Wednesday, January 12, 2011

Thoughts on Financial Institutions and Money Supply

Over the last two weeks, I've taken an in-depth look at both U.S. financial institutions and the overall money supply situation. Here are some thoughts, in no order of importance:
  • Regardless of size, banks are still hurting. The overall return on assets and equity are near 20 year lows and the interest spread is very low as well. On the other side of the coin, we have loans, on which we see increases in losses and loan loss reserves. Basically, banks are getting squeezed from both sides of the balance sheet right now which partially explains why we haven't seen a large increase in loan growth.
  • I don't think it can be conclusively said we are at the end of the problems regarding loans. Spikes in non-performing loans and loan loss reserves are still near highs; in only one or two cases have we seen decreases from highs. In addition, with lower interest rate spreads, it will take longer for banks to replenish their diminished earnings.
  • The entire argument of inflationary pressures in the monetary system is a complete and total farce. At no point in any of the data do we see spikes or increases that in any way should be alarming.
  • The recent increase in the savings rate has been mirrored by the increase in demand deposits.
  • MZM may not be the best indicator of money supply, because of its use of money market funds.
  • The velocity and amount of funds in M1 -- especially in check deposits -- is encouraging and at a level that would support growth.