patriotic
reasons and partly because the yields were higher than elsewhere.
Once the Greek government bonds went south, it wiped out the capital base
of the Cypriot banks that had purchased them. The Cypriot government was not
in a financial position to bail them out, so instead they had what is called
a bail-in, where large depositors took a haircut.
Nick: So, what kinds of speculative
opportunities have been created from this crisis?
Doug: In all chaotic situations, in all true crisis
situations, the baby gets thrown out with the bathwater. Everybody has
decided that they don't want to have anything to do with a stock market whose
index is down 98%.
But the fact of the matter is that there are sound, productive, and
well-run businesses that are listed on the Cyprus Stock Exchange that got
caught up in the maelstrom. There are businesses that will continue to
produce earnings and pay dividends.
As Damon Runyon famously said, "The race is not always to the swift,
nor the battle to the strong, but that's the way to bet."
The country has some unique advantages going for it. Cyprus is a place
where Warren Buffett would be looking if the market weren't so tiny. It's
also quite illiquid now because most people who needed to sell have already
done so, but almost everybody is still too afraid to buy.
That said, I think it's time to start edging in.
We also looked at opportunities the crisis has created in the real estate
market.
Nick: We should be clear that we are not necessarily
talking about investing here. This is a long-term speculation. Can you
elaborate on the differences?
Doug: I think it is critical to use words accurately and
precisely, so that we know exactly what we are talking about.
"Investing" is about allocating capital so that it can be used
productively and produce more capital. "Speculating" is different.
As I said before, speculating is about capitalizing on politically caused
distortions in the marketplace.
One way this is pertinent to Cyprus is the fact that this is the first
time the bail-in model was used and a government didn't step in to make
depositors whole. That wiped out billions of euros and depressed the prices
of financial assets.
People often confuse speculators with traders, who try to scalp a couple
of basis points over a short period of time. What we are doing with Cyprus is
not a trade. This is a speculation, and a good speculation can take a
considerable amount of time to work itself out.
Nick: In order to take advantage of these opportunities
and speculate on this market, one realistically needs to have a Cypriot
brokerage account.
It's a testament to the chilling effects of FATCA and other US regulations
that the vast majority of financial institutions in Cyprus, which are
extremely desperate for cash, won't even consider dealing with American
citizens.
And if Cypriot financial institutions won't deal with American clients,
who will? Do you think the chilling effects of FATCA really amount to de
facto capital controls for Americans?
Doug: Yes. US citizens have had draconian reporting
requirements on what they do with their money abroad for years. But the new FATCA
law has taken it to a new level.
Essentially, what it does is impose severe compliance burdens on foreign
financial institutions that take an American client. It really makes the
foreign banks, brokers, and other financial institutions unpaid employees of
the US government.
This is expensive, legally onerous, and actually ethically questionable as
far as their relationship with their clients. So, for this reason, there are
very few non-US financial institutions anywhere that are still willing to
take US customers. It's increasingly hard, and in some cases impossible, for
an American now to get money out of the country, simply because nobody is
going to take it.
I think as the global economic crisis that started in 2007 gets worse—and
there is every reason to believe it's going to get worse, since we're just in
the eye of the storm at the moment—these regulations will become even more
onerous, and are likely to spread from the US to other countries.
So the takeaway from this is that your most important form of
diversification in the world today is not diversification across investment
classes—although that's very important. It's political diversification, so
that all of your assets aren't under the control of one political entity, one
government.
Here's how you can get in…
The opportunity for contrarians in Cyprus is great, but it's hugely
important to analyze and evaluate all of the options. Doug and Nick's recent
trip gave them great insights into the real economic situation in Cyprus and
the companies located there. After getting their boots on the ground, Doug
and Nick found quite a few pigs with copious amounts of lipstick applied… and
a few shining gems, too—quality Cypriot stocks trading for tremendous
crisis-driven bargains.
You don't need to take a trip to Cyprus yourself to get the lay of the
land. Doug and Nick have written a special report titled Crisis
Investing in Cyprus detailing their trip and offering the top
investment picks they found on the Cyprus Stock Exchange. In it, you'll find
detailed information of the best way to access these amazing opportunities
from your living room, the real story on the ground, and much more.
The two of them also found a solution to the brokerage dilemma—they
investigated every single brokerage on the island and found one willing to
open accounts for American citizens remotely and without the need to visit
the country.
All the details and on-the-ground contacts are in their report, which
shows you exactly how to access the opportunities on the Cyprus Stock Exchange
from your computer.
Crisis Investing in Cyprus is a crucial tool for taking
the destructive actions of a desperate government and turning them on their
head… and to your advantage.
For a limited time, you can get the report with a savings of 50% off the
retail price of $199. That's just $99 for a huge speculative opportunity,
penned by Doug Casey—the man who literally wrote the book on crisis
investing. To get in on these opportunities, act now before the price
discount is no longer offered. Click here
for more details.