Look, it should be pretty well obvious that a bank run will not materialize in Cyprus. How could it? The population is limited to 300 euros a week and there are armed guards and security forces everywhere.

Incidentally, there aren’t really “banks” in Cyprus anymore either. Last I checked, I can take my money out of a bank…

The currency controls have effectively created an entirely different social structure on the island, and euros there have significantly different value from euros anywhere else. By all measures, Cyprus is no longer a capitalist country.

However, there will still be long term damage done. If you’re a Cyprus resident, will you be depositing much money with your trusty bank branch over the next few years? Dark pool currency is going to swell, and since modern banking is built on top of fractional reserve systems, that will carry a heavy toll.

Now, avert your attention back to Spain. Yesterday, yields of Greece, Italy and Spain bonds all exploded. Today, there’s been some retracement in Greece and Italy bonds. But Spanish 10 years are flat. No recovery.

You need to have your eyes pegged on Spain. She’s the real danger. Not the tiny island tax shelter. You know the problems with Spain well enough – youth unemployment, Catalonia wanting to cede from the country, housing crisis, huge debt – if Spanish bonds start to blow out and it looks like Europe needs to step in, well…currency controls aren’t in place there yet.

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Do not be mistaken by the market recovering from the lows of the day, for there is severe damage being done in surreptitious ways.

Leading the pack is the euro, which has seen itself cut down, and doesn’t appear anywhere near support yet.

The debt of Italy, Spain and Greece is selling off hard. Spanish yields in particular ramping back above 5% carry a heavy hand against this market.

Those idiots helming the EU made a monumental miscalculation when they stole the Cyprus accounts. At that moment, they gave themselves no room to maneuver; balancing the entire euro project on a wobbly pinnacle. If debt of the PIIGS continues to sell off, the result will be calamitous.

Dijsselbloem will be taken at his word, and the ensuing bank run will force depression across the currency bloc.

Stay vigilant here. There will be no second chances given if the wrong developments materialize.

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I added a position in SCO for $40.19.

This takes my artificial cash position north of 50%. We are at the “edge of disappointment”, where things are neither good nor bad, but merely “meh”.

“Meh” gets you killed.

Europe will flare up again. Cyprus doesn’t matter particularly. The underlying reason we keep hearing about the EU is because the EU is fundamentally fucked on a spindle. The cost of holding the euro together, not just in terms of money, but in terms of man hours, resources, lost opportunities, bitter resentment, livelihood,…is just immense.

It’s never just about the money. When the economics and numbers don’t work, it should usually be a warning sign that you’re screwing something up largely. Money is a metric for measurement; hence why when obnoxious social justiciers whine about people only caring about the money – refusing to just go along with their latest “great idea” – I have a resounding urge to punch them in the throat.

I really don’t understand why European citizens are subjecting themselves to this. It’s not like they’re avoiding the losses…the pain is coming either way, so it’s a choice of accepting that, making changes to improve their underlying format, and moving on, or…not accepting that, getting the beat down anyway and setting themselves up for more failure later.

Anyways…Italian/Spanish/French debt is docile now, but it’s just a matter of time before the next explosion. Europe continues to miss deficit reduction targets by a quarter mile, and they’re all in recessions.

Dangers to the SCO position would include if the ECB and Fed were ever permitted to team up like Batman and Robin; doesn’t seem in the cards at the moment (or ever), but it’s worth stipulating that I really believe Bernanke & Co would view $150 oil as a “successful policy outcome.”

For the meantime, however, I’ve got decreasing industrial production overseas, an oil production bonanza here at home, and a hundred-years demographic movement towards smaller commutes all playing to my hand.

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Starting right around October and driven by the Fed QE3 announcement, the dollar went into a lovely spiral that culminated in a EUR/USD exchange rate of 1.35. This brought a boon to US equity markets as business picked up, cheap dollars flooded debt markets and foreign capital found it had easier entrance.

However, the sustainability of the trend was always suspect, as witnessed first by Japanese retaliation and now by the reminder that Europe is built on a cracked foundation. EUO is preparing to correct the entire last five months of movement and the US advantage in trade is about to be eliminated. The Fed has once again been checked, this time by foreign currency markets (the last time was by the commodity markets).

Play close attention to the euro here. If it should follow through on the break down that would mark the top of this rally. I have long said that euro parity is an inevitability and with the latest bout of clowning that is being witnessed, I’m guessing that time is drawing nigh. Recall that I also said months ago this rally would be derailed by the EU crisis resuming.

Much of the uptick of economic data was built on those lower currency swaps. While the housing markets subsist on witnessed improvement, the question arises as to how the currency and housing markets are interlocked? The euro can erode the equity run and if the equity run erodes, will that impact homesteading?

The EURUSD thus threatens to create a major disappointment for investors and I see it leading us to the correction I offhandedly guessed at last Fall. The start of Spring is at hand, and it will be déjà vu.

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So far, taking a check at the state of affairs, I still think we can turn back around. Look at the sheer price run and know that we are only now approaching what could be called “top of the range”. I cannot become concerned by bond prices, as they remain at all-time lows and, thanks to central banks, are not allowed to sell off significantly anyway. Why shouldn’t bonds go up? (I know, that logic cannot hold, but for the moment it’s a sticky sort of rule of thumb). Bonds selling off hard are a cause for concern. Bonds being bought are a given.

But I am most assuredly fixed on the yields of France, Italy, Spain and Greece. Yesterday, Italy managed to eradicate three months of goodwill for themselves and their neighbors in what amounts to sheer idiocy. Italians obviously don’t understand the concept of a Catch 22 – in this case, they can pick between austerity or being left for dead (a compelling choice, I know).

Italian 10 years are now approaching the 5% level; effectively lifting ~1% in a matter of two days. While that is certainly a warning sign, I wish to see if that price can hold.

Also, remember that France is intricately tied up in all of this. If we were getting ready for a true panic, I would expect France yields to be getting murdered here.

I’m also not sure what I think of the EURUSD. It’s sitting at around 1.3, which has really been a sort of center for the currency swap during the last 2-3 years. Any time there’s trouble or rebound, it seems like we make the decision around 1.3.

If we were ready to crater, part of me thinks we’d be seeing a bigger initial euro rally, as European financials stock up on emergency stores of euros. Yet, we certainly have had a large resurgence of the EURUSD off the lows, and perhaps that was driven by European financials as much as anything, gathering that very same I have just described.

Also, even though I suspect demand for currency would create a spike before any major selloff, ultimately the euro is destined to go lower, either through devaluation necessary to hold the EU together, or its abstract worthlessness when the EU begins to come apart.

In any major event I expect the euro to move sharply and with conviction. The sashaying it’s undergoing at the moment makes me think this selloff will pass with time.

Until I’m more confident of that though, I’ll be keeping a wary eye on bonds and currencies.

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I apologize for not piping in on the sell off. I was driving down from northern Michigan and only had the intense joy of watching “Revenge of Silvio Berlusconi” on Twitter, as opposed to the full blown Blue Ray.

My cash position only stands just north of 10%. Not even a few days ago it was almost 30%. Thus I have egg all over my face.

But I have hope. Hope for higher prices. This winter was so excellent, it’s difficult for me to believe I could possibly walk away down from the amount I’ve made. So I have some breathing room. Also, I have EUO as a hedge; and that is just running here.

Thus I will be watching closely what happens.

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