Cigarbutt

BTW, what wabuffo describes for car loans being moved around is a similar scheme when money is moved to MMFs (also like Apple savings accounts, One savings accounts at Walmart (offer 5% now up to 100k) etc) as these entities don't create deposits/money, they only act as intermediates (flow-through entities). ----- Short version: The Q1 "liquidity crunch" was noise. There is however building evidence (signal) for a credit crunch. If banks are to be held long term, fine but if there is a plan to hold banks for the long term there is a window of opportunity that will be opening. Disclosure: i aim to hold (really hold) 2 or 3 large commercial banks before reaching senility but maybe it's too late. ----- Long version: Thanks to Ed Yardeni: The Q1 'scare' is noise. Of course noise can be useful for trading opportunities. And deposits (especially uninsured ones) remain wildly elevated in the system. FDIC Quarterly Banking Profile - First Quarter 2023 Details from Q1 were reported in headlines as deposits accelerating their 'flights' from US banks but numbers under the hood reveal longer trends related primarily to macro stuff (QE, QT, TGA account, RR window) and, shorter term, some money simply (temporarily through MMFs as conduits) left through the RR window and some money (deposits) was temporarily withdrawn from the reporting when unusual banks were (temporarily) taken over by the FDIC-sponsored transactions for larger TBTF banks. The interesting aspect is that deposits have effectively disconnected from underlying economic activity and the 2020 unusual accentuation of centrally-planned macro stuff goes a long way in explaining the 'transitory' inflation episode. So, 'we' are basically back to 2019 trends (with still some excess money/deposits sloshing around) but banks have started tightening for some time and, if history is any guide, the next few months should reveal lower loan-lease growth etc etc

Longerish term, interest rates are tied to inflation rates and inflation rates... So yes, so much for 'independence' and domestic priorities when the recent inflation surge appears to have key underlying ingredients that are shared by the US and Canada as well as other more 'developed' countries. An interesting aspect is that the recently added ingredients are coincident and even backward looking and work with a (few months) lag.

There are secular forces behind lower valuations allocated to smaller banks that are unrelated to the recent ‘liquidity’ issues and, contrary to areas like commodities (lower relative valuations), it is likely that this tendency for low valuations of smaller banks (unless a niche player of some kind) will persist and even accentuate. An interesting aspect is that capital (deposit) movements occurred from a rather select group of banks (unusual interest rate risk, high uninsured deposit ratios, “super-regional” category) to other depository institutions, mostly perceived as ‘safe’ (or too big to fail) and smaller and more regional banks of the main street-type did not feel to liquidity unease. Bank Funding during the Current Monetary Policy Tightening Cycle - Liberty Street Economics (newyorkfed.org) A fascinating aspect is that deposits are still plentiful at banks despite some marginal systemic tightening and, since 2008, deposit growth is no longer tied to run-of-the-mill loan growth, deposit growth at commercial banks is mostly tied to quantitative easing/tightening and the level of securities held by commercial banks (when banks buy a security, including government debt, they do create money with the associated creation of a deposit through balance sheet expansion). This is nicely shown in the following graph (found in a note written by John Hussman, someone who is sometimes rightly criticized but also someone who simply puts ideas out there for the world to think about). What is even more fascinating is that people who write, comment and opine on the web about ‘excess money’ don’t seem to see the ‘excess’ savings as a mirror image of the government-sponsored (Fed-Treasury alliance) MMT-like money creation scheme. Before the last two recessions, ‘savings’ would simply align with ‘loans’ but after the GFC and, especially, after the great virus crisis, ‘excess’ savings is mostly money that governments ended up creating. The Rise and Fall of Pandemic Excess Savings | San Francisco Fed (frbsf.org) The podcast with Sheila Bair (someone who deserves respect IMHO) is interesting but her theory that there was a deposit flight from banks to MMFs and then to the O/N RR window is not significantly supported by data as deposits mostly remained within commercial banks (it is ironic that there is a publicity about a yield ETF during the podcast; when someone puts a deposit into this ETF, where does the money go? The money certainly does not stay there because money held by the ETF earns 0% and not the yield they are advertising!). However Sheila Bair is on to something when she describes the potential need for banks to build more capital…eventually…because, in a way, the Fed is ending up these days with a balance sheet (negative equity really) that is looking similar to recently challenged banks as a result of poor duration risk management. Of course, the Fed can print money, somehow or even technically, but it’s been the expectation of commercial banks that the Fed will come to their rescue whenever needed and this moral hazard is bound to…eventually, mean higher capital requirements (and lower returns on equity) for banks. At least, in terms of risk management (historically US style), banks are not supposed to fall back on excessive and permanent Fed support but are supposed to fall forward (some banks may need temporary support at times). At least that’s what famous financier Denzel Washington suggested in 2011.

