Legendary Investor

Benjamin Graham: Three Timeless Principles

Daniel Myers, Investopedia, 02.23.09, 06:00 PM EST

Warren Buffett is the world's richest human. But he may owe it all to his teacher Benjamin Graham.

Benjamin Graham

Warren Buffett is widely considered to be one of the greatest investors of all time, but if you were to ask him who he thinks is the greatest investor, he would probably mention one man: his teacher Benjamin Graham. Graham was an investor and investing mentor who is generally considered to be the father of security analysis and value investing.

His ideas and methods on investing are well documented in his books Security Analysis(1934) and The Intelligent Investor (1949), which are two of the most famous investing books. These texts are often considered to be requisite reading material for any investor, but they aren't easy reads. Here, we'll condense Graham's main investing principles and give you a head start on understanding his winning philosophy.

Principle No. 1: Always Invest With a Margin of Safety

Margin of safety is the principle of buying a security at a significant discount to its intrinsic value, which is thought to not only provide high-return opportunities but also to minimize the downside risk of an investment. In simple terms, Graham's goal was to buy assets worth $1 for 50 cents. He did this very, very well.

To Graham, these business assets may have been valuable because of their stable earning power or simply because of their liquid cash value. It wasn't uncommon, for example, for Graham to invest in stocks in which the liquid assets on the balance sheet (net of all debt) were worth more than the total market cap of the company (also known as "net nets" to Graham followers). This means that Graham was effectively buying businesses for nothing. While he had a number of other strategies, this was the typical investment strategy for Graham. (For more on this strategy, read "What Is Warren Buffett's Investing Style?")

This concept is very important for investors to note, as value investing can provide substantial profits once the market inevitably re-evaluates the stock and raises its price to fair value. It also provides protection on the downside if things don't work out as planned and the business falters. The safety net of buying an underlying business for much less than it is worth was the central theme of Graham's success. When stocks are chosen carefully, Graham found that a further decline in these undervalued equities occurred infrequently.

While many of Graham's students succeeded using their own strategies, they all shared the main idea of the "margin of safety."

Principle No. 2: Expect Volatility and Profit From It

• Warren Buffett

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Investing in stocks means dealing with volatility. Instead of running for the exits during times of market stress, the smart investor greets downturns as chances to find great investments. Graham illustrated this with the analogy of "Mr. Market," the imaginary business partner of each and every investor. Mr. Market offers investors a daily price quote at which he would either buy an investor out or sell his share of the business. Sometimes, he will be excited about the prospects for the business and quote a high price. Other times, he will be depressed about the business's prospects and will quote a low price.

Because the stock market has these same emotions, the lesson here is that you shouldn't let Mr. Market's views dictate your own emotions or, worse, lead you in your investment decisions. Instead, you should form your own estimates of the business's value based on a sound and rational examination of the facts. Furthermore, you should only buy when the price offered makes sense and sell when the price becomes too high. Put another way, the market will fluctuate--sometimes wildly--but rather than fearing volatility, use it to your advantage to get bargains in the market or to sell out when your holdings become way overvalued.

--Dollar-cost averaging: Achieved by buying equal dollar amounts of investments at regular intervals. It takes advantage of dips in the price and means that an investor doesn't have to be concerned about buying his or her entire position at the top of the market. Dollar-cost averaging is ideal for passive investors and alleviates them of the responsibility of choosing when and at what price to buy their positions. (For more, read "DCA: It Gets You In At The Bottom" and "Dollar-Cost Averaging Pays.")Here are two strategies that Graham suggested to help mitigate the negative effects of market volatility:

--Investing in stocks and bonds: Graham recommended distributing one's portfolio evenly between stocks and bonds as a way to preserve capital in market downturns while still achieving growth of capital through bond income. Remember, Graham's philosophy was, first and foremost, to preserve capital, and then to try to make it grow. He suggested having 25% to 75% of your investments in bonds, and varying this based on market conditions. This strategy had the added advantage of keeping investors from boredom, which leads to the temptation to participate in unprofitable trading (i.e., speculating). (To learn more, read"The Importance Of Diversification.")

