Banking Can Be Profitable

September 1, 2009

Canada has only six big banks. They really are too big to fail. A recent article in the Wall Street Journal points out, “Not only do Canada’s Big Six banks have diversified earnings streams, including wealth management, insurance and trading, but they also have benefited from a stricter regulatory regime than in the U.S. that kept their leverage in check during the structured-credit boom. That stood them in good stead during the 2008 crash. A healthier consumer debt profile compared with the U.S. also has played a role, as has a more conservative housing market where subprime loans are virtually nonexistent.”

Imagine that! Regulators forced them to control their leverage, they didn’t make loans to overleveraged consumers, and they didn’t make mortgage loans to people who couldn’t make the payments. No bubble, no bust. Voila!-profits.

According to the article, Royal Bank of Canada (RBC) is now the 12th largest bank in the world. It’s encouraging to me that nothing heroic had to be done to bail out the Canadian banks-they are all still profitable.

There is probably nothing wrong with the U.S. banking system that a little common sense regulation can’t fix. It also points out that investment opportunities can be found all over the world, if only one looks for them.

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Posted by Mike Moody

“I Kill You Later”

September 1, 2009

How soon we forget! Private wealth managers at large international banks are once again selling stock accumulators to clients. The accumulator is a derivative akin to a giant call option, although apparently buying the contracts on margin has been cut back. The fallout wasn’t pretty last go round, but apparently anything sold at a ”discount” is popular.

I am always amazed how popular gimmicks can become, as opposed to executing a well thought out systematic investment program.

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Posted by Mike Moody

Dollar Under Fire Again

September 1, 2009

It’s not so much that the dollar has been notably weak in the very recent past—it’s more that the dollar is being assailed as the world’s reserve currency. Now it’s not just the central bank of China that is complaining.

The U.S. has benefited massively since World War II with the dollar as the de facto reserve currency. Because the dollar has become the world’s reserve currency, there is always tremendous demand for dollars. Huge demand for dollars has allowed businesses to borrow dollars cheaply—benefitting mainly U.S. businesses. It has made funding for American companies far more readily available than funding for other international companies, which primarily have to rely on their home market.

The strong demand for dollars has allowed the U.S. government to borrow as much as it wants whenever it wants. While it can be argued that this has been too much of a good thing, it has made financing the U.S. deficit much, much easier than it would otherwise have been.

Foreign creditors are now looking at the current administration’s deficit coming at them like a tidal wave and are beginning to get a little nervous about holding so many dollars and so little of any other currency. If the dollar begins to decline in earnest, I suppose there is the risk that U.S. investors may also decide it would be nice to have a slug of Swiss Francs, Euros, and Aussie dollars, or whatever. If you think the budget deficit is a problem now, just imagine what will happen if the dollar becomes unglued.

American investors aren’t used to thinking about currency exchange rates, but this is one of the consequences of globalization that needs to be considered in your asset allocation.

Leave a Comment » | Markets, Tactical Asset Alloc, Thought Process | Permalink
Posted by Mike Moody