Pension Partners’ Ed Dempsey to Moneynews: Cyprus’ Impact on World Markets Still a Question Mark

Friday, 22 Mar 2013 01:42 PM

By Dan Weil and David Nelson

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Whether the financial crisis in Cyprus has a major effect worldwide remains an open issue at this point, says Ed Dempsey, chief investment officer for Pension Partners.

“It’s not known yet,” he tells Newsmax TV in an exclusive interview. “I would ask you, was Iceland, a tiny country [and one of the first to crater in last decade’s financial crisis], important to investors?” And the same could be asked of the small sub-prime mortgage lenders that were the first to tank in the United States.

“At the time no one really thought so,” Dempsey says. “Now, here we are five years post-U.S. crisis, and we have something similar going on in Cyprus.”

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Banking systems operate on confidence, he notes, and the proposed deposit tax obviously isn’t boosting confidence. “Once you attack that confidence, you set off what are potentially ugly consequences,” Dempsey adds.

But a worldwide financial meltdown is no slam dunk. “What we don’t know right now, and we’ll know in the weeks ahead, like an echo, is whether Cyprus is the end of the crisis,” he states.

The global financial meltdown began with a little blip in Iceland, then moved to the United States, while Europe stayed strong, Dempsey explains.

Editor’s Note: Put the World’s Top Financial Minds to Work for You

“Then it went to Europe. So now is this the last sound of the echo?” he asks. “Or has the fuse been lit on the next stage of the crisis? If it is the last piece of it, then we might have a path to substantial new highs in risk assets, especially in the U.S.”

So how does Pension Partners have its investors positioned amid this backdrop? It has placed them in “very short- term positions” in Treasurys, Dempsey says.

The firm uses a weekly inflation-rotation investment strategy and was moving last week to a risk-on position. “We get to Friday, and suddenly, like an EKG, everything starts fluttering for us in our systems. And all of our systems then told us to go to Treasurys, go to risk-off,” Dempsey maintains.

“Well, we woke up to Cyprus on Saturday. So this is an example where big events sometimes do leave footprints, and our models really have been having a hard time, though it’s getting bullish over the last, really, five or six weeks.”

You make money on an escalator and lose it on an elevator, he notes. “So I’m worried about where the next 10 percent is. … If Cyprus is the end of the crisis, then maybe you do have a path to new highs.”

And what if the worst is still yet to come?

“If it represents a new, chaotic, disorderly phase, while we are all connected — we learned that in 2008 — we’re less connected here in the U.S.,” Dempsey explains. “The U.S. financial institutions don’t have those debt charges on their balance sheets.” But stocks may be poised for a correction, he adds.

Editor’s Note: Put the World’s Top Financial Minds to Work for You

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