Looking Back, Looking Forward

January 7th, 2011

Note: This was originally going to be released before the year end, but another topic (Main Street Bank)took my time away.

2010 is done. I thought I would do a post and give some of my perspective on last year and what could happen in 2011. I don’t have a crystal ball so I could be way off. I would love to read your thoughts (as I’m sure others would, too) so please leave yours in the comments section.

Looking Back – 2010
In 2010 there were 157 bank closures and 18 credit union closures. There are still some banks exhibiting extreme weakness, but for the most part, the pace of closures should drastically slow down for 2011.

[Side note:] It has taken me so long to complete this post that I have to revise the above. A quote from our friend at Deposit Accounts makes me wonder if in 2011 we could see a lot of bank closures.

In the FDIC’s 2009 Third Quarter report, it listed the number of problem banks at 552. In its 2010 Third Quarter report, the number has increased to 860.

Sadly, it seems that the “too big to fail” institutions are even bigger. I do believe in free markets, but the markets were not allowed to separate the chaff from the wheat. Institutions that pose a systematic risk should be broken down into smaller pieces. In my opinion all of the various stimulus measures have just prolonged true recovery. A Home Tax Credit early in the year boosted home sales temporarily, but now that the credit has long expired, home prices are falling again. The fact is that home prices need to fall in-line with what the economy and proper risk analysis can accommodate.

The Fed held overnight rates near 0% for the entire year. This has caused CD rates to steadily drift down. In the beginning of the year there were still 2%, 1-year CD rates out there. But, now you are lucky if you can find anything above 1.00%. 5-year CD rates were in the high 3.00% range and now they are around 2.00%. Recent increases in Treasury yields have caused some upwards pressure, but I don’t expect those levels to hold past January of 2011. Throughout the year, the difference between the short-term and long-term rates has been quite pronounced. For those with longer-term ladders or those that are willing to deal with an early withdrawal penalty, the pick-up in income is quite good.

The FDIC has basically been at war with brokered deposits. They levied an assessment of 20 Basis Points (0.20%) in the late spring. This has caused more and more banks to go looking towards rate services for deposits and avoid being under scrutiny. The ultimate problem with this is the FDIC really doesn’t have a handle on the mix of deposits that banks are carrying. Now, I don’t believe brokered deposits are the problem, but by basically allowing banks to hide them, many bank closures have been more expensive than necessary.

Official unemployment has remained close to 10% (today it was 9.4%), however, when those who have given up looking or are only able to work part-time is factored back in, the percentage is closer to 17%. Given a rate that is about 2 1/2 times greater than the Fed likes to see they have tried various methods to encourage investments into people. But so far, those efforts haven’t produced much success. I think most companies are just too leery of expanding with the uncertainties they are facing (think healthcare, taxes, and regulations).

Looking Forward – 2011
I don’t see the real economy changing much in the first half of the year. We are already seeing higher gas prices and home heating costs. Those dollars will help keep local gas stations and utility companies in business, but stores that market the non-essentials will still most likely struggle through the year.

Everyday, you hear about the stock market roaring ahead, but I don’t see that it is based on any true data. Just lots of hot air. With the Fed still basically handing out free money to institutions, they are hedging their bets on longer term, “higher” yielding assets. It seems that some very dangerous bubbles are appearing.

If you have funds to play with, real estate could be great for you. Prices are expected to fall more and in many areas they are already down 30% to 50%. I’m not in the extra funds area, so don’t ask me where the deals are.

The web seems poised for another run. But, I just worry about too much over valuation. Facebook has been valued at $50 Billion dollars, but all they have is advertising (at this point). Google still controls search and most still go there for their digital inquiries. Another problem is the speed of innovation (and downturns). Companies can rise and fall so quickly. Take Groupon. They rebuffed Google’s $5BB offer and now Google is looking at creating a similar service. That could drastically alter Groupon’s revenue.

Finally, what about CD and savings rates? I don’t see much changing. There is still just too much money in the system and too few “qualified” people seeking loans. Banks are taking a much harder look at who they loan to these days. I suspect that as the Fed increases rates (late 2011 for the optimists / sometime in 2012 for the less so) that there could be some flattening of the yield curve. This means that the difference between the rates on the different terms could shrink. Right now we have average 1-year CDs around 1.00% and 5-year around 2.00%. I suspect the longer-term rates will rise more slowly than the short-term. Ultimately this will depend on how well people think the Fed can control inflation.

So what do you think? Leave your comments below.
cd :O)

-- By +Chris Duncan

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