Deposit competition is a thing, especially for some banks. However, overall, there is still an abundance of deposits and outflows in one bank will, almost by definition, mean inflows for others. For that specific aspect, USB does not appear to be in trouble and, in fact, may be considered a relative safe place for deposits. As shown below (from USB disclosures), deposits haven't been running away from USB, especially after the 'turmoil'. Banks overall, for quite a few months now, are seeing deposits decreasing at an annualized rate of 3 to 3.5% (despite still rising loan books, so due to 'macro' factors) and (taking into account the digestion of acquisition) USB's deposit base is still growing or at least remaining stable in this declining environment, especially since early March...and they are showing growth in their own in-house money market funds' assets so... ----- Take the above with a grain of salt (i'm no banking expert) as my main activity today was getting the backyard pool ready for the season (my contrarian side provided satisfaction of doing this activity when it is raining as i sense the pleasure of enjoying the pool later when the sun will be up). Disclosure: i've opportunistically held USB in the past and only follow now on the surface although my timing (and holding period return) was better than the Master on this one: Warren Buffett Buys Banks, Healthcare, and Dow Jones Shares (cnbc.com)

Maybe this belongs to the USB thread but the discussion may/will get going when the asset side will be questioned so the following is about the liability side noise that recently occurred for many US banks including USB. When Q1 results came out, noise was made around the end of quarter total deposits numbers (compared to end of last quarter, down 3.7% from 525B to 505B). In the more detailed (and boring) disclosure, there were mostly technical reasons for this and no fundamental numbers showing some kind of run on deposits in March. In a time when deposits are overall going down in US banks (for reasons completely unrelated to basic banking activity), USB has actually grown its deposit base (even when adjusting for some acquisition activity in late 2022, using average total deposits during quarters):

^The 'Panik stage' description needs to be put in context. When the FDIC creates a bridge bank for a failed institution, deposits temporarily get withdrawn from the ordinary Fred numbers shown above. For the 'small' banks, what happened to Signature Bank (89B in deposits) is responsible for much of the (apparent vertical) drop in deposits FDIC: PR-21-2023 3/19/2023 For the 'large' banks, what happened to Silicon Valley Bank (175B in deposits) is not even associated with some kind of vertical drop as the withdrawal of deposits was easily mitigated in the normal course of human events. FDIC: PR-16-2023 3/10/2023 This may change, but in this ample reserves regime, banks (as a group) don't need to compete with deposits as money is (still) coming out of their ears.

This unusual Fed-Treasury coordination has been tried before (World War 2) and things worked out (easy to say in retrospect). So this too shall pass. But i wonder about the potential unintended consequences of all the extra dollars that need to be held by someone at all times (effect on asset inflation and, more recently, on consumer inflation (MMT-like side effect)). Thank you for the always interesting and helpful perspective. This is an investment board (apologies to John Hjorth for the following (likely?) waste of mental energy) but your 'macro' question is fascinating. Easy answer (technical): The Fed can widen the field of eligible participants and can (did double in 2021) the counterparty limit. Tougher answer: there appears to be no limit (constraints)? ----- This topic reminds me of a personal anecdote. This was my first clinical rotation as a resident in basic surgical training (cardiac surgery) and i was thrown into the action, on call at night, to take care of a bunch of relatively unstable inpatients, mostly post-operative cases. i'd go and assess these people semi-crashing on the ward (failing hearts) and then call my chief resident (one of the few people i'd let crack my chest open, given the right circumstances). Invariably, he advised to give a fluid bolus (long story short, increasing fluids (liquidity) will tend to increase output, at least temporarily). Invariably, a few hours later, the same patient would be crashing again from fluid overload (!) and then my chief would advise to give a diuretic (to get rid of the excess fluid) which almost always worked out in the short term. So he'd join me in the morning for a short round before going to the operating room. To the following question: Aren't we just trying to catch our tails here? came the following answer: Oh! the fundamentals, leave that to the cardiologists, they should be here soon. To the technically capable person that i potentially was, this answer always left me wondering about fundamentals? -----