Principle No. 3: Know What Kind of Investor You Are

Graham said investors should know their investment selves. To illustrate this, he made clear distinctions among various groups operating in the stock market.

Active vs. passive:Graham referred to active and passive investors as "enterprising investors" and "defensive investors."

You only have two real choices: The first is to make a serious commitment in time and energy to become a good investor who equates the quality and amount of hands-on research with the expected return. If this isn't your cup of tea, then be content to get a passive, and possibly lower, return but with much less time and work. Graham turned the academic notion of "risk = return" on its head. For him, "work = return." The more work you put into your investments, the higher your return should be.

If you have neither the time nor the inclination to do quality research on your investments, then investing in an index is a good alternative. Graham said that the defensive investor could get an average return by simply buying the 30 stocks of the Dow Jones industrial average in equal amounts. Both Graham and Buffett said getting even an average return--for example, equaling the return of the S&P 500--is more of an accomplishment than it might seem.

The fallacy that many people buy into, according to Graham, is that if it's so easy to get an average return with little or no work (through indexing), then just a little more work should yield a slightly higher return. The reality is that most people who try this end up doing much worse than average.

In modern terms, the defensive investor would be an investor in index funds of both stocks and bonds. In essence, they own the entire market, benefiting from the areas that perform the best without trying to predict those areas ahead of time. In doing so, an investor is virtually guaranteed the market's return and avoids doing worse than average by just letting the stock market's overall results dictate long-term returns. According to Graham, beating the market is much easier said than done, and many investors still find they don't beat the market. (To learn more, read "Index Investing.")

Speculator vs. investor:Not all people in the stock market are investors. Graham believed that it was critical for people to determine whether they were investors or speculators. The difference is simple: An investor looks at a stock as part of a business and the stockholder as the owner of the business, while the speculator views himself as playing with expensive pieces of paper with no intrinsic value. For the speculator, value is only determined by what someone will pay for the asset. To paraphrase Graham, there is intelligent speculating as well as intelligent investing--just be sure you understand which you are good at.

Commentary

Graham's basic ideas are timeless and essential for long-term success. He bought into the notion of buying stocks based on the underlying value of a business and turned it into a science at a time when almost all investors viewed stocks as speculative. Graham served as the first great teacher of the investment discipline, as evidenced by those in his intellectual bloodline who developed their own. If you want to improve your investing skills, it doesn't hurt to learn from the best; Graham continues to prove his worth in his disciples, such as Buffett, who have made a habit of beating the market.

Below you will find a table of stocks Forbes recently identified based on the Benjamin Graham screen of the American Association of Individual Investors.

Company	Description	Market Cap ($mil)	Price/Earnings	Yield
Spartan Motors(nasdaq:SPAR -news -people )	Auto & truck manufacturers	152	3.1	2.1%
Euroseas(nasdaq:ESEA -news -people )	Water transportation	168	2.7	14.5
Signet Jewelers(nyse: SIG- news -people )	Retail	608	3.5	538.6
Ternium S.A. (nyse:TX - news- people ) (ADR)	Iron & steel	2,007	2.1	5
United States Steel(nyse: X -news -people )	Iron & steel	4,006	1.9	3.5

Source: AAII Stock Investor Pro

--The price-to-earnings ratio is among the lowest 10% of the database (percent rank less than or equal to 10).
--The current ratio for the last fiscal quarter (Q1) is greater than or equal to 1.5.
--The long-term debt to working capital ratio for the last fiscal quarter (Q1) is greater than 0% and less than 110%.
--Earnings per share for each of the last five fiscal years and for the last 12 months have been positive.
--The company intends to pay a dividend over the next year (indicated dividend is greater than zero).
--The company has paid a dividend over the last 12 months.
--Earnings per share for the last 12 months is greater than the earnings per share from five years ago (Y5).
--Earnings per share for the last fiscal year (Y1) is greater than the earnings per share from five years ago (Y5).
--The price-to-book ratio is less than or equal to 1.2.

