Thursday, July 24, 2014

Europe – Here is What the Wealthy are Doing

By: Chris Tell at:
There are essentially three main reasons for using Banks:
  1. Storing cash for ease of transacting;
  2. Keeping cash safe from theft;
  3. Earning interest on your capital.
As a teenager I remember opening my first bank account, diligently saving my money and watching it slowly grow. Receiving "official" mail was cool. I felt important by simply receiving my monthly bank statements with my name on the envelope.
I was confident that by banking my cash I was protecting my capital. After all, it seemed a better idea than sticking it in my sock drawer, and I soon found that I was earning interest on my money, something else my sock drawer couldn't provide.
Little did I know or understand how modern banking actually worked back then, though it's only gotten worse since I opened that first bank account many years ago. Much worse, in fact.
In Europe, Banks reserve ratios have literally collapsed, despite what the "stress tests" conducted by Eurocrats want us to believe. Passing a European Banking stress test these days is a little like farting - easy to do, mostly hot air, and yet it typically warns of something else coming down that isn't going to be pretty. And for those who see the writing on the wall, they know it stinks.
As Reuters recently reported:
European banks have a combined capital shortfall of about 84 billion euros ($115 billion), German weekly WirtschaftsWoche reported, citing a new study by the Organisation for Economic Cooperation and Development (OECD).
French bank Credit Agricole has the deepest capital shortfall at 31.5 billion euros, while Deutsche Bank and Commerzbank have gaps of 19 billion and 7.7 billion respectively, the magazine reported in a pre-release of its Monday publication.
If you'd like your eyes to bleed, you're welcome to read the entire report here.
It is no surprise that cash withdrawal limits are being implemented across Europe, and cash transactions of more than a fleeting amount are actually being banned. Yep, it is actually illegal to purchase anything over 1,000 Euro using cash.
Want to have a big party night in Berlin? No problem. Go to the ATM and withdraw a couple hundred Euro in cash. If you're a central banker out for a taxpayer-funded soiree, (un)fortunately you'll have a problem, as you'll likely need to withdraw a few thousand Euro (hookers and blow aren't cheap). I wonder how they're going to pay for services rendered now? With a Visa card?
It was only a few months back that HSBC were publicly humiliated for restricting cash withdrawals by its customers. Now this is becoming commonplace across Europe.
Why are they doing this?
Two reasons:
  1. Bank runs are a real risk if the populace actually wakes up;
  2. Controlling the flow of money allows the controlling of people. Ensuring that transactions are all digital guarantees that financial privacy is vaporised.
None of the above information is particularly enlightening for those paying attention. However, what is going on to combat this might raise a few eyebrows. I thought I'd relay a little story which came out of a conversation I had last week with a friend.
Switzerland, once known for its robust banking privacy and healthy capital ratios, despite all of Europe's troubles, is still home to large pools of wealth. My friend maintains a relationship with an old banking colleague, who is currently working with fiduciaries in Switzerland to get client money out of their own bank accounts and into physical cash. These clients are no longer allowed to withdraw large amounts of cash, THEIR cash, directly from the banks any longer. However, they are free to wire funds anywhere they please.
What is therefore happening is that the fiduciaries are wiring the money to Hong Kong, where it is picked up by a "messenger" and placed in an envelope to be couriered BACK to Switzerland, in cash. There are currently no restrictions on remitting cash into Switzerland. Right now a loophole exists, and these wealthy clients are moving many millions of dollars each week - wiring it out of the country only to have it sent back in cash. No doubt they're looking to put it in the sock drawer! What do they see that the man on the street doesn't?
Remember the 3 reasons for using a bank account mentioned at the beginning of this article?
  1. Storing cash for ease of transacting - This is still valid so long as you use the system.
  2. Keeping cash safe from theft - The words "safe" and "bank", at least with most European banks that is, should not be used in the same sentence. Aside from the theft occurring on a daily basis by our central bankers, the risk to waking up one day to a nationalization of your European bank is a real and present risk.
  3. Earning interest on your capital
Central bankers have single-handedly destroyed any incentive to place capital into the traditional banking system for yield. Anyone buying CDs thinking they're safe and that they provide a satisfactory return is simply delusional.
- Chris

"The Eurozone was never designed to cope with millions of Spaniards moving their money out of the country, behaving like middle-class Venezuelans with offshore accounts in Miami. And it also was never designed to cope with capital controls. But increasingly, it looks like we’re going to end up with one or the other. Or both." - Felix Salmon