Thursday, November 27, 2008

Banks Hoarding Cash, But There's a Bull Market Coming

From 3 Wood at Jammie Wearing Fool:

With all the market unrest, and the year end reporting coming up soon, it appears that banks have resumed hoarding cash to make their balance sheet look better to investors.
The cost of borrowing in dollars for one month in London jumped the most since 1999 as banks sought to bolster balance sheets through year-end amid a squeeze on credit that’s being exacerbated by the global economic slump.

The London interbank offered rate, or Libor, that banks say they charge one another for such loans climbed 47 basis points to 1.90 percent today, British Bankers’ Association data showed. The Libor for three-month loans rose two basis points to 2.20 percent. The Libor-OIS spread, a measure of the willingness of banks to lend, increased.

“There is some concern about the turn of the year,” said Patrick Jacq, a senior fixed-income strategist in Paris at BNP Paribas SA. “I wouldn’t be surprised to see this tension easing over the next few days as central banks address the situation with more liquidity.”

With little more than a month to go until the end of 2008, banks are vying for loans that mature after Dec. 31 to strengthen their balance sheets as they prepare to report to investors. Financial institutions mark the value of loans and cash positions at the end of each quarter. The euro interbank offered rate, or Euribor, for one-month loans rose 22 basis points to 3.61 percent today, the first increase in 24 days, according to the European Banking Federation.

“This is purely because the loans are crossing year-end,” said Barry Moran, a money-markets trader at the Bank of Ireland in Dublin. “It’s a little bit harder to tell this year how high rates might go because central banks are going a long way toward providing excess liquidity."
Look for the Feds to lower the discount rate another 0.25% and pump even more money into the banking system in December.

Now, that leaves the issue of what happens to all this cash in the banking system after the reporting period is over?

Well, eventually the banks are going to get tired of sitting on all this cash and will want to use it. That means loans and lots of them (hopefully, this time around, they actually vet the applicants). And that means the market and the economy will take off.

At first it will see like a miracle. But then when unused production capacity is absorbed, we will see high inflation.

Also, get ready for phase 2 of the credit defaults as credit card and other consumer debt defaults start hitting hard in January. They are much smaller though, per person than mortgages and so the down side should be a little easier to handle in the market. If you did not notice, American Express got itself declared a bank the other day so it can borrow at the discount window and get a piece of the bail out. They see the credit card defaults coming.

At this point the bigger economic threat is not the recession (as long as Obama does not raise taxes any time soon), but the ensuing inflation we will see.

But regardless, we will have to pay higher taxes sometime down the road. With the $8.5 trillion bail out, we not only have borrowed on our future, we have passed that burden onto our children and grandchildren.

We have been following a path of pain avoidance. Eventually, we have to pay the tab.

Interesting analysis. It seems to me one thing 3 Wood is not taking into account here is that, while the inflation he predicts will initially be caused by a maxing out of production capacity, ultimately inflation means there is more demand than available goods. 

In a sensible economy that means more growth. And, this recession is wiping all the nonsense out of the economy.

I predict major bullishness in 3-6 months.


WC said...

I belive he's pretty corrcet.

All this talk of a depression is media hyped bull cookies. There will never ever be another depression as long as there are central backs printing money. There will however, be hyper-inflation as they print their way out of a threatening depression.

You might ask why did we have a depression in the the 1930s even when the Fed reserve was around? The answer is gold. We were still on a gold stadard and the Fed was restricted as to how much paper money they could print.

This time around, there are no restrictions on the amount of paper. They will print away - tillions upon trillions as we see happening now and soon into the future!

So don't watch the stock or bond markets. Watch the price of gold. If it climbs to $1500 to $2000 an oucounce, that's a red flag. Any higher than $2000 and we're on our way to hyper-inflation.

Pastorius said...

Money follows ideas. It does not follow gold.

An economy tied to the production of commodities is a stagnant economy.

An economy tied to the production of ideas about how to handle commodities is a growing economy.

An economy whose monetary system is tied to a commodity (like gold) is a stagnant economy.

An economy whose monetary system reflects the real value of ideas put into action is a growing economy.

Your home is where your heart is. If the heart of an economy is gold, then that's all there is.

If the heart of an economy is ideas, then it is never-ending.

WC said...


I make no bones about gold or whether a currecny should be backed by a hard commodity. All I'm saying is that an unrestrained central bank can get us into real deep doo doo if there are no restrictions placed upon its power to print money.

Scoff at gold, but if hyper-inflaction occurs, one ounce will by the Prious the Left loves.

Remember 1920s Germany. They printed Marks like they were going out of style.

Pastorius said...

Good point.

The point I think everyone misses in all this speculation about what will/won't, can/can't happen is that the economy is based on something real; it is based on what we do.

When the world's markets go into recession or depression of when they collapse, there is still stuff happening, and as long as there is freedom, there will still be stuff happening.

If you didn't have any money, would that mean you wouldn't have anything to eat, or a place to live in? No. Instead, you would find other ways to attain those things, and a new system would be built on those new ways you found to attain the same things.

I don't think our system is nearly so damaged as to collapse entirely, however. I'm only using the extreme to make my point. There is still stuff happening. The one with the most freedom has the most ideas, and the one with the most ideas


SamenoKami said...

Flag the posts about the economy and re-post them Thanksgiving '09 and see who is right or closer to right.

BTW - I was mortally wounded and you hurt my self-esteem when you referenced me as 'chicken little' in an earlier post on the economy. :)

Pastorius said...

I don't remember which post that was. I'll see if I can find it.

I also don't remember what my comment was. What did I say?


SamenoKami said...

Pastorius, here is the article.

"Why has Russia only been a major player because of big nukes and dead dinosaurs?"

Don't take my comments too seriously.
Checking up next yr. might be fun though.

Pastorius said...

Check out my latest post.


Pastorius said...

Ok, so I reread the comment from me to you. It said,

"Something just hit me in the head. I don't know if it was a piece of the sky, or my foot going in my mouth."

The point was, yeah, I was calling you Chicken Little, but I was also saying, but maybe my foot is going in my mouth. In other words, maybe I'm wrong.

So, I was admitting I could be wrong.

I'm not an expert in anything. Instead, I just proceed from intuition on things based upon fundamental principles. I believe in Freedom and the creativity and growth it inspires.

Hokey, but that's me.


SamenoKami said...

Ahh crap! Now you're getting all honorable.

Point taken.