http://www.forbes.com/2009/02/23/graham-buffett-value-personal-finance_benjamin_graham.html

Get Out While You Can

Marc Lichtenfeld

Published: Thursday, March 21st 2013

Last year, my wife and I decided to buy an investment property. One talent I do not have is to be able to walk into a home and see the potential. If it doesn’t already look great, then I’m not interested.

Fortunately, my wife is much more practical. So I let her find our new property and I handled the financing, something she despises. She uncovered a great condo and I rode the mortgage broker hard— like a rodeo champ.

The mortgage rate on the property was an important factor to whether the deal made sense. Rates had come off their historic lows, but were still very cheap.

As the deal matured, I watched every tick of the 10-year Treasury note. (Most mortgages are based on this key rate.) Finally, when we had a move to the downside, I called the mortgage broker and told him to lock it in.

“We have time,” he said. “There’s no rush.”

“Lock it in now,” I shot back.

He tried to talk me out of it, saying that if the property didn’t close when we expected it to, we’d have to pay to keep the rate. I told him we’d get the closing done and I wanted that 3.25% 30-year fixed rate locked in.

He locked it in… And rates went higher shortly after.

Back then, the 10-year note was trading at about 1.67%. Today, it’s back above 2%, and I suspect it to stay above that key threshold.

Trouble ahead

Unless you’re in the market for a mortgage, you probably don’t care about rates — but you should.

Many folks will see their retirement funds get slammed as a result of rising rates.

Remarkably, investors are still pouring money into bond funds. Stock fund inflows get the most media attention, as investors are once again putting money into stock funds rather than taking it out, reversing a multi-year trend.

But money is still rushing into bond funds.

In fact, municipal bond funds have seen seven straight weeks of inflows — with $780 million flowing into the sector over the last two weeks. High-yield funds added $148 million in new money in the past two weeks. And investment-grade corporate bond funds saw a whopping $1.6 billion come into their coffers.In all of 2012, an astounding $227 billion flowed into bond funds.

It’s sad to say, but investors would be better off heading to the roulette wheel and putting that money on black. They’re more likely to emerge with all of their money than if they buy bonds.

As Investment U's Steve McDonald has said numerous times… Bond funds are deadly.

Yes, the Fed has pledged to keep short-term rates at zero. But the Fed doesn’t control the market. (Sorry, Ben.) If investors — especially institutions and foreign governments — stop buying our debt, rates will soar.

It’s the simple law of supply and demand.

Currently, the 10-year is at 2.05%. Three months ago it was at 1.65%. What happens if China or Japan decides a return of 2.05% isn’t worth the risk of holding a U.S. Treasury for 10 years?

What if they don’t trust our do-nothing Congress to straighten out our exploding debt situation, and these key lenders decide they need 2.5%, or 3% or 5% for the risk of holding a U.S. debt obligation?
 

Sadly a lot would happen. But most notable for our discussion is that the quarter of a trillion dollars invested last year (and billions more from 2011, 2010) in bond funds would suffer huge losses.
 

Think of it this way. If you paid $100 today for a bond that paid 2%, what would you pay tomorrow if a new bond with a 3% yield goes for the same $100? You’d pay a lot less for that 2% bond.
 

As rates go up, bond prices fall. And there are a lot of pension funds, sovereign funds and mutual funds that are stuffed to the gills with bonds, in danger of losing big money if prices fall.

What to do about it

If you have money in bond funds, sell them while you still can. They will lose value over the coming years.

Put that money into stocks with a history of raising their dividends. By investing in stocks that raise their payouts annually, you ensure you will get a pay raise every year. Even in the best of times, that’s a feat no bond fund can offer.

