Why What You Think Might Be Happenin’-Ain’t

Now that the SP and the NASDAQ made new highs this morning and bonds sold off across a broad spectrum, you may be thinking that big sea change is coming. Although we would love to believe, the facts just keep getting in the way. The latest data show the US banking industry owns 17x the historical average in Uncle Sam's IOUs. (The raw data is obscured by the IOER change but lets just agree its a large number)
The deposit to loan gap shows the ratio out almost 15% in May. The 136.4B in Treasuries and Agonies compares to 62.6B in 2011. Conveniently, our European friends have drawn us a blue print of what happens to a banking system that questions the nature of its asset base. Forget about TARP and forget about fiscal cliffs, the crisis ushered in a phase of the credit super cycle that isolates Bank choices to the "risk free."
Thus, an obtuse rise in rates brought on by the dumping of system assets just ain't-a-goin' to happen. So far, shell shocked Boomers have played along and poured billions into various types of bond funds as retirement dreams morphed into post debt cycle realities.
The marginal breath in C&I loans has helped the growth rate somewhat. On a grander scale, the Summer saw a robust amount of Corporate issuance, as we highlighted toward the end of July. Loans entail risk and are a capital deployment and that kind of thinking will not be tolerated in this administration. I'm not convinced the banks got "bailed out" but they are towing the line like they did. I actually wrote in 2009 that the public could be forced to buy bonds by legislation, turns out it wasn't needed with Ben around.
Anywho, no one likes to see bonds fall more than we do (It's a Chicago pit thing) but this is just an orderly correction in an overhang that will be with us for some time to come. Last time we checked (Thursday) the Fed had a fair amount of these "thingamajigs" on its shelf too. Secretary Geithner has been cashing checks on that position, we wouldn't want the next bill autograph-er to have to send them the other way.

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