As mentioned before, deposits have been on a down trend for a while (reasons for that unrelated to the recent 'liquidity' issue) and there has been a recent and slight change in this trend, especially for small banks (related to the recent 'liquidity' issue). There is no basis for the assertion that 600B have bled the banking system due to a recognition of MTM and AFS mark-to-market potential losses. If you actually follow the recent money flows (recent blip down for smaller banks outside of recent trend), it looks like most of the money went through MMFs and back at the Fed through the reverse repo window. So when your local bank offers an in-house MMF higher-yielding security for your money, the higher yield is linked to IOER offered by the Fed. So there are ways for money to leave the banking system including the Fed reverse repo window but, using Occam's razor tool, when, in normal circumstances outside of Fed operations, money is moved to an MMF, the MMF can only offer a yield on this money if this money is swapped for a higher yielding security such as a Treasury Bill. If the MMF buys a Treasury Bill, it will send the recently accepted money to the private market participant who held the Bill before. And where will this money go then...it will end up as a commercial bank deposit. ----- Yes, banks have to 'manage' liquidity' and some banks may have to offer higher yields on deposits somehow but, overall, banks haven't been competing for deposits. Because they don't have to. i woundn't mind if wabuffo would contribute here (to tear apart my perspective).

^A ratio's significance is improved if inputs are looked at? The graph does not show the relatively small change in recent trend but the big drivers in the very significant decline of the ratio since 2008 have been QE to non-banks and commercial banks buying securities, both activities increasing deposits (balance sheet expansion). ----- Just for fun, if there is an expectation of a potential run on PNC Bank, where would deposits go? Under mattresses?

Unless you show otherwise, the following applies for the Fed collateralized lending and income derived from pledged assets: "Unless an Event of Default occurs or the {Fed} Bank expressly directs otherwise, any proceeds, dividend, interest, rent, proceeds of redemption, and/or any other payment received by the Borrower regarding any Collateral may be retained by the Borrower." This was somewhat covered in the above posts but here's some additional perspective with a graph showing where the action has mostly happened in US MMFs: So, in early 2020, excess excessive money went to MMFs (expanding their balance sheets) and the money then was swapped by MMFs for mostly Treasuries (resulting in a swapped money deposit to a private market participant in a commercial bank). Over time, banks started to resist (on top of keeping deposit rates very low) and the 'supply' of Treasuries dwindled so MMFs moved the money to the Fed through the reverse repo window (Fed sort of does the opposite of QE ie it loans a Treasury in exchange for money). And then with the system still awash with excess money and as a result of some duration mismatch and an uneasy market feeling, they set up a facility to exchange money with commercial banks for temporarily duration impaired Treasuries to make it easier during the tightening.

Banks, pre-GFC, existed in a tight reserves system and effectively kept cash levels very low because cash was a zero-earning asset. Since then, banks have existed in an ample reserves system. Since 2009, banks have been in no way restricted by cash levels in order to loan. It is ironic that there is a 'panic' now with cash levels overall that remain extremely ample or excessive. Sure, there are a few banks with idiosyncratic exposure (uninsured deposit, wild asset-liability mismatch with duration risk etc) but banks overall have absolutely no need to sell securities and can easily hold them to maturity. There is no fundamental need to throw a temper tantrum because of recent pseudo tightening. Comparing the growth in assets for banks and MMFs is interesting. There was so much money 'injected' into the system in 2020 that banks were drowning in cash and the excessive excess went to MMFs (and back to the Fed, reverse repo direction). That's why banks had no incentive to offer higher rates on deposits. The excess cash will move around but will, in essence, tend to end up in commercial banks.

That may be one of the reasons why a top-down approach is difficult to apply in order to appropriate some of those profits at the individual stock holder level. i've been following (with some dismay) Restoration Hardware (RH, a high-end furniture retailer) and seen margins go up and missed the boat in this Great Gatsby economy. i guess it's ok to accept missing some boats. In the past, i've had interesting results (process and outcome) investing in furniture retailers (GBT BMTC group, holding period return helped by increasing margins 1+ but mostly through superior capital allocation and sustained buybacks below intrinsic value and The Brick, when margins went from negative to positive, often a very helpful development, if achieved). And yes, one has to wonder at the possibility of a systemic misallocation of capital but what do i know?

^Concerning the idea that deposits have become scarce: Concerning the recent wave (temporary, accrual-wise) of deposit outflows, how is this recent money flow different?