A stock like Exxon Mobil (NYSE: XOM), on the other hand, that raises the dividend 9% to 10% per year, means you’ll make 9% to 10% more money every year from your income investments.

And, as you should know, stocks with track records of annual dividend raises tend to be safer investments than other stocks. In fact, companies with track records of raising the dividend for 25 years or more have never lost money over any 10-year period going back over 32 years of rolling 10-year periods (i.e. 1981-1991, 1982-1992, 2002-2012).

Even if you’re not in the market for a mortgage, keep a close eye on the 10-year bond yield. As it ticks higher, you’re going to hear more and more about the devastating losses suffered by large institutions and sovereign funds. And as those losses mount, bonds will be dumped, making the carnage even worse.

If you own bond funds, find alternative places to put the money before the sell-off occurs. Otherwise you’ll be selling in the panic with everyone else.

They say it’s better to be lucky than good. Fortunately, when it came to my mortgage, I was both. I got lucky that rates dipped, and I was smart that I locked it in.

You have the same opportunity now with bond funds. The steep losses haven’t started yet, so take advantage of your good timing and get out unscathed while you can.

Note: These rate hikes, coming much sooner than most expect, will crush individual investors who are not prepared. And it’s likely to happen in a matter of minutes. But those who understand this situation will not only survive disaster, but stand to soak up significant wealth.

Marc thinks clued-in investors are looking at as much as a 164% windfall, plus thousands of extra dollars each month when this three-minute event occurs.

http://www.physiciansmoneydigest.com/personal-finance/Get-Out-While-You-Can-IU?utm_source=Lyris&utm_medium=Email&utm_campaign=PMD+3-22-13

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Can Tesco Outperform Wal-Mart Stores?

By Roland Head 

March 21, 2013 

LONDON -- If you're interested in building a profitable, diversified portfolio, then you will often need to compare similar companies when choosing which share to buy next. These comparisons aren't always as easy as they sound, so in this series I compare some of the best-known names from the FTSE 100, the FTSE 250, and the U.S. stock market.

I use three key criteria -- value, income, and growth -- to compare companies to their sector peers. I've included some U.S. shares, as these provide U.K. investors with access to some of the world's largest and most successful companies. Although there are some tax implications to holding U.S. shares in a U.K. dealing account, they are pretty straightforward, and I feel they are outweighed by the investing potential of the American market.

Today I'll take a look at supermarket giants Tesco (LSE: TSCO  ) (NASDAQOTH: TSCDY  ) and Wal-Mart Stores (NYSE: WMT  ) , which owns the Asda supermarket chain in the UK.

1. ValueThe easiest way to lose money on shares is to pay too much for them. So which share looks like a better value?

Metric	Tesco	Wal-Mart
Current price-to-earnings ratio	10.9	14.4
Forecast P/E	12.5	14.7
Price-to-book ratio	1.8	3.2
Price-to-sales ratio	0.5	0.5

Tesco edges ahead of Wal-Mart in terms of value, offering a lower P/E on both a historic and forecast basis. Tesco also trades on a much lower P/B ratio than Wal-Mart, although the two supermarkets' P/S ratios are evenly matched thanks to their near-identical profit margins. The P/S ratio can be useful for comparing the profitability of different companies within the same sector.

2. IncomeWith low interest rates set to continue for the foreseeable future, dividends have become one of the most popular ways of generating an investment income. How do Tesco and Wal-Mart compare in terms of income?

Value	Tesco	Wal-Mart
Current dividend yield	3.9%	2.6%
5-year average historical yield	3.5%	2.2%
5-year average dividend growth rate	8.9%	12.6%
2013 forecast yield	3.8%	2.2%

Tesco's dividend yield is 50% higher than that of Wal-Mart. U.S. dividend yields tend to be lower than comparable U.K. yields, and although Wal-Mart's dividend has grown at a faster rate than Tesco's over the last five years, the firm's payout ratio -- the proportion of its earnings paid as dividends -- remains lower than that of Tesco.

