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Strategies & Market Trends : 2026 TeoTwawKi ... 2032 Darkest Interregnum -- Ignore unavailable to you. Want to Upgrade?

To: philv who wrote (40242)	9/22/2008 11:02:31 PM
From: TobagoJack	Respond to of 218126

just in in-tray Ha! Every single on of these wholesale funding building societies is bust. No wonder GM is drawing down its remaining 3.5bn in bank loans. Bet the banks that have them are just delighted about that prospect…more bad debts for Henry to buy in due course. Here’s one for you guys though (Heinz in particular): in 1929 the aggregate bank balance sheet broke down like this (2008 percentages in brackets) – Loans 57.9% (62.7%); Investments22.0% (22.4%); Cash assets 14.4% (6.6%); other assets 5.8% (9.3%). In 1929 the cash element was so much bigger because of the gold standard. However, aren’t the loans and investments numbers creepily similar? Another parallel, in 1929 the ratio of loans to investments was 2.6. In 2008 it was 2.8. Of the ‘investments’ in 1929, 30% were treasuries/government debt. Today, treasuries account for 46% of investments. By 1935 the composition of bank balance sheets was loans, 30.7%; investments 40.3%; cash assets 24.1% and other assets 4.9%. The L:I ratio was 0.8 (it didn’t get back above 1 until around 1955). Treasuries were 50% of investments. In short, that is the direction bank balance sheets are headed from here. Loans will shrink, investments will grow (particularly treasuries) and the ironical part, the US won’t need to worry one whit about where the demand for more public debt will come from (the banks will be lining up). And here’s the rub, if they don’t line up my strong guess is that capital requirements will be re-written to FORCE banks to hold a certain percentage of assets in government debt (as used to be the case in the UK). If the 1935 composition is repeated US banks will be holding 1.8 trillion in US government debt by 2012 (up from 1.1 trillion now) and that is assuming a 20% shrinkage in the total assets of the US commercial banking system. If things don’t get as bad as the Great Depression then the demand for US treasuries from US commercial banks ALONE could be much more than the extra 700 billion suggested here. Add in the shift from money market funds to treasuries and from equities to treasuries… Let’s just say 2-2.5% on the 10-year treasury by this time next year is a realistic prospect (by which time the US will also be running a current account surplus and consumer price inflation will be close to zero (Heinz, our inflation will be negative)). As markets get confused yet again (what a bunch of headless chickens that populate every nook and cranny of bond and equity markets) the sell off in US treasuries is a perfect buying opportunity – for capital gain, not yield.