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Global Markets

Global Economy

The Cyprus Bailout Sets a "Very, Very Dangerous Precedent"

The Cyprus Parliament appeared poised Tuesday to reject the $13 billion international bailout that would force bank depositors to pay a levy.

So what happens now?

Will Russia step up to offer money in exchange for oil and gas? Will China offer a similar deal to Cyprus?

Will those with money in Cyprus banks withdraw it and deposit it elsewhere, leading to a run on the banks?

Will investors flock to gold as a safe-haven investment?

Money Morning Chief Investment Strategist Keith Fitz-Gerald appeared Tuesday on Fox Business to talk about the fast-developing story in Cyprus and the potential fallout in Europe and well beyond, including in the United States.

Fitz-Gerald said a vote in the Cyprus Parliament to reject the bailout "is a big deal because it sets the stage for a very, very dangerous precedent."

Check out this video to hear Fitz-Gerald's perspective on the Cyprus situation – and whether the U.S. government could come after your bank deposits.

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Global Investing

Can Kuroda's New Round of "Easy Money" Finally Revive Japan?

[Kyoto, Japan] – I think I hear the sounds of helicopter engines warming up in Tokyo.

Newly elected 2nd time Prime Minister Shinzo Abe has officially tapped Haruhiko Kuroda as the next head of the Bank of Japan and the financial markets here seem quite pleased.

Since rumors of his nomination surfaced in conjunction with Shinzo Abe's election campaign last November, the Nikkei has risen nearly 30%. But the Nikkei's rise is based on little more than hope and "Abenomics" – which is not unlike U.S. markets that have risen with each new infusion of Bernanke Bucks.

Unfortunately, disappointment is the more likely outcome when reality sets in.

It's not that there is anything wrong with Kuroda-san. He's aggressive and has a solid track record as president of the Asian Development Bank. Like many here he wants to ease monetary policy even further to stimulate the economy out of the hole it's dug for itself over the past 23 years.

I just question what "else" he possibly can do to fix it.

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The Eurozone

The Eurozone Hangs On By a Whisker

Four days after the Italian elections only one thing is clear: A majority of Italian voters have rejected austerity.

The problem is their victory came up short by the slimmest of margins.

0.36%. That's the difference between a firm new government that could move Italy out of the Eurozone and the constitutional logjam Italian voters woke up to the next day.

As it is, they could roll the dice on a new election, but that could also make matters worse.

Since Italy's a big country with a chunky economy, that's likely bad news for us all.

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Top News

Italian Elections: Split Vote "Worst-Case" for Eurozone

If preliminary results prove accurate, the Italian elections will result in a "hung" parliament, meaning no party will have enough seats to form a government.

The lack of a definitive result could temporarily paralyze the Eurozone's third-largest economy and revive fears that Italian voters will ultimately reject austerity and the euro itself.

Such a development would threaten to reignite the Eurozone debt crisis, setting off an economic shock that would ripple out to markets around the world.

As of Monday afternoon, the center-left forces of Pier Luigi Bersani appeared set to win Italy's lower house, while the center-right party of former Premier Silvio Berlusconi looked headed for victory in the Italian Senate.

In the Italian political system, a prime minister must have a majority coalition in both legislative houses in order to form a government. Unless one of the leading parties can form a majority in both houses by partnering with one or more other parties, a new round of Italian elections will be needed.

"A hung parliament would be a guarantee of stillness both in terms of economic program and structural reforms," Annalisa Piazza, a fixed-income analyst at Newedge Group in London, told Bloomberg News. "Such a scenario would be the worst-case outlook."

Italian and European markets, which rose on early reports that Bersani's group was ahead in both houses, fell later on the news that Berlusconi would probably prevail in the Senate. The reports also helped turn U.S. markets negative.

Exactly how all this will play out won't be known for certain for days.

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Global Economy

Would Turkey in the Shanghai Co-op Cause a Global Power Shift?

Is Turkey about to join the Shanghai Cooperation Organization (SCO)?

After years of delay on its application to join the European Union (EU) as a full member, Turkey has made overtures to the SCO as an alternative to the EU.

Turkish Prime Minister Recep Tayyip Erdogan said after a meeting with Russian Prime Minister Vladimir Putin that Turkey was seriously considering becoming a member of the SCO instead of continuing its efforts to join the EU.

"The European Union needs to stop stalling us," Erdogan said. "We have a strong economy. I told [Putin], 'You should include us in the Shanghai Five [the former name of the SCO] and we will say farewell to the European Union.' The Shanghai Five is much better off economic-wise. It is much more powerful. We told them, "If you say come, we will.'"

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Global Economy

Eurozone Debt Crisis: Why U.S. Investors Still Can't Relax

After nearly four years, billions in bailouts and increasingly strict austerity measures, not only is the Eurozone debt crisis no closer to resolution, but the attempts to solve it are pushing the region deeper into recession.

According to Eurostat, the Gross Domestic Product (GDP) for the 17-nation Eurozone plunged 0.6% in the final quarter of 2012, a steeper drop than the 0.4% economists had expected and the worst decline since 2009.

It's the third consecutive GDP decline for the Eurozone, reaffirming that the area is mired in a recession that started with the 2008 financial crisis and has been exacerbated by the ongoing Eurozone debt crisis.

For all of 2012, the Eurozone economy shrank 0.5%, while the U.S. economy grew 2.2%. Even the GDP of beleaguered Japan increased 1.9%.

Most ominously, the GDP decline of the Eurozone's largest and strongest economy, Germany, mirrored that of the region as a whole, falling 0.6%.

Long one of the few bright spots, Germany is slowly getting dragged down by its weak neighbors, which include Italy, Spain, Greece and even France.