For me, Tesco is a clear winner in the income stakes, but although both companies have an outstanding record of continuous dividend growth -- 28 years for Tesco and 39 years for Wal-Mart -- it's worth noting that Tesco's dividends have not been covered by free cash flow since 2010, unlike those of Wal-Mart. Free-cash-flow cover is a good measure of dividend safety: Using reserves or borrowed money to pay shareholder dividends is not sustainable in the long term.

3. GrowthEven if your main interest is value or income investing, you do need to consider growth. At the very least, a company needs to deliver growth in line with inflation -- and realistically, most successful companies need to grow ahead of inflation if they are to protect their market share and profit margins.

How do Tesco and Wal-Mart shape up in terms of growth?

Value	Tesco	Wal-Mart
5-year earnings-per-share growth rate	9.5%	9.7%
5-year revenue growth rate	8.6%	4.5%
5-year share price return	(2.1%)	45.4%

In terms of shareholder returns, Wal-Mart has hugely outperformed Tesco over the last five years. The U.S. firm's share price has risen by 45% during a period when Tesco's share price has languished and delivered almost zero returns. Yet underlying this, both companies have grown their earnings per share at a similar rate, and Tesco's revenue growth has moved ahead of that of Wal-Mart. What's more, over a 10-year timeframe, Tesco's shares price has risen by 120%, outperforming Wal-Mart's more modest 47% 10-year gain.

Should you buy Tesco or Wal-Mart?Tesco is in the middle of a much-publicized effort to turnaround its fortunes. Apart from improving its existing stores, one aspect of this is cutting expenditure on very large new stores. Over time, an improved focus on profitability and smaller stores should help to improve its cash flow situation and support its dividend. Although Wal-Mart's finances appear to be more robust at present, I think Tesco's greater yield is worth the risk for U.K. investors, especially given its low P/E ratio, which makes the company look better value than Wal-Mart in my view.

In terms of growth, Tesco's stronger revenue growth rate appeals to me, because over time it should facilitate stronger earnings growth than Wal-Mart, assuming other factors -- such as profit margins -- remain roughly equal.

2013's top income stock?Although both Tesco and Wal-Mart are attractive income shares, the utility sector remains one of the best places to find reliable, high-yielding income stocks. But not all utilities are equal, and some are facing serious challenges that could lead to dividend cuts.

http://www.fool.com/investing/general/2013/03/21/can-tesco-outperform-wal-mart-stores.aspx

Hyperinflation Nation

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Warren Buffett's career advice

"Take the job you will take if you are independently wealthy."

Personal finance lending grows

KUALA LUMPUR:  Personal financing expanded by 30% last year, the fastest growth over the last three years, mainly due to lending by nonbank financial institutions (NBFI), said BNM in its 2012 Financial Stability and Payment Systems report yesterday.

Although the majority of borrowers were those earning less than RM3,000 per month, BNM said the credit risk had been well mitigated as about 80% of the borrowers have stable jobs and a regular salary with loan repayments deducted automatically at source.

“These developments are nonetheless being closely monitored particularly in light of recent innovations observed on product offerings by the NBFI,” it said in a statement released in conjunction with its 2012
BNM annual report.

NBFIs accounted for 12% of total credit to the nation’s household sector. But collectively, these institutions provided 57% of personal financing credit to households and such credit has been increasing significantly in recent years.

Last year, overall credit on all facilities extended by the three largest NBFIs expanded at a faster rate of 23.1%. The strong credit expansion was primarily driven by the personal financing activities which grew 30%
last year.

In 2010, personal financing grew 28.7% while in 2011 it recorded a growth of 25.1%. According to the statement, as at the end of last year, the banking system’s gross impaired loans ratio improved to 1.5% for the household portfolio, 2.9% for large businesses and 3% for small and medium enterprises.

