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BofA and Citi Fail Stress Test? / Will the real 'flation please stand up?

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April 28, 2009 – Comments (1) | RELATED TICKERS: BAC , C

I suppose that this shouldn't come as much of a surprise.  If the two worst banks in the country don't fail the government's "stress test" then it isn't much of a test.  The WSJ is out with a report this morning that the Federal Reserve is urging Bank of America (BAC) and Citigroup (C) to raise billions more in capital. 

Ahhh hello guys, where do you think that they're going to get this capital from.  I suppose that they could sell some assets into this messed up market that we have right now, but I doubt that they are going to be able to raise much in the way of private capital.  I suspect that once again Uncle Sam will write a check to these zombie banks to prop them up.  That's the bet that I made when I purchased BofA (the better of the two walking dead banks) bonds and preferred stock.  I don't like it one bit, but I'll be darned if I am going to sit here and watch my hard-earned tax dollars pissed away and not hop on for the ride.

Fed Pushes Citi, BofA to Increase Capital

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I came across this article late yesterday and just got around to reading it.  The first line is worth the price of admission:

Will the real 'flation please stand up?

What a fantastic quote.  That sums up what is going on right now perfectly.  An intelligent case can be made for deflation, inflation, and stagflation using the information that is currently available.

I personally still believe that deflation is the most immediate problem.  The destruction of the shadow  banking system, reduction in leverage, problems at banks, and fall in consumer confidence / rising unemployment have taken a hammer to the velocity of money.  I don't think that Uncle Sam can print and spend money fast enough to make up for the dramatic drop in velocity in the short run.

Longer term inflation may indeed end up being a problem...sooner rather than later if the value of the U.S. dollar begins to fall and/or if foreign countries begin to choke on all of the debt that the government has to issue. Unfortunately, even with raging inflation the economy has so many headwinds right now and in the foreseeable future that stagflation is a very likely outcome.

This article provides a great description of the three possible scenarios.  Which one occurs will have an extremely significant impact upon what investments do well going forward.

Gary Shilling makes case for deflation in the article and he makes some excellent points.  Keep in mind though that he has been calling for deflation since the Civil War.  Even a broken clock is right twice per day.

Mohamed El-Erian make the case for stagflation in the article.

Check it out, it's definitely worth a read.

Pick Your Poison: Inflation, Deflation, Stagflation

Deej

1 Comments – Post Your Own

#1) On April 28, 2009 at 7:59 AM, AnomaLee (28.71) wrote:

I suspect that once again Uncle Sam will write a check to these zombie banks to prop them up.

If General Motors files for bankruptcy you will see employee outrage unseen in decades. I think Citigroup will be sacrificed late this year if GM files for bankruptcy in June for political reasons.

I read the artcile on 'flation. I'm right there with you in my thought process. I fail to see how the government will moderately stimulate inflation short-term. Anything short of fiscal stimulus and mailing out $37,000 checks to everyone can be absorbed.

I seriously fail to see how the former investment banks are not being mentioned. Aside from shoddy accounting tricks Goldman Sachs and Morgan Stanley are still highly levered and still undercapitalized as commercial banks subject to reserve requirements.

Pfft....

They both have received preferential treatment. No wonder Ken Lewis is ratting out The Club.

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