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No country for old banks

The charts below from Ray Dalio illustrate very clearly the problem with US banks balance sheets. On the left, you have bond holdings as percentage of US gdp. On the right, the mark to market losses on commercial banks and on the Fed’s balance sheet also as a percentage of gdp. The charts on the bottom provide perspective over the last 50 years, while the top ones zoom in the last 5 years. All the money that households didn’t invest in bonds during #zirp was deposited on banks which did buy long term bonds at very low rates. When inflation showed up at the beggining of 2022, the fed hikes rates aggressively, and those banks bond portfolios experienced substantial losses. Deposits are now demanding higher rates that banks can’t satisfy without incurring in losses selling those bonds. Those losses amount for 4% of gdp, or roughly $900bn (times 2 if we consider the Fed’s losses). It’s going to take a long time for banks bonds portfolios to run off and in the meantime the banking sector will need assistance from the government. It will be difficult to see a sustained market rally if the financial sector doesn’t participate.


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