“Following the implementation of the Guidelines on Responsible Financing during the year, banks are also more thorough in assessing borrower affordability with more prudent buffers allocated in the computation of debt service ratios, improved processes and documentation in income verification,” said BNM in its report.

The bank’s risk-weighted capital ratio and core capital ratio stood at 15.2% and 13.4% as at end of last year with financial buffers in excess of RM80 billion.

The banking system’s total capital ratio for financial institution was at 14.5% as at end of January this year.
Domestic implementation of the Basel III global regulatory reform package will significantly raise the level and quality of banks’regulatory capital starting January this year until December 2018.

This article first appeared in The Edge Financial Daily, on March 21, 2013



Business & Markets 2013
Written by Zatil Husna of theedgemalaysia.com
Thursday, 21 March 2013

Cyprus risks euro exit after EU bailout ultimatum

By Michele Kambas

NICOSIA | Thu Mar 21, 2013 11:02pm GMT

(Reuters) - The European Union gave Cyprus till Monday to raise the billions of euros it needs to secure an international bailout or face a collapse of its financial system that could push it out of the euro currency zone.

In a sign it was at least preparing for the worst, the Cypriot government sought powers on Thursday to impose capital controls to stem a flood of funds leaving the island if there is no deal before banks reopen following this week's shutdown.

Parliament will reconvene later on Friday to debate a raft of government crisis measures after lawmakers adjourned a late-Thursday sitting saying they needed more time for consultation.

Even those measures looked likely to fall short of a promised "Plan B" to raise the 5.8 billion euros (4.92 billion pounds) demanded by the EU in return for a 10 billion euro lifeline from the EU and IMF.

The European Central Bank said it would cut off liquidity to Cypriot banks without a deal, and a senior EU official told Reuters the bloc was ready to see the island banished from the euro to contain damage to the wider European economy.

Angry Cypriot lawmakers on Tuesday threw out a tax on deposits, calling the EU-backed proposal "bank robbery".

After more talks on Thursday, the currency union's finance ministers urged Cyprus to table a new proposal.

Trying to placate its lenders, the government proposed to parliament a "solidarity fund" that would bundle state assets, including future gas revenues, as the basis for an emergency bond issue, likened by JP Morgan to "a national fire sale".

It also sought the power to impose capital controls on banks, a type of measure unseen since before the country joined the single currency bloc five years ago.

ECB PATIENCE FLAGS

The European Central Bank, which has kept Cyprus's banks operating with a liquidity lifeline, said the government had until Monday to get a deal in place, or funds would be cut off.

"Thereafter, Emergency Liquidity Assistance (ELA) could only be considered if an EU/IMF programme is in place that would ensure the solvency of the concerned banks," the ECB said.

In Brussels, a senior European Union official told Reuters that an ECB withdrawal would mean Cyprus's biggest banks being wound up, wiping out the large deposits it has sought to protect, and probably forcing the country to abandon the euro.

"If the financial sector collapses, then they simply have to face a very significant devaluation, and faced with that situation, they would have no other way but to start having their own currency," the EU official said.

Cypriot banks, crippled by their exposure to Greece, the centre of the euro zone debt crisis, have been closed all week and are not due to reopen until Tuesday.

Long queues formed on Thursday at ATMs still dispensing cash, and there were angry scenes outside parliament where several hundred protesters, many of them bank employees, rallied after rumours the second-largest lender, Cyprus Popular Bank, was to be wound up.

Chanting "Hands off the bank", several demonstrators jostled with riot police.

"We have children studying abroad, and next month we need to send them money," protester Stalou Christodoulido said through tears. "We'll lose what money we had and saved for so many years if the bank goes down."

The central bank said it was readying measures to keep Popular Bank afloat. Some banking officials said it could be split between good and bad assets.

