Family and friends asked "Should I invest in bank stock? They are the backbone of our country". My answer to them is, not with my money.
Remember the times where you were 10-year-old and wanted to buy a toy. You went to your dad and asked if he would buy it for you. He replied, "you can buy it with the allowance I'll give you. You just have to save for it". You skipped your daily candy so you can have that latest toy you've been wanting. You gave up something, for something. That was great.
Things changed over the past decade when borrowing became the norm. Of course you are not 10 anymore, but the credit card company were giving those away for free as long as you were 18 and were breathing. I remembered signing up for a card on one cold day just to get a free t-shirt. That card allowed me to borrow $3,200 without collateral.
Bank may be the backbone of our economy, but it was a leveraged economy. One which allow a person with $1 of income to borrow $10 or $20. The bank then securitized these borrowings and sold it off to investors. Securitization allowed money to flow freely and recklessly. My assumption is that such model will not be back for quite sometime. Imagined this, your friend sold you an investment and you later found out that it doesn't worth as much as he promised. Would you be buying anything from him again? Chances are you probably won't be his friend. The US is the "bad" friend. We sold mortgages, credit card loans, car loans, and student loans to other countries.
Japan went through something similar to what we are going through, but not quite. They did many things the US are doing: taking the rate down to zero and buying their own bonds (quantitative easing). Something rather extraordinary happened in 2002. Despite that lack of lending from the banks, businesses were able to expand through free cash flow. Quoted below came from Financial Times on 12/17/2008
Remember the times where you were 10-year-old and wanted to buy a toy. You went to your dad and asked if he would buy it for you. He replied, "you can buy it with the allowance I'll give you. You just have to save for it". You skipped your daily candy so you can have that latest toy you've been wanting. You gave up something, for something. That was great.
Things changed over the past decade when borrowing became the norm. Of course you are not 10 anymore, but the credit card company were giving those away for free as long as you were 18 and were breathing. I remembered signing up for a card on one cold day just to get a free t-shirt. That card allowed me to borrow $3,200 without collateral.
Bank may be the backbone of our economy, but it was a leveraged economy. One which allow a person with $1 of income to borrow $10 or $20. The bank then securitized these borrowings and sold it off to investors. Securitization allowed money to flow freely and recklessly. My assumption is that such model will not be back for quite sometime. Imagined this, your friend sold you an investment and you later found out that it doesn't worth as much as he promised. Would you be buying anything from him again? Chances are you probably won't be his friend. The US is the "bad" friend. We sold mortgages, credit card loans, car loans, and student loans to other countries.
Japan went through something similar to what we are going through, but not quite. They did many things the US are doing: taking the rate down to zero and buying their own bonds (quantitative easing). Something rather extraordinary happened in 2002. Despite that lack of lending from the banks, businesses were able to expand through free cash flow. Quoted below came from Financial Times on 12/17/2008
Quantitative easing was nearly irrelevant to the expansion of real economic activity that began in 2002. The expansion was largely self-financed by corporations’ free cash flow and therefore not constrained by an absence of banks’ lending.What does it all mean?
This mean, we don't need banks to lend for our economy to grow. The growth rate will just be smaller. Companies that generate free cash flow will prosper. Bank will not be as profitable as they once were because large portions of their profit came from securitization fees and transaction fees. CEOs of Wells Fargo, Bank of America, and Citi Bank will portray a robust business environment, but that is essentially their job: to tell everyone businesses are booming! If you visit a restaurant and ask the staff to recommend you something, chances are they'll say everything is good.
I will do my best to search for company with strong fundamental, free cash flow, and exceptional dividend record to suggest to you. Regardless of what happen to the market, bull or bear, prices are controlled by values in the long run. I don't value in the bank stocks right now.
Art
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