^Submitted for: -perspective (versus the deposit 'flight' or 'hemorrhage') -if you like banks (large and small) (and there many reasons not to like them), the recent deposit 'shortage', in itself, is noise. Deposits in the 'system' have been going down for some time mainly because of some Fed tightening with non-banks, commercial banks de-expanding their balance sheets through the sale of securities, including government debt. This trend down has been partly mitigated by the Treasury General Account (TGA) at the Fed going down. Lending by banks has played a role in deposit growth but this effect has been stunted by the other factors. Overall deposits at banks continue to be way more elevated than the long term trend. Also, what happens when cash goes from JPM or a small bank to a money market fund? There may be a short term blip in truly cash assets at MMFs but this cash does not stay there as MMFs need to convert this cash to an interest-bearing security of some kind. In the main, this cash, after MMFs use it to buy a security, goes back to JPM or a small bank. Yes, in a funny twist of financial plumbing and since banks are in no rush to accept more deposits (as they are flush with them), some of the cash accepted by MMFs as temporary deposits does go back to the Fed through the reverse repo window (essentially QT) and there's been some of that but banks remain bloated with deposits overall.

It's actually an interesting accounting identity (with potential insights) but (apologies to Kalecki, Levy, Godley and all) there is a fundamental flaw. i understand that your training is at least partly 'scientific' so when this accounting identity is formed, there is a giant assumption about the identification of the dependent variable (corporate profits) as a function of a whole set of other assumed independent variables and this is obviously not the case in the real world. Higher profits per unit of revenue may be the result of other factors (less competition?, more mature economy?, more 'mature' population?). Also, the equation does not take into account the dynamic nature of the interactions. For example, in the late 19th century, US corporations reported lower profits as a consequence of high levels of investments which meant higher profits to come. ----- Back to the real world Let's say you have a business (ie real estate leasing). You may increase profit margins by exploiting easy money, cheap leverage/taxes and by reducing leasehold improvements but that may point to future lower profit margins even if reversion to the mean may be blurred by 'transitory' issues?

In 1999, someone who knew a thing or two about investing ventured the following: "In my opinion, you have to be wildly optimistic to believe that corporate profits as a percent of GDP can, for any sustained period, hold much above 6%. One thing keeping the percentage down will be competition, which is alive and well. In addition, there's a public-policy point: If corporate investors, in aggregate, are going to eat an ever-growing portion of the American economic pie, some other group will have to settle for a smaller portion. That would justifiably raise political problems—and in my view a major reslicing of the pie just isn't going to happen." So, potential conclusions: -A macro 'opinion' does not prevent very reasonable outcomes otherwise? -It's hard (impossible?) to reliably profit from a macro 'opinion'? ---- Irrelevant personal addition: i'm reading a book titled Chasing Daylight about a KPMG CEO whose lifespan shortened all of a sudden. The author discusses when he met Warren Buffett and how baffled he was to hear (in informal and impromptu discussions) Mr. Buffett's informed and substantiated opinions about very specific accounting standards. So if you're into that type of rabbit hole, you may be interested by the Kalecki equation which ties corporate profits and the rest of the world (a concept which is also the driver behind recent legislative noise concerning the taxation of buybacks etc). Of course, if that concepts holds any water, fiscal deficits have helped in sustaining corporate profits, a situation quite obvious for some time and especially since 2020 when corporations were able to pass-through increasing and printed costs while corporations and consumers were both subsidized to record levels. The Kalecki Profit Equation: Why Government Deficit Spending (Typically) MUST Boost Corporate Earnings – Economist Writing Every Day

Note: USB has a diverse deposit base, serves a variety of consumers, businesses, in different industries and states so their deposit base is much less at risk of an isolated run although the possibility cannot be completely ruled out.

Thanks for this post. If one aims to do better than the average, one has to be different (and better). The challenge is to find some kind of an edge, whether concentrated or not. It is often said that humans tend to forget the actual content of conversations around a situation but tend to strongly recall how they felt during those conversations. In 2006, holding Fairfax was quite uncomfortable (i was often having discussions with fellow expatriates who marveled at real estate and somehow felt at odds investing wise (they're still 'working')). Anyways, that was then, now is now and the future is something else. A fascinating aspect is that self-directed investing requires a balance between opposing arrogance and humility and public sharing on the topic tends to favor (or favour?) the former. i do appreciate the balance that you achieve. Good luck to you and your family. edit: link added from memory lane: Fairfax Attacks Shorts, Then Restates - CFO

^My guess is that the answer was more qualitative than quantitative but numbers (loss ratios) help to guess how Progressive has been better at segmentation and retention leaving Geico with spontaneous relative adverse selection. Recently:

i guess it depends on what you mean by "tightening". If tightening means an attempt at reversal of easy money, from the banks' balance sheet perspective, it's become harder to sell Treasuries on a net basis. Mark-to-market losses will help to go back to an easing mode as banks are less likely to continue to sell securities. If tightening means less liquidity for 'risk-free' securities, it's unusual that a squeeze is already felt in this still ample reserves era. Somehow (similar to the UK situation not long ago), given the apparent liquidity still present, it feels like the 'market' is refusing to react the way expected and this is similar to the 2019 repo crisis. It's not clear if recent tremors have anything to do with a "bottom" concept but i wonder if the Fed is not about to try to become unusually creative with further innovative facilities?