The bad GDP news also belies the sunny assessments recently delivered by many economists and EU leaders.

"These are horrible numbers, it's a widespread contraction, which does not match this positive picture of stabilization and positive contagion," Carsten Brzeski from ING told the BBC.

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Precious Metals

Why Russia is Investing in Gold More Than Anyone

Now we know what Russia has been doing all these years with all its oil mega-profits: investing in gold.

A Bloomberg News article Monday reported that Russia's central bank added 570 metric tons of gold in the past decade, making the country the world's biggest gold buyer. That amount is a quarter more than the world's second-biggest buyer, China.

The amount of gold Russia added to its stockpile is almost triple the weight of the Statue of Liberty, according to Bloomberg.

It certainly makes sense for Russia to add to its official gold reserves. Gold prices have gained about 400% over the past decade.

"The more gold a country has, the more sovereignty it will have if there's a cataclysm with the dollar, the euro, the pound or any other reserve currency," Evgeny Fedorov, a lawmaker for Putin's United Russia party in the lower house of parliament, told Bloomberg in a telephone interview in Moscow.

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Currencies

Best Investments 2013: What to Buy as Global “Currency Wars” Begin

Japanese Prime Minister Abe's recent success in talking the yen lower against other currencies has increased fears over "currency wars." Now investors are on the hunt for the best investments to profit from central bankers' "race to the bottom" in 2013.

As we've pointed out, the Japanese have done nothing overt to weaken the yen – yet. Markets were massively long the Japanese currency and, when Prime Minister Abe called for "unlimited easing" during the election campaign last year and in the run-up to selecting a new Bank of Japan governor, that was all traders needed to hear to begin selling their yen long bets and taking out short positions.

Abe's great success was in getting the market to do all of the heavy lifting for him.

In fact, Abe has been a little too successful. Minister of Finance Taro Aso told reporters in Tokyo on Friday that the yen had weakened too quickly, which prompted an immediate reversal in the currency markets.

Aso's comments came after remarks by European Central Bank President Mario Draghi Thursday raising concerns that the recent strength of the euro might derail the recovery just gathering momentum in Europe now.

Looking at the interplay of comments from Draghi and Aso last week, it is tempting to think that all of this commotion in the currency markets is being coordinated at the highest level of central banking.

But, with the exception of China, which has been quietly pushing the renminbi toward the lower end of its trading range, no one has done anything. It's all just talk.

In the financial markets, however, talk is a big industry. Talk gets people to put on trades and that is how bankers and brokers make money.

This leaves investors wondering the best currencies to invest in to profit from these fluctuating values, which is why Morgan Stanley developed a currency war basket trade.

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Currencies

Is Japan About to Fire the First Shots in a 1930s Style Currency War?

Chances are you've heard about the so-called "race to the bottom" in which various industrialized nations are gradually allowing their currencies to depreciate in an attempt to maintain competitive parity.

Forget about it…the real risk right now is an all-out 1930s-style currency war. I know it's not front-page news yet, but I have a sneaking suspicion it will be shortly.

It's going to blindside Washington and most of Europe, where central bankers, politicians, and more than a few economists fail to recognize that events from nearly 100 years ago are now primed to repeat themselves.

Worse, it will devastate an entire class of investors who have put their faith in the current economic dogma of endless bailouts and money printing.

Ironically, this currency war won't start because of international problems. Instead, it will be touched off in earnest because of domestic concerns– only they aren't ours. My guess is Japan fires the first shots.

Here's why:

  1. Japan's newly elected Prime Minister, Shinzo Abe, is calling for unlimited stimulus and more aggressive financial intervention in an effort to boost Japan's flagging economic situation and eviscerated domestic economy.
  2. The Bank of Japan has doubled its inflation target to 2% while also promising to buy unlimited assets using a page from Bernanke's playbook. Bear in mind that Japan's combined private, corporate and public debt is already nearly 500% of GDP, which is much larger than the 250% that's commonly bandied about in the media.
  3. Japan has one of the strongest fiat currencies on the planet, which means it has the most to gain and everything to lose if somebody beats them to the punch. An expensive yen holds back Japan's exports by making them more expensive in global markets, while the debt I just mentioned hobbles future economic development by robbing the private sector of capital it needs for an actual recovery.

Top News

Early Exit from Bank of Japan Governor is Good for Abe

Bank of Japan Governor Masaaki Shirakawa told Prime Minister Shinzo Abe yesterday (Tuesdsay) that he will step down a few weeks early, on March 19, in order to align his term, which expires on April 8, with those of the two BoJ deputy governors.

"I told the prime minister that I will resign on March 19 so that a structure with a new governor and two deputy governors can start simultaneously," Shirakawa said at a press conference called after a meeting of the Council on Economic and Fiscal Poicy.

This will enable Abe to replace the entire central bank leadership all at once with people who are more sympathetic to his policy of unlimited easing.

Although some press reports have highlighted the apparent unenthusiastic support Shirakawa is giving to Abe's policies, Shirakawa's resignation is really just putting the Bank of Japan leadership transition process back to normal.

The Bank of Japan governor must be approved by both houses of the Diet. Back in 2008, former deputy governor Toshiro Mutoh was nominated for the top spot by the ruling Liberal Democratic Party (LDP) which held a majority in the Lower House but not in the Upper House, where the opposition Democratic Party of Japan (DPJ) held sway.

The DPJ rejected Mutoh's nomination and it took three weeks of political infighting before Shirakawa was approved as a compromise candidate and took office on April 9.

The situation is exactly the same today. Abe's LDP has a super majority in the Lower House but must get some opposition support to get their nominee approved by the Upper House.

By resigning as governor effective March 19, Shirakawa is undoing the delay caused by political wrangling five years ago.

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