In my November 2012 column, I outlined the views of Felix Stephen, head of strategy and research at Advance Asset Management.
Stephen correctly predicted that low-yielding cash, sitting on the sideline, would be drawn into the market, driving prices higher.
By early March this year, the All Ordinaries had reached 5160.
The second part of his forecast was that gains made at this level could be wiped out, with markets possibly falling by up to 30 percent.
In early March, veteran market newsletter commentator, Ian Huntley, also expressed concern that flashing warning lights were suggesting a significant correction for the stock market.
This would start initially with a nervous sideways market, leading to a possible 20-30 percent bear market throughout next year.
Yet, considering the Australian All Ordinaries has risen by over 25 percent since June 2012, a retraction of this magnitude shouldn’t overly surprise investors.
Stephen’s view centres on quantitative easing measures by the US Federal Reserve, allowing European governments to "kick the can down the road", avoiding drastic reform needed in the eurozone.
Their delay was dramatically exposed on 16 March, when banks in Cyprus closed their doors for 12 days, while the government of Cyprus considered various proposals to deal with its banking crisis.
These proposals now include new capital controls, which also happens to be a violation of a core principle of Europe’s Maastricht Treaty, the free movement of capital, between member nations.
According to a statement from the Cypriot central bank depositors with over 100,000 euros ($123,000) in Bank of Cyprus accounts, could lose up to 60 percent of their savings.
For the first time ever, a eurozone deal has forced a bank's customers to contribute to a bailout.
Major depositors could lose up to 37.5 percent after their savings are turned into shares, while a further 22.5 percent of their money could be expropriated, if deemed necessary.
But if you think this crisis is confined to Europe, you should want to think again.
While the Cypriot depositor “bail-in” may be regarded as a one-off event, plans are well advanced to pursue the bail-in model within the banking system of most Western nations.
This new Cypriot banking wind-up template is likely to turn into EU law by 2015, no longer penalising taxpayers when a bail-out is needed, but instead imposing major losses on bigger savers.
Since 2009, depositor “haircuts” have been legal in the UK, and the same legal authority has already been given by the US Dodd-Frank Act.
And the Canadian Government has also proposed a “bail-in” regime as a blueprint for their nation’s future bank failures [see pages 144 -145 of "Economic Action Plan 2013" at: http://www.budget.gc.ca/2013/doc/plan/budget2013-eng.pdf ]
Across the Tasman, the New Zealand Reserve Bank is in the final stages of implementing a system of managing bank failures called “Open Bank Resolution”.
NZ Finance Minister, Bill English, has proposed three options, which includes a Cyprus-style depositor "haircut" in the event of financial collapses.
While it’s reasonable that moves are finally afoot to make bank shareholders and bond holders responsible for bad banking practices, instead of taxpayers, treating depositors as bank shareholders is a first.
However, this new bank wind-up template may result in unintended consequences.
If under such new rules depositors cannot rely on banks to repay all of their funds on demand, they may well opt for alternative investments, undermining confidence in the modern-day banking system.
In Australia, personal bank deposits of up to $250,000 are currently guaranteed, covering about 80 percent of households.
This means that the federal government is carrying a contingent liability of about $650 billion, or 40 percent of national output.
Cyprus has given us some foresight into what the new eurozone bank resolution system could look like, with bank stakeholders now fully exposed.
The only certainty is that we are a long way from seeing the eurozone banking crisis resolved.
• Steve Blizard is a senior securities advisor at Roxburgh Securities
