March 25, 2013 Comments

I leave tonight for a family vacation in New York City. I hope to visit the New York stock Exchange among many other attractions. It’s my first trip to New York City unless I count visiting Coney Island and the Bronx Zoo in 1972 when I was twelve years ago.  I expect to be able to update the daily comments from New York. But if I am not able to, I am back on April 3.

It should be no surprise that markets were down on Monday. This business of depositor “haircuts” for Cyprus bank depositors may not be any big deal at all for North America but it certainly is not a positive development.

I think there will be some ripples from this. Depositors in any weak bank especially those with deposits above the insured levels should be looking to move their deposits to more solid banks.

Banks hit with large deposit withdrawals may have problems unless central banks lend them enough money to cover all withdrawals. Most banks will have their assets tied up in loans.

These weak banks facing deposit withdrawals will call call in all the loans they can. Corporations and individuals who have borrowed from weak banks may find themselves scrambling to get new loans and new lines of credit.

All of this should mean that short-term interest rates on treasury bills of the strongest countries will go down and even go negative. The bond interest rate for these countries may go down as well. Tresury bill interest rates for and bond interest for weak countries will rise.

Costs for corporations to borrow should rise as many banks will not have money to lend.

Weaker banks will face nationalization or a forced takeover or in some cases even failure. Virtually none of this will affect the big banks in Canada. Smaller banks or weaker banks in Canada could face some deposit withdrawals.

Deposit insurance and implicit government guarantees have made people largely indifferent to which bank they had deposits with. These latest developments should make people, especially very large depositors including large corporate deposits more selective in choosing a bank.  And that is a good thing. We may see the emergence of small banks with much higher equity ratios. Possibly the higher equity will be invested in equities but it would still be there to provide security to depositors while also earning decent returns for bank shareholders.

It is sad indeed that Warren and Buffett, Berkshire Hathaway is not allowed in the banking business in the U.S. Berkshire owned a small bank in the 70’s and was forced by regulators to sell it.  If it were it would be showing how banks should be run.

I considered reducing some of my positions today but in the end decided rather than do something, I would just stand there.

Meanwhile Walmart and Canadian Tire did well today.

Visa was up 2.4% today. It has looked quite expensive for a long time but as I have said before it is hard to keep a good monopoly down. It is not on our list at this time.


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