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Strategies & Market Trends : The Epic American Credit and Bond Bubble Laboratory -- Ignore unavailable to you. Want to Upgrade?

To: Keith Feral who wrote (90914)	1/28/2008 6:44:16 PM
From: glenn_a	Read Replies (2) \| Respond to of 110194

((...the banks have not suffered that big a a draw in capitalization. C is fine, WB is fine, and all the big cap banks are fine.)) Keith, how do you know that C is fine? My thesis is that there is a whole lot of paper that is on bank balances sheets that are "marked to model" that represents, as Russ calls it, "fictitious capital". If you trust the bank balance sheets as being transparent and fairly representing the their capitalization, then I can see how you would think the banking system is fine. My contention is that the bank's are actually very poorly capitalized once they are forced to mark outstanding paper "to market", and write off bad loans. So perhaps our difference if very fundamental. You trust bank balance sheets at face value. I don't. Who knows, maybe you're right. But this is another area where we obviously differ. ((However, I would totally oppose any argument that would suggest that lower rates are a problem with treasury yields so low.)) And what about the rate of inflation? Do you feel that a negative real rate of inflation represents sound monetary policy? Do you feel that treasury yields reflect actual inflation expectations? I would make the case that treasury yields are being artificially supported by central banks and recycling of petrodollars by market participants that are purchasing Treasuries for political reasons and not as sound investments. I take it you wouldn't subscribe to this point of view. ((The spreads between FED funds and 4w treasuries keeps getting bigger, not smaller.)) Sorry, what are 4w treasuries? ((The victims of the banking crisis are ...)) I would respectively suggest that victims of the banking crisis - and there will be many more to come IMO - include anyone who believed that the artificially low interest rate policy conducted by the Fed for the past several years represents the true cost of capital. For God sakes, for several years now we've had negative real interest rates IMO. How can this possibly result in proper pricing mechanisms in an economy? ((I think the FED engineered high rates to put the undercapitalized lenders out of business.)) Keith, I think we've got a major disconnect. Negative real interest rates are in no way, shape or form HIGH interest rates. How can you possibly come to this conclusion? I'm not sure what else to say. If your fundamental understanding is: 1 - Banks are NOT undercapitalized 2 - That bank balance sheets and "marked to model" asset prices reflect the true financial condition of banks, and 3 - Treasury yields accurately reflect long-term inflation expectations, and are not manipulated by political players who's primary interest is not return on their investment 4 - That real interests rates have been too high ... I really don't think we have much basis for continuing this conversation. I mean, I respect your opinion, but I'm not sure how we can have a meaningful discussion when our a-priori assumptions are so markedly different. Best regards, Glenn