LIMITED OPTIONS

Under the levy rejected by parliament, EU lenders, notably Germany, had wanted uninsured bank depositors to bear some of the cost of recapitalising the banks, but Cyprus feared for its future reputation as an offshore banking haven and planned to spread the burden also to small savers whose deposits under 100,000 were covered by state insurance. Lawmakers threw it out.

In Moscow since Tuesday, Cypriot Finance Minister Michael Sarris said he was discussing possibleRussian investments in banks and energy resources, as well as an extension of an existing 2.5-billion-euro Russian loan.

He said Cyprus had no plans to borrow more money from Russia and add to its debt mountain. The Russian Finance Ministry had said on Monday that Nicosia sought an extra 5-billion-euro loan.

The chairman of the euro group of finance ministers, Dutchman Joreon Dijsselbloem, told the European Parliament in Brussels that Moscow informed the EU it had no intention of ploughing more money into Cyprus.

Senior euro zone officials acknowledged in a confidential conference call on Wednesday that they were "in a mess" and discussed imposing capital controls to insulate the currency area from a possible collapse of the small Cypriot economy.

Cyprus itself refused to take part in the call, minutes of which were seen by Reuters. Several participants described its absence as troubling and reflecting the wider confusion surrounding the island's predicament.

(Additional reporting by Jan Strupczewski and Luke Baker in Brussels, Karolina Tagaris and Costas Pitas in Nicosia, Georgina Prodhan in Vienna, Lidia Kelly and Darya Korsunskaya in Moscow and Paul Carrel in Frankfurt; Writing by Matt Robinson; Editing by Will Waterman)

http://uk.reuters.com/article/2013/03/21/uk-eurozone-cyprus-idUKBRE92F07R20130321?feedType=nl&feedName=uktopnewsmid

Forget Cyprus, Nobody Is Stealing from Depositors More than Bernanke

By Bernice Napach 

After the Federal Reserve reaffirmed its easy money policy Wednesday, Chairman Ben Bernanke was asked whether the U.S. would ever think of taxing bank depositors as Cyprus has done. He said that was very unlikely but Jim Rickards, senior managing director of Tangent Capital Partners, says the Fed already has its hands in depositors’ pockets.

“Nobody is stealing more money from bank depositors than Ben Bernanke,” Rickards tells The Daily Ticker. Bernanke's doing that, Rickards says, by maintaining interest rates near zero.

Related: There are No Bubbles, QE is Working

“At this stage of a recovery normalized interest rates should be around 2-3%,” says Rickards. “Apply that 2-3%…to the entire multi-trillion-dollar deposit base of the United States of America and that’s a $400-billion per year wealth transfer from savers to bankers so they can pay themselves bigger bonuses or make crazy bets.” Over time, Rickards says, that wealth transfer could reach $1 trillion.

Rickards says zero interest rates are just one way the Fed is fleecing depositors. Others include increasing inflation, which Bernanke is trying to do, and taxing deposits like Cyprus is pushing for.“Bernanke is stealing more money from depositors than Cyprus is... looting everyday Americans—teachers, firemen and retirees,” says Rickards.

There’s another way, of course, to view Fed policy: that near-zero interest rates and $85 billion worth of asset purchases every month are helping to boost economic growth and employment and maintain low interest rates for both short-term and long-term debt. Bernanke himself, testifying before the Senate Banking Committee late last month, said, “The benefits of asset purchases, and of policy accommodation more generally, are clear…monetary policy is providing important support to the recovery.”

But Rickards says the easy money policy is creating asset bubbles that may feel good for now but will eventually crash. Cyprus could crash much sooner than that.

Related: Cyprus is a Game Changer for Investors: Jacob Kirkegaard

The ECB today set a Monday deadline for the island nation to finalize an agreement with the bank, the European Union and IMF in order to qualify for emergency funding. If no deal is reached by the Monday deadline Cyprus will lose access to emergency funds and its banking system could collapse. That’s especially bad news for the Cypriot economy because not only does it depend on its banks, as most economies do, but its banking system is 7 to 8 times the size of its 70-billion-euro GDP.

