Tuesday, March 31, 2009

Banks May Shrink Balance Sheets By $2 Trillion More

In a September 2008 post, "The Great Deleveraging (and what it means)", I tried to put it as succinctly as I could:
Deleveraging is Deflationary. Ignore the talk of any immediate Inflationary effect. That comes later. Anyone telling you to buy gold now is a fool, a liar, a knave or a nut. The time for AU will come but it is most assuredly not now....
Today we see the process continues. From DealBook:

The largest 15 global banks are expected to further shrink their balance sheet by about $2 trillion in 2009 and longer-term return on equity will remain subdued for the next two years, Reuters said, citing a joint report from Morgan Stanley and Oliver Wyman.

The balance sheet shrinkage will continue to have a huge impact on liquidity and provision of capital, hence it is critical confidence is restored soon, in particular to help real money investors buy credit assets, the analysts from both the firms wrote in a note to clients.

A rebound in profit before provisions and markdowns is expected in 2009 and will be led by rates, foreign exchange, flow credit and commodities, even though the industry was likely to see “material” write-downs, the analysts said.

Post markdowns, the analysts expect 2009 net revenue to be around the levels seen in 2003-2004, but said they were concerned that further to 2010 the revenue rebuild in 2009 is unlikely to have real momentum....MORE

Continuing the self-referential [-reverential? -ed] schtick is a line from October '08:

The incredible growth of credit over the last thirty years must be unwound. It fueled a fantasy worldwide economy and as with most every aspect of human existence, when fantasy collides with reality, reality eventually wins.

If the truth of the above statement is accepted, it becomes a policy question as to how fast the deleveraging should proceed. If the U.S. follows the Japanese playbook it can be ugliness protracted.

Getting the macro stuff right frees you to screw up the micro.