Cyprus is on the verge of default, facing a plethora of difficult choices that will invariably result in weak economic performance for years to come and capital controls in the near future. Although Cyprus has directly crossed the Maginot line of proposing losses to bank depositors and will conceivably become the first country to leave the Eurozone, the market hardly blinked, with a slight safety bid, although we are hard pressed to blame it on Cyprus. Either the market has become immune to the hijinks in Europe or believes that central bank puts limit tail risk, or some combination of both. The Fed indicated to us that it was not going to be the first to flinch when it comes to stimulus, likely in play at least through the end of year. We find the concept of tapering QE (in Fed speak) akin to QE Infinity becoming a policy tool that will adjust down or up as economic conditions warrant. Such an active central bank requires that investors alter their approach to portfolio construction, as global central banks will de facto become more coordinated. Bernanke also hinted that his term would end at the beginning of 2014, although policy is unlikely to change if Vice Chair Yellen were to succeed him. Cyprus is far from resolved as we move into the weekend, and will likely be confronted with an emergency response to the crisis from EU leaders, probably late on Sunday which has become de rigueur. Read the full commentary now.
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