Fair enough but banks have been tightening lending for quite some time now, much before this recent liquidity noise. However, the revelation of some weakness in some banks (smaller, low loan to deposit ratio, less sticky deposit base) is unlikely, on its own, to cause a bank-induced liquidity crisis as deposits from weaker institutions will only tend move to larger institutions (with some leakage to money market funds, not showing up at this point in the reverse repo window). If you dissect the info below from the graphs, smaller banks show a slightly more pronounced recent move in liquidity but, overall, at least on the surface, liquidity appears to remain abundant. Cash assets have grown ++ with recurrent episodes of easing and the growth of cash assets has been larger than the growth of all assets which itself has been superior than GDP growth. The level of cash assets has always corresponded to total reserves (including excess reserves) so banks do not keep excess cash on top of excess reserves and always buy securities with the excess excessive cash. With the recent tightening, the deposit to cash ratio has gone up but remains very low from an historical perspective. This aspect is unlikely to change significantly for the whole banking system if deposits simply move around. All that to say though that it is interesting to see that cracks are starting to appear in the 'system', much earlier in this tightening phase than during the 2019 repo crisis. This looks like an addiction pattern and i wonder if it is debt addiction? ----- Also, a slightly semantic precision (but a conceptual one also): banks do not do loans with deposits, they do deposits with loans. And the largest sources of deposit growth during 2020 to 2022 (about 80 to 85%) were QE to non-banks (most of QE) and banks expanding their balance sheets with government debt.

For perspective, all over the news, it's being said that the entire banking sector is scrambling for cash? From a wider perspective, this is unusual and has a similar flavor than around the time of the 2019 repo crisis when banks seemed to be struggling when reserves were being decreased and when reserves were still widely ample from a wider historical perspective. "all of them collectively will increase the liquidity on their balance sheet somewhat. That means less security purchases" Can you elaborate on the previous sentences, especially the bolded parts?

^From a collision repair source which may be relevant to the recent Progressive edge: Market concentration in auto insurance increases; GEICO, Progressive projected to pass State Farm in 2023 | Repairer Driven News So, unusually, Progressive has been able to maintain a reasonable compromise between market share growth and profitability. Geico has not but likely will change course for the better? Right now, until they define and see more clearly their competitive position, Geico seems to focus more on the making profit aspect than on the market share aspect, using "macro" criteria? Is it not, in a (exaggerated) way, similar to holding cash when one is relatively clueless about what's going on?

This is becoming widespread knowledge but banks have been tightening for a while now. Below is a picture for C+I loans as a precursor of capital investment to come but a similar picture has been emerging since last fall in most lending categories. There's been covid noise and it's always a cause/consequence/correlation issue just like with inverted yield curves but bank balance sheets as a % of GDP have been going up and it feels like banks are signaling a need to ease conditions even if balance sheets are stuffed with cash and risk-free securities? Many factors enter into the SLOOS process but risk perception is a big one so...and within the sub-sections of the survey, loan demand has been softening too so there's been some recalibration of the supply/demand curve here. The picture is from end of January 2023. From FFH's annual report released yesterday: "As rates go higher, they will have an impact on the economy – 4% across the curve does not seem to do it! Higher rates will destroy the speculation we continue to see in areas such as high tech, SPACs and cryptocurrency. Credit also may be very vulnerable to higher rates as the economy goes into recession. Credit has been very easy all over the world with very low interest rates. While it is difficult to predict, we will not be surprised at a black swan event that arises in the credit area, particularly in the U.S. and Europe, because of the “easy money” that has prevailed for the past decade. Higher interest rates may reveal some “Ponzi” financial structures that we cannot see today!"" Of course, FFH has often been wrong with macro predictions.

What's the meaning of lucky and happy and is there a correlation? Anyways back in the days when investing in Fairfax involved more than reading newspaper clips, there seemed to be a tension between some who wanted to get very rich very quickly and some who wanted to get rich relatively quickly. Sometimes, one has to sacrifice something when a change of pace is involved and despite some uncertainty, Fairfax withstood the attacks.