About 30% of those deposits are reportedly from Russia.Talks are expected to continue throughout the weekend and now reportedly include Russia.

"‘At least now the Russians and the Europeans are talking…so there’ll be some kind of resolution,” Rickards says.

There's even speculation that Russia’s gas producer Gazprom (OGZPY),which has its own bank, could lend Cyprus some money.

http://finance.yahoo.com/blogs/daily-ticker/forget-cyprus-noboby-stealing-depositors-more-bernanke-170851783.html

Cyprus' Unprecedented Bailout: More Common Than You Think

By Morgan Housel 

March 18, 2013 

The tiny nation of Cyprus was bailed out by its eurozone partners and the IMF this weekend. That much is barely news. The bailout of a country with a broken banking system is now known as a slow Sunday.

But there was something different about Cyprus' bailout that sent shivers through the global banking system. Deposit holders in Cyprus banks are being forced to pay for part of the deal. The original deal, which looks like it's now being revised as I write this, says those with 100,000 euros or more in Cyprus banks will have 9.9% of their deposits levied -- or taxed, or confiscated, or whatever you want to call it. Those with less than 100,000 euros will take a 6.75% haircut.

This is rare, if not unprecedented, in modern bank bailouts. Deposit holders have long been considered sacrosanct. In the U.S., we have the FDIC. A bank's shareholders can lose everything when it screws up. Bondholders can take a hit, too. But deposit holders, particularly small mom-and-pops, are typically untouchable. "The FDIC has a long history of stability and safety," says former chairwoman Sheila Bair. "No one has ever lost a penny of insured deposits." Europe can't say the same. 

But there's another side to this story.

If Cyprus had its own currency, it would be dealing with its economic problems by printing money. That would eventually cause inflation. How much? I don't know, let's say 6.75%. In that case, those with cash deposits in Cypriot banks would lose 6.75% of their money in real terms -- the same amount being directly confiscated on most deposits through the IMF bailout. 

Think of it that way, and Cyprus's bailout fee is only unprecedented in a semantic way. When a government directly takes 6.75% of deposits, people freak out. When the government takes money indirectly through 6.75% inflation, few are concerned.

There are two takeaways from this.

The obvious one is that Cypriots are getting a raw deal only if you consider the bailout fee in isolation. Compared with what would have likely occurred without a bailout, it isn't bad at all. Most estimates I've seen of what would happen if Cyprus were forced to leave the euro and return to its old currency predict a devaluation of 40% to 60%. The country was in a terrible position with no easy solutions. It took the least bad option.

The other takeaway is that when it comes to cash, the difference between inflation and a direct levy is minimal. Most don't think of inflation as a fee because they don't see money being directly removed from their bank accounts. But the effect on wealth is the same in the end. Sheila Bair is right that no one has ever directly lost a penny on FDIC-insured deposits. But an untold amount of deposit wealth has been lost to inflation.

I'm neither a conspiracy theorist nor a goldbug, and this is not an anti-Fed rant. There will always be inflation, and dealing with it is more useful than grumbling about it. There are plenty of options to invest money at rates of return above inflation. Charlie Munger once said: "I remember the $0.05 hamburger and a $0.40-per-hour minimum wage, so I've seen a tremendous amount of inflation in my lifetime. Did it ruin the investment climate? I think not."

The problem is that so many investors have willingly made themselves subject to inflation's mercy, plowing into cash and bonds that yield less than inflation. They are subjecting themselves to their own mini-Cyprus bailout fee year after year.

What's unfortunate is that they may not even know it. Cypriots are well aware of their fee. They see the headlines. They'll see the withdrawals. Money here today will be gone tomorrow. Other people around the world who invest in the comfort of FDIC-insured cash and bonds yielding nothing, I'm afraid, are much less aware.

http://www.fool.com/investing/general/2013/03/18/cyprus-unprecedented-bailout-more-common-than-you.aspx