What's All That Noise?

Shlitt! Rip! Crinkle! Shlitt!

What are those sounds?

Millions of unopened monthly brokerage statements, heaped in a pile, finally being sifted and opened.

Just a guess, but with stocks now up more than 40% from the March lows, lots of people now have the courage to tackle all that unopened mail . . .

"Bank Runs," Circa 2009

No "Run on the Banks?" Define, "Run"

It's true that depositors haven't raced to withdraw their money from the nation's -- indeed, the world's -- largest, so-called "money-center" banks the last 18 months or so (basically, the ones considered "too-big-to-fail"). That's largely a credit, literally, to deposit insurance -- administered in the U.S. by the FDIC.

However, that doesn't mean there hasn't been a run . . . in the world's stock markets, by (and on) their shareholders.

In a devastating post, "Bank Market Caps, Then & Now," financial blog The Big Picture graphically depicts the collapse in value of the world's 18 largest banks since the second quarter of 2007. The list includes not only such storied names as Citigroup and Bank of America, but the "Citigroup's" and "Bank of America's" of the U.K, Germany, France, and Spain -- international entities such as HSBC, Santander, BNP Paribas, and Credit Suisse.

To date, the average drop in value exceeds 80%. And that excludes the fate that befell shareholders at AIG, Fannie Mae, Freddie Mac, Bear Stearns, Lehman Bros., etc., whose drops ranged from 95% to 99%-plus.

All this is against the backdrop of an historic stock market rout, and increasing speculation that the new Obama administration is close to embracing the "Swedish model," or temporary nationalization, to deal with the ongoing financial crisis.

Until now, the U.S. has been focused on preserving some semblance of private ownership through the various, tortured iterations of bank bailouts, debt guaranties, TARP, etc.

Judging by the leading banks' rapidly shriveling market cap's, the equity markets clearly anticipate full-blown nationalization . . . soon.

'09 Stock Market Rally

Out of Treasuries, Into Stocks?

"Obama Warns Trillion-Dollar Deficit Potential"
--The New York Times (Jan. 7, 2009)

"Suddenly, a Markets Turnaround"
--The Wall Street Journal (Jan. 7, 2009)

The stock market is famously forward-looking, so it's certainly possible that the rally the last month or so -- up 10% to 20% from its lows, depending on the index -- reflects investors' optimism that the economy is due to start improving (or, as NYT columnist Floyd Norris puts it, that "things are getting worse at a slightly slower rate").

It's also true that tax-loss selling peaks near the end of the year, and that once it subsides stocks frequently rise (called the "January effect," which often as not now occurs in December).

However, it's at least a fair guess that some of the market's rise is due to investors taking President-elect Obama at his word, and exiting suddenly not-so-safe Treasuries. Where does that money go? Stocks, bonds, gold, commodities -- you name it, all these asset categories have rallied recently.

High Risk, No Reward?

For the uninitiated, literally trillions of dollars have flooded into U.S. government debt (T-bill's and bonds) seeking refuge from the stock and credit market crack-up's the last 18 months ago. The stampede has been so great that the yield on short-term debt has effectively been driven to zero -- less when you take account of fees.

Now, with the prospect of trillion dollar U.S. deficits as far as the eye can see, would-be Treasury buyers are faced with the double whammy of minuscule yield and debased currency (in truth, the latter has been a concern for some time, but the magnitude of the risk is clearly rising along with the deficit projections).

Such a combo recalls the Cal Tech football team's slogan: 'we may be small, but we're slow.' Not surprisingly, investors are taking the hint and deploying their money elsewhere.